UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-K
_______________
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
OR
o
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
Securities registered pursuant to Section 12(g) of the Act:
Title of class
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
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 o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
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 (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
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 o
Smaller reporting company o
Accelerated filer x
Emerging growth company o
Non-accelerated filer o
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. o
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section
404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
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, 2020 of $9.80 was
approximately $616.1 million.
As of March 1, 2021, 57,934,841 shares of common stock, par value $1.00 per share, of the registrant were outstanding.
Portions of the proxy statement for registrant’s 2021 Annual Meeting of Shareholders are incorporated by reference in Part III of this Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
THE BANCORP, INC.
INDEX TO ANNUAL REPORT
ON FORM 10-K
Forward-looking statements
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedules
Form 10-K Summary
PART I
Item 1:
Item 1A:
Item 1B:
Item 2:
Item 3:
Item 4:
PART II
Item 5:
Item 6:
Item 7:
Item 7A:
Item 8:
Item 9:
Item 9A:
Item 9B:
PART III
Item 10:
Item 11:
Item 12:
Item 13:
Item 14:
PART IV
Item 15:
Item 16:
SIGNATURES
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FORWARD-LOOKING STATEMENTS
The Securities and Exchange Commission (“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, including the impact of the
Covid-19 pandemic, 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 credit losses;
operating costs may increase;
adverse governmental or regulatory policies may be promulgated;
weak economic and credit market conditions may result in a reduction in our capital base, reducing our ability to maintain deposits at current levels;
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 commercial real estate loans held at fair value, 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 possible future
restrictions on adding customers;
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the loans from our discontinued operations are now held-for-sale and were marked to fair value based on various internal and external inputs; however,
the actual sales price could differ from those third-party fair values. The reinvestment rate for the proceeds of those sales in investment securities
depends on future market interest rates; and
we may not be able to sustain our historical growth rates in our loan, prepaid and debit card and other lines of business.
We caution you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. All subsequent written and
oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained
or referred to in this section. Except to the extent required by applicable law or regulation, we undertake no obligation to update these forward-looking statements to
reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.
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PART I
Item 1. Business.
Overview
We are a Delaware financial holding company and our primary subsidiary is The Bancorp Bank, which we wholly own and which we refer to as “the
Bank”. The vast majority of our revenue and income is generated through the Bank. In our continuing operations, we have four primary lines of specialty lending:
securities-backed lines of credit (“SBLOC”) and insurance policy cash value-backed lines of credit (“IBLOC”), vehicle fleet and other equipment leasing (“direct
lease financing”), small business loans (“SBL”) and loans which prior to 2020 were generated for sale into capital markets through commercial loan securitizations
and other sales (“CMBS”). In the third quarter of 2020, we decided to retain those loans on our balance sheet and no future securitizations or sales are currently
planned. SBLs 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 other commercial loans held at fair value are made nationally. At December 31, 2020, SBLOC and IBLOC, direct lease financing, SBL,
Advisor Financing, and other commercial loans held at fair value respectively totaled $1.55 billion, $462.2 million, $821.5 million (including SBL loans held at fair
value), $48.3 million, and $1.57 billion (excluding SBL loans held at fair value), respectively, and comprised approximately 35%, 10%, 18%, 1%, and 35% of our
loan portfolio and commercial loans held at fair value. Our investment portfolio amounted to $1.21 billion at December 31, 2020, representing a decrease from the
prior year.
The majority of our deposits and non-interest income are generated in our payments business which consists of consumer deposit accounts accessed by
Bank-issued prepaid or debit cards, automated clearing house, or “ACH” accounts, the collection of card payments on behalf of merchants and other payments. The
card-accessed deposit accounts are comprised of debit and prepaid card accounts that are generated by companies that market directly to end users. Our card-
accessed 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.
Available Information
Our main office is located at 409 Silverside Road, Wilmington, Delaware 19809 and our telephone number is (302) 385-5000. Our website internet 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. 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
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accounts and card payment processing. We derive the largest component of our deposits and non-interest income from our prepaid and debit card operations.
Develop Relationships with Affinity Groups to Gain Sponsored Access to their Membership, Client or Customer Bases to Market our Services. We seek to
develop relationships with organizations with established membership, client or customer bases. Through these affinity group relationships, we gain access to an
organization’s members, clients and customers under the 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.
Payments Business Line: 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;
We also offer ACH bill payment and other payment services.
commercial accounts; and
various types of prepaid and debit cards.
Specialty Finance: Lending Activities
We focus our lending activities upon four specialty lending segments: SBLOC and IBLOC loans, direct lease financing and SBL loans. Prior to 2020 we
originated and sold commercial real estate loans into CMBS securitizations. In 2020, we decided to retain those loans on our balance sheet and no future
securitizations or sales are planned.
SBLOC, IBLOC and Advisor Financing. 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 our standards. Additionally, the Bank utilizes
assignments of cash surrender value which legal counsel has concluded are enforceable. In 2020, the Bank began originating loans to investment advisors for
purposes of debt refinance, acquisition of another firm or internal
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succession. Maximum loan amounts are subject to loan-to-value ratios of 70%, based on third party business appraisals, but may be increased depending upon the
debt service coverage ratio. Personal guarantees and blanket business liens are obtained as appropriate. The qualitative factors for advisor financing focus on
changes in lending policies and procedures, portfolio performance and economic conditions.
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 ongoing 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
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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, we make SBA loans to franchisees of various business concepts, including loans to multiple franchisees with the same concept. In making
loans to franchisees, we consider franchisee failure rates for the specific franchise concept. However, factors adversely affecting a specific type of franchisor or
franchise concept, including in particular risks that a franchise concept loses popularity with consumers or encounters negative publicity about its products or
services, could harm the value not only of a particular franchisee’s business but also of multiple loans to other franchisees with the same concept.
We also participated in the Paycheck Protection Program, or “PPP”, in 2020 which was a temporary program to provide Covid-19 pandemic relief to small
businesses. Additional PPP lending was authorized by Congress for 2021 and we also intend to participate in that program. PPP loans are fully guaranteed by the
U.S. government and are expected to be repaid within one year of origination or less.
CRE Loans. Prior to 2020 we originated commercial real estate, or “CRE”, loans for sale into securitizations into commercial mortgage backed security, or
“CMBS” markets. In 2020, we decided to retain the loans which had not been sold on our balance sheet. These loans are collateralized by various types of
commercial real estate, primarily multi-family (apartments) but also include, retail, office 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 were originated for sale, the underwriting and
other criteria used were those which buyers in the capital markets indicated were 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, 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.
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.
Card Payment, Bill 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 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.
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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. Such fees comprise substantially all of the interest expense on deposits in our consolidated statement of operations.
Other Operations
Account Services. Depending upon the product, account holders may access our products through the website or app of their affinity group, or through our
website. This access may allow account holders to apply for loans, review account activity, pay bills electronically, receive statements electronically and print
statements.
Call Centers. A third-party servicer provides virtually all call center operations that serve inbound customer support, including after hours and overflow
support. The call center provides account holders or potential account holders with assistance accessing the Bank’s products and services, and in resolving any
related customer issues that may arise. 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. We have a national scope for our affinity group banking operations, and 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; and
direct contact with potential affinity organizations by our marketing staff, with relationship managers focusing on particular regional markets.
Loan Administration and Business Development 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 and Warminster, Pennsylvania and Orlando, Florida. We maintain SBL loan
offices in suburban Chicago (Westmont), Illinois and suburban Raleigh (Morrisville), North Carolina, primarily for SBA loans. We maintain a loan administration
office in New York, New York.
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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 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 offerings, with internally developed software
as well as third-party platforms and 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;
A training and compliance program for staff including a detailed policy; and
File access and integrity monitoring and reporting;
Threat intelligence;
Third-party vendor management.
Intellectual Property and Other Proprietary Rights
We use third-party providers for a significant portion of our core and internet banking systems and operations. 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 for 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 Bank Secrecy Act (“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;
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the relevance of our products and services to customer needs and the rate at which we and our competitors introduce them;
satisfaction of our customers with our customer service;
our perceived safety as a depository institution, including our size, credit rating, capital strength, earnings strength and regulatory posture;
ease of use of our banking websites and other customer interfaces; and
the capacity, reliability and security of our network infrastructure.
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, other federal regulatory agencies, the United States Congress, or the states in which we operate or our customers
reside could have a material adverse impact on us, the Bank and our operations. 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.
Because we are a legal entity separate and distinct from the Bank, our right to participate in the distribution of assets of the Bank, or any other subsidiary,
upon the Bank’s or the subsidiary’s liquidation or reorganization will be subject to the prior claims of the Bank’s or subsidiary’s creditors. In the event of liquidation
or other resolution of an insured depository institution, the claims of depositors and other general or subordinated creditors have priority of payment over the claims
of holders of any obligation of the institution’s holding company or any of the holding company’s shareholders or creditors.
Holding Company Liability. Under Federal Reserve policy, a financial holding company is expected to act as a source of financial strength to each of its
banking subsidiaries and commit resources to their support. The Dodd-Frank Wall Street Reform and Consumer Protection Act, or (“the Dodd-Frank Act”), codified
this policy as a statutory requirement. Under this requirement, we are expected to commit resources to support the Bank, including at times when we may not be in a
financial position to provide such resources. As discussed below under “Prompt Corrective Action,” a financial holding company in certain circumstances could be
required to guarantee the capital plan of an undercapitalized banking subsidiary.
In the event of a financial holding company’s bankruptcy under Chapter 11 of the U.S. Bankruptcy Code, the trustee will be deemed to have assumed, and
is required to cure immediately, any deficit under any commitment by the debtor holding company to 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.
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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 credit 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, 2020, we and the Bank
had total capital to risk-adjusted assets ratios of 14.84% and 14.68%, respectively, and Tier 1 capital to risk-adjusted assets ratios of 14.43% and 14.27%,
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, 2020, we and the Bank had leverage
ratios of 9.20% and 9.11%, 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 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
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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, 2020 were as follows:
4.5% CET1 to risk-weighted assets;
6.0% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets;
8.0% Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets; and
4.0% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the “leverage ratio”).
The New Capital Rules also introduce a new “capital conservation buffer”, composed entirely of CET1, on top of these minimum risk-weighted asset
ratios. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted
assets above the minimum but below the capital conservation buffer will face constraints on dividends, equity repurchases and compensation based on the amount of
the shortfall. Thus, when fully phased-in on January 1, 2019, we and the Bank were required to maintain such additional capital conservation buffer of 2.5% of
CET1, effectively resulting in minimum ratios of (i) CET1 to risk-weighted assets of at least 7%, (ii) Tier 1 capital to risk-weighted assets of at least 8.5%, and (iii)
Total capital to risk-weighted assets of at least 10.5%.
The New Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that deferred tax
assets arising from temporary differences that could not be realized through net operating loss carrybacks and significant investments in non-consolidated financial
entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such items, in the aggregate, exceed 15% of CET1.
In addition, under the current general risk-based capital rules, the effects of accumulated other comprehensive income or loss, or AOCI, items included in
shareholders’ equity (for example, marks-to-market of securities held in the available-for-sale portfolio) 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
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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,
2020, our total risk-based capital ratio was 14.84%, our Tier 1 risk-based capital ratio was 14.43% and our leverage ratio was 9.20% while the Bank’s ratios were
14.68%, 14.27% and 9.11%, respectively and, accordingly, both we and the Bank were “well capitalized” within the meaning of the regulations. A depository
institution is generally prohibited from making capital distributions (including paying dividends) or paying management fees to a holding company if the institution
would thereafter be undercapitalized. Adequately capitalized institutions cannot accept, renew or roll over brokered deposits except with a waiver from the FDIC,
and are subject to restrictions on the interest rates that can be paid on such deposits. Undercapitalized institutions may not accept, renew, or roll over brokered
deposits. The majority of the Bank’s deposits are classified as brokered, because related accounts, primarily prepaid and debit card deposit accounts, are obtained
with the assistance of third parties. On December 12, 2019, the FDIC issued a proposed notice of regulatory change which, if adopted, could result in the
reclassification of the majority of our deposits to non-brokered, see “Insurance of Deposit Accounts” below.
Bank regulatory agencies are permitted or, in certain cases, required to take action with respect to institutions falling within one of the three undercapitalized
categories. Depending on the level of an institution’s capital, the agency’s corrective powers include, among other things:
prohibiting the payment of principal and interest on subordinated debt;
prohibiting the holding company from making distributions without prior regulatory approval;
placing limits on asset growth and restrictions on activities;
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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, 2020, the Bank’s DIF
assessment rate was 16 basis points. On December 15, 2020, the FDIC approved a final rule, effective April 1, 2021 which we believe will result in the
reclassification of certain of our deposits currently required to be classified as brokered, to non-brokered. The potentially impacted deposits are those obtained with
the assistance of third parties and the new rules specify an application process to the FDIC, which will determine whether the deposits fall under the new rule. If the
classification change applications are approved, our FDIC insurance expense could decrease in the future, which may also depend on other factors. However, there
can be no assurance as to the extent that our deposits will be reclassified, or as to the amount of a potential FDIC insurance expense reduction, if any.
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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, 2020, the Bank’s
limit on loans-to-one borrower was $85.7 million ($142.8 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, 2020, 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,
2020 and 2019, loans to these related parties included in discontinued assets held-for-sale amounted to $4.7 million and $2.3 million.
Standards for Safety and Soundness. The Federal Deposit Insurance Act requires each federal banking agency to prescribe for all insured depository
institutions standards relating to, among other things, internal controls, information and audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, compensation, fees, benefits and such other operational and managerial standards as the agency deems appropriate. The federal banking
agencies have adopted final regulations and Interagency Guidelines Prescribing Standards for Safety and Soundness to implement these safety and soundness
standards. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. If the appropriate federal banking agency determines that an 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.
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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 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, or “FinCEN”, a bureau of the U.S. Treasury Department. Under the law, the Bank must have a
board-approved written BSA-Anti-Money Laundering, or “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.
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.
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USA PATRIOT Act. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or
“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 (“OFAC”). 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 (“UDAAP”). Section 5 of the Federal Trade Commission Act prohibits all persons, including financial
institutions, from engaging in any unfair or deceptive acts or practices in or affecting commerce. The Dodd-Frank Act codifies this prohibition, and expands it even
further by prohibiting “abusive” practices as well. These prohibitions, which we refer to as UDAAP, apply in all areas of the Bank, including marketing and
advertising practices, product features, terms and conditions, operational practices, and the conduct of third parties with whom the Bank may partner or on whom the
Bank may rely in bringing Bank products and services to consumers.
Other Consumer Protection-Related Laws and Regulations. The Bank is subject to a wide range of consumer protection laws and regulations which may
have an enterprise-wide impact or may principally govern its lending or deposit operations. To the extent the Bank engages third-party service providers in any
aspect of its products and services, these third parties may also be subject to compliance with applicable law, and must therefore be subject to Bank oversight.
The Bank’s loan operations are also subject to federal consumer protection laws applicable to credit transactions, including:
the federal “Truth in Lending Act,” governing disclosures of credit terms to consumer borrowers;
the “Home Mortgage Disclosure Act of 1975,” requiring financial institutions to provide information to enable the public and public officials to
determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;
the “Equal Credit Opportunity Act,” prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;
the “Fair Credit Reporting Act of 1978,” as amended by the “Fair and Accurate Credit Transactions Act,” governing the use and provision of
information to credit reporting agencies, certain identity theft protections and certain credit and other disclosures;
the “Fair Debt Collection Practices Act,” governing the manner in which consumer debts may be collected by collection agencies;
the “Home Ownership and Equity Protection Act” prohibiting unfair, abusive or deceptive home mortgage lending practices, restricting mortgage
lending activities and providing advertising and mortgage disclosure standards;
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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 Consumer Financial Protection Bureau
(“CFPB”) went into effect related to prepaid accounts and the applicability of provisions of Regulation E and Regulation Z, respectively, which we call “the Final
Prepaid Rule”.
The Final Prepaid Rule includes a significant number of changes to the regulatory framework for prepaid products, some of which include: (a) establishing
a definition of “prepaid account” within Regulation E that includes reloadable and non-reloadable physical cards, as well as codes or other devices, and focuses on
how the product is issued and used; (b) modifying Regulation E to require that short form and long form disclosures be provided to a consumer prior to a consumer
agreeing to acquire a prepaid account with certain exceptions and with specified forms that, if used, would provide a safe harbor for financial institutions; (c)
extending to prepaid accounts the periodic transaction history and statement requirements of Regulation E currently applicable to payroll and Federal government
benefit accounts; (d) extending the error resolution and limited liability provisions of Regulation E currently applicable to payroll cards to registered network
branded prepaid cards; (e) requiring financial institutions to post prepaid account agreements to the issuers’ websites and to submit them to the CFPB; (f) extending
Regulation Z’s credit card rules and disclosure requirements to prepaid accounts that provide overdraft protection and other credit features; (g) requiring an issuer to
obtain a prepaid account holder’s consent prior to adding overdraft services or other credit features and prohibiting the issuer from adding overdraft services or other
credit features for at least 30 calendar days after a consumer registers the prepaid account; and (h) prohibiting the application of different terms and conditions, such
as charging different fees, to a prepaid account depending on whether the consumer elects to link the prepaid account to overdraft services or other credit features.
The Bank has evaluated the impact of the Final Prepaid Rule on its operations and its third-party relationships, and has established internal processes accordingly.
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Community Reinvestment Act (“CRA”). 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 CRA requires financial insitutions to 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, 2021 through December 31, 2023. 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 Comproller of the
Currency issued its final rule on May 20, 2020 which impacts national banks. However, the FDIC, which regulates the Bank, has not yet issued a final rule. 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 2020, Federal Reserve regulations generally required that reserves be maintained against aggregate transaction
accounts as follows: for accounts aggregating $127.5 million or less (subject to adjustment by the Federal Reserve), the reserve requirement is 3%; and, for accounts
aggregating greater than $127.5 million, the reserve requirement is 10% (subject to adjustment by the Federal Reserve to between 8% and 14%). The first
$16.9 million of otherwise reservable balances (subject to adjustments by the Federal Reserve) were exempt from the reserve requirements. For 2021, the Federal
Reserve has announced that the $127.5 million and $16.9 million thresholds will be respectively increased to $182.9 million and $21.1 million. At December 31,
2020, the Bank had $339.5 million in cash and balances at the Federal Reserve. However, the Federal Reserve, after the onset of the Covid-19 pandemic, has
temporarily waived reserve requirements.
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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 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 Interest On Lawyer Trust Accounts (“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.
The Durbin Amendment. 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. Accordingly, the Federal Reserve promulgated
Regulation II to implement these requirements. Durbin Amendment and Regulation II exempts from the debit card interchange fee standards any issuing bank that,
together with its affiliates, have assets
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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 Regulation II is
amended or if we, together with our subsidiaries, surpass $10 billion in assets. Regulation II also prohibits network exclusivity arrangements on debit card
transactions and ensures 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.
Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years. Specific rulemaking intended to implement
provisions of the Dodd-Frank Act is underway and is addressed elsewhere in this section as applicable. It is difficult to predict the extent to which the Dodd-Frank
Act or the resulting regulations may impact us. However, compliance with these new laws and regulations may increase our costs, limit our ability to pursue
attractive business opportunities, cause us to modify our strategies and business operations and increase our capital requirements and constraints, any of which may
have a material adverse impact on our business, financial condition, liquidity or results of operations. We cannot predict whether, or in what form, any proposed
regulation or statute will be adopted or the extent to which our business may be affected by any new regulation or statute.
Economic Growth, Regulator Relief, and Consumer Protection Act of 2018. On May 24, 2018, the Economic Growth, Regulatory Relief, and Consumer
Protection Act, or “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
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guidance seeks to address the safety and soundness risks of incentive compensation practices to ultimately be sure that compensation practices are not structured in a
manner to give employees incentives to take imprudent risks. Federal regulators intend to actively monitor the actions being taken by banking organizations with
respect to incentive compensation arrangements and will review and update their guidance as appropriate to incorporate best practices that emerge.
The Federal Reserve will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking
organizations such as ours that are not considered “large, complex banking organizations.” These reviews will be tailored to each organization based on the scope
and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be
included in reports of examination. Deficiencies will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make
acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-
management controls or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective
measures to correct the deficiencies.
In February 2011, the Federal Reserve, the Office of Comptroller of the Currency and the FDIC approved a joint proposed rulemaking to implement
Section 956 of the Dodd-Frank Act, which prohibits incentive-based compensation arrangements that encourage inappropriate risk-taking by covered financial
institutions and that are deemed to be excessive, or that may lead to material losses.
Effect of Governmental Monetary Policies. The commercial banking business is affected not only by general economic conditions but also by both U.S.
fiscal policy and the monetary policies of the Federal Reserve. Some of the instruments of fiscal and monetary policy available to the Federal Reserve include
changes in the discount rate on member bank borrowings, the fluctuating availability of borrowings at the “discount window,” open market operations, the
imposition of and changes in reserve requirements against member banks’ deposits and assets of foreign branches, the imposition of and changes in reserve
requirements against certain borrowings by banks and their affiliates, and the placing of limits on interest rates that member banks may pay on time and savings
deposits. Such policies influence to a significant extent the overall growth of bank loans, investments, and deposits and the interest rates charged on loans or paid on
time and savings deposits (see “Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations”). We cannot predict the nature of
future fiscal and monetary policies and the effect of such policies on the future business and our earnings.
Delaware 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.
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.
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Prior Regulatory Actions
Historically, the Bank has entered into a number of consent orders with the FDIC which have significantly impacted its operations and financial
performance over time. On November 17, 2020, the Bank satisfied the final outstanding consent order with the FDIC and all FDIC consent orders have now been
resolved, concluded and terminated. The history of these regulatory actions and the Bank’s response are set forth below.
The Bank entered into a Stipulation and Consent to the Issuance of a Consent Order effective August 7, 2012 with the FDIC, 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.
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”. In addition to restating the general terms of the 2012 Consent Order, the 2015 Consent Order directed 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 required the Bank to implement a corrective action plan (“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 required that if, through the CAP, the Bank identified prepaid cardholders who had been adversely affected by a denial
or failure to resolve an EFT error claim, the Bank would ensure that monetary restitution was made. The Bank completed its implementation of the CAP on
January 15, 2020. As of the completion date, $1,592,505.82 of restitution was paid to consumers of which $4,389.06 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 paid and which was recognized as
expense in the fourth quarter of 2015. The 2015 Consent Order was terminated by the FDIC on November 17, 2020.
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. As described below, the 2014 Consent Order was lifted in May 2020. The Bank consented to
the issuance of the 2014 Consent Order without admitting or denying any charges of unsafe or unsound banking practices or violations of law or regulation relating
to the Bank’s Bank Secrecy Act, or BSA, compliance program. The 2014 Consent Order required the Bank to take certain affirmative actions to comply with its
BSA obligations, including a look-back review. Satisfaction of the requirements of the 2014 Consent Order was subject to the review of the FDIC and the Delaware
State Bank Commissioner. 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 restricted 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 submitted to the FDIC
and Delaware State Bank Commissioner a report summarizing the same completion of certain BSA-related corrective actions (“BSA Report”). During the period
prior to the approval of the BSA Report by the FDIC and Delaware State Bank Commissioner, those aspects of the growth of our card payment processing and
prepaid card operations were affected. The Bank provided the FDIC and the Delaware State Bank Commissioner with the required BSA Report as of December 31,
2019. The BSA Report was implicitly approved by the FDIC and Delaware State Bank Commissioner upon the termination of the Order as described below.
On August 27, 2015, the Bank entered into an Amendment to the 2014 Consent Order with the FDIC. The Bank took this action without admitting or
denying any additional charges of unsafe or unsound banking practices or violations of law or regulation
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relating to continued weaknesses in the Bank’s BSA compliance program. The 2014 Consent Order Amendment provided 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 the Company a letter which we refer to as the “Supervisory Letter”, 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 directed that the Company shall not pay any
dividends on our common stock or make any interest payments on its trust preferred securities, without the prior written approval of the Federal Reserve. It further
provided 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 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 had 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.
On May 15, 2020, the FDIC notified the Bank that it issued an Order Terminating Consent Order thereby lifting the 2014 Consent Order by and between
the Bank and the FDIC. The FDIC’s order was effective on May 14, 2020. The termination of the 2014 Consent Order confirmed that the Bank had satisfactorily
complied with all requirements of the 2014 Consent Order, most notably related to its Bank Secrecy Act compliance program and anti-money laundering and
sanctions controls. The FDIC’s lifting of the 2014 Consent Order also meant that the business-related restrictions contained in the 2014 Consent order were no
longer applicable to the Bank. The State of Delaware’s Office of the State Bank Commissioner concurred with the FDIC in taking this action.
On November 20, 2020, the FDIC notified the Bank that it issued an Order Terminating Amended Consent Order and Order For Restitution thereby lifting
the Consent Order dated December 23, 2015 (the “2015 Consent Order”) by and between the Bank and the FDIC. The FDIC’s termination order was effective on
November 17, 2020. The lifting of the 2015 Consent Order confirmed that the Bank had satisfactorily complied with all requirements of the 2015 Consent Order,
most notably related the Bank’s Compliance Management System, including the consumer compliance audit function and third-party risk management. Termination
of the 2015 Consent Order concluded all outstanding regulatory actions brought by the FDIC against the Bank.
All FDIC consent orders have now been resolved, concluded and terminated.
Human Capital Resources
The Company believes that human capital management is an essential component of our continued growth and success. Key human capital resources and
management strategies are described below.
Employees. As of December 31, 2020, we had 635 full-time employees and believe our relationships with our employees to be good. Our employees are
not employed under a collective bargaining agreement.
Structure. The Company’s Chief Human Resources Officer reports directly to the President and CEO and oversees most aspects of the employee
experience, including talent acquisition, learning and development, talent management, compensation and benefits. The Company’s Chief Diversity Officer oversees
diversity and inclusion efforts and reports directly to the President and CEO in that regard. Our Board of Directors and executive management receive regular
updates on human capital management efforts, including diversity and inclusion initiatives.
Talent and Development. We aim to attract, develop and retain high-performing, diverse talent who can further the Company’s strategic business
objectives. To that end, we offer market-competitive compensation and strive to accelerate employees’ professional development through performance management
and fostering a learning culture. Our employees work together with their managers to set business and professional development goals, supported by a variety of
resources and tools developed to help employees enhance their leadership skills.
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Total Rewards and Employee Well-Being. The Company is committed to providing competitive benefits programs designed with the everyday needs of our
employees and their families in mind. These programs offer resources that promote employee well-being in various aspects, including mental, physical, and
financial wellness. During the Covid-19 pandemic, we added to our well-being offerings to help employees to better balance their work and home responsibilities. In
addition, we established an Employee Financial Relief Program in 2020 that is designed to assist employees experiencing financial hardship during the pandemic.
Diversity and Inclusion. We strive to maintain a diverse and inclusive work culture in which individual differences and experiences are valued and all
employees have the opportunity to contribute and thrive. We believe that leveraging our employees’ diverse perspectives and capabilities will enhance innovation,
foster a collaborative work culture and enable us to better serve our customers and communities. With this vision in mind, the Company’s diversity and inclusion
strategy focuses on five key pillars: Organizational Commitment, Workforce Practices, Community Engagement, Supplier Diversity and Transparency. In 2018, the
Company established an Internal Diversity & Inclusion Council to oversee and implement initiatives that advance these core values at all levels of the Company,
including training and events designed to increase cultural awareness and engaging with external organizations such as the National Minority Supplier Development
Council and the Women’s Business Enterprise National Council. These efforts are supported by the Company’s seven employee resource groups (ERGs). Open to
all employees, our ERGs give employees the opportunity to connect with their colleagues and work to provide greater organizational awareness of the unique issues
related to women, people of color, working parents, veterans and first responders, health and wellness and the environment.
Item 1A. Risk Factors
Risk Factors Summary
Risks Relating to Our Business
The ongoing Covid-19 pandemic and measures intended to prevent its spread could adversely affect our business activities, financial condition, and results of
operations and such effects will depend on future developments, which are highly uncertain and difficult to predict.
Periods 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.
Risk management processes and strategies must be effective, and concentration of risk increases the potential for losses.
We cannot assure you that we will be able to accomplish our strategic goals that would enable us to meet our financial targets.
We may have difficulty managing our growth which may divert resources and limit our ability to expand our operations successfully.
We operate in highly competitive markets.
Our affinity group marketing strategy has been adopted by other institutions with which we compete.
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.
Our operations may be interrupted if our network or computer systems, or those of our providers, fail.
A failure of cyber security may result in a loss of customers and our being liable for damages for such failure.
We outsource many essential services to third-party providers who may terminate their agreements with us, resulting in interruptions to our banking operations.
We are subject to extensive government regulation.
Any future FDIC insurance premium increases will adversely affect our earnings.
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 government supervision with respect to our compliance with numerous laws and regulations.
Our reputation and business could be damaged by our entry into any future enforcement matters with our regulators and other negative publicity.
We may be subject to potential liability and business risk from actions by our regulators related to supervision of third parties.
Legislative and regulatory actions taken now or in the future may increase our operating costs and impact our business, governance structure, 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.
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.
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Potential acquisitions may disrupt our business and dilute stockholder value.
Risks Relating to Our Specialty Lending Business Activities
The Bank’s allowance for credit losses may not be adequate to cover actual losses.
We are subject to lending risks.
Our lending limit may adversely affect our competitiveness.
Changes to the Financial Accounting Standards Board (“FASB”) accounting standards have and will continue to result in a significant change to our recognition
of credit losses and may materially impact our financial condition or results of operations.
The Bank may suffer losses in its loan portfolio despite its underwriting practices.
Environmental liability associated with lending activities could result in losses.
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.
A prolonged U.S. government shutdown or default by the U.S. on government obligations could harm our results of operations.
We may be adversely impacted by the transition from London Inter-bank Offered Rate (“LIBOR”) as a reference rate.
Changes in interest rates and loan production could reduce our income, cash flows and asset values.
Risks Relating to Our Payments Business Activities
Regulatory and legal requirements applicable to the prepaid and debit card industry are unique and frequently changing.
The potential for fraud in the card payment industry is significant.
There is a significant concentration in prepaid and debit card fee income which is subject to various risks.
Our prepaid and debit card and other deposit accounts obtained with the assistance of third parties have been classified as brokered.
We may depend in part upon wholesale and brokered certificates of deposit to satisfy funding needs.
We derive a significant percentage of our deposits, total assets and income from deposit accounts generated by diverse independent companies, including those
which provide card account marketing services, and investment advisory firms.
We face fund transfer and payments-related reputational risks.
Unclaimed funds from deposit accounts or represented by unused value on prepaid cards present compliance and other risks.
Risks Relating to Taxes and Accounting
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.
The appraised fair value of the assets from our discontinued commercial loan operations or collateral from other loan categories may be more than the amounts
received upon sale or other disposition.
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.
Risks Relating 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.
An investment in our common stock is not an insured deposit.
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.
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.
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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.
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.
General Risks
Severe weather, natural disasters, acts of war or terrorism or other adverse external events could harm our business.
Pandemic events could have a material adverse effect on our operations and our financial condition.
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.
Risks Relating to Our Business:
The ongoing COVID-19 pandemic and measures intended to prevent its spread could adversely affect our business activities, financial condition, and
results of operations and such effects will depend on future developments, which are highly uncertain and difficult to predict.
Global health concerns relating to the Covid-19 pandemic and related government actions taken to reduce the spread of the virus have negatively impacted
the macroeconomic environment, and the pandemic has significantly increased economic uncertainty and abruptly reduced economic activity. The pandemic has
resulted in government authorities implementing numerous measures to try to contain the virus, including the declaration of a federal national emergency; multiple
cities’ and states’ declarations of states of emergency; school and business closings; limitations on social or public gatherings and other social distancing measures,
such as working remotely; travel restrictions, quarantines and shelter-in-place orders. Such measures have significantly contributed to rising unemployment and
negatively impacted consumer and business spending, borrowing needs and saving habits. Governmental authorities worldwide have taken unprecedented measures
to stabilize markets and support economic growth. To that end, the Trump Administration, Congress, and various federal agencies and state governments have taken
measures to address the economic and social consequences of the pandemic, including the passage of the Covid-19 pandemic Aid, Relief, and Economic Security
Act, or (“the CARES Act”), and the Main Street Lending Program. The CARES Act, among other things, provides certain measures to support individuals and
businesses in maintaining solvency through monetary relief, including in the form of financing, loan forgiveness and automatic forbearance. There can be no
assurance, however, that the steps taken by the worldwide community or the U.S. government will be sufficient to address the negative economic effects of Covid-
19 or avert severe and prolonged reductions in economic activity.
The pandemic has adversely impacted and could potentially further adversely impact our workforce and operations, and the operations of our customers
and business partners. In particular, we may experience adverse financial consequences due to a number of factors, including, but not limited to:
increased credit losses due to financial strain on its customers as a result of the pandemic and governmental actions, specifically on loans to borrowers in
the lodging, retail trade, restaurant and bar, nursing home/assisted living, childcare facilities, and loans to borrowers that are secured by multi-family
properties or retail real estate; increased credit losses would require us to increase our provision for credit losses and net charge-offs;
decreases in new business for example if the shutdown of automobile factories continues for an extended time, it may impact the supply of vehicles which
the Bank could otherwise lease to its customers, possibly reducing growth in the leasing portfolio which would otherwise have increased revenues and net
income;
declines in collateral values;
decline in our stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause
management to perform impairment testing on its goodwill or core deposit and customer relationships intangibles that could result in an impairment charge
being recorded for that period, or declines in assets held at fair value, which would adversely impact our results of operations and the ability of certain of
our bank subsidiaries to pay dividends to us;
disruptions if a significant portion of our workforce is unable to work effectively, including because of illness, quarantines, government actions, or other
restrictions in connection with the pandemic; we have modified our business practices,
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including restricting employee travel, and implementing work-from-home arrangements, and it may be necessary for us to take further actions as may be
required by government authorities or as we determine is in the best interests of our employees, customers and business partners; there is no certainty that
such measures will be sufficient to mitigate the risks posed by Covid-19 or will otherwise be satisfactory to government authorities;
the negative effect on earnings resulting from the Bank modifying loans and agreeing to loan payment deferrals due to the Covid-19 crisis;
increased demand on our liquidity as we meet borrowers’ needs and cover expenses related to the pandemic management plan;
reduced liquidity may negatively affect our capital and leverage ratios, and although not currently contemplated, reduce our ability to pay dividends;
third-party disruptions, including negative effects on network providers and other suppliers, which have been, and may further be, affected by, stay-at-
home orders, market volatility and other factors that increase their risks of business disruption or that may otherwise affect their ability to perform under
the terms of any agreements with us or provide essential services;
increased cyber and payment fraud risk due to increased online and remote activity; and
other operational failures due to changes in our normal business practices because of the pandemic and governmental actions to contain it.
These factors may remain prevalent for a significant period of time and may continue to adversely affect our business, results of operations and financial
condition even after the Covid-19 pandemic has subsided.
Additionally, the Covid-19 pandemic has significantly affected the financial markets and has resulted in a number of Federal Reserve actions. Market
interest rates have declined significantly. In March 2020, the Federal Reserve reduced the target federal funds rate and announced a $700 billion quantitative easing
program in response to the expected economic downturn caused by the Covid-19 pandemic. In addition, the Federal Reserve reduced the interest that it pays on
excess reserves. We expect that these reductions in interest rates, especially if prolonged, could adversely affect our net interest income and margins and our
profitability. The Federal Reserve also launched the Main Street Lending Program, which will offer deferred interest on four-year loans to small and mid-sized
businesses. The full impact of the Covid-19 pandemic on our business activities as a result of new government and regulatory policies, programs and guidelines, as
well as market reactions to such activities, remains uncertain.
The Bank is a participating lender in the PPP, a loan program administered through the SBA that was created under the CARES Act to help eligible
businesses, organizations and self-employed persons fund their operational costs during the Covid-19 pandemic. Under this program, the SBA guarantees 100% of
the amounts loaned under the PPP, and borrowers are eligible to apply to the FDIC for forgiveness of their PPP loan obligations. The PPP opened on April 3, 2020;
however, because of the short window between the passing of the CARES Act and the opening of the PPP, there was some initial ambiguity in the laws, rules and
guidance regarding the operation of the PPP, which exposed us to risks relating to noncompliance with the PPP. For instance, other financial institutions have
experienced litigation related to their process and procedures used in processing applications for the PPP. Under the PPP, lending banks are generally entitled to rely
on borrower representations and certifications of eligibility to participate in the program, and lending banks may also be held harmless by the SBA in certain
circumstances for actions taken in reliance on borrower representations and certifications. The PPP was modified on June 5, 2020, with the adoption of the Paycheck
Protection Program Flexibility Act, or (‘the PPFA”). The PPFA increased the amount of time that borrowers have to use PPP loan proceeds and apply for loan
forgiveness and made other changes to make the program more favorable to borrowers. Notwithstanding the foregoing, the Bank has been, and may continue to be,
exposed to credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or
serviced. If a deficiency is identified, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the
guaranty, seek recovery of any loss related to the deficiency from the Bank.
The Bank’s participation in and execution of these and other measures taken by governments and regulatory authorities in response to the Covid-19
pandemic could result in reputational harm and has resulted in, and may continue to result in, litigation, including class actions, or regulatory and government
actions and proceedings. Such actions may result in judgments, settlements, penalties and fines levied against us.
In addition, while the Covid-19 pandemic had a material impact on the provision for credit losses and fair value estimates, we are unable to fully predict the
impact that Covid-19 will have on the credit quality of the loan portfolios of the Bank, our financial position and results of operations due to numerous uncertainties.
One of the provisions of the CARES Act was the payment by the U.S. government of six months of principal and interest on SBA 7a loans, which was largely be
completed in the fourth quarter of
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2020. Additional payments were authorized in December 2020 legislation. While proposed legislation for continuation of U.S. government funded loan payments is
being considered by Congress, there can be no assurance that such proposals will become law. If legislation does not result in future monthly payments by the U.S.
government, we may decide to grant deferrals of monthly interest and principal payments. Accounting and banking regulators have determined that principal and
interest deferrals of up to six months do not represent material changes in loan terms and such loans will not, during the deferral period, be classified as delinquent,
non-accrual or restructured. We will continue to assess these and other potential impacts on the credit quality of the loan portfolio of the Bank, our financial
position and results of operations.
The extent to which the Covid-19 pandemic impacts our business, results of operations and financial condition will depend on future developments, which
are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the pandemic, its severity, the actions to contain the virus or
treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even after the Covid-19 pandemic has subsided, we
may continue to experience materially adverse impacts to our business as a result of the virus’s global economic impact, including the availability of credit, adverse
impacts on liquidity and any recession that has occurred or may occur in the future.
There are no comparable recent events that provide guidance as to the effect the spread of Covid-19 as a global pandemic may have, and, as a result, the
ultimate impact of the pandemic is highly uncertain and subject to change. We do not yet know the full extent of the impacts on our business, operations or the
economy as a whole. However, the effects could have a material impact on our results of operations and heighten many of the known risks described in this “Risk
Factors” section.
Periods 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.
In recent periods, 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 credit 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 cannot assure you that we will be able to accomplish our strategic goals that would enable us to meet our financial targets.
Our future earnings will reflect our success in replacing and growing both our loans and deposits at targeted rates and yields, and the payments transactions from
which we derive fee income. Our businesses differ from most banks in the nature of both our lending niches and our payments businesses, and changes in loan
acquisition and repayment speeds. We provide additional information on our lending niches and payments businesses in this Form 10K and other public filings and,
on our website, as to our financial planning and performance goals. As noted above, information found on our website is not part of this Annual Report on Form 10-
K. Loan, deposit and transaction growth rates and financial targets may also be impacted by other strategic goals including maintaining a scalable infrastructure,
continuing technology innovations, maintaining what we believe to be an industry leading compliance and risk function; non-interest expense management and
others. There can be no assurance that we will maintain or increase loan and deposit balances or payment transactions at the required yields or volumes, or succeed
in other strategic goals, as necessary to achieve financial targets.
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
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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.
Risk management processes and strategies must be effective, and concentration of risk increases the potential for losses.
Our risk management processes and strategies must be effective, otherwise losses may result. We manage asset quality, liquidity, market sensitivity,
operational, regulatory, third-party vendor and partner relationship risks and other risks through various processes and strategies throughout the organization. If our
risk management judgments and strategies are not effective, or unanticipated risks arise, our income could be reduced or we could sustain losses.
We 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.
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.
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.
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Many conventional financial institutions offer the option of internet banking and financial services to their existing and prospective customers. The public
may perceive conventional financial institutions as being safer, more responsive, more comfortable to deal with and more accountable as providers of their banking
and financial services, including their internet banking services. We may not be able to offer internet banking and financial services and personal relationship
characteristics that have sufficient advantages over the internet banking and financial services and other characteristics of established conventional financial
institutions to enable us to compete successfully.
Moreover, both the internet and the financial services industry are undergoing rapid technological changes, with frequent introductions of new technology-
driven products and services. In addition to improving the ability to serve customers, the effective use of technology increases efficiency and enables financial
institutions to reduce costs. Our ability to compete will depend, in part, upon our ability to address the needs of our customers by using technology to provide
products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially
greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be
successful in marketing these products and services to our customers. Such products may also prove costly to develop or acquire.
Our operations may be interrupted if our network or computer systems, or those of our providers, fail.
Because we deliver our products and services over the internet and outsource several critical functions to third parties, our operations depend on our ability,
as well as that of our service providers, to protect computer systems and network infrastructure against interruptions in service due to damage from fire, power loss,
telecommunications failure, physical break-ins and computer hacking or similar catastrophic events. Our operations also depend upon our ability to replace a third-
party provider if it experiences difficulties that interrupt our operations or if an operationally essential third-party service terminates. Service interruptions to
customers may adversely affect our ability to obtain or retain customers and could result in regulatory sanctions. Moreover, if a customer were unable to access his
or her account or complete a financial transaction due to a service interruption, we could be subject to a claim by the customer for his or her loss. While our accounts
and other agreements contain disclaimers of liability for these kinds of losses, we cannot predict the outcome of litigation if a customer were to make a claim against
us.
A failure of cyber security may result in a loss of customers and our being liable for damages for such failure.
A significant barrier to online and other financial transactions is the secure transmission of confidential information over public networks and other
mediums. The systems we use rely on encryption and authentication technology to provide secure transmission of confidential information. Advances in computer
capabilities, new discoveries in the field of cryptography or other developments could result in a compromise or breach of the algorithms used to protect customer
transaction data. If we, or another provider of financial services through the internet, were to suffer damage from a security breach, public acceptance and use of the
internet as a medium for financial transactions could suffer. Any security breach could deter potential customers or cause existing customers to leave, thereby
impairing our ability to grow and maintain profitability and, possibly, our ability to continue delivering our products and services through the internet. We could also
be liable for any customer damages arising from such a breach. Other cyber threats involving theft of confidential information could also result in liability. Although
we, with the help of third-party service providers, intend to continue to implement security technology and establish operational procedures to prevent security
breaches, these measures may not be successful.
We outsource many essential services to third-party providers who may terminate their agreements with us, resulting in interruptions to our banking
operations.
We obtain essential technological and customer services support for the systems we use from third-party providers. We outsource our check processing,
check imaging, transaction processing, electronic bill payment, statement rendering, and other services to third-party vendors. For a description of these services, see
Item 1, “Business—Other Operations—Third-Party Service Providers.” Our agreements with each service provider are generally cancelable without cause by either
party upon specified notice periods. If one of our third-party service providers terminates its agreement with us and we are unable to replace it with another service
provider, our operations may be interrupted. Even a temporary disruption in services could result in our losing customers, incurring liability for any damages our
customers may sustain, or losing revenues. Moreover, there can be no assurance that a replacement service provider will provide its services at the same or a lower
cost than the service provider it replaces.
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We are subject to extensive government regulation.
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 us and the Bank in substantial and unpredictable ways and
could have a material adverse effect on our financial condition and results of operations.
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 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") 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
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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.
We are subject to extensive government supervision with respect to our compliance with numerous laws and regulations.
We have policies and procedures designed to prevent violations of the extensive federal and state laws and regulations that we are subject to, however there
can be no assurance that such violations will not occur. Failure to comply with these statutes, regulations or policies could result in a determination of an apparent
violation of law, and could trigger formal or informal enforcement actions or other sanctions against us or the Bank by regulatory agencies, including entering into
consent orders or other agreements, assessment of civil money penalties, criminal penalties, reputational damage, and a downgrade in the Company’s ratings or 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. Further, we are at risk of the imposition of additional civil money penalties by our
regulators, based on, among other things, 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 may be contractually indemnified for certain
violations atrributable to third parties, 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 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 any 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.
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 continually evaluate our practices and must be satisfied with the results of our third-party oversight
activities. We cannot assure you that we will satisfy all related requirements. Not maintaining 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.
Legislative and regulatory actions taken now or in the future may increase our operating costs and impact our business, governance structure, financial
condition or results of operations.
Federal and state regulatory agencies frequently adopt changes to their regulations or change the manner in which existing regulations are interpreted and
applied. Changes to the laws and regulations applicable to the financial industry, if enacted or adopted, could expose us to additional costs, including increased
compliance costs, require higher levels of capital and liquidity, negatively impact our business practices, including the ability to offer new products and services and
attract and retain new customers and business partners who may do business with us based, in whole or in part, upon our corporate and governance structure,
regulatory status, asset size and other factors tied to the legal and regulatory framework governing the financial industry. 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 and operating activities of financial institutions and their holding companies. While a significant number of regulations have already
been promulgated to implement the Dodd-Frank Act, including, for example, the Collins Amendment and the Durbin Amendment, future changes or interpretations
to these rules and other bank regulations are uncertain and could negatively impact our business, thereby increasing our operating and compliance costs and
obligations, and reducing or eliminating our ability to generate profits.
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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 and
certain of our loans are government guaranteed. 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 and certain loan portfolios.
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. Significant amounts of loans are accounted for at fair (market) value, and a decrease in such value would reduce income.
Potential acquisitions may disrupt our business and dilute stockholder value.
Acquiring other banks or businesses involves various risks including, but not limited to:
potential exposure to unknown or contingent liabilities of the target entity;
exposure to potential asset quality issues of the target entity;
difficulty and expense of integrating the operations and personnel of the target entity;
potential disruption to our business;
potential diversion of our management’s time and attention;
the possible loss of key employees and customers of the target entity;
difficulty in estimating the value of the target entity;
potential changes in banking or tax laws or regulations that may affect the target entity; and
difficulty navigating and integrating legal, operating cultural differences between the United States and the countries of the target entity’s operations.
From time to time we evaluate merger and acquisition opportunities and conduct due diligence activities related to possible transactions with other
financial institutions and financial services companies. As a result, merger or acquisition discussions and, in some cases, negotiations may take place and future
mergers or acquisitions involving cash, debt or equity securities may occur at any time. Acquisitions typically involve the payment of a premium over book and
market values, and, therefore, some dilution of our tangible book value and net income per common share may occur in connection with any future transaction.
Furthermore, failure to realize the expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits from an
acquisition could have a material adverse effect on our financial condition and results of operations.
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Risks Related to Our Specialty Lending Business Activities:
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 accounted for at fair value. 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 credit 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 credit losses, see Item 1, “Business –Lending Activities.”
The Bank’s allowance for credit losses may not be adequate to cover actual losses.
Like all financial institutions, the Bank maintains an allowance for credit losses to provide for current and future expected losses inherent in its loan
portfolio. At December 31, 2020, the ratios of the allowance for credit losses to total loans and to non-performing loans were, respectively, 0.61% and 126.4%. The
Bank’s allowance for credit 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 credit 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, industry information, economic conditions and
reasonable and supportable forecasts. 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 credit 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 credit losses. Although we believe that the Bank’s allowance for credit losses is adequate to provide for current and future expected credit 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 credit losses, change our methodology for determining our allowance and provision for credit 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 credit losses, see Item 1,”
Business –Lending Activities.”
Our lending limit may adversely affect our competitiveness.
Our regulatory lending limit as of December 31, 2020 to any one customer or related group of customers was $85.7 million for unsecured loans and
$142.8 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.
Changes to the Financial Accounting Standards Board (“FASB”) accounting standards have and will continue to 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
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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 deteriorated loans
and debt securities, 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 losses instead of a direct write-down,
which allows for reversal of credit losses in future periods based on improvements in credit. The CECL model has and will materially impact how we determine our
allowance for credit losses and may require us to significantly increase our allowance for credit losses. Furthermore, our allowance for credit losses may experience
more fluctuations, some of which may be significant. If we determined that we would need to increase the allowance for credit losses to appropriately capture the
credit risk that exists in our lending and investment portfolios, it may negatively impact our business, earnings, financial condition and results of operations.
We adopted the guidance in first quarter 2020.
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 we are 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 credit losses. In addition, only certain SBA loans are 75% guaranteed by
the U.S. government, and even for those, we still assume credit risk on the remaining 25%. These borrowers, which include new start-ups, may have a higher
probability of failure which may result in higher losses on such loans. If the level of non-performing assets increases, interest income will be reduced. If we
experience loan defaults in excess of amounts that we have included in our allowance for credit losses, we will have to increase the provision for credit 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.”
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.
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
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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.
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.
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. Loan demand may vary for economic and competitive reasons and we cannot assure you that historical rates of
loan growth will continue or as to other loan production. Net interest income is difficult to project, and our models for making such projections are theoretical.
While they may indicate the general direction of changes in net interest income, they do not indicate actual future results. In first quarter 2020, the Federal Reserve
instituted emergency rate cuts, and additional rate cuts may still occur in response to economic and other conditions. Such actions may decrease net interest income,
to the extent the reduction is not offset with the impact of loan growth or other factors.
We may be adversely impacted by the transition from London Inter-bank Offered Rate (“LIBOR”) as a reference rate.
The administrator of LIBOR, announced that it intends to phase out LIBOR by June 30, 2023, 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. The majority of our commercial mortgages, at fair value 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 Relating to Our Payments Business Activities:
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.
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 74% of such fees. Prepaid and debit card deposits comprise a significant portion of the Bank’s deposits.
Our prepaid and debit card and other deposit accounts generated by 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. In December 2020, the FDIC adopted a regulation which may result in the reclassification of certain of our deposits as non-
brokered, depending on multiple factors including the potential filing of applications with the FDIC for a determination as to the non-brokered status of the deposits.
While we intend to pursue reclassification of a significant portion of our deposits, we cannot determine whether the FDIC will agree with the proposed
reclassifications.
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.
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We derive a significant percentage of our deposits, total assets and income from deposit accounts generated by 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 $4.45 billion at December 31, 2020. The top twenty
relationships result in the majority of our payments related income. We provide oversight over these relationships which must meet all internal and regulatory
requirements. We may exit relationships where such requirements are not met or be required by our regulators to exit such relationships. Also, an affinity group
could terminate a relationship with us for many reasons, including being able to obtain better terms from another provider or dissatisfaction with the level or quality
of our services. If an affinity group relationship were to be terminated, it could materially reduce our deposits, assets and income. We cannot assure you that we
could replace such relationship. If we cannot replace such relationship, we may be required to seek higher rate funding sources as compared to the exiting affinity
group and interest expense might increase. We may also be required to sell securities or other assets to meet funding needs which would reduce revenues or
potentially generate losses.
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.
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.
Risks Relating to Taxes and Accounting:
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.
The appraised fair value of the assets from our discontinued commercial loan operations or collateral from other loan categories 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 for this and other loan catgories and actual sales prices
could be significantly less than the estimates, which could materially affect our results of operations in future quarters.
39
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.
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.
40
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. Although we believe we have
sufficient existing liquidity for our needs for the foreseeable future, there is risk that, we may not be able to service our obligations as they become due or to pay
dividends on our common stock or trust preferred obligations. Even if 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.
General Risks:
Severe weather, natural disasters, acts of war or terrorism or other adverse external events could harm our 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 pandemic, 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
41
those portions of our business or operations which rely on vendors and suppliers from other countries or regions impacted by such a pandemic event.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our executive office and an operations facility are located at 409 Silverside Road, Wilmington, Delaware. We maintain business development and
administrative offices for SBL in Morrisville, North Carolina, and Westmont, Illinois (suburban Chicago), primarily for SBA lending. Leasing offices are located in
Charlotte, North Carolina, Crofton, Maryland, Kent, Washington, Logan, Utah, Orlando, Florida, Raritan, New Jersey, and Norristown and Warminster,
Pennsylvania. We maintain a loan operations office in New York, New York. Prepaid and debit card offices and other executive offices are located in Sioux Falls,
South Dakota. The Philadelphia, Pennsylvania and one of two New York properties are no longer occupied by us, 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, 2020 are listed below.
We own a property in Orlando, Florida which houses our leasing operations, consisting of a stand-alone building of 8,850 square feet. A summary of significant
properties is as follows.
Location
Bank Owned Property
Orlando, Florida
Leased Space
Charlotte, North Carolina
Crofton, Maryland
Kent, Washington
Logan, Utah
Morrisville, North Carolina
New York, New York (one of two properties is subleased)
Norristown, Pennsylvania
Raritan, New Jersey
Philadelphia, Pennsylvania (subleased)
Sioux Falls, South Dakota
Warminster, Pennsylvania
Westmont, Illinois
Wilmington, Delaware
Expiration
Square Feet
Monthly Rent
2021
2025
2021
2021
2024
2024 - 2025
2025
2022
2022
2022
2022
2026
2025
8,850
2,345 $
3,364
1,700
3,181
3,590
11,701
7,180
2,145
14,839
38,611
2,600
3,003
70,968
4,148
4,500
2,653
1,425
5,576
36,028
10,500
3,776
7,316
54,674
2,295
2,292
142,993
We believe that our offices are suitable and adequate for our operations.
Item 3. Legal Proceedings.
For a historical discussion of prior regulatory actions resulting in Consent Orders issued by the FDIC to the Bank, but which have been terminated, see Part
I, Item I, Business—Regulatory Actions.
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 has filed an answer denying the allegations and continues to vigorously defend
the claims. The Bank and other defendants previously filed a motion to dismiss the action, but the motion was denied and the case is in preliminary stages of
discovery. At this time, the Company is unable to determine whether the ultimate resolution of the matter will have a material adverse effect on the Company’s
financial condition or operations.
42
The Company has received and is responding to two non-public fact-finding inquiries from the SEC, which in each case is seeking to determine if
violations of the federal securities laws have occurred. The Company refers to these inquiries collectively as the SEC matters. On October 9, 2019, the Company
received a subpoena seeking records related generally to The Bancorp Bank’s debit card issuance activity and gross dollar volume data, among other things. The
Company responded to the subpoena and subsequent subpoenas issued to the Company. Unrelated to the first inquiry, on April 10, 2020, the Company received a
subpoena in connection with The Bancorp Bank’s CMBS business seeking records related to various offerings as well as CMBS securities held by the Bank. Since
inception of these SEC matters to the present, the Company has been cooperating fully with the SEC. The SEC has not made any findings, or alleged any
wrongdoings, with respect to the SEC matters. The costs related to responding to and cooperating with the SEC staff may be material, and could continue to be
material at least through the completion of the SEC matters.
On June 2, 2020, the Bank was served with a complaint filed in the Supreme Court of the State of New York, titled Cascade Funding, LP – Series 6,
Plaintiff v. The Bancorp Bank, Defendant. The lawsuit arises from a Purchase and Sale Agreement between Cascade Funding, LP – Series 6 (“Cascade”) and the
Bank, pursuant to which Cascade was to purchase certain mortgage loan assets from the Bank for securitization. Cascade improperly attempted to invoke a market
disruption clause in the agreement to avoid the purchase. Cascade’s failure to close the transaction constituted a breach of the agreement and, accordingly, the Bank
terminated the agreement, effective April 29, 2020. Pursuant to the agreement, the Bank retained Cascade’s deposit of approximately $12.5 million. The lawsuit
asserts three causes of action: (i) breach of contract; (ii) injunction and specific performance; and (iii) declaratory judgment. Cascade seeks the return of its deposit
plus interest and attorneys’ fees and costs. The Bank is vigorously defending this matter and the case is in preliminary stages of discovery. Given the early stages of
this matter, the Company is not yet able to determine whether the ultimate resolution of this matter will have a material adverse effect on the Company’s financial
condition or operations.
On January 12, 2021, three former employees of the Bank filed separate complaints against the Company in the Supreme Court of the State of New York,
New York County. The Company subsequently removed all three lawsuits to the United States District Court for the Southern District of New York. The cases are
captioned: John Edward Barker, Plaintiff v. The Bancorp, Inc., Defendant; Alexander John Kamai, Plaintiff v. The Bancorp, Inc., Defendant; and John Patrick
McGlynn III, Plaintiff v. The Bancorp, Inc., Defendant. The lawsuits arise from the Bank’s termination of the plaintiffs’ employment in connection with the
restructuring of its CMBS business. The plaintiffs seek damages in the following amounts: $4,135,142.80 (Barker), $901,088.00 (Kamai) and $2,909,627.20
(McGlynn). The Company intends to vigorously defend these matters. Given the early stage of the lawsuits, the Company is not yet able to determine whether the
ultimate resolution of this matter will have a material adverse effect on the Company’s financial conditions or operations.
In addition, we are a party to various routine legal proceedings arising out of the ordinary course of our business. Management believes that none of these
actions, individually or in the aggregate, will have a material adverse effect on our financial condition or operations.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock trades on the NASDAQ Global Select Market under the symbol “TBBK.” As of March 1, 2021, there were 57,934,841 shares of our
common stock outstanding held by 49 record holders. The actual number of stockholders is greater than this number of record holders and includes stockholders
who are beneficial owners but whose shares are held in street name by brokers, financial institutions and other nominees. As of January 8, 2021, the most recent
date for which we have beneficial ownership information, there were at least 6,317 beneficial owners of our common stock.
We have not paid cash dividends on our common stock since our inception, and do not currently plan to pay cash dividends on our common stock in 2021.
Our payment of dividends is subject to restrictions discussed in Item 1, “Business—Regulation under Banking Law,”. Irrespective of such restrictions, it is our intent
to generally 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.
43
44
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, 2015 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.
Index
The Bancorp, Inc.
NASDAQ Bank Stock Index
NASDAQ Composite Stock Index
12/31/2015
12/31/2016
12/31/2017
12/31/2018
12/31/2019
12/31/2020
100.00
100.00
100.00
123.39
135.03
107.50
45
155.10
139.77
137.86
124.96
114.74
132.51
203.61
139.10
179.19
214.29
124.31
257.38
The following graph reflects stock performance since 2015, compared to the KBW bank index, which is an industry recognized peer group of regional and
money center banks.
Index
The Bancorp, Inc.
KBW Bank Index
12/31/2015
12/31/2016
12/31/2017
12/31/2018
12/31/2019
12/31/2020
100.00
100.00
123.39
125.60
155.10
151.71
124.96
117.39
203.61
155.12
214.29
133.98
As of
46
Common Stock Repurchase Plan
On November 5, 2020, our Board of Directors authorized and we publicly announced a common stock repurchase program (the “Common Stock
Repurchase Program”). Under the Common Stock Repurchase Program, repurchased shares may be reissued for various corporate purposes. We currently plan to
spend up to $10.0 million per quarter for such repurchases depending on the share price, securities laws and stock exchange rules which regulate such repurchases.
This plan may be modified or terminated at any time. As of December 31, 2020, no share repurchases had been made under the plan.
Item 6. Selected Financial Data.
The following table sets forth selected financial data as of and for the years ended December 31, 2020, 2019, 2018, 2017 and 2016. 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.
47
$
$
$
$
$
$
$
$
$
$
$
Income Statement Data:
Interest income
Interest expense
Net interest income
Provision for credit losses
Net interest income after provision for
credit
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
Commercial loans, at fair value
Total loans, net of unearned costs
Allowance for credit 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 1 capital to average assets
Tier 1 or common equity capital to total
risk-weighted assets
Total capital to total risk-weighted assets
Allowance for credit losses to total loans
nm = not meaningful
2020
2019
$
210,782
15,916
194,866
6,352
179,569
38,281
141,288
4,400
As of and for the years ended
December 31,
2018
(in thousands, except per share data)
$
$
147,960
27,111
120,849
3,585
188,514
84,617
164,847
108,284
27,688
80,596
(512)
80,084
1.40
(0.01)
1.39
1.38
(0.01)
1.37
6,276,841
1,810,812
2,652,323
16,082
345,515
5,462,060
581,164
$
$
$
$
$
$
$
$
$
1.34%
15.08%
3.45%
$
10.10
9.26%
9.20%
14.43%
14.84%
0.61%
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
4,437,911
688,471
1,501,976
8,653
554,302
3,935,714
406,776
$
$
$
$
$
$
$
$
$
2.07%
24.26%
3.19%
$
7.22
9.17%
10.11%
20.64%
21.07%
0.58%
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
5,656,963
1,180,546
1,824,245
10,238
944,472
5,052,030
484,497
$
$
$
$
$
$
$
$
$
1.09%
11.57%
3.32%
$
8.52
8.56%
9.63%
19.04%
19.45%
0.56%
48
2017
2016
$
122,020
15,340
106,680
2,920
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
4,708,147
503,316
1,390,458
7,096
908,935
4,260,842
324,149
$
$
$
$
$
$
$
$
$
nm
nm
3.04%
$
5.81
6.88%
7.90%
16.73%
17.09%
0.51%
102,219
12,253
89,966
3,360
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)
4,858,114
663,140
1,220,729
6,332
999,059
4,238,304
298,963
nm
nm
2.74%
5.40
6.15%
6.90%
13.34%
13.63%
0.52%
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.
Recent Developments
The Covid-19 pandemic has impacted our financial performance, primarily through unrealized losses on commercial loans previously originated for sale which we
have now decided to retain. Our net income of $80.1 million in 2020 reflected pre-tax charges of approximately $5.6 million for such losses, substantially all
unrealized, on our commercial loans held at fair value which were primarily related to the economic impact of the Covid-19 pandemic. Additional impact of the
Covid-19 pandemic included an approximate $1.1 million increase in the provision for credit losses in 2020 related to economic factors. These charges were
recognized primarily in the first quarter of 2020. As a result of the potentially unique impact of the Covid-19 pandemic, we have added new loan tables under
“Financial Condition-Loan Portfolio”, which detail diversification by loan type, collateral and other characteristics. The $67.8 million of hotel loans in our
$1.57 billion commercial loans held at fair value portfolio may represent an elevated risk. Of that $1.57 billion, $50.2 million, with a weighted average origination
loan-to-value of 57%, are in deferral with respect to principal and interest payments. The loans in deferral consist of four hotel loans totaling $40.4 million and one
retail property loan (a movie complex) of $9.8 million. However, $1.43 billion of that $1.57 billion portfolio are multi-family loans (apartments), which have an
updated expected Covid-19 pandemic cumulative loss rate of 1.2% based on an analysis by a nationally recognized analytics firm. Substantially all of these loans are
recorded on the balance sheet at a 1% discount, which largely offsets those projected cumulative Covid-19 pandemic losses. Our next largest $1.55 billion loan
portfolio is comprised of securities-backed lines of credit (“SBLOC”), and insurance policy cash value-backed lines of credit (“ IBLOC") loans which have not
incurred credit losses, notwithstanding the recent historic declines in equity markets. Over half of the Small Business Administration (“SBA”) loan portfolio is U.S.
government guaranteed, and the U.S. government paid principal and interest on those loans for a six month period in 2020. The six months of principal and interest
payments funded by the U.S. government were made on SBA 7a loans pursuant to The CARES Act of 2020 (the “CARES Act”) and were largely completed in the
fourth quarter of 2020. The Consolidated Appropriations Act, 2021, became law in December 2020 and provided for at least an additional two months of principal
and interest payments on SBA 7a loans, with up to five months of payments for hotel, restaurant and other more highly impacted loans. Unlike the six months of
CARES Act payments, these additional payments are capped at $9,000 per month. The portions of SBA 7a loans not guaranteed by the U.S. government may also
have an elevated risk, but are diversified with respect to loan type. That diversification is detailed in tables appearing later in this section including a table
illustrating diversification for the non-guaranteed portions of 7a loans in deferral. The majority of the balance of SBA loans consists of commercial mortgages with
50% to 60% origination date loan-to-value. For leases which experience credit issues, we have recourse to the leased vehicles. While there is uncertainty related to
the future, we believe these are positive characteristics of our loan portfolio which demonstrate lower risk than other forms of lending.
U.S. government efforts to address the economic impact of the Covid-19 pandemic include several actions which have and will directly impact us as
follows:
Under the Cares Act, the Paycheck Protection Program (“PPP”) provided for our making loans as an SBA lender which are fully guaranteed by the U.S.
government to allow businesses to continue funding their payrolls and related costs. We originated approximately 1,250 PPP loans, totaling in excess of
$200 million, which we expect will net approximately $5.5 million of fees and interest. The average loan size was approximately $165,000, with over 90% of
the loans under $350,000. While it was originally anticipated that these fees would be recognized earlier, new legislation and rulemaking have resulted in their
estimated recognition over approximately eleven months beginning April 2020. The Consolidated Appropriations Act, 2021 provides for additional PPP loans
and we are planning to lend within that program. As that new legislation includes lost revenue thresholds for participation, we believe that loan volume and fees
will likely be less than for the first PPP.
The SBA began, in April 2020, to make six months of principal and interest payments on SBA 7a loans, which are generally 75% guaranteed by the U.S.
government. As of December 31, 2020, we had $337.9 million of related guaranteed balances, and additionally had $167.7 million of PPP loans which were
also guaranteed. The majority of the six months of support expired in the fourth quarter of 2020, and we began approving Covid-19 pandemic-related deferrals
for principal and interest payments as requested by borrowers. The Consolidated Appropriations Act, 2021, became law in December 2020 and provided for at
least an additional two months of payments on SBA 7a loans, and up to five months of such payments for hotel, restaurant and other more highly impacted
loans. Unlike the Cares Act, these payments are capped at $9,000 per month. Additionally, we have and are granting monthly principal and interest deferrals for
certain other loans, as shown in the table summarizing loan payment deferrals below.
49
Per section 4013 of the CARES Act, accounting and banking regulators have determined that loans with Covid-19 pandemic-related deferrals of principal and
interest payments will not, during the deferral period, be classified as delinquent, non-accrual or restructured. The Consolidated Appropriations Act, 2021,
extended that treatment for deferrals through the earlier of December 31, 2021, or the end of the national emergency.
In the third quarter of 2020, we decided to retain the existing portfolio of commercial real estate loans totaling $1.57 billion which had been originated for
sale or securitization. Further, we are not currently planning any future securitizations. The portfolio is mostly comprised of multi-family loans, specifically
apartment buildings, and comprises the majority of the commercial loans at fair value on our balance sheet, with the balance of that category comprised of the
government guaranteed portion of SBA loans.
The following table summarizes our loan payment deferrals as of December 31, 2020:
Cumulative
months
deferred (1)
Total
loan
balance deferrals
Total
loan
balances
% of
loan balances
with deferrals
Commercial real estate loans held at fair value (excluding SBA loans
shown below)
Securities backed lines of credit, insurance backed lines of credit &
advisor financing
SBL commercial mortgage
SBL construction
SBL non-real estate and PPP
Direct lease financing
Discontinued operations
Other consumer loans and specialty lending
Total
(1) Weighted average of cumulative months deferred.
6.8
$
—
5.6
—
4.5
3.0
6.2
—
5.8
$
(dollars in thousands)
50,155
$
—
66,862
—
23,691
467
6,370
—
$
147,545
1,572,027
1,598,368
419,413
20,273
381,817
462,182
95,982
6,426
4,556,488
3%
—%
16%
—%
6%
—%
7%
—%
3%
In the table above, the total loan balance deferrals for SBL categories are comprised of unguaranteed portions of SBA loans. The CARES Act provided
SBA 7a borrowers six months of principal and interest payments. The Consolidated Appropriations Act, 2021, became law in December 2020 and provided for at
least two additional months of payments on SBA 7a loans which begin on February 1, 2021. Hotel, restaurant and other loans more highly impacted by the Covid-19
pandemic will receive up to five additional months of payments made for them. Unlike the CARES Act, these payments will be capped at $9,000 per month.
Accordingly, we expect deferrals to decrease when those payments are reinstituted at that date. In addition to the payments being made on these loans by the U.S.
government, the following table details the diversification of the non-guaranteed portions of SBA 7a loans in deferral, which we believe is a mitigant to potential
losses. Additional diversification tables by geography and loan size are also presented under “Financial Condition-Loan Portfolio”. The unguaranteed portions of
SBA 7a loans total $101.5 million and may represent an elevated risk. The following table details the loan types for the $14.8 million of the unguaranteed portions
of 7a deferrals which are included in the table above.
Hotels*
Sports and recreation instruction
Offices of dentists
Car washes
Child and youth services
Full-service restaurants*
Limited-service restaurants*
Sporting and athletic goods manufacturing
All other miscellaneous food manufacturing
Coin-operated laundries and drycleaners
Administrative management and general management consulting services
Commercial printing (except screen and books)
Pet care (except veterinary) services
Funeral homes and funeral services
Industrial machinery and equipment merchant wholesalers
Other
Total
50
Total
% Total
(in thousands)
$
$
4,924
1,157
1,096
861
810
763
512
476
434
405
333
332
308
308
302
1,755
14,776
34%
8%
7%
6%
5%
5%
3%
3%
3%
3%
2%
2%
2%
2%
2%
13%
100%
* At December 31, 2020, SBA 7a loans, included in SBL, totaled $439.0 million of which $101.5 million was not U.S. government guaranteed. The CARES Act provided SBA 7a borrowers six
months of principal and interest payments. The Consolidated Appropriations Act, 2021, became law in December 2020 and provided for an additional two months of payments on SBA 7a loans
which begin on February 1, 2021, with up to five months for hotel and restaurant loans. Accordingly, we expect deferrals to decrease when those payments are reinstituted at that date.
Key Performance Indicators
We use a number of key performance indicators to measure our overall financial performance. We describe how we calculate and use a number of these
performance indicators and analyze their results below.
Return on assets and return on equity. Two performance indicators we believe are commonly used within the banking industry to measure overall financial
performance are return on assets and return on equity. Return on assets measures the amount of earnings compared to the level of assets utilized to generate those
earnings. It is derived by dividing net income by average assets. Return on equity measures the amount of earnings compared to the equity utilized to generate those
earnings. It is derived by dividing net income by average shareholders’ equity.
Net interest margin and credit losses. The largest component of our earnings is net interest income, or the difference between the interest earned on our
interest-earning assets consisting of loans and investments, less the interest on our funding, consisting primarily of deposits. The key performance indicator for net
interest income is net interest margin, derived by dividing net interest income by average interest-earning assets. Higher levels of earnings and net interest income,
on lower levels of assets, equity and interest-earning assets are generally desirable. However, these indicators must be considered in light of regulatory capital
requirements which impact equity, and credit risk inherent in loans. Accordingly, the magnitude of credit losses is an additional key performance indicator.
Other performance indicators. Other performance indicators we use include loan growth, non-interest income growth and the level of non-interest expense.
Results of performance indicators. In the five year period ended December 31, 2020, we have transitioned from a balance sheet which was significantly
comprised of local Philadelphia commercial real estate loans, to other types of lending which we believe are lower risk. These include: multi-family (apartment)
loans in selected national regions; loans collateralized by securities (“SBLOC”) and the cash value of life insurance (“IBLOC”); SBA loans, a significant portion of
which are government guaranteed or must have loan-to-value ratios lower than other forms of lending; and leasing to which we have access to underlying vehicles.
These loan categories have grown significantly which we believe has contributed to improved financial performance over the past five years.
Our most recent improved financial performance is reflected in a number of these performance indicators. In 2020, return on assets and return on equity
amounted to 1.34% and 15.08%, respectively, compared to 1.09% and 11.57% in the prior year. Net interest margin increased over that period, to 3.45% in 2020
compared to 3.32% in 2019. Deposit accounts generated by our payments business has resulted in a cost of funds lower than other forms of funding which
contributed to that increase. The payments business contributed to increases in non-interest income, as fees earned from transactions on these accounts increased
14.3% in 2020 compared to 2019. In 2020, the increase in net interest income more than offset the elimination of gains on loan securitization sales realized in 2019,
which resulted from a decision to hold certain loans instead of securitizing them. Non-interest expense between those years also decreased. Please see Item 6.
Selected Financial Data for a five year summary of financial results.
Overview
In 2020, we recorded net income of $80.1 million compared to $51.6 million in 2019, with pre-tax income from continuing operations increasing to
$108.3 million from $72.5 million. The increases resulted primarily from net interest income, which increased $53.6 million between those periods. The increase in
net interest income resulted primarily from an increase in average loans and leases to $3.94 billion from $2.42 billion in 2019. The increase in average loans
reflected growth in small business (primarily SBA), leases, SBLOC and IBLOC and commercial loans, at fair value. Commercial loans, at fair value were
previously generated for sale or securitization but we decided in 2020 to retain those loans on the balance sheet. The aforementioned $53.6 million increase in net
interest income more than offset a $19.5 million reduction in non-interest income. That reduction primarily reflected gains on securitizations in 2019 which were
absent in 2020. In 2020, we recorded unrealized losses of $5.6 million related to loans previously generated for securitizations, resulting primarily from the impact
of the Covid-19 pandemic. Those losses compared to gains of $24.1 million related to securitizations in 2019. As a result of historic Federal Reserve rate reductions
in first quarter 2020, our interest expense in 2020 decreased by $22.4 million compared to the prior year. Non-interest expense, after
51
excluding $8.9 million of civil money penalties in 2019, increased $5.2 million year over year and the primary component of that increase was salaries and
employee benefits.
Critical Accounting Policies and Estimates
Our accounting and reporting policies conform with accounting principles generally accepted in the United States and general practices within the financial
services industry. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to
make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those
estimates. We believe that the determination of our allowance for credit losses on loans, leases and securities, our determination of the fair value of financial
instruments and the level in which an instrument is placed within the valuation hierarchy, and income taxes involve a higher degree of judgment and complexity
than our other significant accounting policies.
We determine our allowance for credit losses with the objective of maintaining an allowance level we believe to be sufficient to absorb our estimated
current and future expected 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, collateral values and historical
loss experience. We also evaluate economic conditions and uncertainties in estimating losses and other risks in our loan portfolio. To the extent actual outcomes
differ from our estimates, we may need additional provisions for credit losses. Any such additional provisions for credit losses will be a direct charge to our
earnings. See “Allowance for Credit 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. One significant input is that $1.43 billion of commercial real estate at fair value are multi-family loans (apartments). Multi-family loans have
an updated expected Covid-19 pandemic cumulative loss rate of 1.2% based on an analysis by a nationally recognized analytics firm.To the extent actual outcomes
differ from our estimates, subsequent adjustments to the financial statements may be required.
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 result from credit, 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 Statements of Operations. If management believes market value losses are not credit related, we recognize the
reduction in other comprehensive income, through equity. We evaluate whether a credit loss exists by considering primarily the following factors: (a) the 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 a credit loss is determined, we estimate expected future cash flows to estimate 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.
52
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.
Results of Operations
Overview: Net interest income continued its upward trend in 2020, increasing $53.6 million over the prior year, primarily as a result of higher balances of
loans in all major loan categories, including commercial loans previously originated for sale. We decided to retain those loans, which are now shown as commercial
loans, at fair value on the balance sheet. Accordingly, average balances for those loans grew 153%, to $1.43 billion, in 2020 compared to 2019, as a result of our
decision to retain them. The increase in net interest income also reflected increases in other loan categories. From year end 2019 to year end 2020, SBA and leasing
balances grew 14% and 6%, respectively. Net interest income additionally benefited from a lower cost of funds, resulting primarily from historic Federal Reserve
rate reductions in first quarter 2020. For 2020, funding costs were 62 basis points lower than 2019 compared to a 44 basis point decrease in yield on interest earning
assets. The provision for credit losses increased $2.0 million to $6.4 million in 2020. Non-interest income in 2020 decreased by $19.5 million compared to the prior
year. That reduction reflected $24.1 million of gains related to securitizations in 2019. In 2020 there were no securitizations, and net losses of $3.9 million were
recognized on that portfolio primarily as a result of the Covid-19 pandemic. We are currently not planning any future securitizations. We instead plan to continue to
hold the $1.57 billion of related loans on our balance sheet as interest-earning assets. In 2017 through 2019, we sponsored six securitizations, approximately six
months apart, which resulted in gains on sale in the quarter of securitization. Future gains on sale will not occur with the retention of the portfolio of loans which
would otherwise have been securitized. The loans will continue to be fair valued, which may result in income or loss. While gains on sale will not occur, interest
income will be earned for the lives of these loans, which are generally recorded at 1% discounts and which have exit and prepayment fees which may vary.
In 2020, total non-interest expense decreased $3.7 million to $164.8 million, reflecting a $7.5 million increase in salaries and employee benefits and a
$2.8 million increase in FDIC insurance expense, partially offset by $8.9 million of civil money penalties in 2019. The increase in salaries and employee benefits
reflected increases in incentive compensation, compliance, risk management and IT expense. The increase in FDIC insurance expense reflected balance sheet
growth. We have targeted control over non-interest expense as a key strategic goal.
At December 31, 2020, our total loans, including commercial loans, at fair value, amounted to $4.46 billion, an increase of $1.46 billion, or 48.5%, over the
$3.0 billion balance at December 31, 2019, reflecting growth in all major categories of loans and the decision to retain loans which were originally generated for sale
or securitization. Our investment securities available-for-sale decreased $114.5 million to $1.21 billion from $1.32 billion between those respective dates as
prepayments of higher yielding securities accelerated after the Federal Reserve rate reductions in first quarter 2020.
Net Income: 2020 compared to 2019. Net income from continuing operations was $80.6 million in 2020 compared to $51.3 million in 2019 while income
before taxes was, respectively, $108.3 million and $72.5 million, an increase of $35.8 million. In 2020, net interest income grew by $53.6 million while non-interest
income decreased $19.5 million. The $53.6 million, or 37.9%, increase in 2020 net interest income over 2019 resulted primarily from higher balances of loans
previously originated for sale or securitization, and higher SBA and leasing balances. The reduction in non-interest income reflected $24.1 million of gains related to
securitizations in 2019. In 2020 there were no securitizations, and net losses of $3.9 million on loans previously generated for sale or securitization were recognized
primarily as a result of the Covid-19 pandemic. In 2020 compared to 2019, the primary drivers of fee income, prepaid, debit and related fees, increased 14.3% to
$74.5 million. The increase reflected increased volumes of transactions including volume increases from new relationships.
In 2020, total non-interest expense decreased $3.7 million to $164.8 million, reflecting a $7.5 million increase in salaries and employee benefits and a
$2.8 million increase in FDIC insurance expense, partially offset by $8.9 million of civil money penalties in 2019. The increase in salaries and employee benefits
reflected increases in incentive compensation, compliance, risk management and IT expense. The increase in FDIC insurance expense reflected balance sheet
growth.
A 21% federal corporate tax rate was effective for 2020 and 2019. The combined federal and state income tax rate was 26% in 2020. It was lower than the
29% rate in 2019 primarily as a result of the non-deductibility of the $8.9 million of civil penalties in 2019.
53
Reflecting these changes, net income from continuing operations amounted to $80.6 million in 2020 compared to $51.3 million in 2019, or continuing
operations earnings per diluted share of $1.38 compared to $0.89 in 2019. Net loss from discontinued operations was $512,000 for 2020 compared to net income of
$291,000 for 2019. Including discontinued operations, diluted income per share was $1.37 for 2020 compared to $0.90 for 2019 on net income of $80.1 million and
$51.6 million, respectively.
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
Safe Harbor Individual Retirement Account (“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 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 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 Securities Exchange Commission (“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.
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 Interest Income: 2020 compared to 2019. Our net interest income for 2020 increased to $194.9 million, an increase of $53.6 million, or 37.9%, from
$141.3 million for 2019, reflecting a $31.2 million, or 17.4%, increase in interest income to $210.8 million from $179.6 million for 2019. The increase in interest
income reflected the impact of loan growth, including the impact of the decision to retain loans previously generated for sale or securitization. Our average loans and
leases increased 63.0% to $3.94 billion in 2020 from $2.42 billion for 2019, while related interest income increased $43.7 million on a tax equivalent basis. The
largest increase in average loans and leases was in commercial loans previously originated for sale, now retained on the balance sheet, which increased
$864.1 million. Related interest income increased $36.4 million in 2020 compared to the prior year. Small business loan (primarily SBA) and leasing interest income
respectively increased $8.1 million and $1.6 million. Notwithstanding significant increases in balances, SBLOC and IBLOC interest decreased by $1.8 million as a
result of the Federal Reserve rate reductions. Our average investment securities were $1.32 billion for 2020 compared to $1.41 billion for 2019, while related
interest income decreased $4.5 million on a tax equivalent basis primarily as a result of Federal Reserve rate reductions. Those rate reductions also contributed to the
increase in net interest income as they were reflected in a decrease in interest expense of $22.4 million or 58.4% to $15.9 million, from $38.3 million in 2019.
Our net interest margin (calculated by dividing net interest income by average interest earning assets) for 2020 increased 13 basis points to 3.45% from
3.32% for 2019, as the decrease in cost of funds was greater than the decrease in the yield on earning assets. The average yield on our interest earning assets
decreased to 3.74% from 4.18% for 2019, a decrease of 44 basis points, while the cost of total deposits and interest-bearing liabilities decreased to 0.30% for 2020
from 0.92% for 2019, a decrease of 62 basis points. The net interest margin increase reflected the impact of weighted average 4.8% floors on an average $1.4 billion
portfolio of commercial real estate variable rate apartment loans, which were previously originated for sale or securitization, which significantly offset lower rates in
the similarly sized SBLOC and IBLOC portfolio. That SBLOC and IBLOC portfolio yield decreased to approximately 2.5% after the Federal Reserve rate
reductions. However, that portfolio, due to the nature of the collateral, has not experienced losses. The net interest margin also reflected the impact of growth in
higher yielding SBA loans and leases, which have
54
yielded in the 5% to 6% range.The yield on loans in total decreased to 4.34% from 5.25%, a decrease of 91 basis points. The yield on the investment portfolio
decreased less, 14 basis points, but further decreases may occur in that and the loan portfolio as maturities reprice to a lower rate environment. In 2020, average
demand and interest checking deposits amounted to $4.86 billion, compared to $3.82 billion in 2019, an increase of 27.4%, reflecting growth in debit and prepaid
card account balances. The yield on those deposits decreased to 0.23% in 2020 compared to 0.80% in 2019. Savings and money market balances averaged
$291.2 million in 2020 compared to $37.7 million in 2019 with an average 0.15% rate in 2020 compared to 0.48% in 2019. The $253.5 million increase in savings
and money market between these respective periods reflected growth in interest-bearing accounts offered by our affinity group clients to prepaid and debit card
account customers. The lower rates on these deposit categories also reflected the impact of Federal Reserve rate reductions.
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.
55
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:
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
Net interest earning assets
Allowance for credit losses
Assets held-for-sale from discontinued operations
Other assets
Liabilities and Shareholders' Equity:
Deposits:
Demand and interest checking
Savings and money market
Time
Total deposits
Short-term borrowings
Repurchase agreements
Subordinated debt
Senior 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 *
Average
balance
2020
Interest
Year ended December 31,
Average
rate
Average
balance
(dollars in thousands)
2019
Interest
Average
rate
$
$
$
$
3,931,758 $
8,885
1,317,031
4,412
381,290
5,643,376
(13,878)
127,519
226,210
5,983,227
4,864,236 $
291,204
79,439
5,234,879
27,322
49
13,401
38,532
5,314,183
137,983
5,452,166
531,061
5,983,227
170,449
647
37,822
145
1,885
210,948
4.34% $
7.28%
2.87%
3.29%
0.49%
3.74%
4,222
3.31%
11,356
442
1,483
13,281
198
—
524
1,913
15,916
$
0.23% $
0.15%
1.87%
0.25%
0.72%
—%
3.91%
4.96%
0.30%
$
2,402,686 $
14,968
1,406,247
6,533
472,279
4,302,713
(9,696)
169,986
254,674
4,717,677
3,817,176 $
37,671
170,438
4,025,285
129,031
90
13,401
—
4,167,807
104,233
4,272,040
445,637
4,717,677
126,176
1,177
42,286
215
10,007
179,861
5.25%
7.86%
3.01%
3.29%
2.12%
4.18%
6,710
3.95%
30,664
181
3,555
34,400
3,131
—
750
—
38,281
0.80%
0.48%
2.09%
0.85%
2.43%
—%
5.60%
—%
0.92%
$
199,254
166
$
199,088
$
148,290
292
$
147,998
3.45%
3.32%
* Full taxable equivalent basis, using 21% respective statutory Federal tax rates in 2020 and 2019.
56
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 credit 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 *
Average
balance
Year ended December 31,
2018
Interest
(dollars in thousands)
Average
rate
$
$
$
$
1,915,456 $
20,025
1,375,566
8,631
460,577
59,157
3,839,412
(7,528)
253,348
190,252
4,275,484
3,499,288 $
362,267
3,861,555
20,346
173
13,401
3,895,475
14,546
3,910,021
365,463
4,275,484
$
$
94,232
1,370
41,994
262
8,737
1,708
148,303
8,810
23,068
2,878
25,946
451
—
714
27,111
130,002
343
129,659
4.92%
6.84%
3.05%
3.04%
1.90%
2.89%
3.86%
3.48%
0.66%
0.79%
0.67%
2.22%
—%
5.33%
0.70%
3.19%
* Full taxable equivalent basis, using a 21% statutory Federal tax rate.
In 2020 compared to 2019, average interest earning assets increased to $5.64 billion, an increase of $1.34 billion, or 31.2%, from 2019. The increase
reflected a $1.52 billion, or 63.0%, increase in average loans and leases. The increase resulted primarily from higher balances of loans previously originated for sale
into securitizations and loan growth in SBLOC and IBLOC, small business (primarily SBA) and leasing. Average balances of investment securities decreased
$91.3 million, or 6.5%, as prepayments of higher yielding securities accelerated after the Federal Reserve rate reductions in first quarter 2020. In 2020, average
demand and interest checking deposits amounted to $4.86 billion, compared to $3.82 billion in 2019, an increase of 27.4%, reflecting growth in debit and prepaid
card account balances. 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 of retained loans
previously originated for sale into securitizations, SBLOC and IBLOC, SBA and leasing. Average balances of 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%.
57
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 2018 through 2020 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
Senior debt
Total interest expense
Net interest income:
$
$
$
Volume
2020 versus 2019
Due to change in:
Rate
Total
Volume
(in thousands)
2019 versus 2018
Due to change in:
Rate
Total
60,996
$
(16,723)
$
44,273
$
25,248
$
6,696
$
(448)
(2,612)
(70)
(1,631)
—
(1,512)
54,723
8,833
291
(1,732)
7,392
(1,552)
$
—
1,913
7,753
46,970
$
(82)
(1,852)
—
(6,491)
—
$
(976)
(26,124)
(28,141)
(30)
(340)
(28,511)
(1,381)
(226)
—
(30,118)
3,994
$
(530)
(4,464)
(70)
(8,122)
—
(2,488)
28,599
(19,308)
261
(2,072)
(21,119)
(2,933)
(226)
1,913
(22,365)
50,964
$
$
(472)
894
(72)
227
(854)
(3,564)
21,407
2,096
(1,872)
3,555
3,779
2,633
$
—
—
6,412
14,995
$
279
(602)
25
1,043
(854)
1,464
8,051
5,500
(825)
$
—
4,675
47
36
—
4,758
3,293
$
31,944
(193)
292
(47)
1,270
(1,708)
(2,100)
29,458
7,596
(2,697)
3,555
8,454
2,680
36
—
11,170
18,288
Provision for Credit Losses. Our provision for credit losses was $6.4 million for 2020, $4.4 million for 2019 and $3.6 million for 2018. Provisions are
based on our evaluation of the adequacy of our allowance for credit losses, particularly in light of current economic conditions and the estimated impact of charge-
offs. The provision for credit losses in 2020 increased $2.0 million over the prior year, as the provision for leasing was increased $2.1 million, reflecting a
$1.7 million increase in leasing charge-offs. The increase in the 2019 provision over 2018 reflected decreases in provisions for small business loans and leasing
which were more than offset by a $1.0 million provision for a consumer line of credit, for which remaining loans now have minimal balances and are no longer
offered. At December 31, 2020, our allowance for credit losses amounted to $16.1 million, or 0.61%, of total loans. Effective January 1, 2020, we implemented
current and future expected credit loss accounting guidance which differs from prior guidance. Accordingly, provisions between these years lack comparability. We
believe that our allowance is adequate to cover current and future expected losses, consistent with the newly implemented guidance. For more information about
our provision and allowance for credit losses and our loss experience see “—Financial Condition—Allowance for Credit Losses” and “—Summary of Loan and
Lease Loss Experience,” below.
Non-Interest Income: 2020 compared to 2019. Non-interest income was $84.6 million for 2020 compared to $104.1 million for 2019. The $19.5 million, or
18.7%, reduction resulted primarily from the $27.9 million change in net realized and unrealized gains (losses) on commercial loans previously originated for sale or
securitization which was partially offset by an increase in prepaid and debit card and related fees. Prepaid and debit card and related fees increased $9.3 million, or
14.3%, to $74.5 million for 2020 from $65.1 million for 2019. The increase reflected higher transactional volume including increases from new relationships.
Related fees in this category include income related to the use of cash in ATMs for prepaid payroll cardholders. Automated Clearing House (“ACH”), card and other
payment processing fees decreased $2.3 million, or 24.3%, to $7.1 million for 2020 compared to $9.4 million for 2019. The decrease relected the exit of higher risk
ACH customers and the exit of a relationship with an ownership change. Net realized and unrealized gains (losses) on commercial loans originated for sale reflected
a loss of $3.9 million in 2020 resulting primarily from the impact of the Covid-19 pandemic, compared to a gain of $24.1 million in the prior year. In 2019 the vast
majority of the $24.1 million gain was realized upon the closing of two securitizations, while the $3.9 million 2020 loss resulted from fair value adjustments to our
portfolio of commercial loans held at fair value, including losses on related hedges. Total fair value adjustments related to the previously securitized loans now held
on the balance sheet were $5.6 million, but were partially offset by $1.7 million of exit fees on loan payoffs in that portfolio. We are planning to hold the loans
which were originated for securitizations in our portfolio
58
and are not currently planning any further securitizations. Leasing related income was comparable, increasing $51,000, or 1.6%, to $3.3 million for 2020 from
$3.2 million for 2019. Other non-interest income increased $1.4 million, or 64.2%, to $3.6 million in 2020 from $2.2 million in 2019. The increase refected the
recovery of certain prepaid fees which were written off in prior years and other legal settlements.
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%, 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 Expense: 2020 compared to 2019. Total non-interest expense in 2020 was $164.8 million, a decrease of $3.7 million, or 2.2%, over the
$168.5 million in 2019. Salaries and employee benefits expense increased to $101.7 million, an increase of $7.5 million, or 7.9%, from $94.3 million for 2019.
Higher salary expense in 2020 reflected higher incentive compensation expense, and higher compliance, risk management and IT expense, which were primarily
related to the payments business. Depreciation and amortization decreased $494,000, or 13.4%, to $3.2 million in 2020 from $3.7 million in 2019 which reflected
reduced spending on fixed assets and equipment. Rent and occupancy decreased $1.1 million, or 16.4%, to $5.5 million in 2020 from $6.6 million in 2019, reflecting
the impact of office relocations. Data processing expense decreased $182,000, or 3.7%, to $4.7 million in 2020 from $4.9 million in 2019. The decrease reflected
reduced check clearing and other costs related to non-electronic account processing, as paper based accounts and transactions decreased, while electronic transaction
volume increased. Printing and supplies decreased $123,000, or 19.3%, to $514,000 in 2020 from $637,000 in 2019, reflecting decreased levels of paper based
accounts and transactions. Audit expense decreased $724,000, or 40.6%, to $1.1 million in 2020 from $1.8 million in 2019 which reflected decreased regulatory and
tax compliance audit fees. Legal expense decreased $178,000, or 3.3%, to $5.1 million for 2020 from $5.3 million in 2019, reflecting decreased costs associated
with two fact-finding inquiries by the SEC as described in Note O to the financial statements. Amortization of intangible assets decreased $975,000, or 63.7%, to
$556,000 for 2020 from $1.5 million for 2019. The reduction reflected the completion of the amortization of our customer list intangible for the Stored Value
Solutions purchase from Marshall Bankfirst. FDIC insurance expense increased $2.8 million, or 39.6%, to $9.8 million for 2020 from $7.0 million in 2019,
primarily due to an increase in average liabilities, against which insurance rates are applied. Software expense increased $1.3 million, or 10.2%, to $14.0 million in
2020 from $12.7 million in 2019 which reflected increased expenditures for information technology infrastructure to improve efficiency and scalability, especially
for SBLOC and IBLOC loans. Insurance expense increased $343,000, or 13.9%, to $2.8 million in 2020 from $2.5 million in 2019, reflecting higher rates and higher
coverage limits. Telecom and IT network communications expense increased $130,000, or 8.7%, to $1.6 million in 2020 from $1.5 million in 2019. The increase
reflected migration to a new fiber optic network to improve performance and efficiency. Consulting expense decreased $1.9 million, or 58.0%, to $1.4 million in
2020 from $3.2 million in 2019, reflecting decreased BSA and other regulatory consulting. In 2019, civil money penalties were assessed in the amount of
$8.9 million, comprised of a $7.5 million FDIC settlement and a $1.4 million SEC settlement. Additionally, lease termination expense amounted to $908,000 in
2019. Other non-interest expense decreased $174,000, or 1.3%, to $12.7 million in 2020 from $12.9 million in 2019 reflecting $2.0 million of decreased travel
expense, partially offset by increases of $962,000 in SBA guarantee fees, $548,000 in marketing expense and $367,000 in other operating taxes.
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
59
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 for 2014 and prior years. 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.
Income Tax Benefit and Expense
Income tax expense for continuing operations was $27.7 million, $21.2 million and $32.2 million, respectively, for 2020, 2019 and 2018. The tax rate of
25.6% in 2020 compared to 29.3% in 2019 and 26.9% in 2018. The higher rate in 2019 resulted primarily from the non-deductibility of $8.9 million of civil money
penalties in that year. The difference between those rates and the federal statutory rate of 21% resulted primarily from state income taxes.
Liquidity and Capital Resources
Liquidity defines our ability to generate funds to support asset growth, meet deposit withdrawals, satisfy borrowing needs and otherwise operate on an
ongoing basis. Based on our sources of funding and liquidity discussed below, we believe we have sufficient liquidity and capital resources available for our needs
in the next 12 months and for the foreseeable future. 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 $193.6 million for the fourth quarter of 2020, compared
to the prior year fourth quarter average of $569.8 million. The reduction reflected loan growth and the Federal Reserve’s temporary suspension of reserve
requirements.
Our primary source of funding has been deposits. Average deposits in 2020 increased by $1.21 billion, or 30.0%, to $5.23 billion. While that increase
primarily reflected increases in transaction accounts from debit and prepaid card account balances, it also reflected an increase in average savings and money market
accounts of $253.5 million between those periods. That growth resulted from interest-bearing accounts offered by our affinity group clients to prepaid and debit card
account customers. The increased deposits were primarily utilized to fund loan growth, as securities balances decreased as a result of prepayments which accelerated
after the Federal Reserve’s first quarter 2020 rate reductions. Overnight borrowings are also periodically utilized as a funding source to facilitate cash management,
but average balances have not generally been significant.
Our primary source of liquidity is available-for-sale securities which amounted to $1.21 billion at December 31, 2020 compared to $1.32 billion at
December 31, 2019. In excess of $700 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
2020. As a result, at December 31, 2020 outstanding loans amounted to $2.65 billion, compared to $1.82 billion at the prior year end, an increase of $828.1 million,
which was generally funded by deposits. Commercial loans held at fair value increased to $1.81 billion from $1.18 billion between those respective dates, an
increase of $630.3 million. In 2019 and previous years, these loans were originated for sale into securitizations at six month intervals. In 2020, we decided to not
pursue additional securitizations and no future securitizations are currently planned. While securitizations resulted in cash inflows, such inflows were generally
retained at the Federal Reserve to provide funding for the following securitization. Accordingly, the retention of these loans will not significantly impact our overall
liquidity, which is primarily based upon our securities and other U.S. government guaranteed instruments. While gains on sale will be eliminated, the net interest
margin benefits from these loans, which have an average rate floor of 4.8%.
60
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 generated by third parties and as a
result are classified as brokered by the FDIC. The FDIC guidance for classification of deposit accounts as brokered is relatively broad, and generally includes
accounts which were referred to or “placed” with the institution by other companies. If the Bank ceases to be categorized as “well capitalized” under banking
regulations, it will be prohibited from accepting, renewing or rolling over brokered deposits without the consent of the FDIC. In such a case, the FDIC’s refusal to
grant consent to our accepting, renewing or rolling over brokered deposits could effectively restrict or eliminate the ability of the Bank to operate its business lines
as presently conducted. In December 2020, the FDIC issued a new regulation which should result in certain of our deposits being reclassified from brokered to non-
brokered, effective April 1, 2021.
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 2020. The largest deposit inflows have generally occurred
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 deposit 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, 2020, we had a line of credit with the Federal Reserve
which exceeded one billion dollars, which may be collateralized by various types of loans, but which we generally have not used. To mitigate the impact of the
Covid-19 pandemic, the Federal Reserve has encouraged banks to utilize their lines to maximize the amount of funding available for credit markets. Accordingly,
the Bank has borrowed on its line on an overnight basis and may do so in the future. The amount of loans pledged varies and the collateral may be unpledged at any
time to the extent remaining collateral value exceeds advances. Additionally, we have pledged approximately $1.3 billion of multi-family loans to the FHLB. As a
result, we have approximately $1.0 billion of availability on our line of credit which we can access at any time. As noted previously, that line may be increased by
$700 million by pledging our U.S. government agency securities. As of December 31, 2020, we had no amount outstanding on the Federal Reserve line or on our
FHLB line. We expect to continue to maintain our facilities with the FHLB and Federal Reserve. We actively monitor our positions and contingent funding sources
daily. As discussed later in this section, in 2020, we issued $100 million in senior notes, providing additional liquidity to our holding company.
Included in our cash and cash-equivalents at December 31, 2020, were $345.5 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 2020, $233.8 million of securities sales and repayments exceeded purchases of $34.7 million. 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. As shown in the
consolidated statements of cash flows, cash required to fund loans was $836.2 million in 2020, $322.6 million in 2019 and $115.1 million in 2018.
At December 31, 2020, we had outstanding commitments to fund loans, including unused lines of credit, of $2.17 billion, the vast majority of which are
SBLOC lines of credit which are variable rate. We attempt to increase such line usage; however, usage percentages have been historically consistent and the
majority of these lines of credit have historically not been drawn. The recorded amount of such commitments has, for many accounts, been based on the full amount
of collateral in a customer’s investment account. Accordingly, the funding requirements for such commitments occur on a measured basis over time and are
expected to be funded by deposit growth. Additionally, these loans are “demand” loans and as such, represent a contingency source of funding.
As a holding company conducting substantially all of our business through our subsidiaries, our near term needs for liquidity consist principally of cash
needed to make required interest payments on our trust preferred securities and senior debt, while our liquidity consists primarily of dividends from the Bank to the
holding company. In the third quarter of 2020, holding company cash was increased by approximately $98.2 million as a result of the net proceeds of a senior debt
offering. As of December 31, 2020, we had cash reserves of approximately $111.3 million at the holding company. The quarterly interest payments on the
$100.0 million of senior debt are approximately $1.2 million based on a fixed rate of 4.75%. Current quarterly interest payments on the $13.4 million of
subordinated debentures are approximately $118,000 based on a floating rate of 3.25% over LIBOR. The senior debt matures in
61
August 2025 and the subordinated debentures mature in March 2038. In lieu of repayment of debt from Bank dividends, industry practice includes the issuance of
new debt to repay maturing debt.
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 most recent quarter. “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, 2020, we were “well capitalized” under banking regulations.
The following table sets forth our regulatory capital amounts and ratios for the periods indicated:
As of December 31, 2020
The Bancorp, Inc.
The Bancorp Bank
"Well capitalized" institution (under FDIC regulations-Basel III)
As of December 31, 2019
The Bancorp, Inc.
The Bancorp Bank
"Well capitalized" institution (under FDIC regulations)
Asset and Liability Management
Tier 1 capital
to average
assets ratio
Tier 1 capital
to risk-weighted
assets ratio
Total capital
to risk-weighted
assets ratio
Common equity
tier 1 to risk-
weighted assets
9.20%
9.11%
5.00%
9.63%
9.46%
5.00%
14.43%
14.27%
8.00%
19.04%
18.71%
8.00%
14.84%
14.68%
10.00%
19.45%
19.11%
10.00%
14.43%
14.27%
6.50%
19.04%
18.71%
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 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 previously originated for sale into secondary securities markets. We no longer originate loans for sale or
securitization and no longer engage in new 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, Chief Credit Officer and others. 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 on that projected net interest income. We also use the interest rate risk management model to calculate the
change in net portfolio value over a range of interest rate change scenarios. Traditional gap analysis involves arranging our interest earning assets and interest-
bearing liabilities by repricing periods and then computing the difference (or “interest rate sensitivity gap”) between the assets and liabilities that we estimate will
reprice during each time period and cumulatively through the end of each time period.
Both interest rate sensitivity modeling and gap analysis are done at a specific point in time and involve a variety of significant estimates and assumptions.
Interest rate sensitivity modeling requires, among other things, estimates of how much and when yields and costs on individual categories of interest earning assets
and interest-bearing liabilities will respond to general changes in market rates, future cash flows and discount rates. Gap analysis requires estimates as to when
individual categories of interest sensitive assets and liabilities will reprice, and assumes that assets and liabilities assigned to the same repricing period will reprice at
62
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,
2020. 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. 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. Loans and security balances, which adjust more fully to market rate changes, are based upon actual balances. The vast majority of loans at their
interest rate floors are included in commercial loans, at fair value and totaled approximately $1.57 billion at December 31, 2020. 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.
Interest earning assets:
Commercial loans, at fair value
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
Securities sold under agreements to
repurchase
Senior debt and 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
(dollars in thousands)
3-5
Years
Over 5
Years
$
$
$
1,665,292
1,990,276
569,982
339,531
4,565,081
3,389,203
64,262
42
13,401
3,466,908
1,098,173
1,098,173
17%
17%
$
16,897
74,796
85,216
—
176,909
72,037
128,526
—
—
200,563
(23,654)
1,074,519
*
17%
$
$
$
32,078
269,317
189,766
—
491,161
72,037
64,262
—
—
136,299
354,862
1,429,381
6%
23%
$
$
$
12,504
249,462
221,173
—
483,139
—
—
—
98,314
98,314
384,825
1,814,206
6%
29%
$
$
84,040
68,472
140,027
—
292,539
—
—
—
—
—
292,539
2,106,745
5%
34%
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
63
probability of interest rate changes and the behavioral response of the consolidated balance sheet to those changes. Market Value of Portfolio Equity (“MVPE”)
represents the modeled fair value of the net present portfolio 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 guidelines at December 31, 2020, with the exception of the decrease of 200 basis points in the net interest income scenario,
which is discussed in the note below*. While our modeling suggests an increase in market rates of 200 basis points will have a positive impact on margin (as shown
in the table below), the actual amount of such increase cannot be determined, and there can be no assurance any increase will be realized.
Rate scenario
+200 basis points
+100 basis points
Flat rate
-100 basis points
-200 basis points
Net portfolio value at
December 31, 2020
Net interest income
December 31, 2020
Amount
Percentage
change
Amount
Percentage
change
$
765,072
745,034
724,549
653,810
685,033
(dollars in thousands)
5.59% $
2.83%
—%
(9.76)%
(5.45)%
201,793
194,758
197,894
181,262
161,214
1.97%
(1.58)%
—%
(8.40)%
(18.54)%
*The target Fed Funds rate at December 31, 2020 was .25% while the ten year treasury yield was below 1%.; thus, scenarios calculating Present Value of Equity and Net Interest Income at 100
and 200 basis point rate declines must assume negative interest rates. The potential impact of negative rates is difficult or impossible to estimate and the changes shown should be viewed
accordingly. While the change in the minus 200 scenario exceeds the guideline, we believe that our bias toward maintaining asset sensitivity is prudent in the long term.
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.
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 held at fair value. Additionally, approximately $1.57 billion of commercial loans held at fair value were at
their approximate weighted average rate floors of 4.8% at December 31, 2020. Because these loan rates reached their floors, their previous benefit in higher rate
environments at December 31, 2019, is now generally reflected in the flat rate modeling, and in net interest income actually being realized. Model projections for
down rate scenarios indicate greater reductions in net interest income compared to the prior year-end. However, these down rate projections would require negative
interest rate assumptions which we believe are significantly less reliable than higher rate assumptions. We continue to evaluate market conditions and may change
our current interest rate strategy in response to changes in those conditions.
64
Financial Condition
General. Our total assets at December 31, 2020 were $6.28 billion, of which our total loans and commercial loans held at fair value from continuing
operations were $4.46 billion and investment securities available-for-sale were $1.21 billion. At December 31, 2019, our total assets were $5.66 billion, of which
our total loans and commercial loans held at fair value from continuing operations were $3.00 billion and investment securities available-for-sale were $1.32 billion.
The increase in total assets at December 31, 2020 reflected our decision to hold commercial loans held at fair value which were previously originated for
securitization on the balance sheet and loan growth in all major loan categories.
Interest Earning Deposits and Federal Funds Sold. At December 31, 2020, we had a total of $339.5 million of interest earning deposits, comprised
primarily of balances at the Federal Reserve, which pays interest on such balances. At December 31, 2019, we had $924.5 million of such balances. The decrease
reflected the use of excess cash balances at the Federal Reserve primarily to fund loan originations.
Investment Portfolio. For detailed information on the composition and maturity distribution of our investment portfolio, see Note D to the Consolidated
Financial Statements. Total investment securities available-for-sale decreased to $1.21 billion on December 31, 2020, a decrease of $114.5 million, or 8.7%, from a
year earlier. The decrease reflected investment security prepayments resulting from Federal Reserve rate reductions in first quarter 2020.
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 unrelated to credit 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 had the positive intent and ability to hold to maturity were classified as held-to-maturity and carried at amortized cost as of December 31, 2019. In
March 2020, we transferred the four securities comprising our held-to-maturity securities portfolio to available-for-sale. The interest rates for these securities utilize
LIBOR as a benchmark and the transfer was made pursuant to a provision of Accounting Standards Update (“ASU” or “Update”) 2020-04, which sought to
maximize management and accounting flexibility as a result of the future phase-out of LIBOR.
The four securities transferred to available-for-sale and their values as of December 31, 2020 were as follows: a trust preferred unrated security issued by
an insurance company with a book value of $10.0 million and a fair value of $6.8 million; and three securities supported by diversified portfolios of corporate
securities with a book value of $75.0 million and a fair value of $75.1 million.
Under the accounting guidance related to current expected credit loss (“CECL”), changes in fair value of securities unrelated to credit losses, continue to be
recognized through equity. However, credit-related losses are recognized through an allowance, rather than through a reduction in the amortized cost of the security.
The guidance for the new CECL allowance includes a provision for the reversal of credit losses in future periods based on improvements in credit, which was not
included in previous guidance. Generally, a security’s credit-related loss 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. That difference is recognized through the income statement, as with prior guidance, but is renamed a
provision for credit loss. For the years ended December 31, 2020 and 2019, we recognized no credit-related losses on our portfolio.
65
The following table presents the book value and the approximate fair value for each major category of our investment securities portfolio. At December 31,
2020 and 2019, 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, 2020
Amortized
cost
Fair
value
$
$
44,960
238,678
4,042
47,884
256,914
145,260
359,125
85,043
1,181,906
$
$
47,197
238,361
4,290
52,064
266,583
148,530
367,280
81,859
1,206,164
Available-for-sale
December 31, 2019
Amortized
cost
Fair
value
Held-to-maturity
December 31, 2019
Amortized
cost
Fair
value
$
$
52,415
244,751
5,174
58,258
335,068
221,109
394,852
—
1,311,627
$
$
52,910
244,349
5,318
60,250
336,596
222,727
398,542
—
1,320,692
$
$
—
—
—
—
—
—
—
84,387
84,387
$
$
—
—
—
—
—
—
—
83,002
83,002
Investments in FHLB and Atlantic Central Bankers Bank stock are recorded at cost and amounted to $1.4 million at December 31, 2020 and $5.3 million at
December 31, 2019. Both the FHLB and Atlantic Central Bankers Bank require its correspondent banking institutions to hold stock as a condition of membership.
The change in balance resulted from differences in FHLB stock, the amount of which is determined by periodic overnight borrowings, as the $40,000 balance of
ACBB stock stayed constant.
In 2020 we began pledging loans against our line of credit at the FHLB and had no securities pledged as of December 31, 2020. At December 31 2019,
investment securities with a fair value of approximately $262.0 million were pledged against that line.
As of December 31, 2020 the principal balance of the security we owned issued by CRE-1 was $7.3 million. Repayment is expected from the workout or
disposition of commercial real estate collateral, all proceeds of which will first repay our $7.3 million balance. The collateral consists of a hotel in a high-density
populated area in a northeastern major metropolitan area. The hotel was valued at over $35 million, based upon a 2020 post-Covid appraisal. As of December 31,
2020 the principal balance of the security we owned issued by CRE-2 was $12.6 million. Repayment is expected from the workout or disposition of commercial real
estate collateral, after repayment of more senior tranches. Our $12.6 million security has 27% excess credit support; thus, losses of 27% of remaining security
balances would have to be incurred, prior to any loss on our security. Additionally, the commercial real estate collateral was appraised in 2017, with certain of those
appraisals updated in 2020 at the direction of the special servicer, for an appraised value of approximately $137 million. The remaining principal to be repaid on all
securities is approximately $114.2 million. The excess of the appraised amount over the remaining principal to be repaid on all securities further reduces credit risk,
in addition to the 27% credit support within the securitization structure. However, reappraisals for remaining properties could result in further decreases in collateral
valuation. While available information indicates that collateral valuation will be adequate to repay our security, there can be no assurance that such valuations will
be realized upon loan resolutions, and that deficiencies will not exceed the 27% credit support.
66
The following tables show the contractual maturity distribution and the weighted average yields of our investment securities portfolio as of December 31,
2020 (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
Corporate debt securities
Total
Weighted average yield
$
$
68
—
488
1,612
—
—
—
—
2,168
Zero
to one
year
Average
yield
After
one to
five
years
2.89% $
—%
Average
yield
2.23% $
1.50%
7,383
7,233
After
five to
ten
years
22,661
123,697
Average
yield
2.83% $
1.59%
Over
ten
years
Average
yield
17,085
107,431
2.24% $
2.19%
Total
47,197
238,361
2.55%
2,570
2.99%
1,232
2.30%
—
—%
4,290
2.61%
—%
—%
—%
—%
$
2.61%
31,849
41,242
83
77,528
—
167,888
3.24%
2.39%
0.31%
2.64%
—%
$
2.63%
18,603
41,340
11,128
30,420
—
249,081
3.51%
2.69%
1.69%
1.06%
—%
$
1.97%
—
184,001
137,319
259,332
81,859
787,027
—%
1.81%
2.05%
3.32%
3.51%
$
2.59%
52,064
266,583
148,530
367,280
81,859
1,206,164
* The average yields of asset backed securities, which are segregated by amount in Note D to the financial statements, are as follows: collateralized loan obligation securities
2.04%, federally insured student loan securities 1.02%.
** If adjusted to their taxable equivalents, yields would approximate 3.23%, 3.78% and 2.92% for zero to one year, one to five years and five to ten years, respectively, at a
Federal tax rate of 21%.
Commercial Loans, at Fair Value. Commercial loans held at fair value are comprised of commercial real estate loans and SBA loans originated for sale or
securitization in the secondary market, which are now being held on the balance sheet with no planned future sales or securitizations.The fair value of commercial
real estate loans and SBA loans reflects discounted cash flow based on quoted prices for the same or similar loans or 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 at fair value increased to
$1.81 billion at December 31, 2020 from $1.18 billion at December 31, 2019. The increase resulted from the decision to hold these loans on the balance sheet
instead of selling or securitizing them.
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, small business loans (“SBL”) and leases 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.
67
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, excluding loans at fair value, by
loan category for the periods indicated (in thousands):
December 31,
2020
December 31,
2019
December 31,
2018
December 31,
2017
December 31,
2016
$
SBL non-real estate
SBL commercial mortgage
SBL construction
Small business loans *
Direct lease financing
SBLOC / IBLOC **
Advisor financing ***
Other specialty lending
Other consumer loans****
Unamortized loan fees and costs
Total loans, net of unamortized loan fees and
$
costs
$
255,318
300,817
20,273
576,408
462,182
1,550,086
48,282
2,179
4,247
2,643,384
8,939
$
84,579
218,110
45,310
347,999
434,460
1,024,420
—
3,055
4,554
1,814,488
9,757
$
76,340
165,406
21,636
263,382
394,770
785,303
—
31,836
16,302
1,491,593
10,383
$
70,379
142,086
16,740
229,205
375,890
730,462
—
30,720
14,133
1,380,410
10,048
2,652,323
$
1,824,245
$
1,501,976
$
1,390,458
$
73,488
126,159
8,826
208,473
343,941
630,400
—
11,073
17,374
1,211,261
9,468
1,220,729
The following table shows SBL loans and SBL loans held at fair value for the periods indicated (in thousands):
December 31,
2020
December 31,
2019
December 31,
2018
December 31,
2017
December 31,
2016
SBL loans, net of (deferred fees) and costs of
$1,536 and $4,215
for December 31, 2020 and December 31,
2019, respectively
SBL loans included in commercial loans, at
fair value
Total small business loans
$
$
577,944
243,562
821,506
$
$
352,214
220,358
572,572
$
$
270,860
199,977
470,837
$
$
236,724
165,177
401,901
$
$
215,786
154,016
369,802
* The preceding table shows small business loans and small business loans held at fair value. The small business loans held at fair value are comprised of the government
guaranteed portion of certain SBA loans at the dates indicated (in thousands). A reduction in SBL non-real estate from $293.5 million to $255.3 million in the fourth quarter of
2020 resulted from the commencement of U.S. treasury repayments of PPP loans which totaled $42.1 million in fourth quarter 2020. At December 31, 2020 PPP loans totaled
$167.7 million.
** Securities Backed Lines of Credit, or SBLOC, are collateralized by marketable securities, while Insurance Backed Lines of Credit, or IBLOC, are collateralized by the cash
surrender value of insurance policies. At December 31, 2020 and December 31, 2019, respectively, IBLOC loans amounted to $437.2 million and $144.6 million.
*** In 2020, we began originating loans to investment advisors for purposes of debt refinance, acquisition of another firm or internal succession. Maximum loan amounts are
subject to loan-to-value ratios of 70%, based on third party business appraisals, but may be increased depending upon the debt service coverage ratio. Personal guarantees and
blanket business liens are obtained as appropriate.
**** Included in the table above under other consumer loans are demand deposit overdrafts reclassified as loan balances totaling $663,000 and $882,000 at December 31, 2020
and December 31, 2019, respectively. Estimated overdraft charge-offs and recoveries are reflected in the allowance for credit losses and have been immaterial.
The following table summarizes our small business loan portfolio, including loans held at fair value, by loan category as of December 31, 2020 (in thousands):
Loan principal
U.S. government guaranteed portion of SBA 7a loans (a)
Paycheck Protection Program Loans (PPP) (a)
Commercial mortgage SBA (b)
Construction SBA (c)
Unguaranteed portion of U.S. government guaranteed loans (d)
Non-SBA small business loans (e)
Total principal
Unamortized fees and costs
Total small business loans
68
$
$
337,851
167,749
175,925
13,610
101,500
17,896
814,531
6,975
821,506
(a) This is the portion of SBA 7a loans (7a) and PPP which have been guaranteed by the U.S. government, and therefore is assumed to have no credit risk.
(b) Substantially all of these loans are made under the SBA 504 Fixed Asset Financing program (504) which dictates origination date loan-to-value percentages (“LTV”),
generally 50-60%, to which the bank adheres.
(c) Of the $14 million Construction SBA loans, $11 million are 504 first mortgages with an origination date LTV of 50-60% and $3 million are SBA interim loans with an
approved SBA post-construction full takeout/payoff.
(d) The $102 million represents the unguaranteed portion of 7a loans which are 70% or more guaranteed by the U.S. government. 7a loans are not made on the basis of real
estate LTV; however, they are subject to SBA's "All Available Collateral" rule which mandates that to the extent a borrower or its 20% or greater principals have
available collateral (including personal residences), the collateral must be pledged to fully collateralize the loan, after applying SBA-determined liquidation rates. In
addition, all 7a and 504 loans require the personal guaranty of all 20% or greater owners.
(e) The $18 million of non-SBA loans are mainly comprised of approximately 20 conventional coffee/doughnut/carryout franchisee note purchases. The majority of
purchased notes were made to multi-unit operators and are considered seasoned and have performed as agreed. A $2 million guaranty by the seller, for an 11% first loss
piece, is in place until August 2021.
The following table summarizes our small business loan portfolio, excluding the government guaranteed portion of SBA 7a and PPP loans, by loan type as of
December 31, 2020 (in thousands):
Hotels
Full-service restaurants
Baked goods stores
Child day care services
Car washes
Offices of lawyers
Assisted living facilities for the
elderly
Limited-service restaurants
Funeral homes and funeral services
Fitness and recreational sports
centers
General warehousing and storage
All other amusement and recreation
industries
Outpatient mental health and
substance abuse centers
Gasoline stations with convenience
stores
Caterers
Offices of dentists
Other warehousing and storage
New car dealers
Drinking places (alcoholic
beverages)
Other**
SBL commercial mortgage*
$
66,332
12,483
4,383
13,791
10,237
9,566
$
1,079
3,815
7,714
4,981
7,371
5,017
5,000
4,438
3,359
3,343
3,285
3,275
$
2,187
66,015
237,671
$
SBL construction*
SBL non-real estate
Total
% Total
3,031
1,146
$
—
646
695
—
8,121
566
148
553
—
—
—
—
—
—
—
—
—
263
15,169
$
$
22
2,840
11,822
999
169
—
—
3,847
—
1,878
—
1,178
—
—
147
57
—
—
676
32,457
56,092
$
69,385
16,469
16,205
15,436
11,101
9,566
9,200
8,228
7,862
7,412
7,371
6,195
5,000
4,438
3,506
3,400
3,285
3,275
2,863
98,735
308,932
22%
5%
5%
5%
5%
3%
3%
3%
3%
2%
2%
2%
2%
1%
1%
1%
1%
1%
1%
32%
100%
* Of the SBL commercial mortgage and SBL construction loans, $63.3 million represents the total of the non-guaranteed portion of SBA 7a loans and non-SBA loans. The balance of those
categories represents SBA 504 loans with 50%-60% origination date loan-to-values.
** Loan types less than $2 million are spread over a hundered different classifications such as Commercial Printing, Pet and Pet Supplies Stores, Securities Brokerage, etc.
69
The following table summarizes our small business loan portfolio, excluding the government guaranteed portion of SBA 7a and PPP loans, by state as of
December 31, 2020 (in thousands):
Florida
California
Pennsylvania
Illinois
North Carolina
New York
Texas
Tennessee
New Jersey
Virginia
Georgia
Colorado
Michigan
Ohio
Washington
Other States
SBL commercial
mortgage*
SBL construction*
SBL non-real estate
Total
% Total
$
$
44,592
36,665
29,521
25,269
21,660
9,846
11,921
10,585
4,327
9,322
4,905
2,815
3,177
3,023
3,225
16,818
237,671
$
$
8,121
1,146
$
—
646
830
3,031
—
—
—
—
—
1,247
—
—
—
148
15,169
$
7,797
4,582
3,553
3,076
2,960
5,293
5,309
835
7,016
1,788
2,138
1,590
1,382
556
207
8,010
56,092
$
$
60,510
42,393
33,074
28,991
25,450
18,170
17,230
11,420
11,343
11,110
7,043
5,652
4,559
3,579
3,432
24,976
308,932
$
$
20%
14%
11%
9%
8%
6%
6%
4%
4%
4%
2%
2%
1%
1%
1%
7%
100%
* Of the SBL commercial mortgage and SBL construction loans, $63.3 million represents the total of the non-guaranteed portion of SBA 7a loans and non-SBA loans. The balance of those
categories represents SBA 504 loans with 50%-60% origination date loan-to-values.
The following table summarizes the 10 largest loans in our small business loan portfolio, including loans held at fair value, as of December 31, 2020 (in thousands):
Type*
Lawyers office
Hotel
General warehouse and storage
Hotel
Assisted living facility for the elderly
Outpatient mental health and substance abuse center
Hotel
Fitness and recreation sports center
Hotel
Hotel
Total
State
California
Florida
Pennsylvania
North Carolina
Florida
Florida
North Carolina
Pennsylvania
Pennsylvania
Tennessee
$
$
SBL commercial
mortgage*
SBL construction*
Total
$
8,866
8,729
7,371
5,775
—
5,000
4,747
4,510
4,172
3,785
52,955
$
— $
—
—
—
5,201
—
—
—
—
—
$
5,201
8,866
8,729
7,371
5,775
5,201
5,000
4,747
4,510
4,172
3,786
58,156
* All the top 10 loans are 504 SBA loans with 50%-60% origination date loan-to-value. The top 10 loan table above does not include loans to the extent that they are U.S.
government guaranteed.
Commercial real estate loans held at fair value, excluding SBA loans, are as follows including LTV at origination as of December 31, 2020 (dollars in thousands):
Multifamily (apartments)
Hospitality (hotels and lodging)
Retail
Other
Fair value adjustment
Total
# Loans
Balance
Weighted average
origination date LTV
Weighted average
minimum interest rate
161
11
8
7
187
$
$
$
70
1,426,996
67,807
51,559
25,665
1,572,027
(4,778)
1,567,249
76%
65%
70%
70%
76%
4.77%
5.75%
4.62%
5.22%
4.82%
The following table summarizes our commercial real estate loans held at fair value, excluding SBA loans, by state as of December 31, 2020 (in thousands):
Texas
Georgia
Arizona
North Carolina
Ohio
Alabama
Other states
Balance
Origination date LTV
$
$
418,537
214,508
122,936
113,706
55,619
54,689
592,032
1,572,027
77%
77%
76%
77%
69%
76%
73%
76%
The following table summarizes our 15 largest commercial real estate loans held at fair value, excluding SBA loans as of December 31, 2020 (in thousands). All of
these loans are multi-family loans.
Balance
Origination date LTV
North Carolina
Texas
Texas
Pennsylvania
Texas
Nevada
Texas
Arizona
Mississippi
North Carolina
Texas
Texas
Georgia
California
Alabama
$
$
43,689
38,009
35,740
32,056
28,936
28,400
26,876
26,555
25,743
24,811
24,667
23,950
22,978
22,957
22,360
427,727
The following table summarizes our institutional banking portfolio by type as of December 31, 2020 (in thousands):
Type
Securities backed lines of credit (SBLOC)
Insurance backed lines of credit (IBLOC)
Advisor financing
Total
Principal
% of total
$
$
1,112,933
437,153
48,282
1,598,368
78%
79%
80%
77%
75%
80%
77%
79%
79%
77%
77%
77%
79%
65%
77%
77%
70%
27%
3%
100%
For SBLOC, we generally lend up to 50% of the value of equities and 80% for investment grade securities. While equities have fallen in excess of 30% in recent
periods, the reduction in collateral value of brokerage accounts collateralizing SBLOCs generally has been less, for two reasons. First, many collateral accounts are
“balanced” and accordingly, have a component of debt securities, which have either not decreased in value as much as equities, or in some cases may have increased
in value. Secondly, many of these accounts have the benefit of professional investment advisors who provided some protection against market downturns, through
diversification and other means. Additionally, borrowers often utilize only a portion of collateral value, which lowers the percentage of principal to the market value
of collateral.
71
The following table summarizes our top 10 SBLOC loans as of December 31, 2020 (in thousands):
Total and weighted average
Principal amount
% Principal to
collateral
$
$
48,850
17,000
14,428
12,369
11,528
10,044
10,000
9,465
8,400
8,233
150,317
37%
38%
31%
25%
30%
42%
21%
28%
35%
73%
35%
IBLOC loans are backed by the cash value of life insurance policies which have been assigned to us. We lend up to 100% of such cash value. Our
underwriting standards require approval of the insurance companies which carry the policies backing these loans. Currently, seven insurance companies have been
approved and, as of August 14, 2020 all were rated Superior (A+ or better) by AM BEST.
The following table summarizes our direct lease financing portfolio* by type as of December 31, 2020 (in thousands):
Government agencies and public institutions**
Construction
Waste management and remediation services
Real estate, rental and leasing
Retail trade
Health care and social assistance
Transportation and Warehousing
Professional, scientific, and technical services
Manufacturing
Wholesale trade
Educational services
Arts, entertainment, and recreation
Other
Principal balance
% Total
$
$
83,588
76,927
64,515
52,134
40,856
26,989
23,891
19,783
16,306
16,080
9,080
5,611
26,422
462,182
* Of the total $462 million of direct lease financing, $421 million consisted of vehicle leases with the remaining balance consisting of equipment leases..
** Includes public universities and school districts.
The following table summarizes our direct lease financing portfolio by state as of December 31, 2020 (in thousands):
Florida
California
New Jersey
New York
Pennsylvania
North Carolina
Maryland
Utah
Washington
Connecticut
Texas
Missouri
Georgia
Alabama
Idaho
Other states
Principal balance
% Total
$
$
94,411
35,605
33,326
32,110
29,568
25,179
23,659
23,038
16,219
15,296
12,940
12,740
10,777
9,655
8,877
78,782
462,182
72
18%
17%
14%
11%
9%
6%
5%
4%
4%
3%
2%
1%
6%
100%
20%
8%
7%
7%
6%
5%
5%
5%
4%
3%
3%
3%
2%
2%
2%
18%
100%
The following table presents selected loan categories by maturity for the periods indicated:
Within
one year
December 31, 2020
One to five
years
After
five years
Total
SBL non-real estate
SBL commercial mortgage
SBL construction
Loans at fixed rates
Loans at variable rates
Total
$
$
3,575
6,743
3,126
13,444
$
$
$
$
(in thousands)
194,810
3,871
488
199,169
167,749
31,420
199,169
$
$
$
$
56,933
290,203
16,659
363,795
3,364
360,431
363,795
$
$
$
$
255,318
300,817
20,273
576,408
171,113
391,851
562,964
Allowance for Credit Losses. We review the adequacy of our allowance for credit losses on at least a quarterly basis to determine a provision for credit
losses to maintain our allowance at a level we believe is appropriate to recognize current expected credit losses. Our chief credit officer oversees the loan review
department, which measures the adequacy of the allowance for credit losses independently of loan production officers. A description of loan review coverage is
summarized in Note E to the financial statements which also provides a description of the methodology by which our quarterly provision for credit losses is
determined.
The following table presents delinquencies by type of loan for December 31, 2020 and 2019 (in thousands):
SBL non-real estate
SBL commercial mortgage
SBL construction
Direct lease financing
SBLOC / IBLOC
Advisor financing
Other specialty lending
Consumer - other
Consumer - home equity
Unamortized loan fees and
costs
SBL non-real estate
SBL commercial mortgage
SBL construction
Direct lease financing
SBLOC / IBLOC
Other specialty lending
Consumer - other
Consumer - home equity
Unamortized loan fees and
costs
30-59 Days
past due
60-89 Days
past due
90+ Days
still accruing
December 31, 2020
Non-accrual
Total
past due
Current
$
$
$
$
1,760
87
—
2,845
650
—
—
—
—
—
5,342
30-59 Days
past due
36
—
—
2,008
290
—
—
—
—
2,334
$
$
$
$
805
961
—
941
247
—
—
—
—
—
2,954
60-89 Days
past due
125
1,983
—
2,692
75
—
—
—
—
4,875
$
$
$
$
110
—
—
78
309
—
—
—
—
—
497
$
$
3,159
7,305
711
751
—
—
—
—
301
—
12,227
90+ Days
still accruing
December 31, 2019
Non-accrual
$
—
—
—
3,264
—
—
—
—
3,693
1,047
711
—
—
—
—
345
$
$
$
$
$
$
5,834
8,353
711
4,615
1,206
—
—
—
301
—
21,020
Total
past due
3,854
3,030
711
7,964
365
—
—
345
$
$
$
249,484
292,464
19,562
457,567
1,548,880
48,282
2,179
1,164
2,782
8,939
2,631,303
Current
80,725
215,080
44,599
426,496
1,024,055
3,055
1,137
3,072
—
3,264
$
—
5,796
$
—
16,269
$
9,757
1,807,976
$
Total
loans
255,318
300,817
20,273
462,182
1,550,086
48,282
2,179
1,164
3,083
8,939
2,652,323
Total
loans
84,579
218,110
45,310
434,460
1,024,420
3,055
1,137
3,417
9,757
1,824,245
Although we consider our allowance for credit 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.
73
The following table presents an allocation of the allowance for credit losses among the types of loans or leases in our portfolio at December 31, 2020,
2019, 2018, 2017 and 2016 (in thousands):
December 31, 2020
December 31, 2019
December 31, 2018
Allowance
% Loan
type to
total loans
Allowance
% Loan
type to
total loans
Allowance
% Loan
type to
total loans
SBL non-real estate
SBL commercial mortgage
SBL construction
Direct lease financing
SBLOC / IBLOC
Advisor financing
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
$
$
$
$
5,060
3,315
328
6,043
775
362
150
49
—
16,082
9.66%
11.38%
0.77%
17.48%
58.64%
1.83%
0.08%
0.16%
—
100.00%
December 31, 2017
Allowance
% Loan
type to
total loans
3,145
1,120
136
1,495
365
57
581
197
7,096
5.15%
10.27%
1.21%
27.33%
52.80%
2.22%
1.02%
—
100.00%
74
$
$
$
$
4,985
1,472
432
2,426
553
—
12
40
318
10,238
4.66%
12.02%
2.50%
23.94%
56.46%
—%
0.17%
0.25%
—
100.00%
$
$
4,636
941
250
2,025
393
—
60
108
240
8,653
5.11%
11.07%
1.45%
26.60%
52.55%
—%
2.13%
1.09%
—
100.00%
December 31, 2016
Allowance
% Loan
type to
total loans
1,976
737
76
1,994
315
32
975
227
6,332
6.14%
10.38%
0.73%
28.53%
51.88%
0.91%
1.43%
—
100.00%
Summary of Loan and Lease Loss Experience. The following tables summarize our credit loss experience for each of the periods indicated (in thousands):
SBL non-real
estate
SBL
commercial
mortgage
SBL
construction
Direct lease
financing
SBLOC /
IBLOC
Advisor
financing
Other
specialty
lending
Other
consumer
loans
Unallocated
Total
December 31, 2020
Beginning balance 12/31/2019
1/1 CECL adjustment
Charge-offs
Recoveries
Provision (credit)
Ending balance
Ending balance: Individually
evaluated for expected credit loss
Ending balance: Collectively
evaluated for expected credit loss
$
$
$
$
4,985 $
(220)
(1,350)
103
1,542
5,060 $
1,472 $
537
—
—
1,306
3,315 $
432 $
139
—
—
(243)
328 $
2,426 $
2,362
(2,243)
570
2,928
6,043 $
553 $
(41)
—
—
263
775 $
— $
—
—
—
362
362 $
12 $
158
—
—
(20)
150 $
40 $
20
—
—
(11)
49 $
318 $
(318)
—
—
—
— $
10,238
2,637
(3,593)
673
6,127
16,082
2,129 $
1,010 $
34 $
4 $
— $
— $
— $
— $
— $
3,177
2,931 $
2,305 $
294 $
6,039 $
775 $
362 $
150 $
49 $
— $
12,905
Loans:
Ending balance*
$
255,318 $
300,817 $
20,273 $
462,182 $ 1,550,086 $
48,282 $
2,179 $
4,247 $
8,939 $
2,652,323
Ending balance: Individually
evaluated for expected credit loss
Ending balance: Collectively
evaluated for expected credit loss
$
$
3,431 $
7,305 $
711 $
751 $
— $
— $
— $
557 $
— $
12,755
251,887 $
293,512 $
19,562 $
461,431 $ 1,550,086 $
48,282 $
2,179 $
3,690 $
8,939 $
2,639,568
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
$
$
$
$
$
$
$
SBL non-real
estate
SBL
commercial
mortgage
SBL
construction
Direct lease
financing
SBLOC /
IBLOC
Other specialty
lending
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 $
—
—
160
553 $
Other
consumer loans Unallocated
108 $
60 $
—
—
(48)
12 $
(1,103)
2
1,033
40 $
240 $
—
—
78
318 $
Total
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
75
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
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
$
$
$
$
$
$
$
$
$
$
$
$
$
$
SBL non-real
estate
SBL
commercial
mortgage
SBL
construction
Direct lease
financing
SBLOC /
IBLOC
Other specialty
lending
December 31, 2018
Other
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 $
—
—
28
393 $
consumer loans Unallocated
581 $
(21)
1
(453)
108 $
197 $
—
—
43
240 $
57 $
—
—
3
60 $
Total
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
SBL non-real
estate
SBL
commercial
mortgage
SBL
construction
Direct lease
financing
SBLOC /
IBLOC
Other specialty
lending
December 31, 2017
Other
1,976
(1,171)
19
2,321
3,145
$
$
737
$
—
—
383
1,120
$
76 $
—
—
60
136 $
1,994 $
(927)
8
420
1,495 $
315 $
—
—
50
365 $
consumer loans Unallocated
975 $
(109)
24
(309)
581 $
227 $
—
—
(30)
197 $
32 $
—
—
25
57 $
Total
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
76
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
$
$
$
$
$
$
$
SBL non-real
estate
SBL
commercial
mortgage
SBL
construction
Direct lease
financing
SBLOC /
IBLOC
Other specialty
lending
December 31, 2016
844
(128)
1
1,259
1,976
$
$
408
$
—
—
329
737
$
48 $
—
—
28
76 $
1,022 $
(119)
17
1,074
1,994 $
762 $
—
—
(447)
315 $
199 $
—
—
(167)
(1,211)
12
1,238
32 $
975 $
Other
consumer loans Unallocated
936 $
181 $
—
—
46
227 $
Total
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
*The ending balance for loans in the unallocated column represents deferred costs and fees.
The following table summarizes select asset quality ratios for each of the periods indicated:
Ratio of the allowance for credit losses to total loans
Ratio of the allowance for credit 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,
2020
2019
0.61%
126.39%
0.20%
0.07%
0.56%
113.00%
0.16%
0.12%
(1) Non-performing loans are defined as non-accrual loans and loans 90 days past due and still accruing interest and are both included in our ratios.
The ratio of the allowance for credit losses to total loans increased to 0.61% at December 31, 2020 compared to 0.56% at December 31, 2019. The higher
ratio in 2020 reflected an increase in the allowance which was relatively more than the increase in loan balances. The largest components of the increase in the
allowance to $16.1 million at year end 2020 from $10.2 million at year- end 2019 was in direct lease financing and the non-guaranteed portion of SBA loans. SBA
loans comprise the vast majority of small business (SBL) loans. The allowance on direct lease financing and SBL commercial mortgage loans increased $3.6 million
and $1.8 million, respectively, between those dates. The increase in the direct lease financing allowance reflected increased net charge-offs in 2020. The increase in
the SBL commercial mortgage allowance reflected additional allowance allocations on specific loans individually evaluated for an allowance for credit losses. For
the year 2020, the largest segment of the loan portfolio continued to be SBLOC and IBLOC which have historically experienced low levels of credit losses as a
result of the collateral against these loans. SBLOC are collateralized by marketable securities and IBLOC are collateralized by the cash value of life insurance (see
Item 1. “Business-Lending-SBL Loans”). The ratio of the allowance for credit losses to non-performing loans increased to 126.39% at December 31, 2020 from
113.0% over the prior year end, reflecting the increase in the allowance for credit losses which exceeded the relative increase in non-performing loans. Similarly, the
ratio of non-performing assets to total assets increased to 0.20% from 0.16%. The ratio of net charge-offs to average loans decreased to 0.07% for 2020 compared to
0.12% for the prior year, reflecting loan growth as net charge-offs were comparable in those years.
77
Net Charge-Offs. Net charge-offs were comparable in 2020 and 2019, respectively, at $2.9 million in 2020 and $2.8 million, compared to $2.0 million in
2018. In 2020, the majority of net charge-offs were in direct lease financing.
Non-accrual Loans, Loans 90 Days Delinquent and Still Accruing, Other Real Estate Owned, 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 material 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
Direct leasing
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
$
$
2020
2019
December 31,
2018
(in thousands)
2017
2016
$
3,159
7,305
711
751
301
12,227
497
12,724
—
$
12,724
$
3,693
1,047
711
—
345
5,796
3,264
9,060
—
$
9,060
2,590
458
—
—
1,468
4,516
954
5,470
—
5,470
$
$
1,889
693
—
—
1,414
3,996
227
4,223
450
4,673
$
$
1,530
—
—
—
1,442
2,972
661
3,633
104
3,737
The loans that were modified for the years ended December 31, 2020 and 2019 and considered troubled debt restructurings are as follows (in thousands):
SBL non-real estate
Direct lease financing
Consumer
Total
Number
December 31, 2020
Pre-modification
recorded investment
Post-modification
recorded investment
Number
8
1
2
11
$
$
911
251
469
1,631
$
$
911
251
469
1,631
December 31, 2019
Pre-modification
recorded investment
Post-modification
recorded investment
8
1
2
11
$
$
1,309
286
489
2,084
$
$
1,309
286
489
2,084
The balances below provide information as to how the loans were modified as troubled debt restructured loans at December 31, 2020 and 2019 (in
thousands):
December 31, 2020
December 31, 2019
Adjusted interest rate
Extended maturity
Combined rate and
maturity
Adjusted interest rate
Extended maturity
Combined rate and
maturity
SBL non-real estate
Direct lease financing
Consumer
Total
$
$
— $
—
—
$
—
16
251
$
—
$
267
895
$
—
469
1,364
$
— $
—
—
$
—
51
286
$
—
$
337
1,258
—
489
1,747
We had no commitments to extend credit to loans classified as troubled debt restructurings as of December 31, 2020.
The Company had three troubled debt restructured loans that had been restructured within the last 12 months that have subsequently defaulted. The largest
was for a single borrower who came under financial stress and agreed to an orderly liquidation of vehicles collateralizing their $15.3 million loan balance at
March 31, 2020, which was reflected in the direct lease financing balance and in troubled debt restructurings at that date. The borrower subsequently filed for
bankruptcy and the bankruptcy court gave the Company permission to sell the vehicles which were transferred to other assets as of June 30, 2020. Subsequent
vehicle sales have repaid substantially all of the balance which has been reduced to $57,000.
78
The following table summarizes the other two loans that were restructured within the 12 months ended December 31, 2020 that have subsequently
defaulted (in thousands).
SBL non-real estate
Total
December 31, 2020
Number
Pre-modification recorded
investment
2
2
$
$
689
689
Please see “Investment in Unconsolidated Entity” below for discussion of a large restructured loan which is accounted for at fair value.
The following table provides information about loans individually evaluated for credit loss at December 31, 2020 and 2019 (in thousands):
Recorded
investment
Unpaid
principal
balance
December 31, 2020
Related
allowance
Average
recorded
investment
Interest
income
recognized
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
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
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
$
$
$
$
$
387
2,037
299
557
3,044
5,268
711
452
$
2,836
2,037
299
557
3,044
5,268
711
452
—
—
3,431
7,305
711
751
557
12,755
$
5,880
7,305
711
751
557
15,204
$
— $
—
—
—
(2,129)
(1,010)
(34)
(4)
—
(2,129)
(1,010)
(34)
(4)
—
$
(3,177)
Recorded
investment
Unpaid
principal
balance
December 31, 2019
Related
allowance
Average
recorded
investment
$
335
76
—
286
489
3,804
971
711
—
121
4,139
1,047
711
286
610
6,793
$
$
2,717
76
—
286
489
4,371
971
711
—
121
7,088
1,047
711
286
610
9,742
$
— $
—
—
—
—
(2,961)
(136)
(36)
—
(9)
(2,961)
(136)
(36)
—
(9)
(3,142)
$
370
1,253
3,352
554
3,257
2,732
711
716
24
3,627
3,985
711
4,068
578
12,969
277
15
284
362
1,161
3,925
561
284
244
344
4,202
576
568
606
1,505
7,457
$
$
$
$
Interest
income
recognized
3
—
—
10
15
—
—
—
—
18
—
—
—
10
28
5
—
—
11
9
30
—
—
—
—
35
—
—
11
9
55
We had $12.2 million of non-accrual loans at December 31, 2020, compared to $5.8 million of non-accrual loans at December 31, 2019. The $6.4 million
increase reflected $15.1 million of loans placed on non-accrual status, partially offset by $1.8 million of charge-offs and $6.9 million of loan payments. Loans past
due 90 days or more still accruing interest amounted to
79
$497,000 and $3.3 million at December 31, 2020 and December 31, 2019, respectively. The $2.8 million decrease reflected $1.9 million of additions, partially offset
by $1.7 million of loan payments, $1.0 million of charge-offs, $1.0 million of transfers to repossessed assets and $1.0 million of transfers to non-accrual. We had no
OREO in continuing operations at December 31, 2020 and December 31, 2019 and no activity during the year.
We evaluate loans under an internal loan risk rating system as a means of identifying problem loans. The following table provides information by credit
risk rating indicator for each segment of the loan portfolio excluding loans at fair value Decemer 31, 2019 (in thousands). In 2020 loans accordingly classified were
segregated by year of origination and are shown in Note E to the financial statements.
SBL non-real estate
SBL commercial mortgage
SBL construction
Direct lease financing
SBLOC / IBLOC
Other specialty lending
Consumer
Unamortized loan fees and costs
Pass
Special mention
Substandard
Unrated subject to
review *
Unrated not subject
to review *
Total loans
December 31, 2019
$
$
76,108
208,809
44,599
420,289
942,858
3,055
2,545
—
1,698,263
$
$
3,045
2,249
—
—
—
—
—
—
5,294
$
$
4,430
5,577
711
8,792
—
—
345
—
19,855
$
$
—
—
—
—
—
—
—
—
—
$
$
996
1,475
—
5,379
81,562
—
1,664
9,757
100,833
$
$
84,579
218,110
45,310
434,460
1,024,420
3,055
4,554
9,757
1,824,245
*For information on targeted loan review thresholds see Note E to the financial statements
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, 2020, a balance
of $31.3 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 2020, there was a $45,000 net decrease in value, compared to no net decrease in value in 2019. A $30.0 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 loan which is
included in commercial loans, at fair value. The underlying collateral consists of a multi-tenant shopping center and the loan value had been previously written down
as a result of a decreased occupancy rate. By December 31, 2020 the center had been substantially all leased and previous write-downs had been reversed. 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 0.5% 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.
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 $113.6 million at December 31, 2020 and were comprised of $91.3 million of net loans and $22.3 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 June 2020 for $17.5 million. At December 31, 2019, discontinued assets of $140.7 million were comprised of
$115.9 million of net loans and $24.8 million of other real estate owned. We continue our efforts to transfer the loans to other financial institutions, and dispose of
the other real estate owned.
80
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, savings and money market accounts. The majority of deposit balances are comprised of accounts generated by third parties. At
December 31, 2020, we had total deposits of $5.46 billion compared to $5.05 billion at December 31, 2019, which reflected an increase of $410.0 million, or 8.1%,
between 2020 and 2019. The increase in deposits 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, 2020
December 31, 2019
December 31, 2018
Average
balance
Average
rate
Average
balance
Average
rate
Average
balance
Average
rate
Demand and interest checking *
Savings and money market
Time
Total deposits
$
$
4,864,236
291,204
79,439
5,234,879
0.23%
0.15%
1.87%
0.25%
$
$
3,817,176
37,671
170,438
4,025,285
0.80% $
0.48%
2.09%
0.85% $
3,499,288
362,267
—
3,861,555
0.66%
0.79%
—
0.67%
* 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 or Federal Reserve at December 31, 2020 on our lines of credit with them. We
discuss these lines in “Liquidity and Capital Resources”. We had no outstanding amounts borrowed on the Bank’s lines of credit at December 31, 2020. 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.
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
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
$
$
2020
As of or for the year ended December 31,
2019
(dollars in thousands)
2018
$
42
49
82
—%
—%
$
82
90
93
—%
—%
2020
As of or for the year ended December 31,
2019
(dollars in thousands)
2018
$
—
27,322
140,000
0.72%
0.25%
$
—
129,031
300,000
2.43%
1.50%
93
173
223
—%
—%
—
20,346
100,000
2.22%
2.35%
We do not have any policy prohibiting us from incurring debt. We have issued senior debt at the holding company, which may be used for various
corporate purposes including stock repurchases, or in the future for common stock dividends, although we historically have not paid such dividends. Those funds
may also be downstreamed to the Bank, where for purposes of the Bank only, they would constitute tier one capital. Additionally, we have issued subordinated
debentures which are grandfathered to also constitute tier one capital, but only at the Bank level. Those instruments are described below.
Senior debt. On August 13, 2020, we issued $100.0 million of senior debt with a maturity date of August 15, 2025, and a 4.75% interest rate, with interest
paid semi-annually on March 15 and September 15. The Senior Notes are our direct, unsecured and unsubordinated obligations and rank equal in priority with all of
our existing and future unsecured and unsubordinated indebtedness and senior in right of payment to all of our existing and future subordinated indebtedness. When
these instruments mature in 2025, in lieu of repayment from Bank dividends, industry practice includes the issuance of new debt to repay maturing debt.
81
Subordinated debentures. As of December 31, 2020, 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 Trusts. 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 and the $3.1 million of debentures issued to The Bancorp Capital Trust III were both issued on
November 28, 2007, mature on March 15, 2038 and bear interest equal to 3-month LIBOR plus 3.25%.
Long-term Borrowings. At December 31, 2020 and 2019, we had long term borrowings of $40.3 million and $41.0 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, 2020, we had $581.2 million in shareholders’ equity compared to $484.5 million at the prior year end. The increase
primarily reflected 2020 net income. The increase also reflected the increase in the 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, 2020, were our unused commitments to extend credit,
which were approximately $2.16 billion, and standby letters of credit, which were approximately $1.8 million, at December 31, 2020. 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 have not been drawn upon, and SBLOC loans are
“demand” loans and can be called at any time.
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 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. SBLOC
commitments are limited to a percentage of the collateral value, which varies for equities and fixed income securities. For IBLOC, the commitment may as high as
the cash value of the applicable insurance policy. Collateral for other loan commitments varies but may include real estate, marketable securities, pledged deposits,
equipment and accounts receivable.
82
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, 2020 (in thousands):
Contractual obligation
Minimum annual rentals on
noncancelable operating leases
Loan commitments
Subordinated debentures
Interest expense on subordinated
debentures (1)
Standby letters of credit
Total
Total
Less than
one year
One to
three years
Three to
five years
After
five years
Payments due by period
$
$
13,224
2,163,331
13,401
9,015
1,829
2,200,800
$
$
3,353
20,107
—
524
1,829
25,813
$
$
5,466
181,250
—
1,048
—
187,764
$
$
4,381
2,427
—
1,048
—
7,856
$
$
24
1,959,547
13,401
6,395
—
1,979,367
(1) Presentation assumes a weighted average interest rate of 4.03%
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 25, 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”.
83
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, 2020 and 2019, 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, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2020, 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, 2020, 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 15, 2021 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 credit losses in the year ended December 31, 2020 due to
adoption of Accounting Standards Update 2016-13 Financial Instruments – Credit Losses – Measurement of Credit Losses on Financial Instruments (Topic 326).
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 regarding 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.
Critical audit matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be
communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially
challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements taken
as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or
disclosures to which they relate.
Allowance for Credit Losses - Direct Financing Leases and Small Business Loans Qualitative Factors
As described in Note E to the consolidated financial statements, Topic 326 requires the Company to estimate an allowance for credit losses for the remaining
estimated life of a financial asset. The allowance for credit losses represents management’s estimate of expected credit losses in the Company’s lease and loan
portfolio, which is segmented into different pools based on shared risk characteristics. As of December 31, 2020, the allowance for credit losses was $16.1 million,
of which $14.7 million relates to direct financing leases and
84
small business loans held at amortized cost. Management estimates the allowance for credit losses using a combination of relevant available historical lease and loan
performance information and reasonable and supportable forecasts. Historical credit loss experience provides the initial basis for the estimation of expected credit
losses over the estimated lifetime of leases and loans. Qualitative adjustments to historical loss information are made for differences in current risk characteristics
such as changes in international, national, regional, and local economic and business conditions, changes in the value of underlying collateral, changes in credit
concentrations, and changes in the volume and severity of past due leases and loans. We identified the qualitative factors used in the allowance for credit losses for
the Company’s direct financing leases and small business loans held at amortized cost as a critical audit matter.
The principal consideration for our determination that the qualitative factors used in the allowance for credit losses for the Company’s direct financing leases and
small business loans held at amortized cost are a critical audit matter is that the qualitative factors require management to make significant judgements to address the
risk of credit loss that is not reflected in historical loss rates and otherwise unaccounted for in the quantitative process. These significant management judgments and
estimates are subject to estimation uncertainty and require a high degree of auditor subjectivity in evaluating the reasonableness of management’s judgments and
estimates when auditing the identification and application of qualitative factors.
Our audit procedures related to the qualitative factors used in the allowance for credit losses for the Company’s direct financing leases and small business loans held
at amortized cost included the following procedures, among others:
We tested the design and operating effectiveness of management’s review control over the allowance for credit losses, which included the identification and
application of qualitative factors.
We evaluated the reasonableness of the qualitative factors applied by management for the impact of changes in international, national, regional, and local
economic and business conditions, changes in the value of underlying collateral, changes in credit concentrations, and changes in the volume and severity of
past due leases and loans on the allowance for credit losses for the Company’s direct financing leases and small business loans held at amortized cost.
Valuation of Commercial Real Estate Loans, at fair value
As described in Note Q to the consolidated financial statements, as of December 31, 2020, the Company held $1,532 million in commercial real estate loans, at fair
value. The Company elected the fair value option at origination for commercial real estate loans and, accordingly, remeasures the fair value of these loans at each
reporting date. The fair values are determined by management or their specialist using discounted cash flow analyses whereby contractual cash flows are measured
at their net present value using market discount rates. The discount rate is adjusted for indicators of borrower-specific credit quality, where applicable. We identified
the fair value of the commercial real estate loans as a critical audit matter.
The principal consideration for our determination that the fair value of the commercial real estate loans is a critical audit matter is that the fair value determination
relies on the substantial use of management judgements and estimates and required the assistance of those with specialized skill and knowledge to audit those
complex judgements and estimates.
Our audit procedures related to the fair value of the commercial real estate loans included the following procedures, among others:
We tested the design and operating effectiveness of management’s controls relating to the fair value of the commercial real estate loans, including controls
related to evaluating borrower-specific indicators of credit quality and the appropriateness of the discount rates.
We inspected a sample of loan files and analyzed the information therein regarding the borrower’s credit quality.
With the assistance of professionals with specialized skills and knowledge, we developed an independent expectation of fair value as a range for the commercial
real estate loans and compared it to management’s estimate.
Valuation of Level 3 Investments in Commercial Mortgage-Backed Securities Available for Sale, at fair value
As described in Note Q to the consolidated financial statements, as of December 31, 2020, the Company held $97.1 million of investments in commercial mortgage-
backed securities available-for-sale (“CMBS investments”), for which the fair value measurement was determined using primarily unobservable (Level 3) inputs.
The Company determined the fair values of these CMBS investments using discounted cash flow analyses, whereby forecasts of expected cashflows or the discount
rate may be
85
adjusted for inputs such as prepayments, defaults, and loss severities. We identified the valuation of the Level 3 CMBS investments as a critical audit matter.
The principal consideration for our determination that the valuation of the Level 3 CMBS investments is a critical audit matter is that the fair value determination
relies on the substantial use of management estimates and required the use of those with specialized skill and knowledge to audit this complex estimate.
Our audit procedures related to the valuation of the Level 3 CMBS investments included the following procedure, among others:
With the assistance of professionals with specialized skills and knowledge, we developed an independent expectation of fair value as a range for the CMBS
investments and compared it to management’s estimate.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2000.
Philadelphia, Pennsylvania
March 15, 2021
86
THE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
Cash and cash equivalents
Cash and due from banks
Interest earning deposits at Federal Reserve Bank
Total cash and cash equivalents
Investment securities, available-for-sale, at fair value
Investment securities, held-to-maturity (fair value $83,002 at December 31, 2019)
Commercial loans, at fair value (held-for-sale at December 31, 2019)
Loans, net of deferred loan fees and costs
Allowance for credit 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
Senior debt
Subordinated debentures
Long-term borrowings
Other liabilities
Total liabilities
SHAREHOLDERS' EQUITY
Common stock - authorized, 75,000,000 shares of $1.00 par value; 57,650,629 and 56,940,521
shares issued and outstanding at December 31, 2020 and December 31, 2019, respectively
Treasury stock, at cost (100,000 shares)
Additional paid-in capital
Accumulated earnings
Accumulated other comprehensive income
Total shareholders' equity
Total liabilities and shareholders' equity
$
$
$
December 31,
2020
December 31,
2019
(in thousands)
$
5,984
339,531
345,515
$
$
1,206,164
—
1,810,812
2,652,323
(16,082)
2,636,241
1,368
17,608
20,458
2,845
9,757
31,294
113,650
81,129
6,276,841
5,205,010
257,050
—
5,462,060
42
98,314
13,401
40,277
81,583
5,695,677
57,651
(866)
378,218
128,453
17,708
581,164
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
The accompanying notes are an integral part of these consolidated financial statements.
$
6,276,841
$
5,656,963
87
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
Senior debt
Subordinated debentures
Net interest income
Provision for credit losses
Net interest income after provision for credit 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 (losses) on commercial loans
originated for sale
Gain on sale of investment securities
Gain on sale of IRA portfolio
Change in value of investment in unconsolidated entity
Leasing related income
Affinity fees
Other
Total non-interest income
Non-interest expense
Salaries and employee benefits
Depreciation and amortization
Rent and related occupancy cost
Data processing expense
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 (loss) from discontinued operations before income taxes
Income tax expense (benefit)
Income (loss) from discontinued operations, net of tax
Net income
Net income per share from continuing operations - basic
Net income (loss) per share from discontinued operations - basic
Net income per share - basic
Net income per share from continuing operations - diluted
Net income (loss) per share from discontinued operations - diluted
Net income per share - diluted
2020
For the year ended December 31,
2019
(in thousands, except per share data)
2018
$
170,960
$
127,106
$
37,822
115
—
1,885
210,782
13,281
198
1,913
524
15,916
194,866
6,352
188,514
30
7,101
74,465
(3,874)
—
—
(45)
3,294
—
3,646
84,617
101,737
3,202
5,541
4,712
514
1,061
5,141
556
9,808
14,028
2,818
1,623
—
1,361
—
—
—
12,745
164,847
108,284
27,688
80,596
(3,816)
(3,304)
(512)
80,084
1.40
(0.01)
1.39
1.38
(0.01)
1.37
$
$
$
$
$
$
$
$
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
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
95,315
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
The accompanying notes are an integral part of these consolidated financial statements.
88
THE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
2020
For the year ended December 31,
2019
2018
$
80,084
$
51,559
$
88,677
Net income
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
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)
Other comprehensive income (loss), net of tax and reclassifications into net income
Comprehensive income
$
15,969
—
5
15,974
4,312
—
1
4,313
11,661
91,745
$
27,662
—
30
27,692
7,469
—
8
7,477
20,215
71,774
$
(13,223)
(41)
99
(13,165)
(3,570)
(11)
27
(3,554)
(9,611)
79,066
The accompanying notes are an integral part of these consolidated financial statements.
89
THE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 2020, 2019 and 2018
(in thousands, except share data)
Common
stock
shares
Common
stock
Treasury
stock
Additional
paid-in
capital
Retained
earnings/
(accumulated
deficit)
Accumulated
other
comprehensive
income/(loss)
55,861,150 $
—
55,861 $
—
(866) $
—
363,196 $
—
(89,485) $
88,677
(4,557) $
—
13,390
571,548
—
—
13
572
—
—
—
—
—
—
107
(572)
3,450
—
(9)
—
—
—
56,446,088 $
—
56,446 $
—
(866) $
—
366,181 $
—
(817) $
51,559
30,000
464,433
—
—
30
465
—
—
—
—
—
—
228
(465)
5,689
—
—
—
—
—
Total
324,149
88,677
111
—
3,450
(9,611)
406,776
51,559
258
—
5,689
—
—
—
(9,611)
(14,168) $
—
—
—
—
20,215
20,215
56,940,521 $
56,941 $
(866) $
371,633 $
50,742 $
6,047 $
484,497
—
—
99,000
611,108
—
—
—
—
99
611
—
—
—
—
—
—
—
—
—
—
767
(611)
6,429
—
(2,373)
80,084
—
—
—
—
—
—
—
—
—
(2,373)
80,084
866
—
6,429
11,661
11,661
Balance at December 31, 2017
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
Balance at December 31, 2018
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 loss net of
reclassification adjustments and
tax
Balance at December 31, 2019
Adoption of current expected credit
loss accounting, net of tax
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
Balance at December 31, 2020
57,650,629 $
57,651 $
(866) $
378,218 $
128,453 $
17,708 $
581,164
The accompanying notes are an integral part of these consolidated financial statements.
90
THE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Operating activities
Net income from continuing operations
Net (loss) income from discontinued operations, net of tax
Adjustments to reconcile net income to net cash used in operating activities
Depreciation and amortization
Provision for credit losses
Net amortization of investment securities discounts/premiums
Stock-based compensation expense
Loans originated for sale
Sales and payments of commercial loans originated for resale
Gain on commercial loans originated for resale
Deferred income tax (benefit) expense
Gain on sale of IRA portfolio
Loss from discontinued operations
Loss on sale of fixed assets
Fair value adjustment on investment in unconsolidated entity
Write-down of other real estate owned
Change in fair value of commercial loans, at fair value
Change in fair value of derivatives
Gain on sales of investment securities
Increase in accrued interest receivable
Decrease (increase) in other assets
Change in fair value of discontinued loans held-for-sale
Change in fair value of discontinued assets held-for-sale
Increase 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 available-for-sale
Net cash paid due to acquisitions, net of cash acquired
Net decrease in repossessed assets
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
Proceeds of senior debt offering
Proceeds from the issuance of common stock options
Proceeds from the sale of IRA portfolio
Net cash provided by (used in) financing activities
Net (decrease) increase 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 investing and financing activities
Investment securities transferred in securitizations
Transfers of discontinued loans to other real estate owned
Loan transferred in acquisition
Leased vehicles transferred to repossessed assets
2020
Year ended December 31,
2019
2018
$
80,596
(512)
$
51,268
291
$
3,758
6,352
15,825
6,429
(721,590)
88,727
(1,684)
(1,350)
—
668
—
45
—
3,567
1,991
—
(6,839)
2,350
—
—
9,489
(512,178)
(34,658)
—
—
233,794
(3,920)
14,727
—
(836,217)
20,783
15
(3,738)
48
7,815
5,556
(595,795)
410,030
(40)
98,160
866
—
509,016
(598,957)
944,472
345,515
13,310
23,040
—
3,780
3,961
15,327
$
$
$
$
$
$
$
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
944,472
37,532
20,683
93,191
5,295
—
—
$
$
$
$
$
$
$
$
$
$
$
$
$
$
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
554,302
27,021
12,663
62,076
—
—
—
The accompanying notes are an integral part of these consolidated financial statements.
91
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 previously generated for sale into capital markets (“CMBS”), which consisted primarily of multi-family (apartment) loans. In the third quarter of
2020, the Company decided to retain the CMBS loans on its balance sheet and no future securitizations are currently planned. Through the Bank, the Company also
provides payment and deposit 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. Reclassifications have been made to the 2019 and 2018 consolidated financial statements to conform to the 2020
presentation. Specifically, lease vehicles previously classified as inventory or repossessed assets were reclassified from loans, net of deferred fees and costs, to other
assets.
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 credit losses, the fair value of
investment in unconsolidated entity, assets held-for-sale from discontinued operations measured at lower of cost or market, credit deterioration in investment
securities, loans 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 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 if any component is attributable to credit loss versus market factors. If a credit loss is determined, a provision for credit
losses is recorded
92
within the consolidated statement of operations. Subsequent improvement in credit may, unlike previous accounting, results in reversal of the credit charge in future
periods. 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 an allowance for credit loss is required by considering primarily the following factors: (a) the extent to which the fair
value is 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 determination of the best estimate of expected future cash flows, which is used to determine the credit loss
amount, is a quantitative and qualitative process that incorporates information received from third-party sources along with internal assumptions and judgments
regarding the future performance of the security. The Company concluded that the securities that are in an unrealized loss position are in a loss position because of
changes in market interest rates after the securities were purchased. The Company’s unrealized loss for other debt securities, which include one single issuer trust
preferred security, is primarily related to general market conditions, including a lack of liquidity in the market. The severity of the impact of fair value in relation to
the carrying amounts of the individual investments is consistent with market developments. The Company’s analysis of each investment is performed at the security
level. As a result of its quarterly review, the Company concluded that an allowance was not required to recognize credit losses in 2020. Under prior accounting rules
which analyzed investment securities for other-than- temporary declines in value, the Company did not recognize any other than temporary impairment (“OTTI”)
charges in 2019 or 2018, applicable to either available-for-sale or held-to-maturity securities.
4. Loans and Allowance for Credit Losses
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are classified as held for investment and are
stated at amortized cost, net of unearned discounts, unearned loan fees and an allowance for credit losses. For loans held for investment at amortized cost, the
Company, effective January 1, 2020, began to utilize a current expected credit loss, or CECL, approach to determine the allowance for credit losses. CECL
accounting replaced the prior incurred loss model that recognized losses when it became probable that a credit loss would be incurred, with a new requirement to
recognize lifetime expected credit losses immediately when a financial asset is originated or purchased. Accordingly, CECL requires loss estimates for the
remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts.
The allowance for credit losses is established through a provision for credit losses charged to expense. Loan principal considered to be uncollectible by
management is charged against the allowance for credit losses. The allowance is an amount that management believes will be adequate to absorb current and future
expected losses on existing loans that may become uncollectible. The evaluation takes into consideration historical losses by pools of loans with similar risk
characteristics and qualitative factors such as portfolio performance and the potential impact of current economic conditions which may affect the borrowers’ ability
to pay. The historical loss ratio for each pool is multiplied by its outstanding balance and further multiplied by the estimated remaining average life of each pool. A
qualitative factor determined according to the pool’s risk characteristics, is multiplied by the pool’s outstanding principal to comprise the second component of the
allowance for credit losses. Additionally, the allowance includes allocations for specific loans which have been individually evaluated for an allowance for credit
losses.
A loan is individually evaluated for an allowance for credit losses 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 the need for individual loan evaluation for a
specific allowance 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 evaluated for an allowance for that reason alone. 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. The determination of the amount of the allowance calculated on individual loans considers either the present value of expected future cash flows
discounted at the loan's effective interest rate or the estimated fair value of the collateral if the loan is collateral dependent. An allowance allocation is established
for such loans in the amount their carrying value exceeds the present value of future cash flows; or, if collateral dependendent, the amount
93
their carrying value exceeds the collateral’s estimated fair value. The estimated fair values of substantially all of the Company's allowances on individual loans are
measured based on the estimated fair value of the loan's collateral, and applicable loans are primarily found in two portfolios.
First, for small business (“SBL”) commercial loans secured by real estate (primarily SBA), estimated fair values are determined primarily through third-
party appraisals or evaluations. When a real estate secured loan is individually evaluated for a potential allowance for credit loss, 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 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 allowance evaluations. Second, for leasing, fair values are determined utilizing authoritative industry sources such as Black Book.
The CECL methodology and the loan analyses performed on individual loans described above comprise the components of the allowance for credit losses.
On a quarterly basis, the allowance is adjusted to the total of those components through the provision for credit losses. The allowance for credit 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.
If the quarterly analysis of those two components exceeds the balance of the allowance for credit losses, the allowance is increased by the provision for credit losses.
Loans deemed to be uncollectible are charged against the allowance for credit 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 is
highly unlikely. Because all identified losses are immediately charged off, no portion of the allowance for credit 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 credit losses includes, among other factors, an analysis of historical loss rates and qualitative
judgments, applied to current loan totals over remaining estimated lives. However, actual losses may be higher or lower than historical trends and estimated
remaining lives, both of which vary. Actual losses on specified problem loans, may depend upon disposition of collateral for which actual sales prices may differ
from appraisals. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes
available.
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 credit 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.
Loans which were originated from continuing operations and previously intended for sale in secondary markets, but which are now being held on the
balance sheet as earning assets, 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 originated and sold or securitized
specific commercial mortgage loans in secondary markets through 2019, but in 2020 decided to retain these loans on its balance sheet. No further sales or
securitizations are currently planned. These loans are accounted for under the fair value option and amounted to $1.81 billion at December 31, 2020, and
$1.18 billion at December 31, 2019. These loans are classified as commercial loans, at fair value.
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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, 2020 and 2019, the Company had net capitalized software costs of approximately $5.6 million and $7.5 million,
respectively. Net capitalized software is presented as part of other assets on the consolidated balance sheets. The Company recorded related amortization expense of
approximately $2.4 million, $2.3 million and $2.4 million for the years ended December 31, 2020, 2019 and 2018, respectively.
7. Income Taxes
The Company accounts for income taxes under the liability method whereby deferred tax assets and liabilities are determined based on the difference
between their carrying values on the consolidated balance sheet and their tax basis as measured by the enacted tax rates which will be in effect when these
differences reverse. Deferred tax expense (benefit) is the result of changes in deferred tax assets and liabilities.
The Company recognizes the benefit of a tax position in the consolidated financial statements only after determining that the relevant tax authority would
more likely than not sustain the position following an audit by the tax authority. For tax positions meeting the more likely than not threshold, the amount recognized
in the consolidated financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant
tax authority. For these analyses, the Company may engage attorneys to provide opinions related to the positions. The Company applies this policy to all tax
positions for which the statute of limitations remain open, but this application does not materially impact the Company’s consolidated balance sheet or consolidated
statement of operations. Any interest 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 restricted stock unit (“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
95
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 credit 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,
2020 and 2019, respectively.
10. Advertising Costs
The Company expenses advertising and marketing costs as incurred. Advertising and marketing costs amounted to $1.3 million, $782,000 and $423,000 for
the years ended December 31, 2020, 2019 and 2018, respectively. Advertising and marketing expense is reflected under “other” in the non-interest expense section
of the consolidated statements of operations.
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:
Basic earnings per share from continuing operations
Net income available to common shareholders
Effect of dilutive securities
Common stock options and restricted stock units
Diluted earnings per share
Net income available to common shareholders
Basic loss per share from discontinued operations
Net loss
Effect of dilutive securities
Common stock options and restricted stock units
Diluted loss per share
Net loss
Income
(numerator)
Year ended December 31, 2020
Shares
(denominator)
(dollars in thousands except per share data)
Per share
amount
80,596
—
80,596
57,474,612
$
936,610
58,411,222
$
Income
(numerator)
Year ended December 31, 2020
Shares
(denominator)
(dollars in thousands except per share data)
Per share
amount
(512)
—
(512)
57,474,612
$
936,610
58,411,222
$
1.40
(0.02)
1.38
(0.01)
—
(0.01)
$
$
$
$
96
Basic earnings per share
Net income available to common shareholders
Effect of dilutive securities
Common stock options and restricted stock units
Diluted earnings per share
Net income available to common shareholders
Income
(numerator)
Year ended December 31, 2020
Shares
(denominator)
(dollars in thousands except per share data)
Per share
amount
$
$
80,084
—
80,084
57,474,612
$
936,610
58,411,222
$
1.39
(0.02)
1.37
Stock options for 1,056,604 shares, exercisable at prices between $6.75 and $8.57 per share, were outstanding at December 31, 2020 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 105,000 shares were anti-
dilutive and not included in the earnings per share calculation.
Basic earnings per share from continuing operations
Net income available to common shareholders
Effect of dilutive securities
Common stock options and restricted stock units
Diluted earnings per share
Net income available to common shareholders
Basic earnings per share from discontinued operations
Net income available to common shareholders
Effect of dilutive securities
Common stock options and restricted stock units
Diluted earnings per share
Net income available to common shareholders
Basic earnings per share
Net income available to common shareholders
Effect of dilutive securities
Common stock options and restricted stock units
Diluted earnings per share
Net income available to common shareholders
Income
(numerator)
Year ended December 31, 2019
Shares
(denominator)
(dollars in thousands except per share data)
Per share
amount
51,268
—
51,268
56,765,635
$
573,350
57,338,985
$
Income
(numerator)
Year ended December 31, 2019
Shares
(denominator)
(dollars in thousands except per share data)
Per share
amount
291
—
291
56,765,635
$
573,350
57,338,985
$
Income
(numerator)
Year ended December 31, 2019
Shares
(denominator)
(dollars in thousands except per share data)
Per share
amount
51,559
—
51,559
56,765,635
$
573,350
57,338,985
$
0.90
(0.01)
0.89
0.01
—
0.01
0.91
(0.01)
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.
Basic income per share from continuing operations
Net earnings available to common shareholders
Effect of dilutive securities
Common stock options and restricted stock units
Diluted income per share
Net earnings available to common shareholders
Income
(numerator)
Year ended December 31, 2018
Shares
(denominator)
(dollars in thousands except per share data)
Per share
amount
87,540
—
87,540
56,343,845
$
724,461
57,068,306
$
1.55
(0.02)
1.53
$
$
97
Basic income per share from discontinued operations
Net earnings available to common shareholders
Effect of dilutive securities
Common stock options and restricted stock units
Diluted income per share
Net earnings available to common shareholders
Basic income per share
Net earnings available to common shareholders
Effect of dilutive securities
Common stock options and restricted stock units
Diluted income per share
Net earnings available to common shareholders
Income
(numerator)
Year ended December 31, 2018
Shares
(denominator)
(dollars in thousands except per share data)
Per share
amount
1,137
—
1,137
56,343,845
$
724,461
57,068,306
$
Income
(numerator)
Year ended December 31, 2018
Shares
(denominator)
(dollars in thousands except per share data)
Per share
amount
88,677
—
88,677
56,343,845
$
724,461
57,068,306
$
0.02
—
0.02
1.57
(0.02)
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.
12. Restrictions on Cash and Due from Banks
Historically, the Bank has been required to maintain reserves against customer demand deposits by keeping cash on hand or balances with the FRB. As a
result of the pandemic, the requirement for such reserves has been at least temporarily suspended. Accordingly, the amounts of those required reserves at
December 31, 2020 and 2019 were approximately zero and $314.7 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 was being amortized over eight years, having ended in October 2020. Amortization expense was $217,000 per year. The gross carrying
value of the software is $1.8 million, and as of December 31, 2020 and December 31, 2019, respectively, the accumulated amortization was $1.8 million and
$1.7 million.
In May 2016, the Company purchased approximately $60 million of lease receivables which resulted in a customer list intangible of $3.4 million which is
being amortized over a 10-year period. Amortization expense is $340,000 per year ($1.7 million over the next five years). The gross carrying value is $3.4 million
and, as of December 31, 2020 and December 31, 2019, respectively, the accumulated amortization was $1.6 million and $1.2 million. 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.
In January 2020, the Company purchased McMahon Leasing and subsidiaries for approximately $8.7 million allocated as follows: $3.9 million
extinguishment of debt, $3.1 million investment in subsidiary, $1.1 million to intangibles and $550,000 primarily comprised of fair value adjustments to the lease
receivables and inventory. In the acquisition, the Company acquired $9.9 million of lease receivables, $958,000 in automobile inventory and other assets. The
excess of the consideration issued over the book value of the assets acquired was $1.6 million which was comprised of the aforementioned $1.1 million of
intangibles and $550,000 of fair value adjustments. The fair value of the leases was $453,000 over their book value which is being amortized over the lives of the
leases, with the balance of the $550,000 reflecting automobile inventory fair value adjustments. The $1.1 million of intangibles is comprised of a customer list
intangible of $689,000, goodwill of $263,000 and a trade name valuation of $135,000 . The customer list intangible is being amortized over a 12 year period and
accumulated depreciation was $57,000 at December 31, 2020. Amortization expense is $57,000 per year ($285,000 over the next five years). The gross carrying
value and accumulated amortization related to the Company’s intangibles at December 31, 2020 and 2019 are presented below.
98
2020
2019
December 31,
Gross
Carrying
Amount
Accumulated
Amortization
Gross
Carrying
Amount
Accumulated
Amortization
Customer list intangibles
Software intangible
Goodwill
Trade Name
Total
$
$
4,093
1,817
263
135
6,308
$
$
(in thousands)
1,646
1,817
—
—
3,463
$
$
15,411
1,817
—
—
17,228
$
$
The approximate future annual amortization of both the Company’s intangible items are as follows (in thousands):
Year ending December 31,
2021
2022
2023
2024
2025
Thereafter
$
$
13,255
1,658
—
—
14,913
398
398
398
398
398
457
2,447
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, or from processing automated clearing
house (“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 accounted for and 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, net realized and unrealized gains on commercial loans originated for sale. Related
loans are no longer held-for-sale, but continue to be accounted for at their estimated fair value. As the Company is no longer originating fixed rate loans for sale, it is
no longer entering into new hedges. The Company has left existing hedges in place to provide interest rate protection against a higher rate environment.
16. Common Stock Repurchase Program
In the fourth quarter of 2020, the Company adopted a common stock repurchase program in which future share repurchases, if made, will reduce the
number of shares outstanding. Up to $10.0 million of share purchases in each quarter of 2021 have been authorized and repurchased shares may be reissued for
various corporate purposes. The repurchase program may be amended or terminated at any time. As of December 31, 2020, under a different plan, the Company
had repurchased 100,000 shares. Shares were repurchased at market price and were recorded as treasury stock at that amount, using the cost method.
17. Long-term Borrowings
The $40.3 million and $41.0 million respectively outstanding for long-term borrowings at December 31, 2020 and 2019, reflected the proceeds from two
loans which were sold, in which the Company retained a participating interest that did not qualify for sale accounting.
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19. Revenue Recognition
The Company’s revenue streams that are in the scope of Accounting Standards Codification (“ASC”) 606 include prepaid and debit card, card payment,
interchange, ACH and deposit processing and other fees. 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 fees on those revenue streams are generally assessed and collected
as the transaction occurs, or on a monthly or quarterly basis. The Company has completed its review of the contracts and other agreements that are within the scope
of revenue guidance and did not identify any material changes to the timing or amount of revenue recognition. The Company’s accounting policies did not change
materially since the principles of revenue recognition in ASU 2014-09, “Revenue from Contracts with Customers” are largely consistent with previous practices
already implemented and applied by the Company. The vast majority of the Company’s services related to its revenues are performed, earned and recognized
monthly.
Prepaid and debit card fees primarily include fees for services related to reconciliation, fraud detection, regulatory compliance and other services which are
performed and earned daily or monthly and are also billed and collected on a monthly basis. Accordingly, there is no significant component of the services the
Company performs or related revenues which are deferred. The Company earns transactional and/or interchange fees on prepaid and debit card accounts when
transactions occur and revenue is billed and collected monthly or quarterly. Certain volume or transaction based interchange expenses paid to payment networks
such as Visa, reduce revenue which is presented net on the income statement. Card payment and ACH processing fees include transaction fees earned for processing
merchant transactions. Revenue is recognized when a cardholder’s transaction is approved and settled, or monthly. ACH processing fees are earned on a per item
basis as the transactions are processed for third party clients and are also billed and collected monthly. Service charges on deposit accounts include fees and other
charges the Company receives to provide various services, including but not limited to, account maintenance, check writing, wire transfer and other services
normally associated with deposit accounts. Revenue for these services is recognized monthly as the services are performed. The Company’s customer contracts do
not typically have performance obligations and fees are collected and earned when the transaction occurs. The 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
100
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. Leases
The Company determines if an arrangement is a lease at inception. Operating lease right-of-use (“ROU”) assets and operating lease liabilities are included
in the Company’s consolidated financial statements. ROU assets represent the Company’s right-of-use of an underlying asset for the lease term, and lease liabilities
represent the Company’s obligation to make lease payments pursuant to the Company’s leases. The ROU assets and liabilities are recognized at commencement of
the lease based on the present value of lease payments over the lease term. To determine the present value of lease payments, the Company uses its incremental
borrowing rate. The lease term may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease
expense is recognized on a straight-line basis over the lease term.
The scheduled maturities of the direct financing leases reconciled to the total lease receivables in the consolidated balance sheet, are as follows (in
thousands):
2021
2022
2023
2024
2025
2026 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 $139,824, $32,176 is not guaranteed by the lessee.
22. Risks and Uncertainties
$
$
144,520
103,201
71,368
37,117
12,413
1,990
370,609
139,824
(48,251)
462,182
ASC 275 addresses disclosures when it is reasonably possible that estimates in the financial statements may change in future periods. The ultimate severity
of the economic impact of Covid-19 pandemic is not known, but its negative impact may exceed the effect of current or future government mitigation efforts, which
could impact loan performance. Additionally, under regulatory guidance loans may be granted principal and interest payment deferrals due to financial hardship
related to the Covid-19 pandemic without classification as non-accrual, delinquency or troubled debt restructuring, barring other information which would require
such classification. The Company has followed the guidance of regulators and is granting such deferrals, but the duration of the crisis is uncertain and additional
government actions are unknown. Accordingly, the Company’s future estimates for the provision for credit losses could increase while the estimated values of loans
accounted for on the basis of fair value could decrease, either of which would reduce the Company’s income.
23. Senior Debt
On August 13, 2020, the Company issued $100 million of senior debt with a maturity date of August 15, 2025, and a 4.75% interest rate, with interest paid
semi-annually on March 15 and September 15. The Senior Notes are the Company’s direct, unsecured and unsubordinated obligations and rank equal in priority
with all of the Company’s existing and future unsecured and unsubordinated indebtedness and senior in right of payment to all of the Company’s existing and future
subordinated indebtedness.
25. Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued an update ASU 2016-13 – “Financial Instruments – Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments”. The Update changes the accounting for credit losses on loans and debt securities. For loans and held-to-
maturity debt securities, the Update requires a CECL approach to determine the allowance for credit losses. CECL requires loss estimates for the remaining
estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts. Also, the Update eliminates the existing
guidance for purchased credit impaired loans, but requires an allowance for purchased financial assets with more than insignificant deterioration since origination. In
addition, the Update modifies the OTTI impairment model for available-for-sale debt securities to require an allowance for credit losses instead of a direct write-
down, which allows for reversal of credit losses in future periods based on
101
improvements in credit. The guidance was effective in the first quarter of 2020 with a cumulative-effect adjustment to retained earnings as of the beginning of the
year of adoption. As a result of the Company’s adoption of the guidance in the first quarter of 2020, it recorded a $2.4 million charge to retained earnings and an
$834,000 deferred tax asset, which were offset by $2.6 million in the allowance for credit losses and a $569,000 credit to other liabilities. The $569,000 reflected an
allowance on unfunded commitments.
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820) Disclosure Framework—Changes to the Disclosure Requirements
for Fair Value Measurement” which eliminates certain fair value disclosures, adds new disclosures and amends another disclosure applicable to the Company as
follows. The amendment states that disclosure of measurement uncertainty of the fair values to changes in inputs will be required for the reporting date and not
future dates. New fair value disclosures consist of disclosure of: a) total gains and losses in OCI from fair value changes in Level 3 assets and liabilities that are held
on the balance sheet date; b) the range and weighted average of inputs and how the weighted average was calculated and c) if weighted average is not meaningful,
other quantitative information that better reflects the distribution of inputs. ASU 2018-13 was implemented in first quarter 2020, and the disclosures discussed are
included in the financial statements. There was no material impact on the financial statements.
In March 2020, the FASB issued ASU 2020-04 which addressed optional expedients and exceptions for applying GAAP to contract modifications and
hedging relationships, resulting from the phase-out of the London Inter-bank Offered Rate (“LIBOR”) reference rate. The interest rates on certain of the Company’s
securities, the majority of commercial loans held at fair value and its trust preferred securities outstanding (classified as subordinated debenture on the balance
sheet), utilize LIBOR as a reference rate. To maximize management and accounting flexibility for holders of instruments using LIBOR as a benchmark, the
guidance permitted a one-time transfer of such instruments from held-to-maturity to available-for-sale. The Company made such a transfer of four LIBOR-based
securities, which comprised its held-to-maturity portfolio, in the first quarter of 2020. The Company is assessing the potential impact of the phase-out of LIBOR and
related accounting guidance.
Note C— Subsequent Events
The Company evaluated its December 31, 2020 consolidated financial statements for subsequent events through the date the consolidated financial statements were
issued. As a result of the Covid-19 pandemic, economic uncertainties continue and negative financial impact could occur though such potential impact is unknown
at this time. Pursuant to a stock repurchase plan described in Note J, the Company repurchased 594,428 common shares in January and February of 2021, at a total
cost of $10.0 million and an average price of $16.82 per share.
Note D—Investment Securities
In March 2020, the Company transferred the four securities previously comprising its held-to-maturity securities portfolio to available-for-sale. The interest
rates for these securities utilize the LIBOR as a benchmark and were permitted to be transferred by a provision of ASU 2020-04, to maximize management and
accounting flexibility as a result of the phase-out of LIBOR. 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
Corporate debt securities
Amortized
cost
December 31, 2020
Gross
unrealized
gains
Gross
unrealized
losses
$
$
44,960
238,678
4,042
47,884
256,914
145,260
359,125
85,043
1,181,906
$
$
102
2,357
143
248
4,180
9,765
3,281
12,717
63
32,754
$
$
(120)
(460)
—
—
(96)
(11)
(4,562)
(3,247)
(8,496)
$
$
Fair
value
47,197
238,361
4,290
52,064
266,583
148,530
367,280
81,859
1,206,164
* Asset-backed securities as shown above
Federally insured student loan securities
Collateralized loan obligation securities
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
Amortized
cost
28,013
210,665
238,678
$
$
Amortized
cost
52,415
244,751
5,174
58,258
335,068
221,109
394,852
1,311,627
$
$
Amortized
cost
33,852
210,899
244,751
$
$
Amortized
cost
9,219
75,168
84,387
$
$
$
$
$
$
$
$
$
$
December 31, 2020
Gross
unrealized
gains
Gross
unrealized
losses
38
105
143
$
$
(93) $
(367)
(460)
$
December 31, 2019
Gross
unrealized
gains
Gross
unrealized
losses
672
132
144
1,992
2,629
1,826
3,836
11,231
$
$
(177) $
(534)
—
—
(1,101)
(208)
(146)
(2,166)
$
December 31, 2019
Gross
unrealized
gains
Gross
unrealized
losses
10
122
132
$
$
(323) $
(211)
(534)
$
December 31, 2019
Gross
unrealized
gains
Gross
unrealized
losses
27,958
210,403
238,361
Fair
value
Fair
value
52,910
244,349
5,318
60,250
336,596
222,727
398,542
1,320,692
33,539
210,810
244,349
Fair
value
Fair
value
— $
682
682
$
(2,067) $
—
(2,067)
$
7,152
75,850
83,002
The amortized cost and fair value of the Company’s investment securities at December 31, 2020, 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
Amortized
cost
Fair
value
$
$
2,152
157,916
242,406
779,432
1,181,906
$
$
2,168
167,888
249,081
787,027
1,206,164
In 2020, the Company began pledging loans to collateralize its line of credit with the FHLB and had no securities pledged against that line at December 31,
2020. At December 31, 2019, investment securities with a fair value of approximately $262.0 million, were pledged to the FHLB to collateralize that line of credit.
The Company also pledged the majority of its loans to the FRB for a line of credit with that institution, which it had not used prior to 2020. The amount of loans
pledged with both institutions varies and the collateral may be unpledged at any time that advances are not outstanding. In 2020, the Company utilized its line with
the FHLB to assist in daily cash management. In 2020, the Company also periodically accessed its line with the FRB, as suggested by that institution, to maximize
available funding in light of the economic impact of the Covid-19 pandemic. The lines are maintained consistent with the Bank’s liquidity policy which maximizes
potential liquidity. Gross realized gains on sales of securities were $0, $0 and $41,000 for the years ended December 31, 2020, 2019 and 2018, respectively. There
were no realized losses on securities sales for the years ended December 31, 2020, 2019 and 2018.
103
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. CECL
accounting was adopted in 2020, and requires that an allowance for credit losses be established through a charge to the income statement to recognize credit
deterioration. The charge may be reversed should credit improve in the future. Prior accounting required recognition of losses of other-than temporary-impairment,
which could not be reversed in future periods. The Company periodically reviews its investment portfolio to determine whether an allowance for credit losses is
warranted, based on evaluations of the creditworthiness of the issuers/guarantors, the underlying collateral if applicable and the continuing performance of the
securities. The Company did not recognize credit charges in 2020 or any other-than-temporary impairment charges in 2019 and 2018.
Investments in FHLB and Atlantic Central Bankers Bank (“ACBB”) stock are recorded at cost and amounted to $1.4 million at December 31, 2020 and
$5.3 million at December 31, 2019. At those dates, ACBB stock amounted to $40,000. The amount of FHLB stock required to be held is based on the amount of
borrowings, and after such borrowings are repaid, the stock may be redeemed.
The table below indicates the length of time individual securities had been in a continuous unrealized loss position at December 31, 2020 (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
Corporate debt securities
Total unrealized loss position
investment securities
Number of
securities
5
24
12
6
4
2
53
Fair Value
Unrealized losses
Fair Value
Unrealized losses
Fair Value
Unrealized losses
$
594 $
123,447
6,221
2,505
69,486
—
(2) $
(337)
(35)
(10)
(4,562)
—
5,322 $
29,563
6,650
3,489
—
31,796
(118) $
(123)
(61)
(1)
—
(3,247)
5,916 $
153,010
12,871
5,994
69,486
31,796
$
202,253 $
(4,946) $
76,820 $
(3,550) $
279,073 $
(120)
(460)
(96)
(11)
(4,562)
(3,247)
(8,496)
The table below indicates the length of time individual securities had been in a continuous unrealized loss position at December 31, 2019 (in thousands):
Available-for-sale
Less than 12 months
12 months or longer
Total
Number of
securities
Fair Value
Unrealized losses
Fair Value
Unrealized losses
Fair Value
Unrealized losses
Description of Securities
U.S. Government agency securities
Asset-backed securities
Residential mortgage-backed securities
Collateralized mortgage obligation securities
Commercial mortgage-backed securities
Total unrealized loss position
investment securities
5
28
64
22
4
$
12,214 $
115,909
58,682
37,387
35,095
(44) $
(275)
(114)
(85)
(129)
3,986 $
56,427
73,311
18,136
3,162
(133) $
(260)
(987)
(123)
(16)
16,200 $
172,336
131,993
55,523
38,257
123
$
259,287 $
(647) $
155,022 $
(1,519) $
414,309 $
(177)
(535)
(1,101)
(208)
(145)
(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 unrealized loss position
investment securities
1
1
$
$
— $
— $
— $
— $
7,152 $
(2,067) $
7,152 $
7,152 $
(2,067) $
7,152 $
(2,067)
(2,067)
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,
2020, it had a book value of $10.0 million and a fair value of $6.8 million. The Company has evaluated the securities in the above tables as of December 31, 2020
and has concluded that none of these securities required an
104
allowance for credit loss. The Company evaluates whether an allowance for credit loss is required by considering primarily the following factors: (a) the extent to
which the fair value is 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 determination of the best estimate of expected future cash flows, which is used to determine the credit
loss amount, is a quantitative and qualitative process that incorporates information received from third-party sources along with internal assumptions and judgments
regarding the future performance of the security. The Company concluded that the securities that are in an unrealized loss position are in a loss position because of
changes in market interest rates after the securities were purchased. The Company’s unrealized loss for other debt securities, which include one single issuer trust
preferred security, is primarily related to general market conditions, including a lack of liquidity in the market. The severity of the impact of fair value in relation to
the carrying amounts of the individual investments is consistent with market developments. The Company’s analysis of each investment is performed at the security
level. As a result of its review, the Company concluded that an allowance was not required to recognize credit losses.
105
Note E—Loans
The Company has several lending lines of business including small business comprised primarily of SBA loans, direct lease financing, SBLOC and IBLOC
and other specialty and consumer lending. Prior to 2020, the Company also originated loans for sale into commercial mortgage-backed securitizations or to
secondary government guaranteed loan markets. At origination, the Company elected fair value treatment for these loans as they were originally held-for-sale, to
better reflect the economics of the transactions. Currently, the Company intends to hold these loans on its balance sheet, and thus no longer classifies these loans as
held-for-sale. The Company continues to present these loans at fair value. At December 31, 2020 and 2019, the fair value of these loans was $1.81 billion and
$1.18 billion, and the unpaid principal balance was $1.81 billion and $1.17 billion, 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 loss of $3.6 million in 2020, an unrealized gain of
$963,000 in 2019 and an unrealized loss of $979,000 in 2018. These amounts include credit related reductions in fair value of $1.0 million, $486,000 and $829,000,
respectively, in 2020, 2019 and 2018. Interest earned on loans held at fair value during the period held is recorded in Interest Income – Loans, including fees in the
consolidated statements of operations. The Bank also pledged the majority of its loans held for investment at amortized cost and commercial loans at fair value to
either the Federal Home Loan Bank or the Federal Reserve Bank for lines of credit with those institutions. The Federal Home Loan Bank line is periodically utilized
to manage liquidity, but the Federal Reserve line has, prior to 2020, not generally been used. However, in light of the impact of the Covid-19 pandemic, the Federal
Reserve has encouraged banks to utilize their lines to maximize the amount of funding available for credit markets. Accordingly, the Bank has periodically
borrowed against its Federal Reserve line on an overnight basis. The amount of loans pledged varies and the collateral may be unpledged at any time to the extent
the collateral exceeds advances. The lines are maintained consistent with the Bank’s liquidity policy which maximizes potential liquidity. At December 31, 2020,
$1.70 billion of loans were pledged to the Federal Reserve and $1.25 billion of loans were pledged to the Federal Home Loan Bank. There were no balances against
these lines at that date.
In 2019, 2018 and 2017, the Company sponsored the structuring of commercial mortgage loan securitizations and in 2020 decided not to pursue additional
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 Commercial Real Estate (“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 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.
There were no securitizations in 2020. A summary of securitizations and securities obtained from those securitizations in 2019 and 2018 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%.
106
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 2020, the Company decided to not pursue securitizations and no future securitizations are currently planned. The loans being currently retained total
approximately $1.57 billion and are mostly comprised of multi-family loans, specifically apartment buildings. The $1.57 billion comprises the majority of the
commercial loans, at fair value on the balance sheet, with the balance of that category comprised of the government guaranteed portion of SBA loans.
The Company analyzes credit risk prior to making loans, on an individual loan basis. The Company considers relevant aspects of the borrowers’ financial
position and cash flow, past borrower performance, management’s knowledge of market conditions, collateral and the ratio of the loan amount to estimated
collateral value in making its credit determinations.
Major classifications of loans, excluding commercial loans, at fair value, are as follows (in thousands):
SBL non-real estate
SBL commercial mortgage
SBL construction
Small business loans *
Direct lease financing
SBLOC / IBLOC **
Advisor financing ***
Other specialty lending
Other consumer loans ****
Unamortized loan fees and costs
Total loans, net of unamortized loan fees and costs
SBL loans, net of (deferred fees) and costs of $1,536 and $4,215
for December 31, 2020 and December 31, 2019, respectively
SBL loans included in commercial loans, at fair value
Total small business loans
December 31,
2020
December 31,
2019
255,318
300,817
20,273
576,408
462,182
1,550,086
48,282
2,179
4,247
2,643,384
8,939
2,652,323
$
$
84,579
218,110
45,310
347,999
434,460
1,024,420
—
3,055
4,554
1,814,488
9,757
1,824,245
December 31,
2020
December 31,
2019
577,944
243,562
821,506
$
$
352,214
220,358
572,572
$
$
$
$
* The preceding table shows small business loans and small business loans held at fair value. The small business loans held at fair value are comprised of the government guaranteed portion of
certain SBA loans at the dates indicated (in thousands). A reduction in SBL non-real estate from $293.5 million to $255.3 million in the fourth quarter of 2020 resulted from the commencement
of U.S. treasury repayments of PPP loans which totaled $42.1 million in fourth quarter 2020. At December 31, 2020, PPP loans totaled $167.7 million.
** Securities Backed Lines of Credit, or SBLOC, are collateralized by marketable securities, while Insurance Backed Lines of Credit, or IBLOC, are collateralized by the cash surrender value of
insurance policies. At Decmber 31, 2020 and December 31, 2019, respectively, IBLOC loans amounted to $437.2 million and $144.6 million.
*** In 2020, the Company began originating loans to investment advisors for purposes of debt refinance, acquisition of another firm or internal succession. Maximum loan amounts are subject to
loan-to-value ratios of 70%, based on third party business appraisals, but may be increased depending upon the debt service coverage ratio. Personal guarantees and blanket business liens are
obtained as appropriate.
**** Included in the table above under other consumer loans are demand deposit overdrafts reclassified as loan balances totaling $663,000 and $882,000 at December 31, 2020 and December 31,
2019, respectively. Estimated overdraft charge-offs and recoveries are reflected in the allowance for credit losses and have been immaterial.
107
The following table provides information about loans individually evaluated for credit loss at December 31, 2020 and 2019 (in thousands):
Recorded
investment
Unpaid
principal
balance
December 31, 2020
Related
allowance
Average
recorded
investment
Interest
income
recognized
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
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
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
$
$
$
$
$
387
2,037
299
557
3,044
5,268
711
452
—
3,431
7,305
711
751
557
12,755
$
$
335
76
—
286
489
3,804
971
711
—
121
4,139
1,047
711
286
610
6,793
$
Recorded
investment
$
2,836
2,037
299
557
3,044
5,268
711
452
—
5,880
7,305
711
751
557
15,204
$
— $
—
—
—
(2,129)
(1,010)
(34)
(4)
—
(2,129)
(1,010)
(34)
(4)
—
$
(3,177)
Unpaid
principal
balance
December 31, 2019
Related
allowance
Average
recorded
investment
$
2,717
76
—
286
489
4,371
971
711
—
121
7,088
1,047
711
286
610
9,742
108
$
— $
—
—
—
—
(2,961)
(136)
(36)
—
(9)
(2,961)
(136)
(36)
—
(9)
(3,142)
$
370
1,253
3,352
554
3,257
2,732
711
716
24
3,627
3,985
711
4,068
578
12,969
277
15
284
362
1,161
3,925
561
284
244
344
4,202
576
568
606
1,505
7,457
$
$
$
$
Interest
income
recognized
3
—
—
10
15
—
—
—
—
18
—
—
—
10
28
5
—
—
11
9
30
—
—
—
—
35
—
—
11
9
55
The loan review department recommends non-accrual status for loans to the surveillance committee, where interest income appears to be uncollectible or a
protracted delay in collection becomes evident. The surveillance committee further vets and approves the non-accrual status.
The following table summarizes non-accrual loans with and without an allowance for credit losses (“ACL”) as of the periods indicated (in thousands):
SBL non-real estate
SBL commercial mortgage
SBL construction
Direct leasing
Consumer
$
$
$
2,824
5,269
711
452
—
$
9,256
335
2,036
$
—
299
301
2,971
$
3,159
7,305
711
751
301
12,227
Non-accrual loans with a
related ACL
December 31, 2020
Non-accrual loans without
a related ACL
Total non-accrual loans
December 31, 2019
$
Total non-accrual loans
3,693
1,047
711
—
345
5,796
$
The following table summarizes the Company’s non-accrual loans, loans past due 90 days at December 31, 2020 and 2019, respectively (the Company had
no other real estate owned in continuing operations at December 31, 2020 or December 31, 2019):
Non-accrual loans
SBL non-real estate
SBL commercial mortgage
SBL construction
Direct leasing
Consumer
Total non-accrual loans
Loans past due 90 days or more and still accruing
Total non-performing loans
Total non-performing assets
2020
December 31,
(in thousands)
2019
$
$
3,159
7,305
711
751
301
12,227
497
12,724
12,724
$
$
3,693
1,047
711
—
345
5,796
3,264
9,060
9,060
The Company had no other real estate owned (“OREO”) in continuing operations at December 31, 2020 and December 31, 2019.
Interest which would have been earned on loans classified as non-accrual at December 31, 2020 and 2019, was $406,000 and $388,000, respectively. No
income on non-accrual loans was recognized during 2020 or 2019. In 2020 and 2019, respectively, $890,000 and $870,000 were reversed from interest income,
which represented interest accrued on loans placed into non-accrual status during the period.
The Company’s loans that were modified as of December 31, 2020 and 2019 and considered troubled debt restructurings are as follows (in thousands):
SBL non-real estate
Direct lease financing
Consumer
Total
Number
December 31, 2020
Pre-modification
recorded investment
Post-modification
recorded investment
Number
8
1
2
11
$
$
911
251
469
1,631
$
$
109
911
251
469
1,631
December 31, 2019
Pre-modification
recorded investment
Post-modification
recorded investment
8
1
2
11
$
$
1,309
286
489
2,084
$
$
1,309
286
489
2,084
The balances below provide information as to how the loans were modified as troubled debt restructured loans at December 31, 2020 and 2019 (in
thousands):
December 31, 2020
December 31, 2019
Adjusted interest rate
Extended maturity
Combined rate and
maturity
Adjusted interest rate
Extended maturity
Combined rate and
maturity
SBL non-real estate
Direct lease financing
Consumer
Total
$
$
— $
—
—
$
—
16
251
$
—
$
267
895
$
—
469
1,364
$
— $
—
—
$
—
51
286
$
—
$
337
1,258
—
489
1,747
The Company had no commitments to extend additional credit to loans classified as troubled debt restructurings as of either December 31, 2020 or 2019.
When loans are classified as troubled debt restructurings, the Company estimates the value of underlying collateral and repayment sources. A specific
reserve in the allowance for credit losses is established if the collateral valuation, less estimated disposition costs, is lower than the recorded loan value. The amount
of the specific reserve serves to increase the provision for credit losses in the quarter the loan is classified as a troubled debt restructuring. As of December 31, 2020,
there were eleven troubled debt restructured loans with a balance of $1.6 million which had specific reserves of $467,000. Substantially all of these reserves related
to the non-guaranteed portion of SBA loans for start-up businesses.
The Company had three troubled debt restructured loans that had been restructured within the last 12 months that have subsequently defaulted. The largest
was for a single borrower who came under financial stress and agreed to an orderly liquidation of vehicles collateralizing their $15.3 million loan balance at
March 31, 2020, which was reflected in the direct lease financing balance and in troubled debt restructurings at that date. The borrower subsequently filed for
bankruptcy and the bankruptcy court gave the Company permission to sell the vehicles which were transferred to other assets as of June 30, 2020. Subsequent
vehicle sales have repaid substantially all of the balance which has been reduced to $57,000.
The following table summarizes the other two loans that were restructured within the 12 months ended December 31, 2020 that have subsequently
defaulted (in thousands).
SBL non-real estate
Total
December 31, 2020
Number
Pre-modification recorded
investment
2
2
$
$
689
689
The SBA began, in April 2020, to make six months of principal and interest payments on SBA 7a loans, which are generally 75% guaranteed by the U.S.
government. As of December 31, 2020, the Company had $337.9 million of related guaranteed balances, and additionally had $167.7 million of PPP loan balances
which were also guaranteed. The majority of the six months of support expired in the fourth quarter of 2020, and the Company is generally approving Covid-19
pandemic-related deferrals for principal and interest payments as they are requested by borrowers. Additionally, the Company has, and is, granting such deferrals for
certain other loans. The Consolidated Appropriations Act, 2021, became law in December 2020 and provided for at least an additional two months of principal and
interest payments on SBA 7a loans, with up to five months of payments for hotel, restaurant and other more highly impacted loans. Unlike the six months of
CARES Act payments, these additional payments are capped at $9,000 per month. Per section 4013 of the CARES Act, accounting and banking regulators have
determined that loans with Covid-19 pandemic-related deferrals of principal and interest payments will not, during the deferral period, be classified as delinquent,
non-accrual or restructured. Such treatment is temporary and will terminate after the earlier of the end of the national emergency, or December 31, 2021.
Effective January 1, 2020, CECL accounting replaced the prior incurred loss model that recognized losses when it became probable that a credit loss would
be incurred, with a new requirement to recognize lifetime expected credit losses immediately when a financial asset is originated or purchased. The allowance for
credit losses is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans, or
portions thereof, are charged off against
110
the allowance when they are deemed uncollectible. Loans are deemed uncollectible based on individual facts and circumstances including the quality of repayment
sources, the length of collection efforts and the probability and timing of recoveries. During the first quarter of 2020, upon adoption of the guidance, the allowance
for credit losses was increased by $2.6 million. Additionally, $569,000 was established as an allowance for off-balance sheet credit losses (for unfunded loan
commitments) and recorded in other liabilities. These amounts did not impact the Company’s Consolidated Statement of Operations, as the guidance required these
cumulative differences between the two accounting conventions to flow through retained earnings, net of their income tax benefit. The following table shows the
effect of the adoption of CECL as of January 1, 2020 and the December 31, 2020 allowance for credit loss (in thousands).
Allowance for credit losses on loans and
leases
SBL non real estate
SBL commercial mortgage
SBL construction
Direct lease financing
SBLOC
IBLOC
Advisor financing
Other specialty lending (1)
Consumer - other
Unallocated
Liabilities:
Allowance for credit losses on off-balance
sheet credit exposures
Total allowance for credit losses
$
$
$
December 31, 2019
Incurred loss method
January 1, 2020
CECL (day 1 adoption)
December 31, 2020
CECL
Amount
% of Segment
Amount
% of Segment
Amount
% of Segment
4,985
1,472
432
2,426
440
113
—
12
40
318
10,238
5.89% $
0.67%
0.95%
0.56%
0.05%
0.08%
—%
0.39%
0.88%
0.56% $
4,765
2,009
571
4,788
440
72
—
170
60
—
12,875
5.63% $
0.92%
1.26%
1.10%
0.05%
0.05%
—%
5.56%
1.32%
0.71% $
5,060
3,315
328
6,043
557
218
362
150
49
—
16,082
1.98%
1.10%
1.62%
1.31%
0.05%
0.05%
0.75%
6.88%
1.15%
0.61%
—
10,238
$
569
13,444
$
795
16,877
(1)
Included in other specialty lending are $35.4 million of SBA loans purchased for CRA purposes as of December 31, 2020. These loans are classified as SBL in the Company’s loan
tables.
Management estimates the allowance using relevant available internal and external historical loan performance information, current economic conditions
and reasonable and supportable forecasts. Historical credit loss experience provides the initial basis for the estimation of expected credit losses over the estimated
remaining life of the loans. The methodology used in the estimation of the allowance, which is performed at least quarterly, is designed to be responsive to changes
in portfolio credit quality and the impact of current and future economic conditions on loan performance. The review of the appropriateness of the allowance is
performed by the Chief Credit Officer and presented to the audit committee for their review. The allowance for credit losses includes reserves on loan pools with
similar risk characteristics based on a lifetime loss-rate model, or vintage analysis, as described in the following paragraph. Loans that do not share risk
characteristics are evaluated on an individual basis. If foreclosure is believed to be probable or repayment is expected from the sale of the collateral, a reserve for
deficiency is established within the allowance. Expected credit losses for such collateral dependent loans are based on the difference between loan principal and the
estimated fair value of the collateral, adjusted for estimated disposition costs as appropriate.
For purposes of determining the pool-basis reserve, the loans not assigned an individual reserve are segregated by product type, to recognize differing risk
characteristics within portfolio segments. A historical loss rate is calculated for each product type, except SBLOC and IBLOC, based upon historical net charge-offs
for that product. The loss rate is determined by classifying charge-off losses according to the year the related loans were originated, which is referred to as vintage
analysis. The loss rate is then projected over the estimated remaining loan lives unique to each loan pool, to determine estimated lifetime losses. For SBLOC and
IBLOC, since losses have not been incurred, probability of loss/loss given default considerations are utilized. Additionally, for all loan pools the Company adds to
the allowance a component for each pool based upon qualitative factors such as the Company’s current loan performance statistics as determined by pool. These
qualitative factors adjust for asset specific differences between historical loss experience and the current portfolio for each pool. The qualitative factors are intended
to address factors that may not be reflected in historical loss rates and otherwise unaccounted for in the quantitative process. A similar process is employed to
calculate an allowance assigned to off-balance sheet commitments, which are comprised of unfunded loan commitments and letters of credit. That allowance is
recorded in other liabilities. The model also includes qualitative factors which may increase or decrease the allowance compared to historical loss rates. However,
expected losses provided for in the allowance are primarily based on applying
111
historical loss rates over the estimated remaining lives of the loans. Even though portions of the allowance may be allocated to loans that have been individually
measured for credit deterioration, the entire allowance is available for any credit that, in management’s judgment, should be charged off.
The Company ranks its qualitative factors in five levels: minimal risk, low, moderate, moderate-high and high. When the Company adopted CECL as of
January 1, 2020, the management assumption was that some degree of economic slowdown should be considered over the next eighteen months. That belief
reflected the length of the current economic expansion and the relatively high level of unsustainable deficit spending. Accordingly, certain of the Company’s
qualitative factors were set at moderate as of January 1, 2020. Based on the uncertainty as to how the Covid-19 pandemic would impact the Company’s loan pools,
the Company increased other qualitative factors to moderate in 2020. The economic qualitative factor is based on the estimated impact of economic conditions on
the loan pools, as distinguished from the economic factors themselves. The Company’s charge-offs have been non-existent for SBLOC and IBLOC. Further, the
charge-off history for SBL and leasing do not correlate with economic conditions. Given the continuing economic weakness, the economic qualitative component
for the non-guaranteed portion of SBA 7a loans, was increased to moderate high. While specific or groups of economic factors did not correlate with actual
historical losses, multiple economic factors are considered. For the non-guaranteed portion of SBA loans and leasing, the Company’s loss forecasting analysis
included a review of industry statistics. However, the Company’s own charge-off history was the primary quantitative element in the forecasts.
112
Below are the portfolio segments used to pool loans with similar risk characteristics and align with the Company’s methodology for measuring expected
credit losses. These pools have similar risk and collateral characteristics, and certain of these pools are broken down further in determining and applying the vintage
loss estimates previously discussed. For instance, within the direct lease financing pool, government and public institution leases are considered separately.
Additionally, the Company evaluates its loans under an internal loan risk rating system as a means of identifying problem loans. The special mention classification
indicates weaknesses that may, if not cured, threaten the borrower’s future repayment ability. A substandard classification reflects an existing weakness indicating
the possible inadequacy of net worth and other repayment sources. These classifications are used both by regulators and peers, as they have been correlated with an
increased probability of credit losses. A summary of the Company’s primary portfolio pools and loans accordingly classified, by year of origination, at
December 31, 2020 is as follows (in thousands):
As of December 31, 2020
SBL non real estate
Non-rated
Pass
Special mention
Substandard
Total SBL non-real estate
SBL commercial mortgage
Non-rated
Pass
Special mention
Substandard
Total SBL commercial
mortgage
SBL construction
Non-rated
Pass
Substandard
Total SBL construction
Direct lease financing
Non-rated
Pass
Substandard
Total direct lease financing
SBLOC
Non-rated
Pass
Total SBLOC
IBLOC
Non-rated
Pass
Total IBLOC
Other specialty
Non-rated
Pass
Total other specialty
Advisor financing
Non-rated
Pass
Total advisor financing
Consumer
Non-rated
Pass
Substandard
Total consumer
Total *
2020
2019
2018
2017
2016
Prior
Revolving loans
at amortized cost
Total
$
169,598 $
10,775
—
—
180,373
— $
10,943
—
—
10,943
— $
12,002
731
20
12,753
— $
5,454
—
1,489
6,943
— $
7,153
499
1,347
8,999
— $
9,964
767
1,491
12,222
— $
—
—
—
—
20,185
26,971
—
—
47,156
821
6,769
—
7,590
23,273
249,946
3,536
276,755
—
—
—
—
—
—
2,691
376
3,067
23,014
25,941
48,955
933
—
—
933
564,829 $
$
2,758
76,975
1,852
—
81,585
—
1,146
—
1,146
2,888
90,156
45
93,089
—
—
—
—
—
—
—
46,099
—
—
46,099
—
11,081
—
11,081
2,189
53,638
97
55,924
—
—
—
—
—
—
—
3,569
3,569
—
6,225
6,225
—
—
—
—
—
—
—
—
—
—
—
—
—
—
190,332 $
132,082 $
113
—
39,219
—
—
39,219
—
—
—
—
1,093
23,944
152
25,189
—
—
—
—
—
—
—
7,320
7,320
—
—
—
—
32,505
—
77
32,582
—
—
711
711
447
9,091
536
10,074
—
—
—
—
—
—
—
7,228
7,228
—
—
—
—
35,298
257
7,605
43,160
—
—
—
—
7
1,106
38
1,151
—
—
—
—
—
—
—
12,555
12,555
—
—
—
14
—
—
14
78,685 $
—
—
—
—
59,594 $
1,558
1,441
301
3,300
72,388 $
—
—
—
—
—
—
—
—
—
—
—
—
—
8,099
1,109,161
1,117,260
132,777
304,376
437,153
—
—
—
—
—
—
—
—
—
—
1,554,413 $
169,598
56,291
1,997
4,347
232,233
22,943
257,067
2,109
7,682
289,801
821
18,996
711
20,528
29,897
427,881
4,404
462,182
8,099
1,109,161
1,117,260
132,777
304,376
437,153
2,691
37,273
39,964
23,014
25,941
48,955
2,505
1,441
301
4,247
2,652,323
Included in the table above, in the SBL non real estate non-rated total of $169.6 million, were $167.7 million of PPP loans which are government
guaranteed.
The following table provides information by credit risk rating indicator for each segment of the loan portfolio excluding commercial loans at fair value at
December 31, 2019 (in thousands):
SBL non-real estate
SBL commercial mortgage
SBL construction
Direct lease financing
SBLOC / IBLOC
Other specialty lending
Consumer
Unamortized loan fees and costs
Pass
Special mention
Substandard
Unrated subject to
review *
Unrated not subject
to review *
Total loans
December 31, 2019
$
$
76,108
208,809
44,599
420,289
942,858
3,055
2,545
—
1,698,263
$
$
3,045
2,249
—
—
—
—
—
—
5,294
$
$
4,430
5,577
711
8,792
—
—
345
—
19,855
$
$
—
—
—
—
—
—
—
—
—
$
$
996
1,475
—
5,379
81,562
—
1,664
9,757
100,833
$
$
84,579
218,110
45,310
434,460
1,024,420
3,055
4,554
9,757
1,824,245
Included in other specialty lending in the December 31, 2020 table above are $35.4 million of SBA loans purchased for CRA purposes as of December 31,
2020. These loans are classified as SBL in the Company’s loan table which classify loans by type, as opposed to risk characteristics.
* At December 31, 2020, 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 2020 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, 2020, approximately 62% of
the SBLOC portfolio had been reviewed.
Insurance Backed Lines of Credit (IBLOC) – The targeted review threshold for 2020 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,
2020, approximately 70% of the IBLOC portfolio had been reviewed.
Advisor Financing – The targeted review threshold for 2020 was 50%. At December 31, 2020, approximately 51% of the advisor financing portfolio had
been reviewed. The loan balance review threshold is $1.0 million.
Small Business Loans – The targeted review threshold for 2020 was 60%, to be rated and/or reviewed within 90 days of funding, less fully guaranteed
loans purchased for CRA, or fully guaranteed PPP loans. The loan balance review threshold is $1.5 million and, additionally, any classified loans. At December 31,
2020, over 80% of the non government guaranteed loan portfolio had been reviewed.
Direct Lease Financing – The targeted review threshold for 2020 was 35%. At December 31, 2020, approximately 51% of the leasing portfolio had been
reviewed. All lease relationships exceeding $1.5 million are reviewed.
Commercial Mortgages, at fair value (Floating Rate) – The targeted review threshold for 2020 was 60%. 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, 2020, approximately 100% of the CMBS
floating rate loans on the books more than 90 days had been reviewed.
Commercial Mortgages, at fair value (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, 2020, approximately 100% of the CMBS fixed rate portfolio had been
reviewed.
114
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, 2020, approximately 100% of the non-CRA loans had been
reviewed.
Home Equity Lines of Credit, or (“HELOC”) – The targeted review threshold for 2020 was 50%. At December 31, 2020, approximately 57% of the
HELOC portfolio had been reviewed.
SBL. Substantially all small business loans consist of SBA loans. The Bank participates in loan programs established by the SBA, including the 7(a) Loan
Guarantee Program and the 504 Fixed Asset Financing Program and a temporary program, the Paycheck Protection Program, or (“PPP”), in 2020. 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 504 Fixed Asset Financing Program includes the financing of real estate and commercial mortgages. In 2020, the
Company also participated in PPP, which provides short-term loans to small businesses. PPP loans are fully guaranteed by the U.S. government. This program was a
specific response to the Covid-19 pandemic, and these loans are expected to be reimbursed by the U.S. government within one year of their origination. The
Company segments the SBL portfolio into four pools: non-real estate, commercial mortgage and construction to capture the risk characteristics of each pool, and the
PPP loans discussed above. In the table above, the government guaranteed PPP loans, amounting to $167.7 million, are included in non-rated SBL non-real estate.
The qualitative factors for SBL loans focus on changes in international, national, regional, and local economic and business conditions, changes in the value of
underlying collateral, changes in credit concentrations, and changes in the volume and severity of past due loans. Additionally, the construction segment adds a
qualitative factor for general construction risk, such as construction delays. The U.S. government guaranteed portions of 7a loans and fully guaranteed PPP loans,
are not included in the risk pools because they have inherently different risk characteristics because of the U.S. government guarantee.
Direct lease financing. The Company provides lease financing for commercial and government vehicle fleets and, to a lesser extent, provides lease
financing for other equipment. 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 Company sells 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. The
qualitative factors for direct lease financing focus on international, national, regional, and local economic and business conditions, changes in the value of
underlying collateral, changes in credit concentrations, and changes in the volume and severity of past due loans.
SBLOC. SBLOC loans are made to individuals, trusts and entities and are secured by a pledge of marketable securities maintained in one or more accounts
with respect to which the Company obtains 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. 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. Substantially all SBLOCs have full recourse to the borrower. The underlying securities
collateral for SBLOC loans is monitored on a daily basis to confirm the composition of the client portfolio and its daily market value. The primary qualitative factor
in the SBLOC analysis is the ratio of loans outstanding to market value. This factor has been maintained at low levels, which has remained appropriate as losses
have not materialized despite the historic declines in the equity markets during 2020, during which there were no losses. Significant losses have not been incurred
since inception of this line of business. Additionally, the advance rates noted above were established to provide the Company with protection from declines in
market conditions from the origination date of the lines of credit.
IBLOC. IBLOC loans are collateralized by the cash surrender value of insurance policies. 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. The qualitative factors for IBLOC primarily focus on the concentration risk with insurance
companies.
115
Advisor financing. In 2020, the Bank began originating loans to investment advisors for purposes of debt refinance, acquisition of another firm or internal
succession. Maximum loan amounts are subject to loan-to-value ratios of 70%, based on third party business appraisals, but may be increased depending upon the
debt service coverage ratio. Personal guarantees and blanket business liens are obtained as appropriate. The qualitative factors for advisor financing focus on
changes in lending policies and procedures, portfolio performance and economic conditions.
Other specialty lending and consumer loans. Other specialty lending loans and consumer loans are categories of loans which the Company generally no
longer offers. The loans primarily are consumer loans and home equity loans. The qualitative factors for all other specialty lending and consumer loans focus on
changes in the underlying collateral for collateral dependent loans, portfolio loan performance, loan concentrations and changes in economic conditions.
Expected credit losses are estimated over the estimated remaining lives of loans. The estimate excludes possible extensions, renewals and modifications
unless either of the following applies: management has a reasonable expectation that a loan will be restructured, or the extension or renewal options are included in
the borrower contract and are not unconditionally cancellable by us.
The Company does not measure an allowance for credit losses on accrued interest receivable balances, because these balances are written off in a timely
manner as a reduction to interest income when loans are placed on non-accrual status.
Allowance for credit losses on off-balance sheet credit exposures. The Company estimates expected credit losses over the contractual period in which the
Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The allowance
for credit losses on off-balance sheet credit exposures is adjusted through the provision for credit losses. The estimate considers the likelihood that funding will
occur over the estimated life of the commitment. The amount of the allowance in the liability account as of December 31, 2020 was $795,000.
A detail of the changes in the allowance for credit losses by loan category and summary of loans evaluated individually and collectively for credit
deterioration is as follows (in thousands):
Beginning balance 12/31/2019
1/1 CECL adjustment
Charge-offs
Recoveries
Provision (credit)
Ending balance
Ending balance: Individually
evaluated for expected credit loss
Ending balance: Collectively
evaluated for expected credit loss
Loans:
Ending balance*
Ending balance: Individually
evaluated for expected credit loss
Ending balance: Collectively
evaluated for expected credit loss
$
$
$
$
$
$
SBL non-
real estate
$
SBL
commercial
mortgage
SBL
construction
Direct lease
financing
SBLOC /
IBLOC
Advisor
financing
Other
specialty
lending
Other
consumer
loans
Unallocated
Total
December 31, 2020
4,985 $
(220)
(1,350)
103
1,542
5,060 $
1,472 $
537
—
—
1,306
3,315 $
432 $
139
—
—
(243)
328 $
2,426 $
2,362
(2,243)
570
2,928
6,043 $
553 $
(41)
—
—
263
775 $
— $
—
—
—
362
362 $
12 $
158
—
—
(20)
150 $
40 $
20
—
—
(11)
49 $
318 $
(318)
—
—
—
— $
10,238
2,637
(3,593)
673
6,127
16,082
2,129 $
1,010 $
34 $
4 $
— $
— $
— $
— $
— $
3,177
2,931 $
2,305 $
294 $
6,039 $
775 $
362 $
150 $
49 $
— $
12,905
255,318 $
300,817 $
20,273 $
462,182 $ 1,550,086 $
48,282 $
2,179 $
4,247 $
8,939 $ 2,652,323
3,431 $
7,305 $
711 $
751 $
— $
— $
— $
557 $
— $
12,755
251,887 $
293,512 $
19,562 $
461,431 $ 1,550,086 $
48,282 $
2,179 $
3,690 $
8,939 $ 2,639,568
116
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
$
$
$
$
$
$
$
SBL non-real
estate
SBL
commercial
mortgage
SBL
construction
Direct lease
financing
SBLOC /
IBLOC
Other specialty
lending
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 $
—
—
160
553 $
Other
consumer loans Unallocated
108 $
60 $
—
—
(48)
12 $
(1,103)
2
1,033
40 $
240 $
—
—
78
318 $
Total
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
*The ending balance for loans in the unallocated column represents deferred costs and fees.
The Company did not have loans acquired with deteriorated credit quality at either December 31, 2020 or December 31, 2019.
117
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
December 31, 2020
Non-accrual
Total
past due
SBL non-real estate
SBL commercial mortgage
SBL construction
Direct lease financing
SBLOC / IBLOC
Advisor financing
Other specialty lending
Consumer - other
Consumer - home equity
Unamortized loan fees and
costs
SBL non-real estate
SBL commercial mortgage
SBL construction
Direct lease financing
SBLOC / IBLOC
Other specialty lending
Consumer - other
Consumer - home equity
Unamortized loan fees and
costs
$
$
$
$
1,760
87
—
2,845
650
—
—
—
—
—
5,342
30-59 Days
past due
36
—
—
2,008
290
—
—
—
—
2,334
$
$
$
$
805
961
—
941
247
—
—
—
—
—
2,954
60-89 Days
past due
125
1,983
—
2,692
75
—
—
—
—
4,875
$
$
$
$
Note F—Premises and Equipment
Premises and equipment are as follows (in thousands):
Land
Buildings
Furniture, fixtures, and equipment
Leasehold improvements
Accumulated depreciation
110
—
—
78
309
—
—
—
—
—
497
$
$
$
3,159
7,305
711
751
—
—
—
—
301
$
5,834
8,353
711
4,615
1,206
—
—
—
301
$
Current
249,484
292,464
19,562
457,567
1,548,880
48,282
2,179
1,164
2,782
—
12,227
$
—
21,020
$
8,939
2,631,303
$
90+ Days
still accruing
December 31, 2019
Non-accrual
Total
past due
$
—
—
—
3,264
—
—
—
—
$
3,693
1,047
711
—
—
—
—
345
$
3,854
3,030
711
7,964
365
—
—
345
$
Current
80,725
215,080
44,599
426,496
1,024,055
3,055
1,137
3,072
—
3,264
$
—
5,796
$
—
16,269
$
9,757
1,807,976
$
Total
loans
255,318
300,817
20,273
462,182
1,550,086
48,282
2,179
1,164
3,083
8,939
2,652,323
Total
loans
84,579
218,110
45,310
434,460
1,024,420
3,055
1,137
3,417
9,757
1,824,245
Estimated
useful lives
-
39 years
3 to 12 years
6 to 10 years
$
$
December 31,
2020
2019
1,732
3,436
55,253
11,225
71,646
(54,038)
17,608
$
$
1,732
3,436
52,172
11,035
68,375
(50,837)
17,538
Depreciation expense for the years ended December 31, 2020, 2019 and 2018 was approximately $3.2 million, $3.7 million and $4.0 million, respectively.
Note G—Time Deposits
There were no time deposits outstanding at December 31 2020. At December 31, 2019 there were $475.0 million of time deposits outstanding, all of which
matured in 2020.
118
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, 2020,
the Company’s investment in WS 2014 was $31.3 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 $31.3 million.
119
The following table shows the total unpaid principal amount of assets held in WS 2014, shown as commercial and other, at December 31, 2020 and 2019
(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.
Commercial and other
Commercial mortgage-backed securities
CRE1 (c)
CRE2 (c)
CRE3
CRE4
CRE5
CRE6
Principal amount outstanding
December 31, 2020
Total assets
held by
securitization
VIEs (a)
Assets held in
consolidated
securitization
VIEs
Assets held in
nonconsolidated
VIEs with
continuing
involvement
The Company's
interest
in securitized
assets in
nonconsolidated
VIEs (b)
$
43,982
$
—
$
43,982
$
28,152
114,205
111,158
157,038
350,569
625,773
—
—
—
—
—
—
28,152
114,205
111,158
157,038
350,569
625,773
31,294
7,342
12,574
17,495
25,575
33,042
51,558
Principal amount outstanding
December 31, 2019
Total assets
held by
securitization
VIEs (a)
Assets held in
consolidated
securitization
VIEs
Assets held in
nonconsolidated
VIEs with
continuing
involvement
The Company's
interest
in securitized
assets in
nonconsolidated
VIEs
Commercial and other
Commercial mortgage-backed securities
$
56,661
$
—
$
56,661
$
CRE1
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
39,154
16,794
12,570
19,861
29,612
38,496
51,558
(a) Consists of 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 were
"A-" rated as of December 31, 2020. CRE1, CRE2, CRE3, CRE4, and CRE5 are valued by discounted cash flow analysis and CRE6 is priced by a pricing service.
(c) As of December 31, 2020 the principal balance of the security the Company owned issued by CRE-1 was $7.3 million. Repayment is expected from the workout
or disposition of commercial real estate collateral, all proceeds of which will first repay our $7.3 million balance. The collateral consists of a hotel in a high-density
populated area in a northeastern major metropolitan area. The hotel is valued at over $35 million, based upon a post-Covid 2020 appraisal. As of December 31, 2020
the principal balance of the security the Company owned issued by CRE-2 was $12.6 million. Repayment is expected from the workout or disposition of
commercial real estate collateral, after repayment of more senior tranches. Our $12.6 million security has 27% excess credit support; thus, losses of 27% of
remaining security balances would have to be incurred, prior to any loss on our security. Additionally, the commercial real estate collateral was appraised in 2017,
with certain of those appraisals updated in 2020 at the direction of the special servicer, for an appraised value of approximately $137 million. The remaining
principal to be repaid on all securities is approximately $114.2 million. The excess of the appraised amount over the remaining principal to be repaid on all securities
further reduces credit risk, in addition to the 27% credit support within the securitization structure. However, reappraisals for remaining properties could result in
further decreases in collateral valuation. While available information indicates that collateral valuation will be adequate to repay our security, there can be no
assurance that such valuations will be realized upon loan resolutions, and that deficiencies will not exceed the 27% credit support.
120
Note I—Debt
1.Short-term borrowings
The Bank has overnight borrowing capacity with the Federal Home Loan Bank of Pittsburgh which amounted to $1.03 billion at December 31, 2020,
collateralized by loans. Borrowings under this arrangement have a variable interest rate. The Bank also had a $1.31 billion line with the FRB as of that date, also
collateralized by loans. As of December 31, 2020, the Bank did not have any borrowings outstanding on these lines. The details of these categories are presented
below:
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
2020
As of or for the year ended December 31,
2019
(dollars in thousands)
2018
$
$
—
27,322
140,000
0.72%
0.25%
$
—
129,031
300,000
2.43%
1.50%
—
20,346
100,000
2.22%
2.35%
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:
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
2020
As of or for the year ended December 31,
2019
(dollars in thousands)
2018
$
$
42
49
82
—%
—%
$
82
90
93
—%
—%
93
173
223
—%
—%
3. Guaranteed preferred beneficiary interest in the Company’s subordinated debt
As of December 31, 2020, 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 and the $3.1 million of debentures issued to The Bancorp Capital Trust III were both issued on November 28, 2007, mature
on March 15, 2038 and bear interest equal to 3-month LIBOR plus 3.25%.
As of December 31, 2020, the Trusts qualify as VIEs under ASC 810, Consolidation. However, the Company is not considered the primary beneficiary
and, therefore, the Trusts are not consolidated in the Company’s consolidated financial statements. The Trusts are accounted for under the equity method of
accounting.
4. Senior debt
On August 13, 2020, the Company issued $100.0 million of senior debt with a maturity date of August 15, 2025, and a 4.75% interest rate, with interest
paid semi-annually on March 15 and September 15. The Senior Notes are the Company’s direct, unsecured and unsubordinated obligations and rank equal in priority
with all of the Company’s existing and future unsecured and unsubordinated indebtedness and senior in right of payment to all of the Company’s existing and future
subordinated indebtedness.
121
Note J—Shareholders’ Equity
In 2020, the Company adopted a common stock repurchase program in which future share repurchases, if made, will reduce the number of shares
outstanding. Up to $10.0 million of share purchases in each quarter of 2021 have been authorized. Repurchased shares may be reissued for various corporate
purposes. The repurchase program may be amended or terminated at any time. As of December 31, 2020, under a different plan, the Company had repurchased
100,000 shares. 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 $1.7 million, $1.6 million and
$1.3 million for the years ended December 31, 2020, 2019 and 2018, 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 each of 2020, 2019 and 2018. The actuarial
assumptions as of December 31, 2020, 2019 and 2018 reflected respective discount rates of 1.59%, 2.62% and 3.79% with a monthly benefit of $25,000. Projected
payouts for each of the next five years are $300,000 per year and $1.1 million for 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-2020. The Company’s related expense was $465,000 and $357,000, respectively, for the years ended December 31, 2020 and 2019. The
Company reversed $34,000 of expense for the year ended December 31, 2018 based upon changes to actuarial tables. As of December 31, 2020, the Company had
accrued $3.3 million for potential future payouts.
Note L—Income Taxes
The Company operates in the United States and is subject to corporate net income taxes for federal and state purposes. 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
2020
For the years ended
December 31,
2019
(in thousands)
2018
21,816
7,222
29,038
(966)
(384)
(1,350)
27,688
$
$
14,407
5,212
19,619
1,382
225
1,607
21,226
$
$
11,038
5,379
16,417
13,926
1,898
15,824
32,241
$
$
122
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 2020, 2019 and 2018, are as follows:
Computed tax expense at statutory rate
State taxes
Tax-exempt interest income
Meals and entertainment
Civil money penalty
Other nondeductible items
Valuation allowance - domestic
Other
$
$
$
22,740
5,363
(517)
24
—
254
587
(763)
27,688
$
2020
For the years ended
December 31,
2019
(in thousands)
2018
$
15,224
4,140
(467)
97
1,870
263
—
99
21,226
$
25,154
6,148
(408)
80
—
546
721
—
32,241
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 credit losses
Non-accrual interest
Deferred compensation
State taxes
Nonqualified stock options
Capital loss limitations
Tax deductible goodwill
Partnership interest, Walnut St basis difference
Operating lease liabilities
Fair value adjustment to investments
Loan charges
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
Right of use asset
Total deferred tax liabilities
Net deferred tax asset
For the years ended
December 31,
2020
2019
(in thousands)
3,544
1,412
697
1,695
1,954
4,158
2,134
12,153
2,790
808
3,606
1,081
36,032
(15,457)
6,550
92
1,671
2,505
10,818
9,757
$
$
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
$
$
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, 2020 and 2019, respectively, was $15.5 million and $14.9 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
2020
For the years ended
December 31,
2019
(in thousands)
338
—
338
$
$
338
—
338
$
$
2018
338
—
338
$
$
123
Management does not believe these amounts will significantly increase or decrease within 12 months of December 31, 2020. The total amount of
unrecognized tax benefits, if recognized, will impact the effective tax rate.
Tax years after 2017 remain subject to examination by the federal authorities and 2016 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.
On December 27, 2020, the Consolidated Appropriations Act 2021 (the “Appropriations Act”) was enacted in response to the COVID-19 pandemic.
The Appropriations Act, among other things, temporarily extends through December 31, 2025, certain expiring tax provisions. Additionally, the Appropriations Act
enacts new provisions and extends certain provisions originated within the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), enacted on
March 27, 2020. Management is currently evaluating the other provisions of the Appropriations Act, but at present time does not expect that the other provisions of
the Appropriations Act would result in a material tax or cash benefit.
Note M—Stock-Based Compensation.
The Company recognizes compensation expense for stock options in accordance with Financial Accounting Standards Board (FASB) ASC 718, “Stock
Based Compensation”. The expense of the option is generally measured at fair value at the grant date with compensation expense recognized over the service period,
which is typically the vesting period. For grants subject to a service condition, the Company utilizes the Black-Scholes option-pricing model to estimate the fair
value of each option on the date of grant. The Black-Scholes model takes into consideration the exercise price and expected life of the options, the current price of
the underlying stock and its expected volatility, the expected dividends on the stock and the current risk-free interest rate for the expected life of the option. The
Company’s estimate of the fair value of a stock option is based on expectations derived from historical experience and may not necessarily equate to its market
value when fully vested. In accordance with ASC 718, the Company estimates the number of options for which the requisite service is expected to be rendered. At
December 31, 2020, the Company had four active stock-based compensation plans.
In May 2020, the Company adopted an Equity Incentive Plan (“the 2020 Plan”). Employees and directors of the Company and the Bank and consultants
(with restrictions) are eligible to participate in the 2020 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 3,300,000 shares of common stock were reserved for issuance under the 2020 Plan. Restricted stock units may also be
granted under the 2020 Plan with conditions similar to those for options.
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 but none remain. 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.
124
The Company granted 300,000 stock options with a vesting period of four years during 2020 with a weighted average grant-date fair value of $3.02. The
Company granted 65,104 stock options with a vesting period of four years during 2019 with a weighted average grant-date fair value of $3.84. In 2018, the
Company did not grant any common stock options. The total common stock options exercised in 2020, 2019 and 2018 were 99,000, 30,000 and 23,125, respectively.
A summary of the Company’s stock options is presented below:
Shares
Weighted-average
exercise price
Weighted-average
remaining
contractual
term (years)
Aggregate
intrinsic value
(in thousands except per share data)
Outstanding at January 1, 2020
Granted
Exercised
Expired
Forfeited
Outstanding at December 31, 2020
Exercisable at December 31, 2020
1,311,604
300,000
(99,000)
(333,000)
(18,000)
1,161,604
812,776
$
$
8.24
6.87
8.74
8.94
9.50
7.62
7.84
3.11
9.39
$
—
—
—
4.75
2.84
$
6,203,523
2,034,000
404,320
—
—
7,001,843
4,719,797
The Company granted 1,531,702 RSUs in 2020 of which 1,387,602 have a vesting period of two years and nine months and 144,100 have a vesting period
of one year. At issuance, the 1,531,702 RSUs granted in 2020 had a fair value of $6.87 per unit. The Company granted 930,831 RSUs in 2019 of which 863,331 had
a vesting period of three years and 67,500 had a vesting period of one year. At issuance, the 930,831 RSUs granted in 2019 had a fair value of $8.57 per unit. The
Company granted 507,792 RSUs in 2018 of which 440,292 had a vesting period of two years and eight months and 67,500 had a vesting period of one year. At
issuance, the 507,792 RSUs granted in 2018 had a fair value of $11.07 per unit.
A summary of the Company’s restricted stock units is presented below:
Outstanding at January 1, 2020
Granted
Vested
Forfeited
Outstanding at December 31, 2020
Shares
1,253,927
1,531,702
(611,111)
(386,575)
1,787,943
$
$
Weighted-average
grant date
fair value
Average remaining
contractual
term (years)
8.87
6.87
8.66
7.65
7.49
A summary of the status of the Company’s non-vested options under the plans as of December 31, 2020, and changes during the year then ended, is
presented below:
Non-Vested at January 1, 2020
Granted
Vested
Expired
Forfeited
Non-Vested at December 31, 2020
Weighted-average
grant date
fair value
Shares
$
140,104
300,000
(91,276)
—
—
$
348,828
1.64
1.97
—
—
1.50
3.33
3.02
3.06
—
—
3.13
There were 710,111 options exercised and restricted stock units vested in 2020, 494,430 options exercised and restricted stock units vested in 2019 and
594,673 options exercised and restricted stock units vested in 2018. The total intrinsic value of the options exercised and stock units vested in 2020, 2019 and 2018
was $7.1 million, $4.4 million and $6.2 million, respectively. The total issuance date fair value of options that were exercised and restricted units which vested
during the year ended December 31, 2020 was $5.7 million.
As of December 31, 2020, there was a total of $9.4 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 1.8 years. Related
125
compensation expense for the years ended December 31, 2020, 2019 and 2018 was $6.4 million, $5.7 million and $3.4 million respectively and the related tax
benefits recognized were $1.4 million, $1.2 million and $724,000, respectively.
For the years ended December 31, 2020, 2019 and 2018, 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)
2020
0.68%
—
45.2%
0.1 - 6.3
December 31,
2019
2018
2.63%
—
41.8%
1.0 - 6.3
—
—
—
—
Expected volatility is based on the historical volatility of the Company’s stock and peer group comparisons over the expected life of the grant. The risk-free
rate for periods within the expected life of the option is based on the U.S. Treasury strip rate in effect at the time of the grant. The life of the option is based on
historical factors which include the contractual term, vesting period, exercise behavior and employee terminations. In accordance with the ASC 718, Stock Based
Compensation, stock based compensation expense for the year ended December 31, 2020 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 did not maintain any deposits for various affiliated companies as of December 31, 2020 and December 31, 2019, respectively.
The Bank has entered into lending transactions in the ordinary course of business with directors, executive officers, principal stockholders and affiliates of
such persons. All loans were made on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable loans with
persons not related to the lender. At December 31, 2020, these loans were current as to principal and interest payments, and did not involve more than normal risk of
collectability or present other unfavorable features. At December 31, 2020 and 2019, loans to these related parties amounted to $4.7 million and $2.3 million,
respectively.
The Bank has periodically purchased securities 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 2020, the Company did not purchase any securities from 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.
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
$1.7 million in 2020, $1.1 million in 2019 and $3.0 million in 2018 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 one of its New York offices,
and has subleased both offices. The lease for its Wilmington, Delaware operations facility and its Crofton, Maryland business leasing office expire in 2025. The
lease for its Westmont (suburban Chicago), Illinois SBL office expires in 2026. The occupied New York and Norristown sites are, respectively, loan administration
and leasing offices, and the leases will expire in 2024 and 2025, respectively. The Morrisville, North Carolina SBL loan office lease also expires in 2024. The
Company also has leases for leasing business development offices in New Jersey and Pennsylvania that expire in 2022, and leases for SBL and leasing business
development offices in North Carolina, Utah and Washington state that expire at various times through 2021. The Company’s lease in South Dakota for its prepaid
and debit card division, also expires in 2022.
126
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,
2021
2022
2023
2024
2025
Thereafter
$
$
3,353
2,867
2,599
2,537
1,844
24
13,224
Rent and related expense for the years ended December 31, 2020, 2019 and 2018 were approximately $4.1 million, $5.0 million and $4.5 million net of
sublease rentals of approximately $848,000, $586,300 and $186,300, respectively.
2. Legal Proceedings
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 has filed an answer denying the allegations and continues to vigorously defend
the claims. The Bank and other defendants previously filed a motion to dismiss the action, but the motion was denied and the case is in preliminary stages of
discovery. At this time, the Company is unable to determine whether the ultimate resolution of the matter will have a material adverse effect on the Company’s
financial condition or operations.
The Company has received and is responding to two non-public fact-finding inquiries from the SEC, which in each case is seeking to determine if
violations of the federal securities laws have occurred. The Company refers to these inquiries collectively as the Securities Exchange Commission (“SEC”) matters.
On October 9, 2019, the Company received a subpoena seeking records related generally to The Bancorp Bank’s debit card issuance activity and gross dollar
volume data, among other things. The Company responded to the subpoena and subsequent subpoenas issued to the Company. Unrelated to the first inquiry, on
April 10, 2020, the Company received a subpoena in connection with The Bancorp Bank’s CMBS business seeking records related to various offerings as well as
CMBS securities held by the Bank. Since inception of these SEC matters to the present, the Company has been cooperating fully with the SEC. The SEC has not
made any findings, or alleged any wrongdoings, with respect to the SEC matters. The costs related to responding to and cooperating with the SEC staff may be
material, and could continue to be material at least through the completion of the SEC matters.
On June 2, 2020, the Bank was served with a complaint filed in the Supreme Court of the State of New York, titled Cascade Funding, LP – Series 6,
Plaintiff v. The Bancorp Bank, Defendant. The lawsuit arises from a Purchase and Sale Agreement between Cascade Funding, LP – Series 6 (“Cascade”) and the
Bank, pursuant to which Cascade was to purchase certain mortgage loan assets from the Bank for securitization. Cascade improperly attempted to invoke a market
disruption clause in the agreement to avoid the purchase. Cascade’s failure to close the transaction constituted a breach of the agreement and, accordingly, the Bank
terminated the agreement, effective April 29, 2020. Pursuant to the agreement, the Bank retained Cascade’s deposit of approximately $12.5 million. The lawsuit
asserts three causes of action: (i) breach of contract; (ii) injunction and specific performance; and (iii) declaratory judgment. Cascade seeks the return of its deposit
plus interest and attorneys’ fees and costs. The Bank is vigorously defending this matter and the case is in preliminary stages of discovery. Given the early stages of
this matter, the Company is not yet able to determine whether the ultimate resolution of this matter will have a material adverse effect on the Company’s financial
conditions or operations.
On January 12, 2021, three former employees of the Bank filed separate complaints against the Company in the Supreme Court of the State of New York,
New York County. The Company subsequently removed all three lawsuits to the United States District Court for the Southern District of New York. The cases are
captioned: John Edward Barker, Plaintiff v. The Bancorp, Inc., Defendant; Alexander John Kamai, Plaintiff v. The Bancorp, Inc., Defendant; and John Patrick
McGlynn III, Plaintiff v. The Bancorp, Inc., Defendant. The lawsuits arise from the Bank’s termination of the plaintiffs’ employment in connection with the
restructuring of
127
its CMBS business. The plaintiffs seek damages in the following amounts: $4,135,142.80 (Barker), $901,088.00 (Kamai) and $2,909,627.20 (McGlynn). The
Company intends to vigorously defend these matters. Given the early stage of the lawsuits, the Company is not yet able to determine whether the ultimate resolution
of this matter will have a material adverse effect on the Company’s financial condition or operations.
In addition, the Company is a party to various routine legal proceedings arising out of the ordinary course of business. The Company believes that none of
these actions, individually or in the aggregate, will have a material adverse effect on the Company’s financial condition or operations.
Note P—Financial Instruments with Off-Balance-Sheet Risk and Concentrations of Credit Risk
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the consolidated financial
statements when they become payable. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in
the consolidated balance sheets. The contractual, or notional, amounts of those instruments reflect the extent of involvement the Company has in particular classes
of financial instruments.
The approximate contract amounts and maturity term of the Company’s unused credit commitments are as follows:
Financial instruments whose contract amounts represent credit risk
Commitments to extend credit
Standby letters of credit
2020
December 31,
(in thousands)
2019
$
$
2,163,331
1,829
2,165,160
$
$
2,340,954
3,512
2,344,466
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. Such commitments are normally based on the full
amount of collateral in a customers investment account. 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 an allowance 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. All of the standby
letters of credit expire 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.
128
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 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 although it sold loans in 2019 and prior years and may do so in the future. For fair value disclosure purposes, the Company utilized the fair value
measurement criteria of ASC 820, Fair Value Measurements and Disclosures.
ASC 820, Fair Value Measurements and Disclosures, establishes a common definition for fair value to be applied to assets and liabilities. It clarifies that
fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. It also establishes a framework for measuring fair value and expands disclosures concerning fair value measurements. ASC
820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to
unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3
measurements). Level 1 valuation is based on quoted market prices for identical assets or liabilities to which the Company has access at the measurement date. Level
2 valuation is based on other observable inputs for the asset or liability, either directly or indirectly. This includes quoted prices for similar assets in active or
inactive markets, inputs other than quoted prices that are observable for the asset or liability such as yield curves, volatilities, prepayment speeds, credit risks, default
rates, or inputs that are derived principally from, or corroborated through, observable market data by market-corroborated reports. Level 3 valuation is based on
“unobservable inputs” that are the best information available in the circumstances. A financial instrument’s level within the fair value hierarchy is based on the
lowest level of input that is significant to the fair value measurement. Transfers between levels in 2020, 2019 and 2018, 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 and the Company’s balance at the FRB, had recorded values of $345.5 million
and $944.5 million at December 31, 2020 and 2019, respectively, which approximated fair values.
Investment securities have estimated fair values based on quoted market prices or other observable inputs, if available. If observable inputs are not
available, fair values are determined using unobservable (Level 3) inputs that are based on the best information available in the circumstances. For these investment
securities, fair values are based on the present value of expected cash flows from principal and interest to maturity, or yield to call as appropriate, at the
measurement date.
Commercial loans, at fair value, reflect cash flow analysis based upon pricing for similar loans, or market indications. 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 flows. 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, primarily based upon the level of borrowings. 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
129
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 based upon discounted cash flow analysis. At December 31, 2020, the cash flows were modeled using a discount rate of
3.93%, 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, 2020 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. For December 31, 2019, 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.
Deposits (comprised of 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, 2020 or 2019.
Time deposits, when outstanding, senior debt and subordinated debentures have a fair value estimated using a discounted cash flow calculation that applies
current interest rates to discount expected cash flows.
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 either assets or liabilities 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.
Investment securities, available-for-sale
Federal Home Loan Bank and Atlantic
Central Bankers Bank stock
Commercial loans, at fair value
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
Senior debt
Subordinated debentures
Securities sold under agreements to
repurchase
Carrying
amount
Estimated
fair value
$
1,206,164
$
1,206,164
$
December 31, 2020
Quoted prices
in active
markets for
identical assets
(Level 1)
(in thousands)
1,368
1,810,812
2,652,323
31,294
113,650
2,223
5,205,010
257,050
98,314
13,401
42
1,368
1,810,812
2,650,613
31,294
113,650
2,223
5,205,010
257,050
104,111
9,102
42
130
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
1,027,213
$
—
—
—
—
—
2,223
5,205,010
257,050
104,111
—
—
178,951
1,368
1,810,812
2,650,613
31,294
113,650
—
—
—
—
9,102
—
—
$
—
—
—
—
—
—
—
—
—
—
42
Carrying
amount
Estimated
fair value
$
1,320,692
84,387
$
1,320,692
83,002
$
December 31, 2019
Quoted prices
in active
markets for
identical assets
(Level 1)
(in thousands)
5,342
1,180,546
1,824,245
39,154
140,657
232
4,402,740
174,290
475,000
13,401
82
5,342
1,180,546
1,826,154
39,154
140,657
232
4,402,740
174,290
475,000
9,736
82
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
1,203,359
75,850
$
—
—
—
—
—
232
4,402,740
174,290
—
—
—
117,333
7,152
5,342
1,180,546
1,826,154
39,154
140,657
—
—
—
475,000
9,736
—
$
—
—
—
—
—
—
—
—
—
—
—
—
82
Investment securities, available-for-sale
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
The assets and liabilities measured at fair value on a recurring basis, segregated by fair value hierarchy, are summarized below (in thousands):
Fair value
December 31, 2020
Quoted prices in active
markets for identical
assets
(Level 1)
Fair Value Measurements at Reporting Date Using
Significant other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Investment securities, available-for-sale
U.S. Government agency securities
Asset-backed securities
Obligations of states and political subdivisions
Residential mortgage-backed securities
Collateralized mortgage obligation securities
Commercial mortgage-backed securities
Corporate debt securities
Total investment securities, available-for-sale
Commercial loans, at fair value
Investment in unconsolidated entity
Assets held-for-sale from discontinued operations
Interest rate swaps, liability
$
$
47,197
238,361
56,354
266,583
148,530
367,280
81,859
1,206,164
1,810,812
31,294
113,650
2,223
3,159,697
131
$
$
— $
—
—
—
—
—
—
—
—
—
—
—
— $
$
47,197
238,361
56,354
266,583
148,530
270,188
—
1,027,213
—
—
—
2,223
1,024,990
$
—
—
—
—
—
97,092
81,859
178,951
1,810,812
31,294
113,650
—
2,134,707
Fair value
December 31, 2019
Quoted prices in active
markets for identical
assets
(Level 1)
Fair Value Measurements at Reporting Date Using
Significant other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Investment securities, available-for-sale
U.S. Government agency securities
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
$
$
52,910
244,349
65,568
336,596
222,727
398,542
1,320,692
1,180,546
39,154
140,657
232
2,680,817
$
$
— $
—
—
—
—
—
—
—
—
—
—
— $
The Company’s Level 3 asset activity for the categories shown for the years 2020 and 2019 is as follows (in thousands):
$
52,910
244,349
65,568
336,596
222,727
281,209
1,203,359
—
—
—
232
1,203,127
$
—
—
—
—
—
117,333
117,333
1,180,546
39,154
140,657
—
1,477,690
Beginning balance
Transfers into level 3
Reclass of held-to-maturity securities to available-for-sale
Total gains or (losses) (realized/unrealized)
Included in earnings
Included in other comprehensive gain (loss)
Purchases, issuances, sales and settlements
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.
$
$
$
Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3)
Available-for-sale
securities
Commercial loans
at fair value
December 31, 2020
December 31, 2019
December 31, 2020
December 31, 2019
117,333
$
—
85,151
—
(2,121)
—
—
(21,412)
178,951
$
$
24,390
100,664
—
—
688
—
—
(8,409)
117,333
$
1,180,546
$
—
—
(1,883)
—
721,590
—
(89,441)
1,810,812
$
688,471
—
—
25,986
—
1,795,376
(1,329,287)
—
1,180,546
—
$
—
$
(3,567)
$
963
132
There were no transfers between levels in 2020. Transfers between levels in 2019 consisted of transfers into level 3 resulting from the non-availability of third party
pricing for CRE securities from the Company’s securitizations, see Note E. There were no transfers out of level 3 in either period.
Beginning balance
Total gains or (losses) (realized/unrealized)
Included in earnings
Purchases, issuances, sales, settlements and charge-offs
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.
$
$
$
Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3)
Investment in
unconsolidated entity
Assets held-for-sale
from discontinued operations
December 31, 2020
December 31, 2019
December 31, 2020
December 31, 2019
39,154 $
59,273 $
140,657
$
(45)
—
—
(7,815)
—
31,294 $
—
—
—
(20,119)
—
39,154 $
(3,326)
4,942
(1,482)
(26,846)
(295)
113,650
$
197,831
(487)
2,125
(7,136)
(49,021)
(2,655)
140,657
(45) $
— $
(2,664) $
(487)
Information related to fair values of level 3 balance sheet categories is as follows.
Level 3 instruments only
Commercial mortgage backed investment
securities available-for-sale (a)
Insurance liquidating trust preferred security,
available-for-sale (b)
Corporate debt securities (c)
Federal Home Loan Bank and Atlantic
Central Bankers Bank stock
Loans, net of deferred loan fees and costs (d)
Commercial - SBA (e)
Commercial - fixed (f)
Commercial - floating (g)
Commercial loans, at fair value
Investment in unconsolidated entity (h)
Fair value at
December 31, 2020
Valuation techniques
Unobservable inputs
Weighted average at
December 31, 2020 December 31, 2020
Range at
$
97,092 Discounted cash flow
Discount rate
3.68-8.30%
6,765 Discounted cash flow
75,094 Traders' pricing
Discount rate
Price indications
6.61%
$100.13
1,368 Cost
2,650,613 Discounted cash flow
243,562 Traders' pricing
87,288 Discounted cash flow
1,479,962 Discounted cash flow
1,810,812
31,294 Discounted cash flow
N/A
Discount rate
Offered quotes
Discount rate
Discount rate
Discount rate
Default rate
Discount rate,
Credit analysis
Discount rate
N/A
1.00% - 6.36%
$100.00 - $117.8
5.16-7.32%
3.96%-9.70%
3.93%
1.00%
2.55-6.83%
6.61%
4.62%
6.61%
$100.13
N/A
2.82%
$105.60
6.03%
4.91%
3.93%
1.00%
4.15%
6.61%
Assets held-for-sale from discontinued operations (i)
113,650 Discounted cash flow
Subordinated debentures (j)
9,102 Discounted cash flow
133
Level 3 instruments only
Commercial mortgage backed investment
securities available-for-sale
Insurance liquidating trust preferred security,
available-for-sale
Federal Home Loan Bank and Atlantic
Central Bankers Bank stock
Loans, net of deferred loan fees and costs
Commercial - SBA
Commercial - fixed
Commercial - floating
Commercial loans, at fair value
Investment in unconsolidated entity
Assets held-for-sale from discontinued operations
Subordinated debentures
Fair value at
December 31, 2019
Valuation techniques
Unobservable inputs
Range at
December 31, 2019
$
117,333 Discounted cash flow
Discount rate
4.05% - 8.18%
7,152 Discounted cash flow
Discount rate
5,342 Cost
N/A
1,826,154 Discounted cash flow
Discount rate
220,358 Traders' pricing
88,986 Discounted cash flow
871,202 Discounted cash flow
Offered quotes
Discount rate
Discount rate
1,180,546
39,154 Discounted cash flow
140,657 Discounted cash flow
9,736 Discounted cash flow
Discount rate
Default rate
Discount rate,
Credit analysis
Discount rate
8.01%
N/A
3.11% - 6.93%
$101.6 - $107.9
4.33% - 7.13%
4.51% - 6.81%
5.84%
1.00%
3.49% -7.58%
8.01%
The valuations for each of the instruments above, as of the balance sheet date, are subject to judgments, assumptions and uncertainties, changes in which
could have a significant impact on such valuations. All weighted averages were calculated by using the discount rate for each individual security or loan weighted
by its market value, except for SBA loans. For SBA loans, traders’ pricing indications for pools determined by date of loan origination were weighted. For
commercial loans recorded at fair value, investment in unconsolidated entity and assets held-for-sale from discontinued operations, changes in fair value are
reflected in the income statement. Changes in the fair value of securities which are unrelated to credit are recorded through equity. Changes in the fair value of loans
recorded at amortized cost which are unrelated to credit are a disclosure item, without impact on the financial statements. The notes below refer to the December 31,
2020 table.
a) Commercial mortgage backed investment securities, consisting of Bank issued CRE securities, are valued using discounted cash flow analysis. The
discount rates and prepayment rates applied are based upon market observations and actual experience for comparable securities. Appropriate default and
loss severity rates are implicit in the discount rates used in the evaluations. Each of the securities has some credit enhancement, or protection from other
tranches in the issue, which limit their valuation exposure to credit losses. Nonetheless, increases in expected default rates or loss severities on the loans
underlying the issue could reduce their value. In market environments in which investors demand greater yield compensation for credit risk, the discount
rate applied would ordinarily be higher and the valuation lower. Changes in prepayments and loss experience could also change the interest earned on these
holdings in future periods and impact fair values.
Insurance liquidating trust preferred is a single debenture which is valued using discounted cash flow analysis. The discount rate used is based on the
market rate on comparable relatively illiquid instruments and credit analysis. A change in the liquidating trust’s ability to repay the note, or an increase in
interest rates, particularly for privately placed debentures, would affect the discount rate and thus the valuation. As a single security, the weighted average
rate shown is the actual rate applied to the security.
b)
c) Corporate debt securities consist of three AAA rated privately placed debt structures backed by investment grade corporate debt each with over 50% credit
enhancement. Each of these securities has a coupon of 3 Month LIBOR + 3.00%. Price indications are obtained from a broker/dealer with significant
experience in trading and evaluating these securities. Changes in either investor yield requirements for relatively illiquid securities, or credit risk could
affect the price indications.
d) Loans, net of deferred fees and costs are valued using discounted cash flow analysis. Discount rates are based upon available information for estimated
current origination rates for each loan type. Origination rates may fluctuate based upon changes in the risk free (Treasury) rate and credit experience for
each loan type. At December 31, 2020, the balance included $167.7 million of Paycheck Protection Program loans, which bear interest at 1%, but also earn
fees.
e) Commercial-SBL (SBA Loans) are comprised of the government guaranteed portion of SBA insured loans. Their valuation is based upon dealer pricing
indications. A limited number of broker/dealers originate the pooled securities for which the loans are purchased and as a result, prices can fluctuate based
on such limited market demand, although the government guarantee has resulted in consistent historical demand. Valuations are also impacted by
prepayment assumptions resulting from both voluntary payoffs and defaults.
f) Commercial-fixed are fixed rate commercial mortgages originated for sale. Discount rates used in applying discounted cash flow analysis are determined
by an independent valuation consultant based upon loan terms, the general level of interest rates and the quality of the credit.
134
g) Commercial-floating are floating rate loans, the vast majority of which are secured by multi-family properties (apartments). These are bridge loans
designed to provide owners time and funding for property improvements and are generally valued internally using discounted cash flow analysis. The
discount rate for the vast majority of these loans was based upon current origination rates for similar loans. Certain non-multi-family loans are fair valued
by a third party, based upon discounting at market rates for similar loans.
Investment in unconsolidated entity is in non-accrual status, and changes in its value, determined by discounted cash flows, are recorded in the income
statement under “Change in value of investment in unconsolidated entity”. A constant default rate of 1%, net of recoveries, on cash flowing loans was
utilized. Changes in market interest rates, credit quality or payment experience could result in a change in the current valuation.
h)
i) Assets held-for-sale from discontinued operations are valued using discounted cash flow by an independent valuation consultant using loan performance,
j)
other credit characteristics and market interest rate comparisons. Changes in those factors could change the valuation.
Subordinated debentures are comprised of two subordinated notes issued by the Company, maturing in 2038 with a floating rate of 3-month LIBOR plus
3.25%. These notes are valued using discounted cash flow analysis. The discount rate is based on the market rate for comparable relatively illiquid
instruments. Changes in those market rates or the credit of the Company could result in changes in the valuation.
Assets measured at fair value on a nonrecurring basis, segregated by fair value hierarchy, at December 31, 2020 and 2019 are summarized below (in
thousands):
Description
Collateral dependent loans (1)
Intangible assets
Description
Collateral dependent loans (1)
Intangible assets
$
$
$
$
Fair value
December 31, 2020
Quoted prices in active
markets for identical
assets
(Level 1)
Fair Value Measurements at Reporting Date Using
Significant other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
9,578
2,845
12,423
$
$
— $
—
— $
— $
—
— $
9,578
2,845
12,423
Fair value
December 31, 2019
Quoted prices in active
markets for identical
assets
(Level 1)
Fair Value Measurements at Reporting Date Using
Significant other
observable
inputs
(Level 2)
Significant
unobservable
inputs (1)
(Level 3)
3,651
2,315
5,966
$
$
— $
—
— $
— $
—
— $
3,651
2,315
5,966
(1) The method of valuation approach for the loans evaluated for an allowance for credit losses on an individual loan basis and also for 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, 2020, principal on loans individually evaluated for an allowance for credit losses 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 $9.6 million. To arrive at that fair value, related loan
principal of $12.8 million was reduced by specific allowances of $3.2 million within the allowance for credit 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 allowance and decreasing principal. Included in the loans individually evaluated for an allowance for credit losses at December 31, 2020,
were troubled debt restructured loans with a balance of $1.6 million which had specific allowances of $467,000. At December 31, 2019, principal on loans
individually evaluated for an allowance for credit losses 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
allowances of $3.1 million within the allowance for credit 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 loans individually evaluated for an allowance for credit losses at December 31, 2019, were
troubled debt restructured loans with a balance of $2.1 million which had specific
135
allowances of $1.0 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 loans being evaluated such as recent sales of similar collateral 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. There was no other real estate owned in continuing
operations at either December 31, 2020 or 2019.
Note R –Derivatives
The Company has utilized 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 at fair value. These instruments are not accounted for as effective hedges. As of December 31, 2020, 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 $2.0 million, a loss of $1.9 million and income of $647,000 for the years
ended December 31, 2020 and 2019 and 2018, 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 and now held at fair value. At December 31, 2020, the amount
payable by the Company under these swap agreements was $2.2 million. At December 31, 2020 and 2019, the Company had minimum collateral posting thresholds
with certain of its derivative counterparties and had posted cash collateral of $2.8 million and $1.3 million, 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, 2020 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
Notional amount
Interest rate paid
Interest rate received
Fair value
December 31, 2020
10,300
6,800
8,200
3,000
6,300
3,200
37,800
$
1.12%
2.16%
2.17%
1.87%
1.44%
2.26%
0.22%
0.24%
0.24%
0.22%
0.22%
0.22%
$
(56)
(583)
(710)
(217)
(331)
(326)
(2,223)
The $2.2 million fair value loss position of the outstanding derivatives at December 31, 2020 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 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
136
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, 2020
Total capital
(to risk-weighted assets)
The Bancorp, Inc.
The Bancorp Bank
Tier 1 capital
(to risk-weighted assets)
The Bancorp, Inc.
The Bancorp Bank
Tier 1 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, 2019
Total capital
(to risk-weighted assets)
The Bancorp, Inc.
The Bancorp Bank
Tier 1 capital
(to risk-weighted assets)
The Bancorp, Inc.
The Bancorp Bank
Tier 1 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
Amount
Ratio
For capital
adequacy purposes
Amount
(dollars in thousands)
Ratio
To be well
capitalized under
prompt corrective
action provisions
Amount
Ratio
577,092
571,220
561,010
555,138
561,010
555,138
561,010
555,138
486,372
478,033
476,134
467,796
476,134
467,796
476,134
467,796
14.84% $
14.68%
14.43%
14.27%
9.20%
9.11%
14.43%
14.27%
19.45% $
19.11%
19.04%
18.71%
9.63%
9.46%
19.04%
18.71%
311,045
311,148
233,284
233,361
243,941
243,843
155,523
175,021
200,074
200,068
150,055
150,051
197,837
197,831
100,037
112,538
>=8.00
8.00
>=6.00
6.00
>=4.00
4.00
>=4.00
4.50
>=8.00
8.00
>=6.00
6.00
>=4.00
4.00
>=4.00
4.50
N/A
388,935
N/A
>= 10.00%
N/A
311,148
N/A
>= 8.00%
N/A
304,804
N/A
>= 5.00%
N/A
252,808
N/A
>= 6.50%
N/A
250,085
N/A
>= 10.00%
N/A
200,068
N/A
>= 8.00%
N/A
247,289
N/A
>= 5.00%
N/A
162,555
N/A
>= 6.50%
As of December 31, 2020, the Company and the Bank met all regulatory requirements for classification as well capitalized under the regulatory framework
for prompt corrective action.
The Bank has entered into several consent orders with the FDIC relating to several aspects of its operations. These orders were resolved and concluded in
2020.
137
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.
2020
Interest income
Net interest income
Provision for credit 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
Net earnings per share from continuing operations - basic
Net earnings (loss) per share from discontinued operations - basic
Net earnings per share - basic
Net earnings per share from continuing operations - diluted
Net earnings (loss) per share from discontinued operations - diluted
Net earnings per share - diluted
2019
Interest income
Net interest income
Provision for credit 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
Net earnings per share from continuing operations - basic
Net earnings per share from discontinued operations - basic
Net earnings per share - basic
Net earnings per share from continuing operations - diluted
Net earnings per share from discontinued operations - diluted
Net earnings per share - diluted
March 31,
June 30,
September 30,
December 31,
(in thousands, except per share data)
Three months ended
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
51,466
42,911
3,579
16,599
38,418
17,513
4,352
13,161
(570)
12,591
0.23
(0.01)
0.22
0.23
(0.01)
0.22
March 31,
43,578
34,010
1,700
30,365
39,229
23,446
6,035
17,411
519
17,930
0.31
0.01
0.32
0.31
0.01
0.32
138
51,899
50,246
922
20,366
42,620
27,070
6,787
20,283
(215)
20,068
$
$
52,478
49,996
1,297
24,352
42,026
31,025
7,894
23,131
123
23,254
$
$
0.35
$
— $
$
0.35
0.35
$
— $
$
0.35
0.40
$
— $
$
0.40
0.40
$
— $
$
0.40
54,939
51,713
554
23,300
41,783
32,676
8,655
24,021
150
24,171
0.42
—
0.42
0.41
—
0.41
Three months ended
June 30,
September 30,
December 31,
(in thousands, except per share data)
44,080
34,539
600
19,749
39,519
14,169
3,575
10,594
756
11,350
0.19
0.01
0.20
0.19
0.01
0.20
$
$
$
$
$
$
$
$
48,375
37,560
650
33,515
42,051
28,374
7,975
20,399
26
20,425
$
$
0.36
$
— $
$
0.36
0.36
$
— $
$
0.36
43,536
35,179
1,450
20,498
47,722
6,505
3,641
2,864
(1,010)
1,854
0.05
(0.02)
0.03
0.05
(0.02)
0.03
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
Senior debt
Subordinated debentures
Stockholders' equity
Total liabilities and stockholders' equity
Condensed Statements of Operations
Income
Other income
Total income
Expense
Interest on subordinated debentures
Interest on senior debt
Non-interest expense
Total expense
Equity in undistributed income of subsidiaries
Net income available to common shareholders
Condensed Statements of Cash Flows
Operating activities
Net income
Decrease (increase) in other assets
Increase (decrease) in other liabilities
Stock based compensation expense
Equity in undistributed income
Net cash used in operating activities
Financing activities
Proceeds from the exercise of common stock options
Proceeds of senior debt offering
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
$
$
$
$
139
2020
December 31,
(in thousands)
2019
$
$
$
$
111,267
575,293
8,160
694,720
1,841
98,314
13,401
581,164
694,720
$
$
$
$
2020
For the year ended December 31,
2019
(in thousands)
2018
$
1
1
524
1,913
7,486
9,923
90,006
80,084
$
— $
—
750
—
6,721
7,471
59,030
51,559
2018
$
$
$
2020
Year ended December 31,
2019
(in thousands)
80,084
484
1,810
6,429
(90,006)
(1,199)
866
98,314
99,180
97,981
13,286
111,267
$
$
51,559
724
(4)
5,689
(59,030)
(1,062)
258
—
258
(804)
14,090
13,286
13,286
475,998
8,644
497,928
30
—
13,401
484,497
497,928
517
517
714
—
4,528
5,242
93,402
88,677
88,677
(22)
6
3,450
(93,402)
(1,291)
111
—
111
(1,180)
15,270
14,090
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, or the retention of such loans if not securitized, 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 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.
Specialty finance
Payments
Discontinued operations
Interest income
Interest allocation
Interest expense
Net interest income (loss)
Provision for credit losses
Non-interest income
Non-interest expense
Income (loss) from continuing operations
before taxes
Income tax expense
Income (loss) from continuing operations
Loss from discontinued operations
Net income (loss)
Interest income
Interest allocation
Interest expense
Net interest income (loss)
Provision for credit 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)
$
$
$
$
170,847
—
1,024
169,823
6,352
678
68,244
95,905
—
95,905
—
95,905
Specialty finance
126,814
—
1,429
125,385
4,400
29,140
63,884
86,241
—
86,241
—
86,241
$
$
$
$
For the year ended December 31, 2020
Corporate
(in thousands)
$
—
39,935
8,690
31,245
—
83,751
68,379
$
39,935
(39,935)
6,202
(6,202)
—
188
28,224
46,617
—
46,617
—
46,617
$
(34,238)
27,688
(61,926)
—
(61,926)
$
Payments
For the year ended December 31, 2019
Corporate
(in thousands)
Discontinued operations
—
52,755
28,971
23,784
—
74,742
67,884
30,642
—
30,642
—
30,642
140
$
$
52,755
(52,755)
7,881
(7,881)
—
245
36,753
(44,389)
21,226
(65,615)
—
(65,615)
$
$
—
—
—
—
—
—
—
—
—
—
291
291
—
—
—
—
—
—
—
—
—
—
(512)
(512)
Total
Total
210,782
—
15,916
194,866
6,352
84,617
164,847
108,284
27,688
80,596
(512)
80,084
179,569
—
38,281
141,288
4,400
104,127
168,521
72,494
21,226
51,268
291
51,559
$
$
$
$
Interest income
Interest allocation
Interest expense
Net interest income (loss)
Provision for credit 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)
Total assets
Total liabilities
Total assets
Total liabilities
Note W—Discontinued Operations
$
$
$
$
$
$
Specialty finance
Payments
For the year ended December 31, 2018
Corporate
(in thousands)
Discontinued operations
Total
95,221
—
3,970
91,251
3,585
89,187
57,952
118,902
—
118,902
—
118,902
$
$
—
52,739
21,293
31,446
—
63,939
65,894
29,492
—
29,492
—
29,492
$
$
52,739
(52,739)
1,849
(1,849)
—
668
27,432
(28,613)
32,241
(60,854)
—
(60,854)
$
$
—
—
—
—
—
—
—
—
—
—
1,137
1,137
$
$
147,960
—
27,111
120,849
3,585
153,795
151,278
119,781
32,241
87,540
1,137
88,677
Specialty finance
Payments
4,491,768
304,908
$
$
32,976
4,877,674
$
$
December 31, 2020
Corporate
(in thousands)
1,638,447
513,095
Discontinued operations
Total
$
$
113,650
—
$
$
6,276,841
5,695,677
Specialty finance
Payments
December 31, 2019
Corporate
(in thousands)
Discontinued operations
Total
3,008,304
247,485
$
$
57,746
4,030,921
$
$
2,450,256
894,060
$
$
140,657
—
$
$
5,656,963
5,172,466
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 Philadelphia 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.
141
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, 2020, 2019 and 2018. 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 (loss) before taxes
Income tax (benefit) expense
Net income (loss)
Loans, net
Other real estate owned
Total assets
2020
$
$
For the year ended December 31,
2019
(in thousands)
$
4,222
—
4,222
$
6,710
—
6,710
21
8,059
(3,816)
(3,304)
(512)
$
$
$
34
6,234
510
219
291
December 31,
2020
(in thousands)
91,316
22,334
113,650
$
$
$
2018
8,810
—
8,810
910
8,229
1,491
354
1,137
December 31,
2019
115,879
24,778
140,657
Non-interest expense for the years ended December 31, 2020, 2019 and 2018, reflected $520,000, $2.0 million and $4.3 million, respectively, of fair value
and realized losses on loans. For those respective years, it also reflected respective expenses and losses of $5.5 million, $1.5 million and $177,000 related to other
real estate owned. Discontinued operations loans are recorded at the lower of their cost or fair value. Fair value is determined using a discounted cash flow analysis
where projections of cash flows are developed in consideration of internal loan review analysis and default/prepayment assumptions for smaller pools of loans.
Since the discontinuance of operations in 2014, the Company has securitized or sold related loans, and the approximate $1.1 billion in book value of loans
has been reduced to $91.3 million at December 31, 2020.
Additionally, the consolidated balance sheet as of December 31, 2020 reflects $31.3 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. The
Company continues to pursue additional loan and other collateral dispositions.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
142
Item 9A. Controls and Procedures.
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s 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 the Company’s management, including the Company’s Chief Executive
Officer and the Company’s Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Members of the Company’s 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 the Company’s Chief Executive Officer and Chief Financial Officer, and, in turn to the Audit Committee of the Company’s Board
of Directors. In designing and evaluating the disclosure controls and procedures, the Company’s 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 the Company’s management
necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Under the supervision of the Company’s Chief Executive Officer and Chief Financial Officer, the Company has carried out an evaluation of the
effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the Company’s
chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures are effective at the reasonable assurance level.
Management’s Report on Internal Control Over Financial Reporting
The Company’s 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, the
Company’s principal executive and principal financial officers and effected by the Company’s 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 the Company’s 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 the Company’s
management and directors; and
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 Company’s 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 the Company’s 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, 2020 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 the Company’s internal control over financial reporting was effective as of December 31, 2020.
143
The Company’s independent registered public accounting firm, Grant Thornton LLP, audited the Company’s internal control over financial reporting as of
December 31, 2020. Their report dated March 15, 2021 appears below in this Item 9A.
Changes in Internal Control Over Financial Reporting
During the fourth quarter of the fiscal year ended December 31, 2020, there were no changes in the Company’s internal control over financial reporting that
have materially affected, or were reasonably likely to materially affect, the Company’s internal control over financial reporting.
144
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,
2020, 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,
2020, 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, 2020, and our report dated March 15, 2021 expressed an unqualified opinion on those
financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express
an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
/s/ GRANT THORNTON LLP
Philadelphia, Pennsylvania
March 15, 2021
145
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information included in our 2021 Proxy Statement to be filed is incorporated herein by reference.
Item 11. Executive Compensation
Information included in our 2021 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 our 2021 Proxy Statement to be filed is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information included in our 2021 Proxy Statement to be filed is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
Information included in our 2021 Proxy Statement to be filed is incorporated herein by reference.
146
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, 2020 and 2019
Consolidated Statement of Operations for each of the three years in the period ended December 31, 2020
Consolidated Statement of Changes in Shareholders’ Equity for each of the three years in the period ended December 31, 2020
Consolidated Statement of Cash Flows for each of the three years in the period ended December 31, 2020
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
None
3. Exhibits
Exhibit No.
3.1.1
Description
Certificate of Incorporation filed July 20, 1999, amended July 27, 1999, amended June 7, 2001, and amended October 8,
3.1.2
3.1.3
3.2
4.1
4.2
4.3
10.1
10.2
10.3
10.4.1
10.4.2
10.5
10.6
10.7.1
10.7.2
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
2002 (1)
Amendment to Certificate of Incorporation filed July 30, 2009 (10)
Amendment to Certificate of Incorporation filed June 1, 2016 (10)
Amended and Restated Bylaws (11)
Specimen stock certificate (1)
Indenture for Senior Debt Securities dated as of August 13, 2020(2)
First Supplemental Indenture for 4.750% Senior Notes due 2025 dated as of August 13, 2020(2)
Stock Option and Equity Plan of 2011 (4)+
Form of Grant of Nonqualified Stock Option under the 2011 Plan (3)+
Form of Restricted Stock Unit Award Agreement (5)+
The Bancorp, Inc. Stock Option and Equity Plan of 2013 (6)+
Amendment One to Stock Option and Equity Plan of 2013 (7)+
Form of Grant of Stock Option under the 2013 Plan (8)+
Form of Grant of Stock Award under the 2013 Plan (8)+
The Bancorp, Inc. 2018 Equity Incentive Plan (9)+
First Amendment to The Bancorp, Inc. 2018 Equity Incentive Plan (9)+
Form of Restricted Stock Unit Award Agreement (9)+
Sales Agreement dated December 30, 2014 among the Bancorp Bank and Walnut Street 2014-1 Issuer, LLC (12)
Amended Consent Order, Order for Restitution and Order to Pay Civil Money Penalty, dated December 23, 2015 (13)
Letter Agreement with Damian Kozlowski (14)+
Letter Agreement with Hugh McFadden (14)+
Letter Agreement with John Leto (14)+
Asset Purchase Agreement dated as of July 10, 2018 (15)
The Bancorp, Inc. 2020 Equity Incentive Plan(16)
Form of Non-Qualified Stock Option Award(16)
Form on Non-Qualified Stock Option Award (non-employee directors) (16)
Form of Restricted Stock Award(16)
147
21.1
23.1
31.1
31.2
32.1
32.2
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
101.INS
104
*
**
+
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
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 *
Inline XBRL Schema Document **
Inline XBRL Calculation Linkbase Document **
Inline XBRL Definition Linkbase Document **
Inline XBRL Labels Linkbase Document **
Inline XBRL Presentation Linkbase Document **
Inline XBRL Instance Document **
The cover page of this Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on
March 15, 2021 is formatted in Inline XBRL.
Filed herewith.
Submitted as Exhibits 101 to this Annual Report on Form 10-K are documents formatted in Inline XBRL (Extensible
Business Reporting Language). Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not
filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or
Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability.
Denotes a management contract or compensatory plan, contract or arrangement.
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 current report on Form 8-K filed August 13, 2020, 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).
Filed previously as an exhibit to our current report on Form 8-K filed May 14, 2020, and by this reference incorporated
herein (File No. 000-51018).
148
Item 16. Form 10-K Summary.
None
149
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
SIGNATURES
behalf by the undersigned, thereunto duly authorized.
March 15, 2021
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
/S/ Paul Frenkiel
PAUL FRENKIEL
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
March 15, 2021
March 15, 2021
March 15, 2021
March 15, 2021
March 15, 2021
March 15, 2021
March 15, 2021
March 15, 2021
March 15, 2021
March 15, 2021
March 15, 2021
March 15, 2021
March 15, 2021
Executive Vice President of Strategy, Chief Financial Officer and Secretary
March 15, 2021
(principal financial and accounting officer)
150
Exhibit 21.1
Subsidiaries of Registrant
The Bancorp Bank
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our reports dated March 15, 2021, 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,
2020. We consent to the incorporation by reference of said reports in the Registration Statements of The Bancorp, Inc. on Form
S-3 (File No. 333-239529, effective July 13, 2020 and 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).).
/s/ GRANT THORNTON LLP
March 15, 2021
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, 2020 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 15, 2021
/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, 2020 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 15, 2021
/S/ Paul Frenkiel
Paul Frenkiel
Executive Vice President of Strategy,
Principal 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, 2020 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 15, 2021
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, 2020 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 15, 2021
Dated
/S/ Paul Frenkiel
Paul Frenkiel
Executive Vice President of Strategy,
Principal Financial Officer and Secretary