BANCORP, INC.
10-Ks and 10-Qs
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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
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x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended December 31, 2009
OR
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¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from
to
Commission
File Number 51018
The
Bancorp, Inc.
(exact
name of registrant as specified in its charter)
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Delaware
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23-3016517
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(State
or other jurisdiction of
incorporation
or organization)
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(IRS
Employer
Identification
No.)
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409
Silverside Road, Wilmington, DE
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19809
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code: (302) 385-5000
Securities
registered pursuant to section 12(b) of the Act:
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Title
of each Class
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Name
of each Exchange
on
which Registered
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None
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None
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Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, par value $1.00 per share
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes
¨
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
¨
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
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes
¨
No
¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.
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Large
accelerated filer
¨
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Accelerated
filer
x
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Non-accelerated
filer
¨
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Smaller
Reporting Company
¨
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes
¨
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, 2009 of $6.00, was approximately $75.5 million.
As of
February 28, 2010, 26,181,291 shares of common stock, par value $1.00 per share,
of the registrant were outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the proxy statement for registrant’s 2009 Annual Meeting of Shareholders are
incorporated by reference in Part III of this Form 10-K.
THE
BANCORP, INC.
INDEX
TO ANNUAL REPORT
ON
FORM 10-K
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Page
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PART I
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| Forward-looking statements | 1 | |||||
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Item 1:
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Business
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2 | ||
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Item 1A:
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Risk
Factors
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19 | ||
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Item
1B:
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Unresolved Staff
Comments
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26 | ||
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Item
2:
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Properties
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26 | ||
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Item
3:
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Legal
Proceedings
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26 | ||
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Item
4:
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[Omitted
and Reserved
]
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26 | ||
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PART
II
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Item
5:
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Market for Registrant’s Common
Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
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27 | ||
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Item
6:
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Selected Financial
Data
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29 | ||
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Item
7:
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Management’s Discussion and
Analysis of Financial Condition and Results of
Operations
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30 | ||
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Item
7A:
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Quantitative and Qualitative
Disclosures About Market Risk
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50 | ||
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Item
8:
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Financial Statements and
Supplementary Data
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51 | ||
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Item
9:
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Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure
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83 | ||
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Item
9A:
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Controls and
Procedures
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83 | ||
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Item
9B:
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Other
Information
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86 | ||
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PART
III
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Item
10:
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Directors and Executive Officers
of the Registrant
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86 | ||
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Item
11:
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Executive
Compensation
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86 | ||
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Item
12:
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Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters
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86 | ||
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Item
13:
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Certain Relationships and Related
Transactions
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86 | ||
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Item
14:
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Principal Accounting Fees and
Services
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86 | ||
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PART IV
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Item
15:
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Exhibits, Financial Statement
Schedules
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86 | ||
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SIGNATURES
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88 | |||||
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FORWARD
-LOOKING STATEMENTS
The Securities and Exchange
Commission, or SEC, encourages companies to disclose forward-looking
information so that investors can better understand a company’s future
prospects and make informed investment decisions. This report contains
such “forward-looking statements” within the meaning of Section 27A of the
Securities Act of 1933, as amended, or Securities Act, and Section 21E of
the Securities Exchange Act of 1934, as amended, or Exchange
Act.
Words such as “anticipates,”
“estimates,” “expects,” “projects,” “intends,” “plans,” “believes” 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:
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the
risk factors discussed and identified in Item 1A of this report and in
other of our public filings with the
SEC;
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recessionary
conditions in the U.S. economy and significant dislocations in the current
markets have had, and we expect will continue to have, significant adverse
effects on our assets and operating results, including increases in
payment defaults and other credit risks, decreases in the fair value of
some assets and increases in our provision for loan
losses;
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current
economic and credit market conditions, if they continue, may result in a
reduction in our capital base, reducing our ability to maintain deposits
at current levels;
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operating
costs may increase;
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adverse
governmental or regulatory policies may be enacted, including policies
affecting institutions such as ours which have obtained funds under
the U.S. government’s Troubled Asset Relief
Program;
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management
and other key personnel may be
lost;
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competition
may increase;
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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;
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the
geographic concentration of our loans 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;
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the
market value of real estate that secures our loans has been and may
continue to be, adversely affected by current 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 of our loans,
natural disasters, changes in neighborhood values, competitive
overbuilding, weather, casualty losses, occupancy rates and other similar
factors.
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We
caution you not to place undue reliance on these forward-looking statements,
which speak only as of the date of this report. All subsequent
written and oral forward-looking statements attributable to us or any person
acting on our behalf are expressly qualified in their entirety by the cautionary
statements contained or referred to in this section. Except to the
extent required by applicable law or regulation, we undertake no obligation to
update these forward-looking statements to reflect events or circumstances after
the date of this filing or to reflect the occurrence of unanticipated
events.
Overview
We are a
Delaware bank holding company with a wholly owned subsidiary, The Bancorp Bank,
which we refer to as the Bank. Through the Bank, we provide a wide range of
commercial and retail banking services and related other banking services, which
include private label banking, health savings accounts and prepaid debit cards,
to both regional and national markets.
Regionally,
we focus on providing our banking services directly to retail and commercial
customers in the Philadelphia-Wilmington metropolitan area, consisting of the 12
counties surrounding Philadelphia, Pennsylvania and Wilmington,
Delaware including Philadelphia, Delaware, Chester, Montgomery, Bucks
and Lehigh Counties in Pennsylvania, New Castle County in Delaware and Mercer,
Burlington, Camden, Ocean and Cape May Counties in New Jersey. We believe that
changes over the past ten years in this market have created an underserved base
of small and middle-market businesses and high net worth individuals that are
interested in banking with a company headquartered in and with decision-making
authority based in, the Philadelphia-Wilmington area. We believe that our
presence in the area provides us with insights as to the local market and, as a
result, with the ability to tailor our products and services, and particularly
the structure of our loans, more closely to the needs of our targeted customers.
We seek to develop overall banking relationships with our targeted customers so
that our lending operations serve as a generator of deposits and our deposit
relationships serve as a source of loan assets. We believe that our regional
presence also allows us to oversee and further develop our existing customer
relationships.
Nationally,
we focus on providing our services to organizations with a pre-existing customer
base who can use one or more selected banking services tailored to support or
complement the services provided by these organizations to their customers.
These services include private label banking; credit and debit card
processing for merchants affiliated with independent service organizations;
healthcare savings accounts for healthcare providers and third-party plan
administrators; and prepaid debit cards, also known as stored value cards, for
insurers, incentive plans, large retail chains and consumer service
organizations. 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 group banking. Our private label banking,
card processing, health savings account and stored value card programs are a
source of fee income and low-cost deposits .
Our
offices are located at 409 Silverside Road, Wilmington, Delaware 19809 and our
telephone number is (302) 385-5000. We also maintain executive offices at 1818
Market Street, Philadelphia, Pennsylvania 19103. Our web address is
www.thebancorp.com. We make available free of charge on our website our Annual
Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K
and amendments to those reports as soon as reasonably practicable after we file
them with the SEC.
Our
Strategy
Our
principal strategies are to:
Build upon the
Network
of
Relationships
Developed
by
our
Senior
Management
. We seek to build
upon our senior managers’ network of relationships through the regional division
of the Bank that target individuals and businesses in the greater
Philadelphia-Wilmington metropolitan area with which our senior management has
developed relationships. This division seeks to offer these customers products
and services that meet their banking and financing needs, and to provide them
with the attention of senior management which we believe is often lacking at
larger financial institutions. The division offers a staff of people experienced
in dealing with, and solving, the banking and financing needs of small to
mid-size businesses.
Develop
Relationships
with
Affinity
Groups
to
Gain
Sponsored
A
ccess to their
Membership
,
Client
or
Customer
bases to
M
arket our
S
ervices.
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 lower our cost of deposits, generate fee income and, with
respect to private label banking, lower our customer acquisition costs and build
close customer relationships.
Develop Relationships with Small to
Mid-Size Businesses and Their Principals.
Our target market regionally is
small to mid-size businesses and their principals. We believe that satisfactory
attention to this market requires a combination of the ability to provide a high
level of service, including customized financing to meet a customer’s needs, and
the personal attention of senior management. Because of the significant
consolidation of banking institutions in the Philadelphia-Wilmington
metropolitan area, we believe that many of the financial institutions with which
we compete may have become too large to provide those services efficiently and
cost-effectively.
Use Our Existing Infrastructure as a
Platform for Growth.
We have made significant investments in our banking
infrastructure in order to be able to support our growth. We believe that this
infrastructure can accommodate significant additional growth without substantial
additional expenditure. We believe that this infrastructure enables us to
maximize efficiencies in both our regional market and our national affinity
group market through economies of scale as we grow without adversely affecting
our relationships with our customers.
Commercial
Banking Operations
Deposit Products and
Services.
We offer our depositors a wide range of products and services,
including:
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checking
accounts, featuring no required minimum balance, no service fees,
competitive interest rates, rebates on automated teller machine fees, free
debit Visa check card and overdraft protection plans; premium checking
accounts have free online bill paying, an enhanced debit Visa check card
or an automated teller machine (ATM)
card;
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savings
accounts;
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health
savings accounts;
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money
market accounts;
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individual
retirement accounts, including Roth and education IRAs as well as
traditional IRAs;
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commercial
accounts, including general commercial checking, small business checking,
business savings and business money market
accounts;
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certificates
of deposit; and
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stored
value and payroll cards
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Lending Activities.
At
December 31, 2009, we had a loan portfolio of $1.52 billion, representing 74.6%
of our total assets at that date. We originate substantially all of our
portfolio loans, although from time to time we purchase individual residential
mortgages, leases and lease pools and in two instances in 2008 purchased
participations in loans originated by an affiliated third party, of which one
was paid off in 2008. Where a proposed loan exceeds our lending limit, we
typically sell a participation in the loan to another financial institution. We
generally separate our lending function into commercial term loans, commercial
mortgage loans, commercial lines of credit, construction loans, direct lease
financing and personal loans. We focus primarily on lending to small to mid-size
businesses and their principals. As a result, commercial, construction and
commercial mortgage loans have comprised a majority of our loan portfolio since
we commenced operations. At December 31, 2009, commercial, construction and
commercial mortgage loans made up $1.18 billion, or 77.4%, of our total loan
portfolio. These types of loans are generally viewed as having more risk of
default than residential real estate loans or consumer loans and are typically
larger than residential real estate and consumer loans.
While
originating loans, we rely upon our evaluation of the creditworthiness and
debt-servicing capability of a borrower. We typically require that our loans be
secured by tangible collateral, usually residential or commercial real property.
We do not typically engage in non-recourse lending (that is, lending as to which
the lender only looks to the asset securing the loan for repayment) and will
typically require the principals of any commercial borrower to personally
guarantee the loan. In general, we require that the ratio of the principal
amount of a loan to the value of the collateral securing the loan be no greater
than between 65% to 85% depending on the type of property and its use. The
maturity dates on our loans are generally short to mid-term. We typically seek
to structure our loans with variable rates of interest based upon either a
stated prime rate or the London Inter-Bank Offered Rate, or LIBOR, although we
do lend at fixed rates when appropriate for a particular customer.
Commercial Term Lending.
We
make loans to businesses to finance fixed assets, acquisitions and other
long-term needs of our business customers. While the loans are generally
secured, the loans are underwritten principally upon our evaluation of the
future cash flows of the borrower. Maturities of these loans are typically five
years or less and have amortization schedules that do not exceed the useful life
of the asset to be acquired with the financing. As of December 31, 2009,
commercial term loans were 18.1% of our total loan portfolio.
Commercial Mortgage Lending.
We make loans to businesses to finance the acquisition of, or to refinance,
income-producing real property. The principal repayment source for these loans
is the property and the income it produces, which depends upon the operation of
the property and its market value, although we also evaluate the
creditworthiness of the borrower and guarantors as a second repayment source.
These loans typically are secured by real estate which is either for rent or
sale. Maturities on these loans generally do not exceed 10 years, although they
may have an extended amortization schedule resulting in a balloon payment due at
maturity. As of December 31, 2009, commercial mortgages were 37.4% of our total
loan portfolio.
Commercial
Lines
of
C
redit.
Lines of credit are
typically short-term facilities intended to support seasonal cash needs. They
may be secured or unsecured, depending on the purpose, anticipated repayment
source and financial condition of the borrower. This form of financing is
typically self-liquidating as repayment comes from the conversion of the
financed assets to cash. All lines of credit are payable on demand and the
availability of the line of credit is subject to a periodic review of the
borrower’s financial information. Generally, lines of credit terminate between
one year and 18 months after they have been established. Lines of credit that
have termination dates in excess of one year typically must be paid out at least
annually. As of December 31, 2009, loans drawn from our outstanding commercial
lines of credit were 8.3% of our total loan portfolio.
1-4
Family
Construction
Loans
.
We make loans to
residential developers for acquisition of land, site improvements and
construction of single and multi-family residential units for sale. Terms of the
loans are generally for no longer than two years. Repayment of these loans
typically depends on the sale of the residential units to consumers or sale of
the property to another developer. As of December 31, 2009, construction loans
were 6.6% of our total loan portfolio.
Commercial Construction, Acquisition
and
Development
.
We make construction loans
on industrial properties that later require permanent financing. As of
December 31, 2009, construction loans were 7.0% of our total loan
portfolio.
Direct Lease Financing
.
Substantially all of our leases are for financing commercial automobile fleets
and fleets of government municipalities and agencies. As of December 31, 2009,
direct lease financing made up 5.2% of our total loan portfolio.
Consumer Loans
. We provide
loans to consumers to finance personal residences, automobiles, home
improvements and other personal items. The majority of our consumer loans are
secured by either the borrower’s residence, typically in a first or second lien
position, or the borrower’s securities portfolio. The ratio of loan amount to
the value of the collateral securing the loan is typically less than 85% on
loans collateralized by real estate and less than 50% on loans collateralized by
securities; however, based on a borrower’s financial strength, we may increase
the ratio. As of December 31, 2009, consumer loans were 17.4% of our total loan
portfolio.
Affinity
Banking
Private Label
Banking.
For our private label banking, we create unique
banking websites for each affinity group, enabling the affinity group to provide
its members with the banking services and products we offer or just those
banking services and products it believes will be of interest to its members. We
design each website to carry the brand of the affinity group and carry the “look
and feel” of the affinity group’s own website. Each such website, however,
indicates that we provide all banking services. To facilitate the creation of
these individualized banking websites, we have packaged our products and
services into a series of modules, with each module providing a specific
service, such as basic banking, electronic payment systems and loan and mortgage
centers. Each affinity group selects from our menu of service modules those
services that it wants to offer its members or customers. We and the affinity
group also may create products and services, or modify products and services
already on our menu, that specifically relate to the needs and interests of the
affinity group’s members or customers. We pay fees to certain affinity groups,
based upon deposits and loans they generate. These fees vary, and certain fees
increase as market interest rates increase, while other fee rates are
fixed. We include these fees as a component of expense in calculating
our net interest margin. For the year ended December 31, 2009, these fees
aggregated $2.3 million. The $2.3 million total includes amounts related to
healthcare accounts, merchant card processing and stored value (prepaid) cards
which are described below.
Healthcare Accounts
. We have
developed relationships with healthcare providers, third-party administrators
and benefit administrators who facilitate the enrollment of both groups and
individuals in high deductible health plans and health savings accounts. Our
health savings account program provides entities a turnkey, low-cost way to
provide this benefit to their members. Under these programs, we open health
savings accounts offered in a privately labeled banking environment, which
enables the affinity group’s members to access account information, conduct
transactions and process payments to healthcare providers. The health savings
accounts provide us with a low-cost source of deposits.
Merchant Card
Processing
. We operate systems and act as the depository
institution for the processing of credit and debit card transactions by merchant
establishments. We also act as the bank sponsor and the depository institution
for independent service organizations that operate similar systems. We have
created banking products that enable those organizations to more easily process
electronic payments and to better manage their risk of loss from the parties
with which they deal. Our services also enable independent service organizations
to provide their members with access to their account balances through the
Internet. These relationships are a source of demand deposits and fee
income.
Stored Value Cards
. We have
developed stored value card programs for insurance indemnity payments, flexible
spending account funds, corporate and incentive rewards, payroll cards, consumer
gift cards and general purpose re-loadable cards. Our cards are offered to end
users through our relationships with insurers, benefits administrators,
third-party administrators, corporate incentive companies, rebate fulfillment
organizations, payroll administrators, large retail chains and consumer service
organizations. We also provide consumer use cards branded with network or
association logos such as Visa, MasterCard, and Discover. Our stored value
program provides prepaid programs that generate non-interest revenue
through interchange and cardholder fees, and low-cost deposits
from the amounts delivered to us to fund the cards.
Private Client Services.
We have developed strategic relationships with limited-purpose trust
companies, registered investment advisors, broker-dealers, and other firms in
the wealth management marketplace. Through these relationships we provide
customized, privately labeled demand, money market and loan products to the
client base of our affinity customers.
Other
Operations
Account Services
. Account
holders may access our products and services through the website of their
affinity group or other organizational affiliate, or through our website, from
any personal computer with a secure web browser, regardless of its location.
This access allows account holders to apply for loans, review account activity,
enter transactions into an online account register, pay bills electronically,
receive statements by mail and print bank statement reports. To open a new
account, a customer must complete a simple online enrollment form. Customers can
make deposits into an open account via direct deposit programs, by transferring
funds between existing accounts, by wire transfer, by mail, at any
deposit-taking automated teller machine, at any of the more than 3,400 UPS
Stores throughout the United States, or in person at our Delaware offices
(although we do not maintain a teller line). Customers may also make withdrawals
and have access to their accounts at automated teller machines.
Call Center
. We have a call
center that operates as an inbound customer support center. The call center
provides account holders or potential account holders with assistance in opening
accounts, applying for loans or otherwise accessing the Bank’s products and
services, and in resolving any problems that may arise in the servicing of
accounts, loans or other banking products. The call center operates from 8:30
a.m. to 9:00 p.m. EST Monday through Friday. Outside these hours, and on
weekends, we outsource call center operations to M&I Direct, a third-party
service provider.
Third-Party Service
Providers
. To reduce operating costs and to capitalize on the technical
capabilities of selected vendors, we arrange for the outsourcing of specific
bank operations and systems to third-party service providers, principally the
following:
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fulfillment
functions and similar operating services, including check processing,
check imaging, electronic bill payment and statement
rendering;
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issuance
and servicing of debit cards;
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compliance
and internal audit;
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call
center customer support;
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access
to automated teller machine
networks;
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processing
and temporarily funding residential mortgage loans where we will not hold
the loans in our portfolio;
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bank
accounting and general ledger system;
and
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data
warehousing services.
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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 it allows us to more readily and cost-effectively respond to growth than
if we sought to develop these capabilities internally. Should any of our current
relationships terminate, we believe we could secure the required services from
an alternative source without material interruption of our
operations.
Sales
and Marketing
Commercial Banking.
Our regional banking
operation targets a customer base of successful individuals and business owners
in the Philadelphia-Wilmington area and uses a personal contact/targeted media
advertising approach. This program consists of:
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direct
e-mail and letter introductions to senior management’s
contacts;
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invitation-only,
private receptions with prominent business leaders in the Philadelphia
community;
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advertisements
in local media outlets, principally newspapers and radio stations;
and
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charitable
sponsorships
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Affinity Group
Banking
. Because of the national scope of our affinity group
banking operation, we use a personal sales/targeted media advertising
approach. This program consists of:
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print
advertising;
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attending
and making presentations at trade shows and other events for targeted
affinity organizations;
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direct
mailing; and
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direct
contact with potential affinity organizations by our marketing staff, with
relationship managers focusing on particular regional
markets.
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Loan Production Offices.
We
maintain two loan production offices in the Philadelphia metropolitan area. We
established these offices to serve suburban areas south (our Exton, Pennsylvania
office) and north (our Warminster, Pennsylvania office) of center city
Philadelphia. In addition, we maintain two offices to market and administer our
automobile leasing programs, one in Maryland and one in Florida.
Marketing
Staff.
Our marketing staff focuses on marketing to
particular affinity group communities and the targeted audience of our
Philadelphia regional banking operations.
Technology
Core and Internet Banking
Systems
. We obtain a significant portion of our core and internet banking
systems and operations under non-exclusive licenses between us and Fidelity
National Information Services, Inc. (previously M&I Data Services). These
systems principally include those for general ledger and deposit, loan and check
processing. We utilize an internet banking platform offered by Digital Insight
Corporation. The Digital Insight platform is a front end system used
by customers to access their account via the Internet.
Software.
We have
internally-developed software to provide our online and traditional banking
products and services. We have developed a series of financial service modules
that are easy to deploy and that we can readily adopt to serve our customers’
needs. We developed these modules using an open architecture and object-oriented
technologies. We use the modules to extend the functionality of our core and
internet banking systems and to personalize financial services to the
constituencies we serve.
System Architecture.
We
provide financial products and services through a highly-secured four-tiered
architecture using the Microsoft Windows Server 2003 and 2008 operating
system, Microsoft Internet Information Server web server software, Microsoft SQL
2005, Microsoft .NET Framework, CheckPoint Systems and Cisco Systems firewalls,
and our licensed and proprietary financial services software. User activity is
distributed and load-balanced across multiple servers on each tier through our
proprietary software and third-party equipment, which maintain replicated, local
storage of underlying software and data, resulting in minimal interdependencies
among servers. Each server is backed up to a storage area network that
replicates across locations. The system’s flexible architecture is designed to
have the capacity, or to be easily expanded to add capacity, to meet future
demand. In addition to built-in redundancies, we continuously operate automated
internal monitoring tools and independent third parties continuously monitor our
websites.
Our
primary website hosting facility is in Wilmington, Delaware and connects to the
Internet by Cisco routers through Internap Technology’s New York network
operating center and U.S. LEC’s Bethlehem, Pennsylvania network operating
center. We also maintain a completely redundant standby hosting facility at our
Sioux Falls, South Dakota office. Internap’s Denver network operating center
provides Internet connectivity to the Sioux Falls offices.
Intellectual
Property and Other Proprietary Rights
Since a
significant portion of the core and internet banking systems and operations we
use come from third-party providers, our primary proprietary intellectual
property is the software for creating affinity group bank websites. We rely
principally upon trade secret and trademark law to protect our intellectual
property. We do not typically enter into confidentiality agreements with our
employees or our affinity group customers because we maintain control over the
software used to create the sites and their banking functions rather than
licensing them for customers to use. Moreover, we believe that factors such as
the relationships we develop with our affinity group and banking customers, the
quality of our banking products, the level and reliability of the service we
provide, and the customization of our products and services to meet the need of
our affinity group and other customers are substantially more significant to our
ability to succeed.
Competition
We
believe that our principal competitors are mid-Atlantic regional banks such as
Citizens Bank, Sovereign Bank, TD Bank, Royal Bank, Wilmington Trust and Metro
Bank. We also face competition from Internet-based banks, and from bank
divisions, such as ING Direct and E-Trade Bank, that provide Internet banking
services as part of their overall banking environment. We also directly compete
with National Interbanc and Virtual Bank, Internet-based banks that provide
private labeled financial services to affinity groups and communities. We
compete more generally with numerous other banks and thrift institutions,
mortgage brokers and other financial institutions such as finance companies,
credit unions, insurance companies, money market funds, investment firms and
private lenders, as well as on-line computerized services and other
non-traditional competitors. We believe that our ability to compete successfully
depends on a number of factors, including:
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our
ability to build upon the customer relationships developed by our senior
management and through our marketing
programs;
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our
ability to expand our affinity group banking
program;
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competitors’
interest rates and service fees;
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the
scope of our products and services;
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the
relevance of our products and services to customer needs and demands and
the rate at which we and our competitors introduce
them;
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satisfaction
of our customers with our customer
service;
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our
perceived safety as a depository institution, including our size, credit
rating, capital strength and earnings
strength;
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our
perceived ability to withstand current turbulent economic
conditions;
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ease
of use of our banking website; and
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the
capacity, reliability and security of our network
infrastructure.
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If we
experience difficulty in any of these areas, our competitive position could be
materially adversely affected, which would affect our growth, our profitability
and, possibly, our ability to continue operations. While the banking industry is
highly competitive, we believe we can compete effectively as a result of our
focus on small to mid-size businesses and their principals, a market segment we
believe is under-served in our region. However, many of our competitors have
larger customer bases, greater name recognition and brand awareness, greater
financial and other resources and longer operating histories which may make it
difficult for us to compete effectively. Our future success will depend on our
ability to compete effectively in a highly competitive market and geographic
area.
Regulation
Under Banking Law
We are
extensively regulated under both federal and state banking law. We are a
Delaware corporation and a registered bank holding company registered with the
Board of Governors of the Federal Reserve System, or the Federal Reserve. Until
September 2009, we had elected to be treated as a financial holding company.
Because we had not engaged in the expanded range of businesses permitted to a
financial holding company; we changed to the more simplified bank holding
company structure at that time. We are also subject to supervision and
regulation by the Federal Reserve and the Delaware Office of the State Bank
Commissioner. The Bank, as a state-chartered, nonmember depository institution,
is supervised by the Delaware Office of the State Bank 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.
Federal
Regulation
As a bank
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 bank 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 bank holding company, without the prior approval of the Federal
Reserve.
The BHCA
generally limits the activities of a bank 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; provide investment and financial advice; acting as
an insurance agent for particular types of credit related insurance and
providing specified securities brokerage services for customers. We have no
present plans to engage in any of these activities other than through the
Bank.
Transactions
with Affiliates.
There are
various legal restrictions on the extent to which a bank holding company and its
nonbank subsidiaries can borrow or otherwise obtain credit from banking
subsidiaries or engage in other transactions with or involving those banking
subsidiaries. In general, these restrictions require that any such transaction
must be on terms that would ordinarily be offered to unaffiliated entities and
secured by designated amounts of specified collateral. Transactions between a
banking subsidiary and its holding company or any nonbank subsidiary are limited
to 10% of the banking subsidiary’s capital stock and surplus and, as to the
holding company and all such nonbank subsidiaries in the aggregate, up to 20% of
the bank’s capital stock and surplus.
Change in
Control.
The BHCA prohibits a company from acquiring control
of a bank holding company without prior Federal Reserve approval of an
application. 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 bank
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 bank holding company is presumed to be an acquisition
of control of the holding company if:
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the
bank holding company has a class of securities registered under
Section 12 of the Securities Exchange Act of 1934;
or
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no
other person will own or control a greater percentage of that class of
voting securities immediately after the
transaction.
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An
acquisition of 25% or more of the outstanding shares of any class of voting
securities of a bank 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 bank 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 bank holding companies should not maintain a level of cash
dividends that undermines the bank 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 bank 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 bank 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.
As a
result of our participation in the Troubled Asset Relief Program’s Capital
Purchase Program, we are required to obtain the consent of the U.S. Treasury
Department to declare or pay any dividend or make any distribution on our common
stock until we have redeemed its Series B Fixed Rate Cumulative Perpetual
Preferred Stock or Treasury has transferred the Series B Preferred Stock to a
third party.
Holding Company Liability
.
Under Federal Reserve policy, a bank holding company is expected to act as a
source of financial strength to each of its banking subsidiaries and commit
resources to their support. Such support may be required at times when, absent
this Federal Reserve policy, a holding company may not be inclined to provide
it. As discussed below under “—Prompt Corrective Action,” a bank holding company
in certain circumstances could be required to guarantee the capital plan of an
undercapitalized banking subsidiary.
In the
event of a bank holding company’s bankruptcy under Chapter 11 of the U.S.
Bankruptcy Code, the trustee will be deemed to have assumed, and is required to
cure immediately, any deficit under any commitment by the debtor holding company
to any of the federal banking agencies to maintain the capital of an insured
depository institution, and any claim for breach of such obligation will
generally have priority over most other unsecured claims.
Capital Adequacy.
The Federal
Reserve and the Federal Deposit Insurance Corporation, which we refer to as the
FDIC, have issued standards for measuring capital adequacy for bank 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 to them to obtain approvals, including
our applications for approval of the reorganization and for registration as a
bank holding company. 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, the risk-related standards require banks and bank 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 bank holding
companies are required to maintain capital to support off-balance sheet
activities such as loan commitments.
The
standards classify total capital for this risk-based measure into two tiers,
referred to as Tier 1 and Tier 2. Tier 1 capital consists of common
shareholders’ equity, certain non-cumulative perpetual preferred stock, and
minority interests in equity accounts of consolidated subsidiaries, less certain
adjustments. Tier 2 capital consists of the allowance for loan and lease losses
(within certain limits), perpetual preferred stock not included in Tier 1,
hybrid capital instruments, term subordinate debt, and intermediate-term
preferred stock, less certain adjustments. Together, these two categories of
capital comprise a bank’s or bank 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 bank holding companies must have a minimum ratio of
8% of qualifying total capital to risk-weighted assets, and a minimum ratio of
4% of qualifying Tier 1 capital to risk-weighted assets. On October 22, 2008,
the Federal Reserve issued an interim final rule that specifically permits bank
holding companies that issue new senior perpetual preferred stock to the
Treasury Department under the Capital Purchase Program (discussed below), such
as us, to include such capital instruments in Tier 1 capital for purposes of the
Federal Reserve Board’s risk-based and leverage capital rules and guidelines for
bank holding companies. At December 31, 2009, we and the Bank had total capital
to risk-adjusted assets ratios of 17.06% and 12.22%, respectively, and Tier 1
capital to risk-adjusted assets ratios of 15.81% and 10.97%, respectively
including the Capital Purchase Program funds.
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 bank 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, 2009, we and the Bank had leverage ratios
of 12.68% and 8.78%, respectively.
The
federal banking agencies’ standards provide that concentration of credit risk
and certain risks arising from nontraditional activities, as well as an
institution’s ability to manage these risks, are important factors to be taken
into account by them in assessing a financial institution’s overall capital
adequacy. The risk-based capital standards also provide for the consideration of
interest rate risk in the agency’s determination of a financial institution’s
capital adequacy. The standards require financial institutions to effectively
measure and monitor their interest rate risk and to maintain capital adequate
for that risk. These standards can be expected to be amended from time to
time.
Prompt Corrective
Action.
Federal banking agencies must take prompt supervisory
and regulatory actions against undercapitalized depository institutions pursuant
to the Prompt Corrective Action provisions of the Federal Deposit Insurance Act.
Depository institutions are assigned one of five capital categories—“well
capitalized,” “adequately capitalized,” “undercapitalized,” “significantly
undercapitalized,” and “critically undercapitalized”—and are subjected to
differential regulation corresponding to the capital category within which the
institution falls. Under certain circumstances, a well capitalized, adequately
capitalized or undercapitalized institution may be treated as if the institution
were in the next lower capital category. As we describe in Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations—Liquidity and Capital Resources,” an institution is deemed to be well
capitalized if it has a total risk-based capital ratio of at least 10%, a Tier 1
risk-based capital ratio of at least 6.0% and a leverage ratio of at least 5%.
An institution is adequately capitalized if it has a total risk-based capital
ratio of at least 8%, a Tier 1 risk-based capital ratio of at least 4% and a
leverage ratio of at least 4%. At December 31, 2009, our total risk-based
capital ratio was 17.06%, our Tier 1 risk-based capital ratio was 15.81% and our
leverage ratio was 12.68%, while the Bank’s ratios were 12.22%, 10.97% and
8.78%, respectively. 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. As of December 31, 2009, both we and the Bank were “well capitalized”
within the meaning of the regulatory categories.
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:
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prohibiting
the payment of principal and interest on subordinated
debt;
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prohibiting
the holding company from making distributions without prior regulatory
approval;
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placing
limits on asset growth and restrictions on
activities;
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placing
additional restrictions on transactions with
affiliates;
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restricting
the interest rate the institution may pay on
deposits;
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prohibiting
the institution from accepting deposits from correspondent banks;
and
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in
the most severe cases, appointing a conservator or receiver for the
institution.
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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.
Insurance of Deposit
Accounts.
The Bank’s deposits are insured to the maximum extent permitted
by the Deposit Insurance Fund (“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, 2013.
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 a bank’s capital ratios or
the occurrence of events that have an adverse effect on a bank’s asset quality,
management, earnings or liquidity could result in a substantial increase in
deposit insurance premiums paid by a 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. Risk Category I, which contains the least
risky depository institutions, is expected to include more than 90% of all
institutions. 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 seven to twenty-four basis points for the
healthiest institutions (Risk Category I) to 77.5 basis points of assessable
deposits for the riskiest (Risk Category IV). 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, 2009, the Bank’s DIF assessment rate
was 15.58 basis points.
On
November 12, 2009, in order to strengthen the cash position of the FDIC’s
Deposit Insurance Fund immediately, the FDIC required our banking subsidiary to
prepay their estimated quarterly risk-based assessments for the fourth quarter
of 2009 and for all of 2010, 2011 and 2012. In addition, the FDIC adopted a
three-basis point increase in assessment rates effective on January 1,
2011. Under the rule each institution’s deposit assessment base would
be calculated using its third quarter 2009 deposit assessment base, adjusted
quarterly for an estimated 5 percent annual growth rate in the deposit
assessment base through the end of 2012. The prepaid assessment was collected on
December 30, 2009 and was mandatory for all institutions (subject to the
exercise of the FDIC’s discretion to exempt an institution if the FDIC
determines that the prepayment would affect the safety and soundness of the
institution). We have recorded a prepaid assessment of approximately $10.0
million, which according to the rule was recorded as a prepaid expense (assets)
as of December 30, 2009. The prepaid assessment will be amortized and
recognized as an expense over the following three years.
In
addition, the FDIC announced on February 27, 2009 an interim rule pursuant to
which it would be imposing an emergency special assessment of $0.20 per $100 of
domestic deposits for all banks to be collected on September 30,
2009. The assessment base for the emergency special assessment would
be the same as the assessment base for the second quarter risk-based assessment.
The FDIC stated that this emergency special assessment was being imposed because
recent and anticipated failures of banks have significantly increased losses to
the DIF, resulting in a large decline in the DIF’s reserve ratio, which has
reached its lowest level since 1993. In addition, the FDIC’s interim
rule provides the FDIC with authority to impose an additional emergency special
assessment of up to 10 basis points if at the end of any quarter the FDIC
determines that the DIF’s reserve ratio has fallen close to zero or negative. In
May 2009, the FDIC adopted the final rule, effective June 30, 2009, that imposed
a special assessment of five cents for every $100 on each insured depository
institution’s assets minus its Tier 1 capital as of June 30, 2009, subject to a
cap equal to $0.10 per $100 of assessable deposits for the second
quarter.
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, 2009, the Bank’s limit on loans-to-one
borrower was $27.9 million ($46.4 million for secured loans). At December 31,
2009, the Bank’s largest aggregate outstanding balance of loans-to-one borrower
was $33.9 million, which was secured by real estate.
Transactions with Related
Parties.
The Bank’s authority to engage in transactions with related
parties or “affiliates” (that is, any company that controls 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, 2009, we were not indebted to the Bank. The aggregate
amount of covered transactions with all affiliates is limited to 20% of the
Bank’s capital and surplus. Certain transactions with affiliates are required to
be secured by collateral in an amount and of a type described in Section 23A and
the purchase of low quality assets from affiliates is generally prohibited.
Section 23B generally provides that certain transactions with affiliates,
including loans and asset purchases, must be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the institution as those prevailing at the time for comparable
transactions with non-affiliated companies.
The
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.
Standards for Safety and
Soundness.
The Federal Deposit Insurance Act requires each federal
banking agency to prescribe for all insured depository institutions standards
relating to, among other things, internal controls, information and audit
systems, loan documentation, credit underwriting, interest rate risk exposure,
asset growth, compensation, fees, benefits and such other operational and
managerial standards as the agency deems appropriate. The federal banking
agencies have adopted final regulations and Interagency Guidelines Prescribing
Standards for Safety and Soundness to implement these safety and soundness
standards. The guidelines set forth the safety and soundness standards that the
federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. If the appropriate
federal banking agency determines that an institution fails to meet any standard
prescribed by the guidelines, the agency may require the institution to submit
to the agency an acceptable plan to achieve compliance with the
standard.
Privacy.
Financial
institutions are required to disclose their policies for collecting and
protecting confidential information. Customers generally may prevent financial
institutions from sharing nonpublic personal financial information with
nonaffiliated third parties except under narrow circumstances, such as the
processing of transactions requested by the consumer or when the financial
institution is jointly sponsoring a product or service with a nonaffiliated
third party. Additionally, financial institutions generally may not disclose
consumer account numbers to any nonaffiliated third party for use in
telemarketing, direct mail marketing or other marketing to consumers. The
federal banking agencies have proposed changes to the form of customer notice of
a bank’s privacy policies. When finalized, such amendments could require the
Bank to amend its current form of privacy notice.
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 to be
provided under other provisions of law, including notices required under other
applicable privacy provisions.
The
federal banking agencies also finalized a joint rule implementing Section 315 of
the FACT Act that 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. The rule became effective January 1, 2008 and
mandatory compliance commenced on November 1, 2008. Among the requirements under
the new rule, the Bank is required to adopt “reasonable policies and procedures”
to:
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identify
relevant red flags for covered accounts and incorporate those red flags
into the program;
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detect
red flags that have been incorporated into the
program;
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respond
appropriately to any red flags that are detected to prevent and mitigate
identity theft; and
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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.
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USA PATRIOT Act.
The Uniting
and Strengthening America by Providing Appropriate Tools Required to Intercept
and Obstruct Terrorism Act, which we refer to as the USA PATRIOT Act, amended,
in part, the Bank Secrecy Act, by providing for the facilitation of information
sharing among governmental entities and financial institutions for the purpose
of combating terrorism and money laundering by enhancing anti-money laundering
and financial transparency laws, as well as enhanced information collection
tools and enforcement mechanisms for the U.S. government, including: (1)
requiring standards for verifying customer identification at account opening;
(2) rules to promote cooperation among financial institutions, regulators and
law enforcement entities in identifying parties that may be involved in
terrorism or money laundering; (3) reports by non-financial trades and
businesses filed with the Treasury Department’s Financial Crimes Enforcement
Network for transactions exceeding $10,000; (4) filing suspicious activity
reports by brokers and dealers if they believe a customer may be violating U.S.
laws or regulations; and (5) requiring enhanced due diligence requirements for
financial institutions that administer, maintain, or manage private bank
accounts or correspondent accounts for non-U.S. persons.
Under the
USA PATRIOT Act, the Federal Bureau of Investigation can send bank regulatory
agencies lists of the names of persons suspected of involvement in terrorist
activities. The Bank can be requested to search its records for any
relationships or transactions with persons on those lists. If the Bank finds any
relationships or transactions, it must file a suspicious activity report and
contact the FBI.
The
Office of Foreign Assets Control, which we refer to as OFAC, which is a division
of the U.S. Treasury Department, is responsible for helping to insure that
United States entities do not engage in transactions with “enemies” of the
United States, as defined by various Executive Orders and Acts of Congress. OFAC
has sent, and will send, bank regulatory agencies lists of names of persons and
organizations suspected of aiding, harboring or engaging in terrorist acts. If
the Bank finds a name on any transaction, account or wire transfer that is on an
OFAC list, the Bank must freeze such account, file a suspicious activity report
and notify the FBI. The Bank checks high-risk OFAC areas such as new accounts,
wire transfers and customer files. The Bank performs these checks utilizing
software, which is updated each time a modification is made to the lists
provided by OFAC and other agencies of Specially Designated Nationals and
Blocked Persons.
Other
regulations.
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 Bank’s loan operations are also subject to
federal laws applicable to credit transactions, such as:
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the
federal “Truth-In-Lending Act,” governing disclosures of credit terms to
consumer borrowers;
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the
“Home Mortgage Disclosure Act of 1975,” requiring financial institutions
to provide information to enable the public and public officials to
determine whether a financial institution is fulfilling its obligation to
help meet the housing needs of the community it
serves;
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the
“Equal Credit Opportunity Act,” prohibiting discrimination on the basis of
race, creed or other prohibited factors in extending
credit;
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the
“Fair Credit Reporting Act of 1978,” as amended by the “Fair and Accurate
Credit Transactions Act,” governing the use and provision of information
to credit reporting agencies, certain identity theft protections and
certain credit and other
disclosures;
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the
“Fair Debt Collection Act,” governing the manner in which consumer debts
may be collected by collection
agencies;
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the
Home Ownership and Equity Protection Act and Regulation prohibiting
unfair, abusive or deceptive home mortgage lending practices,
restricting certain mortgage lending activities and advertising and
mortgage disclosure standards;
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the
“Service Members Civil Relief Act;”
and
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the
rules and regulations of the various federal agencies charged with the
responsibility of implementing these federal
laws.
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The
deposit operations of the Bank will be subject to:
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the
“Truth in Savings Act,” which imposes disclosure obligations to enable
consumers to make informed decisions about accounts at depository
institutions;
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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;
and
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the
“Electronic Funds Transfer Act” and Regulation E issued by the Federal
Reserve to implement that act, which govern automatic deposits to and
withdrawals from deposit accounts and customers’ rights and liabilities
arising from the use of automated teller machines and other electronic
banking services.
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Community Reinvestment Act.
Under the Community Reinvestment Act of 1977, which we refer to as
the CRA, a federally-insured institution has a continuing and affirmative
obligation to help meet the credit needs of its community, including low-and
moderate-income neighborhoods, consistent with the safe and sound operation of
the institution. The CRA requires the board of directors of federally-insured
institutions, such as the Bank, to adopt a CRA statement for its assessment area
that, among other things, describes its efforts to help meet community credit
needs and the specific types of credit that the institution is willing to
extend. 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:
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a
lending test which compares the institution’s market share of loans in low
and moderate-income areas to its market share of loans in its entire
service area and the percentage of the institution’s outstanding loans to
low-and moderate-income areas or
individuals;
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a
services test, which evaluates the provision of services that promote the
availability of credit to low-and moderate-income areas;
and
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an
investment test, which evaluates an institution’s record of investments in
organizations designed to foster community development, small and
minority-owned businesses and affordable housing lending, including state
and local government housing or revenue
bonds.
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The Bank
was examined for CRA compliance in 2007 and received a “satisfactory”
rating.
Enforcement.
Under the
Federal Deposit Insurance Act, the FDIC has the authority to bring actions
against a bank and all affiliated parties, including stockholders, attorneys,
appraisers and accountants, who knowingly or recklessly participate in wrongful
actions likely to have an adverse effect on the bank. Formal enforcement action
may range from the issuance of a capital directive or cease and desist order to
removal of officers and/or directors to institution of receivership or
conservatorship proceedings, or termination of deposit insurance. Civil
penalties cover a wide range of violations and can amount to $25,000 per day, or
even $1 million per day in especially egregious cases. Federal law also
establishes criminal penalties for certain violations.
Federal Reserve System.
Federal Reserve regulations require banks to maintain non-interest bearing
reserves against their transaction accounts (primarily negotiated order of
withdrawal, or NOW, and regular checking accounts). For 2009, Federal Reserve
regulations generally required that reserves be maintained against aggregate
transaction accounts as follows: for accounts aggregating $43.9 million or less
(subject to adjustment by the Federal Reserve), the reserve requirement is 3%;
and, for accounts aggregating greater than $43.9 million, the reserve
requirement is $1.317 million plus 10% (subject to adjustment by the Federal
Reserve to between 8% and 14%) of that portion of total transaction accounts in
excess of $43.9 million. The first $9.3 million of otherwise reservable balances
(subject to adjustments by the Federal Reserve) are exempt from the reserve
requirements. At December 31, 2009, the Bank met these
requirements.
Actions taken by Congress and bank
regulatory agencies in response to
market instability
. In
response to the widely-publicized deteriorating conditions in the U.S. banking
and financial system, the U.S. Treasury Department and federal banking agencies
have taken various actions as part of a comprehensive strategy to stabilize the
financial system and housing markets, and to strengthen U.S. financial
institutions.
Emergency Economic Stabilization Act
of 2008.
The Emergency Economic Stabilization Act of 2008, enacted on
October 3, 2008, provided the Secretary of the U.S. Treasury Department with
authority to, among other things, establish the Troubled Asset Relief Program,
or TARP, to purchase from financial institutions up to $700 billion of troubled
assets, which include residential or commercial mortgages and any securities,
obligations, or other instruments that are based on or related to such
mortgages, that in each case were originated or issued on or before March 14,
2008. The term “troubled assets” also included any other financial instrument
that the Secretary, after consultation with the Chairman of the Federal Reserve
determines the purchase of which is necessary to promote financial market
stability, upon transmittal of such determination in writing to the appropriate
committees of the U.S. Congress.
Under
this authority, the Treasury Department implemented the TARP Capital Purchase
Program, or CPP, whereby the Treasury Department committed to purchase up to
$250 billion of senior preferred shares from qualifying banks, savings
associations, and certain bank and savings and loan holding companies engaged
only in financial activities. Under the CPP, in conjunction with the purchase of
senior preferred shares, the Treasury Department also receives warrants to
purchase common stock with an aggregate market price equal to 15 percent of the
senior preferred investment.
Recipients
of CPP funding under TARP are subject to the Treasury Department’s standards for
executive compensation and corporate governance, for the period during which the
Treasury Department holds equity issued under the CPP. The executive
compensation requirements apply to the chief executive officer, chief financial
officer, plus the next three most highly compensated executive officers.
Requirements include: (1) ensuring that incentive compensation for senior
executives does not encourage unnecessary and excessive risks that threaten the
value of the financial institution; (2) required clawback of any bonus or
incentive compensation paid to a senior executive based on statements of
earnings, gains or other criteria that are later proven to be materially
inaccurate; (3) prohibition from making any golden parachute payment to a senior
executive based on the Internal Revenue Code provision; and (4) an agreement not
to deduct for tax purposes executive compensation in excess of $500,000 for each
senior executive. Moreover, recipients of CPP funding must agree, as a condition
to participating in the program, that the Treasury Department is empowered to
unilaterally amend the terms of the CPP program or impose new restrictions on
recipients, in order to comply with any changes in applicable federal
statutes.
We
entered into a transaction with the Treasury Department on December 12, 2008
pursuant to which we received $45.2 million in exchange for issuing 45,220
shares of the Company’s Series B preferred stock at a 5% annual dividend rate
for the first five years, and a 9% annual dividend thereafter if the preferred
shares are not redeemed by us. All of that preferred stock was
repurchased on March 10, 2010. See Recent Developments in
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” in Item 7 of this report. Furthermore, the Treasury
Department received 10-year warrants to purchase 1,960,405 shares of our common
stock at a purchase price $3.46 per share. The number of warrants issued to the
Treasury Department was reduced by 50%, to 980,203 as the company subsequently
raised an amount of qualifying capital which, by regulation, resulted in that
reduction. We are also subject to the various requirements of the CPP including
executive compensation limitations and ability of the Treasury Department to
impose future restrictions. We cannot predict whether additional restrictions or
requirements will be implemented or the extent to our business may be affected
by such limitations.
Temporary Liquidity Guarantee
Program
. The FDIC established a Temporary Liquidity Guarantee
Program on October 14, 2008 (i) guaranteeing certain debt issued by FDIC-insured
institutions and certain holding companies on or after October 14, 2008 through
June 30, 2009; or, in certain instances, October 31, 2009 and (ii) providing
unlimited insurance coverage for non-interest bearing transaction
accounts.
Debt Guarantee Program.
Under
the Debt Guarantee Program, or DGP, the FDIC temporarily guaranteed all
newly-issued senior unsecured debt incurred by banks up to prescribed limits.
Although we opted to participate in the DGP, we determined to not issue any debt
securities under the DGP.
Transaction Account Guarantee
Program
. Under the Transaction Account Guarantee Program, or TAGP,
non-interest bearing transaction accounts are fully insured through June 30,
2010. Non-interest bearing transaction accounts are any deposit accounts with
respect to which interest is neither accrued nor paid and on which the insured
depository institution does not reserve the right to require advance notice of
an intended withdrawal, including traditional demand deposit checking accounts
that allow for an unlimited number of deposits and withdrawals at any time.
Transaction accounts do not include interest-bearing money market deposit
accounts or sweep arrangements that result in funds being placed in an
interest-bearing account as the result of the sweep. The unlimited guarantee
under the TAGP is in addition to, and separate from, the general deposit
insurance coverage provided for under the DIF, currently at $250,000 per
depositor, per institution through December 31, 2013. On January 1, 2014
coverage returns to $100,000. We do not participate in the
TAGP.
Term Asset-Backed Securities Loan
Facility.
Among other liquidity programs, the Federal Reserve
Board has established the Term Asset-Backed Securities Loan Facility,
or TALF, to provide non-recourse loans secured by
eligible asset-backed securities, or ABS. The TALF was designed to increase
credit availability and support economic activity by facilitating the issuance
of ABS that are collateralized by certain consumer and small business
loans. As part of the Treasury Department’s Financial Stability plan,
announced on February 10, 2009, eligible ABS were expanded to include certain
newly-issued commercial mortgage backed securities, or CMBS. The Federal Reserve
announced on August 17, 2009 that the TALF will cease making loans secured by
ABS on March 31, 2010 and by newly-issued CMBS on June 30, 2010.
Financial Stability
Plan.
On February 10, 2009, Treasury Secretary Timothy
Geithner announced a Financial Stability Plan consisting of both new proposals
and expansion of existing programs. The Financial Stability Plan
included the following principal aspects:
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a
capital assistance plan to provide new capital to
institutions;
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an
expansion of the TALF program;
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the
making home affordable program;
and
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the
small business and community lending
institute.
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We do not
participate in the capital assistance plan or the TALF and are not affected by
the other aspects of the Financial Stability Plan.
The new
“making home affordable” program offers assistance to homeowners unable to
refinance their loans by providing access to low-cost refinancing on conforming
loans owned by the Federal National Mortgage Association, or FNMA, or the
Federal Home Loan Mortgage Corporation, or FHLMC. In addition, the program
provides a $75 billion homeowner stability initiative to prevent foreclosures,
increased funding to FNMA and FHLMC and an increase in the size of the mortgage
portfolios that FNMA and FHLMC may retain.
American Recovery and Reinvestment
Act.
On February 17, 2009, the President signed the American Recovery and
Reinvestment Act of 2009 into law as a $787 billion dollar economic stimulus.
The stimulus included discretionary spending for among other things,
infrastructure projects; increased unemployment benefits and food stamps; as
well as tax relief for individuals and businesses. The stimulus also included
compensation restrictions that apply retroactively to companies that receive
TARP funds.
Unfair or deceptive acts or
practices.
The federal bank regulatory agencies have issued a
joint, final rule on unfair or deceptive acts or practices, specifically as they
pertain to banks, savings associations, and federal credit unions, which we
refer to collectively as Banks. The rule establishes the agencies’ respective
authorities to regulate any unfair or deceptive acts or practices engaged in by
Banks; and prohibits five specific acts or practices relating to credit card
accounts that the agencies identified as “unfair.” The five rules pertaining to
credit card accounts relate to (1) time to make payments; (2) allocation of
payments; (3) interest rate increases; (4) two-cycle billing; and (5) financing
of security deposits and fees. While the Bank has until July 1, 2010 to comply
with the new rules pertaining to credit card accounts, pending legislation in
Congress may accelerate the effective date of the new rules.
Truth in Lending Act regulatory
amendments.
The Federal Reserve adopted a final rule amending
regulations implementing the Truth in Lending Act to revise the disclosures that
consumers receive in connection with credit card accounts and other revolving
credit plans. The final rule imposes new format, timing, and content
requirements for credit card applications and solicitations, as well as for the
disclosures that consumers receive with regard to open-end accounts. While the
Bank has until July 1, 2010, to comply with the new rules pertaining to credit
card accounts, pending legislation in Congress may accelerate the effective date
of the new rules.
Truth in Savings Act regulatory
amendments.
The Federal Reserve adopted a final rule amending
regulations implementing the Truth in Savings Act to address depository
institutions’ disclosure practices related to overdrafts. The final rule extends
to all institutions the requirement to disclose on periodic statements the total
amounts charged for overdraft fees and returned item fees, for both the
statement period as well as the year-to-date. The final rule also requires
institutions that provide account balance information through an automated
system to provide a balance that excludes additional funds that may be made
available to cover overdrafts.
Electronic Fund Transfer Act
regulatory amendments.
The Federal Reserve has adopted a rule
addressing certain consumer protection proposals relating to the assessment of
overdraft fees by banks. This rule is effective July 1, 2010. The rule allows
consumers to either opt-out or opt-in to an institution’s overdraft service for
the payment of ATM and one-time debit card overdrafts before the institution may
charge a fee for the service. The rule also prohibits institutions from
conditioning the payment of overdrafts for checks or other types of transactions
on the consumer also opting in to the institution’s payment of overdrafts for
ATM and one-time debit card transactions. It is not anticipated that
these regulations will materially impact us.
Proposed
l
egislation and
r
egulatory
a
ction.
New
statutes, regulations and guidance are regularly proposed that contain
wide-ranging potential changes to the statutes, regulations and competitive
relationships of financial institutions operating and doing business in the
United States. As a result of the problems encountered during the past three
years in the U.S. financial and banking systems, a number of reform measures are
currently under active consideration. For example, the Treasury Department, in
its June 17, 2009, “white paper” proposed a comprehensive financial regulatory
reform, including:
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establishment
of a permanent Financial Service Oversight Council to coordinate
information sharing among federal regulators and analyze market
risk;
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designation
of the Federal Reserve as the primary regulator of all Tier 1
financial holding companies;
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strengthened
capital and additional corporate governance
requirements;
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establishment
of a national bank supervisor for all federally chartered banks and
elimination of the federal
thrift charter;
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enhanced
regulation of financial markets, including derivatives and
securitizations;
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regulation
of hedge fund and private equity
advisors;
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strengthened
regulation of money market funds;
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establishment
of a Consumer Financial Protection Agency;
and
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establishment
of an Office of National Insurance to monitor and coordinate policies in
the insurance sector.
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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.
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. We cannot predict the nature of future fiscal and monetary policies
and the effect of such policies on the future business and our
earnings.
Delaware
Regulation
General.
As a Delaware bank
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.
Employees
As of
February 15, 2010, we have 367 employees and believe our relationships with
our employees to be good. Our employees are not employed under a collective
bargaining agreement.
Risks
Relating to Our Business
Recessionary
conditions in the U.S. economy and significant dislocations in the credit
markets have had, and we expect they will continue to have, significant adverse
effects on our assets and operating results.
Beginning
in mid-2007 and continuing through the date of this report, the financial system
in the United States, including credit markets and markets for real estate and
real-estate related assets, have been subject to unprecedented turmoil.
This turmoil has resulted in substantial declines in the availability of credit,
the values of real estate and real estate–related assets, the availability of
ready markets for those assets, and impairment of the ability of many borrowers
to repay their obligations. As a result of these conditions, we incurred
significant impairment charges on investment securities, materially increased
our provision for loan losses, and experienced an increase in the amount of
loans charged off and non-performing assets, and our income and the price of our
common stock have declined significantly. Continuation of current conditions
could further harm our financial condition and results of
operations.
Actions
taken by the U.S. government and governmental agencies to respond to current
economic conditions may not have a beneficial impact upon us.
In
response to current economic conditions, the U.S. Government and a number of
governmental agencies have established or proposed a series of programs designed
to stabilize the financial system and credit markets. See item 1,
“Business-Regulation under Banking Law.” We cannot predict whether these
programs will have their intended effect or, if they do, whether they will have
a beneficial impact upon our financial condition and results of
operations.
We
may have difficulty managing our growth which may divert resources and limit our
ability to expand our operations successfully.
We expect
to continue to experience significant growth in the amount of our assets, the
level of our deposits and the scale of our operations. 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 even be able to grow at all. 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, our
continued 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.
Changes
in interest rates could reduce our income, cash flows and asset
values.
Our
consolidated income and cash flows and the value of our consolidated assets
depend to a great extent 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. We discuss the effects of interest rate changes on the market value
of our portfolios equity 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, it will also affect
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
consolidated net interest income, and therefore our consolidated 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.
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 the economy of our regional market that impact the ability of our
borrowers to repay their loans or the value of the collateral securing those
loans. Our loan portfolio contains a high percentage of commercial, construction
and commercial mortgage loans in relation to our total loans and total assets.
At December 31, 2009, commercial loans were 26.4% of total loans, construction
loans were 13.6% of total loans and commercial mortgage loans were 37.4% of
total loans. These types of loans are generally viewed as having more risk of
default than residential real estate loans or consumer loans. These types of
loans are also typically larger than residential real estate loans and consumer
loans. Because our loan portfolio contains a significant number of commercial,
construction and commercial mortgage loans with relatively large balances, the
deterioration of one or a few of these loans would cause a significant increase
in non-performing loans. Current economic conditions have caused increases in
our delinquent and defaulted loans. We cannot assure you that we will not
experience further increases in delinquencies and defaults or that any such
increases will not be material. On a consolidated basis, an increase in
non-performing loans could result in an increase in our provision for loan
losses or in loan charge-offs and a consequent reduction of our
earnings.
Our
lending operations are concentrated in the Philadelphia-Wilmington metropolitan
area.
Our loan
activities are largely based in the Philadelphia-Wilmington metropolitan area.
To a lesser extent, our deposit base is also generated from this area. As a
result, our consolidated financial performance depends largely upon economic
conditions in this area. Local economic conditions that are worse than economic
conditions in the United States generally could cause us to experience an
increase in loan delinquencies, a reduction in deposits, an increase in the
number of borrowers who default on their loans and a reduction in the value of
the collateral securing their loans greater than similarly situated institutions
in other regions.
We
depend to some extent upon wholesale and brokered deposits to satisfy funding
needs.
We have
relied to some extent on funds provided by wholesale and brokered deposits to
support the growth of our loan portfolio. Although funding sources amounted 7.6%
of our total deposits at December 31, 2009, a decrease from 23.5% of total
deposits at December 31, 2008, if we are not successful in obtaining wholesale
funding, we may be unable to continue our growth, or could experience
contraction in our total assets. In addition, to the extent that we are unable
to match the maturities of the interest rates we pay for wholesale and brokered
funds 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 except with a waiver from FDIC.
Although the Bank is currently deemed to be well capitalized, a failure to
continue to be well capitalized could also hurt our growth or cause our total
assets to contract.
We
operate in a highly competitive market and geographic area.
We face
substantial competition in all phases of our operations from a variety of
different competitors, including commercial banks and their holding companies,
savings and loan associations, mutual savings banks, credit unions, consumer
finance companies, factoring companies, insurance companies and money market
mutual funds. Competition for financial services in the Philadelphia-Wilmington
metropolitan area, which is our principal service area, is very strong. This
geographic area includes offices of many of the largest financial institutions
in the nation. Most of those competing institutions have much greater financial
and marketing resources than we have and, because we are a relatively
newly-formed entity, far greater name recognition. Due to their size, many of
our competitors can achieve economies of scale and, as a result, may offer a
broader range of products and services as well as better pricing structures for
those products and services. Moreover, because we are smaller and less
well-established, we may have to pay higher rates on our deposits or offer more
free or reduced-cost services in order to attract and retain customers. 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 new
banking operation without the name recognition of other, more established
banking operations, make it difficult for us to compete effectively in obtaining
affinity group relationships.
Our
lending limit may adversely affect our competitiveness.
Our
regulatory lending limit as of December 31, 2009 to any one customer or related
group of customers was $27.9 million for unsecured loans and $46.4 million for
secured loans. Our lending limit is substantially smaller than those of most
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,
individuals and affinity group members, it may affect our ability to attract or
maintain customers or to compete with other financial institutions. Moreover, to
the extent that we incur losses and do not obtain additional capital, our
lending limit, which depends upon the amount of our capital, will
decrease.
Environmental
liability associated with lending activities could result in
losses.
In the
course of our business, we may foreclose on and take title to properties
securing our loans. If hazardous substances were discovered on any of these
properties, we may be liable to governmental entities or third parties for the
costs of remediation of the hazard, as well as for personal injury and property
damage. Many environmental laws can impose liability regardless of whether we
knew of, or were responsible for, the contamination. In addition, if we arrange
for the disposal of hazardous or toxic substances at another site, we may be
liable for the costs of cleaning up and removing those substances from the site,
even if we neither own nor operate the disposal site. Environmental laws may
require us to incur substantial expenses and may materially limit use of
properties we acquire through foreclosure, reduce their value or limit our
ability to sell them in the event of a default on the loans they secure. In
addition, future laws or more stringent interpretations or enforcement policies
with respect to existing laws may increase our exposure to environmental
liability.
As
a financial institution whose principal medium for delivery of banking services
is the Internet, we are subject to risks particular to that medium.
We
operate an independent Internet bank, 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.
Conventional
financial institutions, in growing numbers, are offering 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 implement effectively new technology-driven products and services
or be successful in marketing these products and services to our
customers.
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, 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.
Security
concerns may adversely affect Internet banking.
A
significant barrier to online financial transactions is the secure transmission
of confidential information over public networks. 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. 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,
electronic bill payment, statement rendering, internal audit and other services
to third party vendors. For a description of these services, you should read
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. If an interruption
were to continue for a significant period of time, our earnings could decrease,
we could experience losses and we could lose customers.
We
may be affected by government regulation.
We are
subject to extensive federal and state banking regulation and supervision. The
regulations are intended primarily to protect our depositors’ funds, the federal
deposit insurance funds and the safety and soundness of the Bank, not our
shareholders. Regulatory requirements affect lending practices, capital
structure, investment practices, dividend policy and growth. 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. Changes in
governing law, regulations or regulatory practices could impose additional costs
on us or impair our ability to obtain deposits or make loans and, as a
consequence, our consolidated revenues and profitability.
As a
Delaware-chartered bank whose depositors and financial services customers are
located in several states, the Bank may be subject to additional licensure
requirements or other regulation of its activities by state regulatory
authorities and laws outside of Delaware. If the Bank’s compliance with
licensure requirements or other regulation becomes overly burdensome, we may
seek to 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.
Our
success will depend on our ability to retain Betsy Z. Cohen, our Chief Executive
Officer, and our senior management.
We
believe that our future success will depend upon the expertise of, and customer
relationships established by Betsy Z. Cohen, our chief executive officer, and
other members of senior management. If Mrs. Cohen were to become unavailable for
any reason, or if we are unable to hire highly qualified and experienced
personnel, our ability to attract deposits or loan customers may be materially
adversely affected. The executive compensation restrictions currently, or that
may in the future be, imposed on us as a result of our participation in the CPP
or other government programs, may adversely affect our ability to retain or
attract qualified personnel. If we cannot do so, we expect that our operations,
income, and financial condition and competitive position will be
harmed.
The
Bank’s allowance for loan losses may not be adequate to cover actual
losses.
Like all
financial institutions, the Bank maintains an allowance for loan losses to
provide for probable losses. The Bank’s allowance for loan losses may not be
adequate to cover actual loan losses and future provisions for loan losses could
materially and adversely affect the Bank’s operating results. The Bank’s
allowance for loan losses is determined by analyzing historical loan losses,
current trends in delinquencies and charge-offs, plans for problem loan
resolution, changes in the size and composition of the loan portfolio, and
industry information. Also included in management’s estimates for loan losses
are considerations with respect to the impact of economic events, the outcome of
which are uncertain. The amount of future 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 losses may exceed current
estimates. Bank regulatory agencies, as an integral part of their examination
process, review the Bank’s loans and allowance for loan losses. Although we
believe that the Bank’s allowance for loan losses is adequate to provide for
probable losses, we cannot assure you that we will not need to increase the
Bank’s allowance for loan losses or that regulators will not require us to
increase this allowance. Either of these occurrences could materially and
adversely affect our earnings and profitability.
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 include analysis of a
borrower’s prior credit history, financial statements, tax returns and cash flow
projections, valuation of collateral based on reports of independent appraisers
and verification of liquid assets. Although the Bank believes that its
underwriting criteria are appropriate for the various kinds of loans it makes,
the Bank may incur losses on loans that meet its underwriting criteria, and
these losses may exceed the amounts set aside as reserves in the Bank’s
allowance for loan losses.
Potential acquisitions may disrupt
our business and dilute stockholder value
.
In recent
years we have been an active acquirer of other entities. We have sought merger
or acquisition partners that are culturally similar and have experienced
management and possess either significant market presence or have potential for
improved profitability through financial management, economies of scale or
expanded services. Acquiring other banks or businesses involves various risks
commonly associated with acquisitions, including, among other
things:
|
·
|
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;
and
|
|
·
|
potential
changes in banking or tax laws or regulations that may affect the target
entity.
|
We
regularly 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.
Risks
related to ownership of our common stock
The
trading volume in our common stock is less than that of other larger financial
services companies, which may adversely affect the price of our common
stock.
Although
our common stock is traded on The NASDAQ Global Select Market, the trading
volume in our common stock is less than that of other larger 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.
There
may be future sales or other dilutions of our equity that may adversely affect
the market price of our common stock.
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. Because our
decision to issue securities in any future offering will depend on market
conditions and other factors beyond our control, we cannot predict or estimate
the amount, timing or nature of our future offerings. Thus, our stockholders
bear the risk of any future stock issuances reducing the market price of our
common stock and diluting their stock holdings in us. The exercise of the
warrant held by the U.S. Treasury, the exercise of any options granted to
directors, executive officers and other employees under our stock compensation
plans, the issuance of shares of common stock in acquisitions and other
issuances of our common stock could have an adverse effect on the market price
of the shares of our common stock, and the existence of options, or shares of
our common stock reserved for issuance as restricted shares of our common stock
may materially adversely affect the terms upon which we may be able to obtain
additional capital in the future through the sale of equity
securities.
Future
offerings of debt, which would be senior to our common stock upon liquidation,
and/or preferred equity securities which may be senior to our common stock for
purposes of dividend distributions or upon liquidation, may adversely affect the
market price of our common stock.
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, trust preferred securities, 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. Additional equity offerings may dilute the holdings
of our existing stockholders or reduce the market price of our common stock, or
both. 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 the
federal and state regulatory agencies could take the position that payment of
dividends by the Bank would constitute an unsafe or unsound banking practice. In
the event the Bank is unable to pay dividends sufficient to satisfy our
obligations or is otherwise unable to pay dividends to us, we may not be able to
service our obligations as they become due or to pay dividends on our common
stock or preferred stock. Consequently, the inability to receive dividends from
the Bank could adversely affect our financial condition, results of operations,
cash flows and prospects.
There
can be no assurance that Treasury warrants can be repurchased.
We have
repurchased the Series B Preferred Stock (see Recent Developments in Management
Discussion & Analysis), and may repurchase the related warrants, there can
be no assurance as to when or if the warrants can be repurchased. Until such
time as the warrants are repurchased, we will remain subject to the terms and
conditions of the CPP. Further, our continued participation in the CPP subjects
us to increased regulatory and legislative oversight. The recently enacted
American Recovery and Reinvestment Act of 2009 includes amendments to the
executive compensation provisions of the Emergency Economic Stabilization Act of
2008 under which the CPP was established, all of which apply to us. These new
and any future legal requirements under the CPP may have unforeseen or
unintended adverse effects on the financial services industry as a whole, and
particularly on CPP participants such as ourselves. They may require significant
time, effort, and resources on our part to ensure compliance, and the evolving
regulations concerning executive compensation may impose limitations on us that
affect our ability to compete successfully with financial institutions that are
not subject to the same limitations for executive and management
talent.
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. 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.
None.
We are
the lessee of ten premises. Our banking and operations facilities occupy 33,950
square feet in Wilmington, Delaware under a lease expiring in 2018. The rent is
currently $60,028 per month and escalates yearly based upon scheduled
increases in base rent and actual increases in taxes and premises operating
costs over specified base rates. We also hold a lease on 24,531 square feet
of space in Philadelphia, Pennsylvania expiring in 2014. The rent is currently
$56,845 per month and escalates yearly based upon scheduled increases in base
rent and actual increases in premises operating costs over specified base
rates. As of December 31, 2009, we had a letter of credit for $65,106 as
security for the lease the requirement for which will be eliminated in 2010. We
sublease portions of our Philadelphia space to affiliated entities. We use
the Philadelphia space for our executive offices. We pay aggregate rent of
$8,270 per month for our two Philadelphia-area loan production offices, and
$5,213 per month for our Maryland automobile leasing offices. We pay $6,920
per month to a related party for our Florida leasing office. We also pay
rent of $603 per month for a customer service space, principally an ATM, at a
Philadelphia location. We pay rents of $1,462 and $1,045 per month for our
Minnesota and Illinois offices. We also hold a sublease on 23,255
square feet of space in Sioux Falls, South Dakota for our stored value (prepaid)
card and various other operations expiring in 2014. The rent is
currently $59,183 per month. We believe these facilities are adequate for
our current needs and for the reasonably foreseeable future.
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
.
[Reserved
and Omitted Pursuant to SEC Release No. 33-9089A.]
Our
common stock trades on the NASDAQ National Market under the symbol “TBBK.” The
following table sets forth the range of high and low sales prices for the
indicated periods for our common stock.
|
Quarter
Ended
|
Price
Range
|
|||||||
|
High
|
Low
|
|||||||
|
2008
|
||||||||
|
March
31, 2008
|
$ | 15.52 | $ | 10.50 | ||||
|
June
30, 2008
|
$ | 13.10 | $ | 7.58 | ||||
|
September
30, 2008
|
$ | 8.82 | $ | 4.42 | ||||
|
December
31, 2008
|
$ | 5.80 | $ | 2.09 | ||||
|
2009
|
||||||||
|
March
31, 2009
|
$ | 4.54 | $ | 2.35 | ||||
|
June
30, 2009
|
$ | 7.90 | $ | 3.86 | ||||
|
September
30, 2009
|
$ | 8.07 | $ | 5.25 | ||||
|
December
31, 2009
|
$ | 7.30 | $ | 5.01 | ||||
As of
February 28, 2010, there were 26,181,291 shares of common stock outstanding held
of record by 2,154 persons.
We have
not paid cash dividends on our common stock since our inception, and do not plan
to pay cash dividends on our common stock for the foreseeable future. We intend
to retain earnings, if any, to increase our capital and fund the development and
growth of our operations. 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 will include our earnings, financial condition, cash
requirements, regulatory capital levels and available investment
opportunities.
Our
payment of dividends is subject to restrictions discussed below and in Item 1,
“Business—Regulation under Banking Law.” In addition, before we may pay a cash
dividend on our common stock in any quarter, we must pay that quarter’s
dividends on our preferred stock.
Share
Repurchase Plan
In June
2007 we adopted a share repurchase plan that authorized us to purchase up to
750,000 shares of our common stock, currently representing approximately 2.9% of
our current total common shares outstanding. Under the plan, we may make
purchases from time to time through open market or privately negotiated
transactions. This plan may be modified or discontinued at any time. Under the
TARP agreement between us and the Treasury Department, we must obtain consent
from the Treasury Department before we may pay any dividend on our common stock
or before we may repurchase our common stock or any other equity securities,
other than in connection with benefits plans consistent with prior practice. We
have not repurchased any of our common stock under this plan.
Securities
authorized for issuance under equity compensation plans *
|
|
Number of securities to be
|
Weighted-average
|
|
|||||
|
|
issued
upon exercise of
|
exercise price of
|
Number of securities
|
|||||
|
outstanding
options and stock
|
outstanding options
and
|
remaining available for
|
||||||
|
appreciation
rights
|
stock
appreciation rights
|
future
issuance
|
||||||
|
1999
Omnibus plan
|
|
537,250
|
|
$11.98
|
|
348,500
|
||
|
2003
Omnibus plan
|
|
540,364
|
|
$10.87
|
|
-
|
||
|
2005
Omnibus plan
|
|
305,250
|
|
$15.40
|
|
625,375
|
||
|
Total
|
|
1,382,864
|
|
$12.30
|
|
973,875
|
||
* All
plans authorized have been approved by shareholders.
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 23, 2004 (the
date our common stock began trading on NASDAQ) 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.
|
Period
ending
|
|||||||
|
Index
|
12/23/2004
|
12/31/2004
|
12/31/2005
|
12/31/2006
|
12/31/2007
|
12/31/2008
|
12/31/2009
|
|
The
Bancorp, Inc.
|
100.00
|
100.00
|
106.25
|
185.00
|
84.13
|
23.44
|
42.88
|
|
Nasdaq
Bank Stock Index
|
100.00
|
99.25
|
95.62
|
106.14
|
82.68
|
62.93
|
51.28
|
|
Nasdaq
Composite Stock Index
|
100.00
|
100.82
|
102.07
|
111.79
|
123.76
|
72.99
|
105.02
|
The
following table sets forth selected financial data as of and for the years ended
December 31, 2009, 2008, 2007, 2006 and 2005. We derived the selected
financial data for the years ended December 31, 2009, 2008, 2007, 2006 and
2005 from our financial statements for those periods, which have been audited by
Grant Thornton LLP, independent registered public accounting firm. You should
read the selected financial data in this table together with, and such selected
financial data is qualified by reference to our financial statements and the
notes to those financial statements in Item 8 of this report and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” in
Item 7 of this report.
|
As
of and for the Year Ended
|
||||||||||||||||||||
|
December
31,
|
December
31,
|
December
31,
|
December
31,
|
December
31,
|
||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
Income
Statement Data:
|
(dollars in thousands, except per share data) | |||||||||||||||||||
|
Interest
income
|
$ | 79,989 | $ | 95,062 | $ | 106,537 | $ | 80,968 | $ | 47,134 | ||||||||||
|
Interest
expense
|
16,280 | 40,843 | 53,868 | 36,695 | 14,975 | |||||||||||||||
|
Net
interest income
|
63,709 | 54,219 | 52,669 | 44,273 | 32,159 | |||||||||||||||
|
Provision
for loan and lease losses
|
13,000 | 12,500 | 5,400 | 2,975 | 2,100 | |||||||||||||||
|
Net
interest income after provision for loan
|
||||||||||||||||||||
|
and
lease losses
|
50,709 | 41,719 | 47,269 | 41,298 | 30,059 | |||||||||||||||
|
Non-interest
income (loss)
|
11,819 | (7,603 | ) | 7,614 | 5,038 | 4,323 | ||||||||||||||
|
Non-interest
expense
|
56,178 | 97,388 | 31,205 | 25,505 | 22,754 | |||||||||||||||
|
Net
income (loss) before income tax
|
||||||||||||||||||||
|
provision
(benefit)
|
6,350 | (63,272 | ) | 23,678 | 20,831 | 11,628 | ||||||||||||||
|
Income
tax provision (benefit)
|
2,248 | (20,892 | ) | 9,338 | 8,331 | 4,181 | ||||||||||||||
|
Net
income (loss)
|
4,102 | (42,380 | ) | 14,340 | 12,500 | 7,447 | ||||||||||||||
|
Less
preferred stock dividends and
|
||||||||||||||||||||
|
accretion
|
(3,760 | ) | (243 | ) | (68 | ) | (75 | ) | (598 | ) | ||||||||||
|
Less
preferred stock conversion premium
|
- | - | - | - | (459 | ) | ||||||||||||||
|
Income
allocated to Series A preferred
|
||||||||||||||||||||
|
shareholders
|
- | - | (115 | ) | (110 | ) | (72 | ) | ||||||||||||
|
Net
income (loss) available to common
|
||||||||||||||||||||
|
shareholders
|
$ | 342 | $ | (42,623 | ) | $ | 14,157 | $ | 12,315 | $ | 6,318 | |||||||||
|
Net
income (loss) per share - basic
|
$ | 0.02 | $ | (2.93 | ) | $ | 1.02 | $ | 0.90 | $ | 0.49 | |||||||||
|
Net
income (loss) per share - diluted
|
$ | 0.02 | $ | (2.93 | ) | $ | 0.98 | $ | 0.86 | $ | 0.48 | |||||||||
|
Balance
Sheet Data:
|
||||||||||||||||||||
|
Total
Assets
|
$ | 2,043,534 | $ | 1,792,375 | $ | 1,568,382 | $ | 1,334,838 | $ | 917,471 | ||||||||||
|
Total
loans, net of unearned costs (fees)
|
1,523,722 | 1,449,349 | 1,286,789 | 1,064,819 | 681,582 | |||||||||||||||
|
Allowance
for loan and lease losses
|
19,123 | 17,361 | 10,233 | 8,400 | 5,513 | |||||||||||||||
|
Total
cash and cash equivalents
|
354,459 | 179,506 | 82,158 | 137,121 | 117,093 | |||||||||||||||
|
Deposits
|
1,654,509 | 1,519,847 | 1,278,317 | 1,069,255 | 732,588 | |||||||||||||||
|
Federal
Home Loan Bank advances
|
100,000 | 61,000 | 90,000 | 100,000 | 40,000 | |||||||||||||||
|
Shareholders'
equity
|
245,203 | 180,403 | 176,259 | 148,908 | 134,947 | |||||||||||||||
|
Selected
Ratios:
|
||||||||||||||||||||
|
Return
on average assets
|
0.22 | % |
nm
|
1.04 | % | 1.19 | % | 1.02 | % | |||||||||||
|
Return
on average common equity
|
1.99 | % |
nm
|
9.15 | % | 8.90 | % | 5.69 | % | |||||||||||
|
Net
interest margin
|
3.74 | % | 3.44 | % | 3.90 | % | 4.32 | % | 4.57 | % | ||||||||||
|
Book
value per common share
|
$ | 7.64 | $ | 9.21 | $ | 12.01 | $ | 10.76 | $ | 9.80 | ||||||||||
|
Selected
Capital and Asset Quality Ratios:
|
||||||||||||||||||||
|
Equity/assets
|
12.00 | % | 10.07 | % | 11.24 | % | 11.16 | % | 14.71 | % | ||||||||||
|
Tier
I capital to average assets
|
12.68 | % | 10.10 | % | 9.18 | % | 12.28 | % | 15.90 | % | ||||||||||
|
Tier
1 capital to total risk-weighted assets
|
15.81 | % | 11.72 | % | 10.15 | % | 13.50 | % | 17.94 | % | ||||||||||
|
Total
Capital to total risk-weighted assets
|
17.06 | % | 12.87 | % | 10.95 | % | 14.28 | % | 18.69 | % | ||||||||||
|
Allowance
for loan and lease losses to total
|
||||||||||||||||||||
|
loans
|
1.26 | % | 1.20 | % | 0.80 | % | 0.79 | % | 0.81 | % | ||||||||||
nm---not
meaningful
It
em 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
On April
1, 2009, we entered into a Stock Purchase Agreement with American Home Mortgage
Holdings, Inc. and its wholly-owned subsidiary, American Home Bank, a federal
savings association (“AHB”) to acquire all of the outstanding shares of capital
stock of AHB. Due to continuing delays in attempting to consummate this
transaction, the stock purchase agreement has been terminated. We are currently
pursuing the establishment of a de novo Federal Savings Bank to be located in
southern New Jersey, contiguous with our Philadelphia/ Wilmington area market.
The pursuit of establishing that institution replaces the pursuit of the AHB
acquisition. The application for the Federal Savings Bank will entail all of the
allowable activities of such institutions, which include generating mortgage
loans, various deposit accounts and other banking services.
Repurchase
and retirement of preferred stock
On March
10, 2010, we repurchased 100% of the preferred stock issued under the United
States Treasury Capital Purchase Program as further described in Note J,
totaling $45.2 million. We will record a non-cash charge of $5.6 million for the
unaccreted discount related to these preferred shares. As a result, $3.7 million
of annualized accretion and dividends which had previously served to reduce net
income available to common shareholder will be eliminated on a going forward
basis. After consideration of repaying the TARP funds, our
leverage capital ratio as of December 31, 2009 continued to exceed 10%, compared
to a well capitalized requirement of
5%.
Overview
We are a
Delaware bank holding company with a wholly owned subsidiary, The Bancorp Bank,
which we refer to as the Bank. Through the Bank, we provide a wide range of
commercial and retail banking services and related other banking services, which
include private label banking, health savings accounts and prepaid debit cards,
to both regional and national markets.
Regionally,
we focus on providing our banking services directly to retail and commercial
customers in the Philadelphia-Wilmington metropolitan area, consisting of the 12
counties surrounding Philadelphia, Pennsylvania and Wilmington,
Delaware including Philadelphia, Delaware, Chester, Montgomery, Bucks
and Lehigh Counties in Pennsylvania, New Castle County in Delaware and Mercer,
Burlington, Camden, Ocean and Cape May Counties in New Jersey. We believe that
changes over the past ten years in this market have created an underserved base
of small and middle-market businesses and high net worth individuals that are
interested in banking with a company headquartered in and with decision-making
authority based in, the Philadelphia-Wilmington area. We believe that our
presence in the area provides us with insights as to the local market and, as a
result, with the ability to tailor our products and services, and particularly
the structure of our loans, more closely to the needs of our targeted customers.
We seek to develop overall banking relationships with our targeted customers so
that our lending operations serve as a generator of deposits and our deposit
relationships serve as a source of loan assets. We believe that our regional
presence also allows us to oversee and further develop our existing customer
relationships.
Nationally,
we focus on providing our services to organizations with a pre-existing customer
base who can use one or more selected banking services tailored to support or
complement the services provided by these organizations to their customers.
These services include private label banking; credit and debit card processing
for merchants affiliated with independent service organizations; healthcare
savings accounts for healthcare providers and third-party plan administrators;
and prepaid debit cards, also known as stored value cards, for insurers,
incentive plans, large retail chains and consumer service organizations. 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 group banking. Our private label banking, card
processing, health savings account and stored value card programs are a source
of fee income and low-cost deposits.
In August
2009, we issued 11.5 million shares of our common stock to investors at a price
of $5.75 per share resulting in net proceeds of approximately $62.1 million,
$45.2million of which was utilized to repay TARP. See Recent Developments above.
Beginning
in mid-2007 and continuing through the date of this report, the financial system
in the United States, including credit markets and markets for real estate and
real estate-related assets, have been subject to unprecedented turmoil. This
turmoil has resulted in substantial declines in the availability of credit, the
values of real estate and real estate-related assets, the availability of ready
markets for those assets, and impairment of the ability of many borrowers to
repay their obligations. As a result of these conditions, we have incurred
significant impairment charges on investment securities, materially increased
our provision for loan losses, and experienced an increase in the amount of
loans charged off and non-performing assets, and our income and the price of our
common stock have declined significantly. These conditions also resulted in the
impairment of goodwill and other-than-temporary impairment on investment
securities, which caused us to record a non-cash charge to earnings in 2008 of
$51.9 million for goodwill impairment and a non-cash charge of $2.2 million and
$19.9 million for other than temporary impairment of investment securities in
2009 and 2008, respectively. Continuation of current conditions could further
harm our financial condition and results of operations. We discuss these effects
in more detail elsewhere in this Item 7.
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 loan and lease losses
involves a higher degree of judgment and complexity than our other significant
accounting policies. We determine our allowance for loan and lease losses with
the objective of maintaining a reserve level we believe to be sufficient to
absorb our estimated probable credit losses. We base our determination of the
adequacy of the allowance on periodic evaluations of our loan portfolio and
other relevant factors. However, this evaluation is inherently subjective as it
requires material estimates, including, among others, expected default
probabilities, the amount of loss we may incur on a defaulted loan, expected
commitment usage, the amounts and timing of expected future cash flows on
impaired loans, value of collateral, estimated losses on consumer loans and
residential mortgages, and general amounts for historical loss experience. We
also evaluate economic conditions and uncertainties in estimating losses and
inherent risks in our loan portfolio. All of these factors may be susceptible to
significant change. To the extent actual outcomes differ from our estimates, we
may need additional provisions for loan losses. Any such additional provisions
for loan losses will be a direct charge to our earnings.
The fair
value of a financial instrument is defined as the amount at which the instrument
could be exchanged in a current transaction between willing parties, other than
in a forced or liquidation sale. We estimate the fair value of a financial
instrument using a variety of valuation methods. Where financial instruments are
actively traded and have quoted market prices, quoted market prices are used for
fair value. When the financial instruments are not actively traded, other
observable market inputs, such as quoted prices of securities with similar
characteristics, may be used, if available, to determine fair value. When
observable market prices do not exist, we estimate fair value. Our valuation
methods and inputs consider factors such as types of underlying assets or
liabilities, rates of estimated credit losses, interest rate or discount rate
and collateral. Our best estimate of fair value involves assumptions including,
but not limited to, various performance indicators, such as historical and
projected default and recovery rates, credit ratings, current delinquency rates,
loan-to-value ratios and the possibility of obligor refinancing.
At the
end of each quarter, we assess the valuation hierarchy for each asset or
liability measured. From time to time, assets or liabilities may be transferred
within hierarchy levels due to changes in availability of observable market
inputs to measure fair value at the measurement date. Transfers into or out of
hierarchy levels are based upon the fair value at the beginning of the reporting
period.
We
periodically review our investment portfolio to determine whether unrealized
losses on securities are temporary, based on evaluations of the creditworthiness
of the issuers or guarantors, and underlying collateral, as applicable. In
addition, we consider the continuing performance of the securities. Credit
losses are recognized through the income statement. If management believes
market value losses are temporary and it believes that we have the ability and
intention to hold those securities to maturity, the reduction in value is
recognized in other comprehensive income, through equity.
We
account for our stock-based compensation plans based on the fair value of the
awards made, which include stock options, restricted stock, and performance
based shares. To assess the fair value of the awards made, management makes
assumptions as to expected stock price volatility, option terms, forfeiture
rates and dividend rates. All of these estimates and assumptions may be
susceptible to significant change that may impact earnings in future
periods.
We
account for income taxes under the liability method whereby we determine
deferred tax assets and liabilities based on the difference between the carrying
values on our 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
Net
Income
:
2009 compared to
2008.
Net income
for 2009 was $4.1 million, compared to a net loss of $42.4 million for
2008. Diluted earnings per share were $0.02 for 2009 compared to a
net loss per share of $2.93 for 2008. As a result of our participation in the
TARP Capital Purchase Program, 2009 earnings per common share reflected $2.3
million of preferred stock dividends and accretion of $1.5 million for the
imputed dividend cost related to our issuance of common stock purchase warrants
to the Treasury Department. The resulting after tax total of $3.8
million, which served to reduce income available to common shareholders,
compared to $243,000 in 2008 and $183,000 in 2007. Amounts in 2008
and 2007 primarily reflected the Series A preferred stock.
Net Loss:
2008 compared to
2007
. The net loss for 2008
was $42.4 million, compared to net income of $14.3 million for 2007. The loss in
2008 reflects a pre-tax goodwill impairment charge of $51.9 million.
That charge resulted from goodwill impairment
related primarily to the purchase of Stored
Value systems. Preferred stock dividends and accretion and net income
(loss) allocated to preferred shareholders for 2008 were $243,000 compared to
$183,000 for 2007, which resulted in a net loss available to common shareholders
of $42.6 million for 2008 as compared to net income of $14.2 million for 2007.
The net loss per share was $2.93 for 2008 compared to diluted net income per
share of $0.98 for 2007.
Net Interest Income:
2009 compared to
2008
. Our net interest income
for 2009 increased to $63.7 million from $54.2 million for 2008, while our
interest income for 2009 decreased to $80.0 million from $95.1 million for 2008.
Our average loans increased to $1.48 billion for 2009 from $1.41 billion for
2008. The decrease in our interest income in 2009 reflected the full year impact
of the reductions in rates by the Federal Reserve beginning in the second half
of 2007 throughout 2008 as rates remained at historic lows. Net interest income
increased as the decrease in interest income was more than offset by the
decrease in interest expense.
Our
net interest margin (calculated by dividing net interest income by average
interest-earning assets) for 2009 increased to 3.74% from 3.44% for 2008, an
increase of 30 basis points. For 2009 the average yield on our interest-earning
assets decreased to 4.69% from 6.04% for 2008, a decrease of 135 basis
points. The cost of interest-bearing deposits decreased to 1.45% for 2009 from
3.22% for 2008, a decrease of 177 basis points, while the cost of
interest-bearing liabilities decreased to 1.49% for 2009 from 3.20% for 2008, a
decrease of 171 basis points. The net interest margin increase reflected
decreases in our cost of funds which exceeded the decrease in yields from our
interest-earning assets. The decrease in average yields was driven by market
interest rate declines. The decrease in cost of funds further reflected an
increase in lower cost transaction accounts and a reduction in certificates
of deposit and other higher cost funds. The increase in lower cost transaction
accounts allowed the bank to decrease average time deposit balances to $151.8
million for 2009, a decrease of $303.4 million or 66.7% from 2008. As
a result of allowing higher cost interest-bearing deposits to roll off our
balance sheet, average interest-bearing deposits decreased to $1.03 billion from
$1.14 billion, a decrease of $103.5 million or 9.10%. The roll-off of the
interest bearing deposits was largely offset by increases in our non-interest
bearing demand deposits. Average non-interest bearing demand deposits
increased $286.6 million for 2009 compared to 2008.
Net Interest Income:
2008 compared to
2007.
Our net interest income
for 2008 increased to $54.2 million from $52.7 million for 2007, while our
interest income for 2008 decreased to $95.1 million from $106.5 million for
2007. Our average loans increased to $1.4 billion for 2008 from $1.2 billion for
2007. The reason for the decreases in our interest income was the reductions in
rates by the Federal Reserve beginning in the second half of 2007 and throughout
2008. The reduction in interest income was partially offset by the interest
income generated by the organic growth of our loan portfolio.
Our net
interest margin (calculated by dividing net interest income by average
interest-earning assets) for 2008 decreased to 3.44% from 3.90% for 2007, a
decrease of 46 basis points. For 2008 the average yield on our interest-earning
assets decreased to 6.04% from 7.89% for 2007, a decrease of 185 basis points.
The cost of interest-bearing deposits decreased to 3.22% for 2008 from 4.75% for
2007, a decrease of 153 basis points, while the cost of interest-bearing
liabilities decreased to 3.20% for 2008 from 4.77% for 2007, a decrease of 157
basis points. The decrease in our interest margin was due to the rate reductions
by the Federal Reserve, as a significant portion of the interest rates on our
loans varied with prime, while our ability to reprice our liabilities
(principally, deposits and debt facilities) typically lags behind the reductions
by the Federal Reserve, and the related reductions in the rates payable by our
loan assets. The decrease in both average yield and average cost was driven by
market interest rate reductions. Average interest-bearing deposits increased to
$1.14 billion from $1.04 billion, an increase of $99.0 million or
9.5%.
Average Daily Balances
. The
following table presents the average daily balances of assets, liabilities and
shareholders’ equity and the respective interest earned or paid on
interest-earning assets and interest-bearing liabilities, as well as average
rates for the periods indicated:
|
Year
ended December 31,
|
||||||||||||||||||||||||
|
2009
|
2008
|
|||||||||||||||||||||||
|
Average
|
Average
|
Average
|
Average
|
|||||||||||||||||||||
|
Balance
|
Interest
|
Rate
|
Balance
|
Interest
|
Rate
|
|||||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||||||
|
Assets:
|
||||||||||||||||||||||||
|
Interest-earning
assets:
|
||||||||||||||||||||||||
|
Loans
net of unearned discount
|
$ | 1,477,614 | $ | 73,304 | 4.96 | % | $ | 1,408,041 | $ | 87,966 | 6.25 | % | ||||||||||||
|
Investment
securities-taxable
|
107,695 | 5,017 | 4.66 | % | 120,529 | 6,104 | 5.06 | % | ||||||||||||||||
|
Investment
securities-nontaxable*
|
25,449 | 2,041 | 8.02 | % | - | - | - | |||||||||||||||||
|
Interest
bearing deposits
|
39,271 | 87 | 0.22 | % | 2,493 | 38 | 1.54 | % | ||||||||||||||||
|
Federal
funds sold
|
70,061 | 234 | 0.33 | % | 42,819 | 954 | 2.23 | % | ||||||||||||||||
|
Net
interest-earning assets
|
1,720,090 | 80,683 | 4.69 | % | 1,573,882 | 95,062 | 6.04 | % | ||||||||||||||||
|
Allowance
for loan and lease losses
|
(18,632 | ) | (13,384 | ) | ||||||||||||||||||||
|
Other
assets
|
135,91 7 | 143,765 | ||||||||||||||||||||||
| $ | 1,837,375 | $ | 1,704,263 | |||||||||||||||||||||
|
Liabilities
and Shareholders' Equity:
|
||||||||||||||||||||||||
|
Deposits:
|
||||||||||||||||||||||||
|
Demand
(non-interest bearing)
|
$ | 529,477 | $ | 242,859 | ||||||||||||||||||||
|
Interest
bearing deposits
|
||||||||||||||||||||||||
|
Interest
checking
|
365,715 | $ | 5,341 | 1.46 | % | 183,996 | $ | 4,481 | 2.44 | % | ||||||||||||||
|
Savings
and money market
|
516,356 | 7,191 | 1.39 | % | 498,156 | 13,989 | 2.81 | % | ||||||||||||||||
|
Time
|
151,791 | 2,510 | 1.65 | % | 455,165 | 18,175 | 3.99 | % | ||||||||||||||||
|
Total
interest bearing deposits
|
1,033,862 | 15,042 | 1.45 | % | 1,137,317 | 36,645 | 3.22 | % | ||||||||||||||||
|
Short
term borrowings
|
44,895 | 329 | 0.73 | % | 123,558 | 3,193 | 2.58 | % | ||||||||||||||||
|
Repurchase
agreements
|
2,175 | 26 | 1.18 | % | 2,568 | 51 | 1.99 | % | ||||||||||||||||
|
Subordinated
debt
|
13,401 | 883 | 6.59 | % | 13,302 | 954 | 7.17 | % | ||||||||||||||||
|
Net
interest bearing liabilities
|
1,094,333 | 16,280 | 1.49 | % | 1,276,745 | 40,843 | 3.20 | % | ||||||||||||||||
|
Other
liabilities
|
7,608 | 5,375 | ||||||||||||||||||||||
|
Total liabilities
|
1,631,418 | 1,524,979 | ||||||||||||||||||||||
|
Shareholders'
equity
|
205,957 | 179,284 | ||||||||||||||||||||||
| $ | 1,837,375 | $ | 1,704,263 | |||||||||||||||||||||
|
Net
interest income on tax equivalent basis*
|
64,403 | 54,219 | ||||||||||||||||||||||
|
Tax
equivalent adjustment
|
694 | - | ||||||||||||||||||||||
|
Net
interest income
|
$ | 63,709 | $ | 54,219 | ||||||||||||||||||||
|
Net
interest margin *
|
3.74 | % | 3.44 | % | ||||||||||||||||||||
|
*
Full taxable equivalent basis, using a 34% statutory tax
rate
|
||||||||||||||||||||||||
|
Year
ended December 31,
|
||||||||||||
|
2007
|
||||||||||||
|
Average
|
Average
|
|||||||||||
|
Balance
|
Interest
|
Rate
|
||||||||||
|
(dollars
in thousands)
|
||||||||||||
|
Assets:
|
||||||||||||
|
Interest-earning
assets:
|
||||||||||||
|
Loans
net of unearned discount
|
$ | 1,172,479 | $ | 96,690 | 8.25 | % | ||||||
|
Investment
securities
|
115,078 | 6,699 | 5.82 | % | ||||||||
|
Investment
securities-nontaxable*
|
- | - | - | |||||||||
|
Interest
bearing deposits
|
3,319 | 76 | 2.29 | % | ||||||||
|
Federal
funds sold
|
59,686 | 3,072 | 5.15 | % | ||||||||
|
Net
interest-earning assets
|
1,350,562 | 106,537 | 7.89 | % | ||||||||
|
Allowance
for loan and lease losses
|
(9,398 | ) | ||||||||||
|
Other
assets
|
41,632 | |||||||||||
| $ | 1,382,796 | |||||||||||
|
Liabilities
and Shareholders' Equity:
|
||||||||||||
|
Deposits:
|
||||||||||||
|
Demand
(non-interest bearing)
|
$ | 88,889 | ||||||||||
|
Interest
bearing deposits
|
||||||||||||
|
Interest
checking
|
93,491 | $ | 2,841 | 3.04 | % | |||||||
|
Savings
and money market
|
520,365 | 23,744 | 4.56 | % | ||||||||
|
Time
|
424,448 | 22,728 | 5.35 | % | ||||||||
|
Total
interest bearing deposits
|
1,038,304 | 49,313 | 4.75 | % | ||||||||
|
Short
term borrowings
|
86,049 | 4,419 | 5.14 | % | ||||||||
|
Repurchase
agreements
|
3,006 | 52 | 1.73 | % | ||||||||
|
Subordinated
debt
|
1,033 | 84 | 8.13 | % | ||||||||
|
Net
interest bearing liabilities
|
1,128,392 | 53,868 | 4.77 | % | ||||||||
|
Other
liabilities
|
6,955 | |||||||||||
|
Total
liabilities
|
1,224,236 | |||||||||||
|
Shareholders'
equity
|
158,560 | |||||||||||
| $ | 1,382,796 | |||||||||||
|
Net
interest income on tax equivalent basis*
|
52,669 | |||||||||||
|
Tax
equivalent adjustment
|
- | |||||||||||
|
Net
interest income
|
$ | 52,669 | ||||||||||
|
Net
interest margin *
|
3.90 | % | ||||||||||
|
*
Full taxable equivalent basis, using a 34% statutory tax
rate
|
||||||||||||
In 2009,
average interest-earning assets increased to $1.72 billion, an increase of
$146.2 million, or 9.3% from 2008. During the same period, average loan balances
increased $69.6 million or 4.9%. In 2008, average interest-earning assets
increased to $1.57 billion, an increase of $223.3 million, or 16.5%, from 2007.
During the same period, average loan balances increased $235.6 million, or
20.1%.
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
2007 through 2009. 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.
|
2009
versus 2008
|
2008
versus 2007
|
|||||||||||||||||||||||
|
Due to change in:
|
Due to change in:
|
|||||||||||||||||||||||
|
Volume
|
Rate
|
Total
|
Volume
|
Rate
|
Total
|
|||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||||||
|
Interest
income:
|
||||||||||||||||||||||||
|
Loans
net of unearned discount
|
$ | 4,629 | $ | (19,291 | ) | $ | (14,662 | ) | $ | 42,214 | $ | (50,938 | ) | $ | (8,724 | ) | ||||||||
|
Investment
securities-taxable
|
(620 | ) | (467 | ) | (1,087 | ) | 341 | (936 | ) | (595 | ) | |||||||||||||
|
Investment
securities-nontaxable
|
2,041 | - | 2,041 | - | - | - | ||||||||||||||||||
|
Interest
bearing deposits
|
52 | (3 | ) | 49 | (16 | ) | (22 | ) | (38 | ) | ||||||||||||||
|
Federal
funds sold
|
2,142 | (2,862 | ) | (720 | ) | (704 | ) | (1,414 | ) | (2,118 | ) | |||||||||||||
|
Total
interest earning assets
|
8,244 | (22,623 | ) | (14,379 | ) | 41,835 | (53,310 | ) | (11,475 | ) | ||||||||||||||
|
Interest
expense:
|
||||||||||||||||||||||||
|
Interest
checking
|
$ | 1,446 | $ | (586 | ) | $ | 860 | $ | 2,063 | $ | (423 | ) | $ | 1,640 | ||||||||||
|
Savings
and money market
|
531 | (7,329 | ) | (6,798 | ) | (974 | ) | (8,781 | ) | (9,755 | ) | |||||||||||||
|
Time
|
(8,337 | ) | (7,328 | ) | (15,665 | ) | 1,811 | (6,364 | ) | (4,553 | ) | |||||||||||||
|
Total
deposit interest expense
|
(6,360 | ) | (15,243 | ) | (21,603 | ) | 2,900 | (15,568 | ) | (12,668 | ) | |||||||||||||
|
Short-term
borrowings
|
(1,348 | ) | (1,516 | ) | (2,864 | ) | 2,330 | (3,556 | ) | (1,226 | ) | |||||||||||||
|
Subordinated
debt
|
7 | (78 | ) | (71 | ) | 879 | (9 | ) | 870 | |||||||||||||||
|
Other
borrowed funds
|
(7 | ) | (18 | ) | (25 | ) | 62 | (63 | ) | (1 | ) | |||||||||||||
|
Total
interest expense
|
(7,708 | ) | (16,855 | ) | (24,563 | ) | 6,171 | (19,196 | ) | (13,025 | ) | |||||||||||||
|
Net
interest income:
|
$ | 15,952 | $ | (5,768 | ) | $ | 10,184 | $ | 35,664 | $ | (34,114 | ) | $ | 1,550 | ||||||||||
Provision for Loan and Lease
Losses
. Our provision for loan and lease losses was $13.0 million for
2009, $12.5 million for 2008 and $5.4 million for 2007. The increase in the
provision is based on our evaluation of the adequacy of our allowance for loan
and lease losses, particularly in light of current economic
conditions. At December 31, 2009, our allowance for loan and
lease losses amounted to $19.1 million or 1.26% of total loans. We believe that
our allowance is adequate to cover expected losses. For more information about
our provision and allowance for loan and lease losses and our loss experience
see “—Allowance for Loan and Lease Losses” and “—Summary of Loan and Lease Loss
Experience,” below.
Non-Interest Income
.
Non-interest income was $14.0 million for 2009 before a $2.2 million impairment
charge on a trust preferred security, as compared to $12.3 million before a
$19.9 million impairment charge in 2008, an increase of $1.8 million or 14.3%.
The primary reason for the increase was a $1.1 million gain on sales of
investment securities and $1.1 million increase in leasing income as a result of
higher resale values for commercial. These gains were partially offset by a
decrease of $803,000 in net stored value processing fees to $8.0 million from
$8.8 million for the same period of 2008, due to volume.
Non-Interest Expense
.
Total non-interest
expense was $56.2 million for 2009, compared to $45.5 million before a $51.9
million impairment charge in 2008, an increase of $10.7 million or
23.5%. Salaries and employee benefits amounted to $23.3 million for 2009
compared to $21.3 million for 2008. The increase in salaries and employee
benefits reflected staff additions related to prepaid cards, leasing and other
areas to accommodate their growth. It also reflected annual salary increases
between 0% to 2% to our employees. Depreciation expense increased to $2.7
million for 2009 from $2.5 million in 2008, an increase of $215,000, or 8.6%,
and reflected increases associated with leasehold improvements. Rent and related
occupancy expense increased to $2.6 million from $2.2 million for 2009, an
increase of $425,000 or 19.6% from 2008. The increase reflected relocation of
our main operating office in the third quarter of 2008 and the cost associated
with renting an additional office. Data processing expense increased to $6.8
million for 2009, an increase of approximately $2.6 million, or 62.5%, and
reflected growth in our account base, in particular health savings accounts, as
well as increases in our core processing costs. Legal fees increased to $2.0
million for 2009, an increase of $968,000 or 96.1% as a result of loan
portfolio related matters as well as legal fees related to our proposed
acquisition of American Home Bank. Due to continuing delays in attempting to
consummate this transaction, it was terminated after the end of 2009. In
addition, during 2009, we sold the property held in other real estate owned for
$2.9 million and recognized a $1.7 million loss. The loss resulted from the
continued decline in the real estate market where the property was located,
which is outside of our regional lending area. FDIC insurance increased to $3.1
million from $795,000 for 2009 due to industry-wide insurance premium increases
and a special insurance premium assessed and levied on all banks in
2009.
Preferred
S
tock
D
ividend
s
and
A
ccretion
.
Our cash dividends on
preferred stock and discount accretion increased to $3.8 million, of which cash
dividends were $2.3 million and accretion was $1.5 million, in 2009 compared to
$243,000 in 2008. The increase is a result of the dividend and accretion for the
Series B preferred stock which we issued to the Treasury in December 2008 from
our participation in the TARP Capital Purchase Program. The accretion
resulted from the fair value applied to the preferred stock which was issued in
conjunction with the issuance of the Series B preferred stock.
Income
Tax Benefit and Expense
Our
income tax expense for 2009 was $2.2 million as compared to a $20.9 million
income tax benefit in 2008. Our effective tax rate for 2009 was 35.4% as
compared to 33.0% in 2008. The tax benefit in 2008 reflected the OTTI charge and
goodwill impairment recorded in that year.
Liquidity
and Capital Resources
Liquidity
defines our ability to generate funds to support asset growth, meet deposit
withdrawals, satisfy borrowing needs and otherwise operate on an ongoing basis.
We invest the funds we do not need for operation primarily in overnight federal
funds or in our interest-bearing account at the Federal Reserve.
Our
primary source of funds has been cash inflows from net increases in deposits,
which were $129.1 million in 2009, $247.0 million in 2008 and $209.1 million in
2007. 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.
We seek to set rates on our deposits at levels competitive with the rates
offered in our market; however we do not seek to compete principally on rate.
The focus of our business model is to identify affinity groups that control
significant amounts of deposits as part of their business. A key component to
the model is that the deposits are both stable and “sticky,” in the sense that
they do not react to fluctuations in the market. However, certain components of
the deposits do experience seasonality, creating excess liquidity at certain
times in 2009.
Our
principal source of contingent day-to-day liquidity is secured borrowing lines
from the Federal Home Loan Bank of Pittsburgh and other unsecured lines from our
correspondent banks, which include Atlantic Central Bankers Bank, M&I Bank
and PNC Bank. We have a $529.4 million line of credit with the Federal Home Loan
Bank and $73.0 million in additional lines of credit with correspondent banks.
As of December 31, 2009, we had $100.0 million of outstanding Federal Home Loan
Bank advances; we did not have any outstanding amounts on our correspondent bank
federal funds lines. We expect to continue to use our facility with the Federal
Home Loan Bank and our correspondent banks. At no time during the year did we
experience any difficulties accessing these lines and, as a result, we have not
experienced the liquidity and credit problems faced by many financial and
commercial institutions. However, we continue actively to monitor our positions.
Additionally, we maintain collateral with the Federal Reserve, which allowed us
to borrow approximately $117.0 million from the discount window at December 31,
2009.
Historically,
we have used institutional (brokered) certificates of deposit as a significant
funding source. Such funds decreased to $125.3 million at December 31, 2009 from
$357.8 million and $390.7 million, at December 31, 2008 and 2007,
respectively. These decreases reflected increased levels of transaction accounts
generated throughout the Bank. We purposefully reduced our brokered
deposits consistent with our strategy to grow transaction accounts.
In
addition to the above sources of funding, during 2009, we completed a stock
offering and issued 11.5 million shares of common stock at a price of $5.75 per
share resulting in proceeds of approximately $62.1 million, net of $4.0 million
in costs. Pursuant to the standard terms of the Securities Purchase Agreement
with the Treasury Department for the CPP, as a result of raising “qualifying
capital” of at least $45.2 million prior to December 31, 2009, the number of
shares issuable under the warrant we delivered to the Treasury Department as
part of the CPP was reduced by 50%. As a result, the number of shares
exercisable under the warrant was reduced from 1,960,405 shares to 980,203
shares. Additionally, all of our remaining shares of Series A preferred stock,
which had a liquidation value of $1.1 million, were converted into 117,372
shares of common stock in 2009.
Included
in our cash and cash-equivalents at December 31, 2009 are $219.2 million of
interest-bearing deposits which primarily consisted of deposits with the Federal
Reserve. Traditionally, we sell our excess funds overnight to other financial
institutions, with which we have correspondent relationships, to obtain better
returns. As the federal funds rates decreased to the same level as the interest
rates offered by the Federal Reserve we have adjusted our strategy to retain our
excess funds at the Federal Reserve, which also offers the full guarantee of the
federal government.
Funding
was directed primarily at cash outflows required for loans, which were $85.6
million in 2009, $167.9 million in 2008 and $225.2 million in 2007. At December
31, 2009, we had outstanding commitments to fund loans, including unused lines
of credit, of $316.2 million.
We must
comply with capital adequacy guidelines issued by the Federal Reserve, while the
Bank must comply with similar FDIC guidelines. Under both sets of guidelines, an
institution must, in general, have a leverage ratio of 5.0%, a ratio of Tier 1
capital to risk-weighted assets of 6.0% and a ratio of total capital to
risk-weighted assets of 10.0% in order to be considered “well capitalized.” A
Tier 1 leverage ratio is the ratio of Tier 1 capital to average assets for the
prior quarter. “Tier 1 capital” includes common shareholders’ equity, certain
qualifying perpetual preferred stock and minority interests in equity accounts
of consolidated subsidiaries less goodwill. At December 31, 2009 both we and the
Bank were “well capitalized” under banking regulations.
The
following tables set forth the regulatory capital amounts and ratios for both us
and the Bank at the dates indicated:
|
Tier
1 capital
|
Tier
1 capital
|
Total
capital
|
|||
|
to
average
|
to
risk-weighted
|
to
risk-weighted
|
|||
|
assets
ratio
|
assets
ratio
|
assets
ratio
|
|||
|
AS
OF DECEMBER 31, 2009
|
|||||
|
The
Company
|
12.68%
|
15.81%
|
17.06%
|
||
|
The
Bancorp Bank
|
8.78%
|
10.97%
|
12.22%
|
||
|
"Well
capitalized" institution (under FDIC regulations)
|
5.00%
|
6.00%
|
10.00%
|
||
|
AS
OF DECEMBER 31, 2008
|
|||||
|
The
Company
|
10.10%
|
11.72%
|
12.87%
|
||
|
The
Bancorp Bank
|
9.24%
|
10.75%
|
11.91%
|
||
|
"Well
capitalized" institution (under FDIC regulations)
|
5.00%
|
6.00%
|
10.00%
|
Asset
and Liability Management
The
management of rate sensitive assets and liabilities is essential to controlling
interest rate risk and optimizing interest margins. An interest rate sensitive
asset or liability is one that, within a defined time period, either matures or
experiences an interest rate change in line with general market rates. Interest
rate sensitivity measures the relative volatility of an institution’s interest
margin resulting from changes in market interest rates.
As a
financial institution, potential interest rate volatility is a primary component
of our market risk. Fluctuations in interest rates will ultimately impact the
level of our earnings and the market value of all of our interest-earning
assets, other than those with short-term maturities. We do not own any trading
assets and we do not have any hedging transactions in place such as interest
rate swaps.
We have
adopted policies designed to stabilize net interest income and preserve capital
over a broad range of interest rate movements. To effectively administer the
policies and to monitor our exposure to fluctuations in interest rates, we
maintain an asset/liability committee, consisting of the Bank’s Chief Executive
Officer, Chief Financial Officer, President and Chief Credit Officer. This
committee meets quarterly to review our financial results, develop strategies to
implement the policies and to respond to market conditions. The primary goal of
our policies is to optimize margin and manage interest rate risk, the effects of
fluctuations in interest rates, subject to overall policy constraints for
prudent management of interest rate risk.
We
monitor, manage and control interest rate risk through a variety of techniques,
including use of traditional interest rate sensitivity analysis (also known as
“gap analysis”) and an interest rate risk management model. With the interest
rate risk management model, we project future net interest income and then
estimate the effect of various changes in interest rates and balance sheet
growth rates on that projected net interest income. We also use the interest
rate risk management model to calculate the change in net portfolio value over a
range of interest rate change scenarios. Traditional gap analysis involves
arranging our interest-earning assets and interest-bearing liabilities by
repricing periods and then computing the difference (or “interest rate
sensitivity gap”) between the assets and liabilities that we estimate will
reprice during each time period and cumulatively through the end of each time
period.
Both
interest rate sensitivity modeling and gap analysis are done at a specific point
in time and involve a variety of significant estimates and assumptions. Interest
rate sensitivity modeling requires, among other things, estimates of how much
and when yields and costs on individual categories of interest-earning assets
and interest-bearing liabilities will respond to general changes in market
rates, future cash flows and discount rates. Gap analysis requires estimates as
to when individual categories of interest-sensitive assets and liabilities will
reprice, and assumes that assets and liabilities assigned to the same repricing
period will reprice at the same time and in the same amount. Gap analysis does
not account for the fact that repricing of assets and liabilities is
discretionary and subject to competitive and other pressures. A gap is
considered positive when the amount of interest rate sensitive assets exceeds
the amount of interest rate sensitive liabilities. A gap is considered negative
when the amount of interest rate sensitive liabilities exceeds interest rate
sensitive assets. During a period of falling interest rates, a positive gap
would tend to adversely affect net interest income, while a negative gap would
tend to result in an increase in net interest income. 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 of our
interest-earning assets and interest-bearing liabilities at December 31, 2009.
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 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.
Therefore, 50% of the core interest checking deposits and 25% of core savings
and money market deposits are shown as maturing or repricing within the “1 – 90
days” column, a total of 25% of these categories is shown repricing in 1-3 years
with the balance in 91-364 days. We estimate the repricing
characteristics of these deposits based on historical performance, past
experience at other institutions and other deposit behavior assumptions.
However, we may choose not to reprice liabilities proportionally to changes in
market interest rates for competitive or other reasons. The table does not
assume any prepayment of 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 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.
|
1-90
Days
|
91-364
Days
|
1-3
Years
|
3-5
Years
|
Over
5
Years
|
||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
Interest
earning assets:
|
||||||||||||||||||||
|
Loans
net of deferred loan costs
|
$ | 768,889 | $ | 236,324 | $ | 289,802 | $ | 112,619 | $ | 116,088 | ||||||||||
|
Investments
securities
|
- | - | - | 16,962 | 97,984 | |||||||||||||||
|
Interest
bearing deposits
|
219,213 | - | - | - | - | |||||||||||||||
|
Total
interest earning assets
|
988,102 | 236,324 | 289,802 | 129,581 | 214,072 | |||||||||||||||
|
Interest
bearing liabilities:
|
||||||||||||||||||||
|
Interest
checking
|
232,260 | 116,130 | 116,130 | - | - | |||||||||||||||
|
Savings
and money market
|
135,132 | 270,264 | 135,132 | - | - | |||||||||||||||
|
Time
deposits
|
131,531 | 5,654 | 4,942 | 693 | ||||||||||||||||
|
Securities
sold under agreements to repurchase
|
2,588 | - | - | - | - | |||||||||||||||
|
Short-term
borrowings
|
100,000 | - | - | - | - | |||||||||||||||
|
Subordinated
debt
|
3,401 | - | - | 10,000 | - | |||||||||||||||
|
Total
interest bearing liabilities
|
604,912 | 392,048 | 256,204 | 10,000 | 693 | |||||||||||||||
|
Gap
|
$ | 383,190 | $ | (155,724 | ) | $ | 33,598 | $ | 119,581 | $ | 213,379 | |||||||||
|
Cumulative
gap
|
$ | 383,190 | $ | 227,466 | $ | 261,064 | $ | 380,645 | $ | 594,024 | ||||||||||
|
Gap
to assets ratio
|
19 | % | -8 | % | 2 | % | 6 | % | 10 | % | ||||||||||
|
Cumulative
gap to assets ratio
|
19 | % | 11 | % | 13 | % | 19 | % | 29 | % | ||||||||||
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 the
interest sensitivity modeling more accurately reflects the effects and exposure
to changes in interest rates. Net interest income simulation considers the
relative sensitivities of the balance sheet including the effects of interest
rate caps on adjustable rate mortgages and the relatively stable aspects of core
deposits. As such, net interest income simulation is designed to address the
probability of interest rate changes and the behavioral response of the balance
sheet to those changes. Market Value of Portfolio Equity, or MVPE, represents
the fair value of the net present value of assets, liabilities and off-balance
sheet items.
We
believe that the assumptions utilized in evaluating our estimated net interest
income are reasonable; however, the interest rate sensitivity of our assets,
liabilities and off-balance sheet financial instruments as well as the estimated
effect of changes in interest rates on estimated net interest income could vary
substantially if different assumptions are used or actual experience differs
from presumed behavior of various deposit and loan categories. The following
table shows the effects of interest rate shocks on our MVPE and net interest
income. Rate shocks assume that current interest rates change immediately and
sustain parallel shifts. For interest rate increases or decreases of 100 and 200
basis points, our policy dictates that our MVPE ratio should not fluctuate more
than 10% and 15%, respectively, and that net interest income should not
fluctuate more than 10% and 15%, respectively. As illustrated in the following
table, we complied with our asset/liability policy at December 31,
2009. While our modeling suggests an increase in market rates will
have a positive impact on margin, as shown in the table below, the amount of
such increase cannot be determined, and there can be no assurance any increase
will be realized.
|
Net
portfolio value at
|
||||||||
|
December
31, 2009
|
Net
interest income
|
|||||||
|
Percentage
|
Percentage
|
|||||||
|
Rate scenario
|
Amount
|
change
|
Amount
|
change
|
||||
|
(dollars
in thousands)
|
||||||||
|
+200
basis points
|
$321,581
|
4.55%
|
$69,863
|
5.51%
|
||||
|
+100
basis points
|
313,343
|
1.87%
|
67,692
|
2.23%
|
||||
|
Flat
Rate
|
307,589
|
0.00%
|
66,214
|
0.00%
|
||||
|
-100
basis points
|
295,294
|
-4.00%
|
63,973
|
-3.38%
|
||||
|
-200
basis points
|
283,906
|
-7.70%
|
60,967
|
-7.92%
|
||||
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 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 commercial loans as the principal means of limiting
interest rate risk. We believe our asset/liability strategy will be to maintain
a positive gap position (that is, to continue to have interest-bearing assets
subject to repricing that exceed in amount interest-earning liabilities subject
to repricing) for periods up to a year. We continue to evaluate market
conditions and may change our current gap strategy in response to changes in
those conditions.
Financial
Condition
Genera
/. Our total
assets at December 31, 2009 were $2.04 billion, of which total loans were
$1.52 billion, or 74.6% and investment securities were $114.9 million, or 5.6%,
while our total assets at December 31, 2008 were $1.79 billion, of which
total loans were $1.45 billion or 80.9% and investment securities were
$106.5 million or 5.9%.
Interest bearing deposits and
federal funds sold.
At December 31, 2009, a total of $219.2
million of interest-bearing deposits was comprised primarily of balances at
the Federal Reserve Bank, which now pays interest on such balances. At December
31, 2008, these balances were held as daily federal funds sold at commercial
banks.
Investment portfolio
. The
Financial Accounting Standards Board, or FASB, Accounting Standards
Codification, or ASC, topic 320,
Investments—Debt and Equity
Securities
, requires that debt and equity securities classified as
available-for-sale be reported at fair value, with unrealized gains and losses
excluded from earnings and reported in other comprehensive income. The net
effect of unrealized gains or losses, caused by marking an available-for-sale
portfolio to market, causes 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 which we have the positive
intent and ability to hold to maturity are classified as held-to-maturity and
are carried at amortized cost.
Total
investment securities increased to $114.9 million on December 31, 2009, an
increase of $8.5 million, or 8.0%, from year-end 2008. The increase in
investment securities primarily reflected increased holdings of state and
municipal securities. At December 31, 2009, we had $29.3 million state and
municipal securities, which were exempt from federal income tax. In 2009, we
began purchasing municipal securities, which increased our investment portfolio,
and the tax equivalent yield thereon.
Other
securities, included in the held-to-maturity classification at December 31,
2009, consisted of 5 single issuer and 2 pooled trust preferred
securities. The amortized cost of the single issuer trust preferred securities
was $19.5 million, of which three securities totaling $7.5 million were issued
by three different banks and two securities totaling $12.0 million were issued
by two different insurance companies. The two pooled trust preferred securities
totaled $2.0 million and were collateralized by bank trust preferred
securities.
We
adopted new accounting guidance related to the recognition of
other-than-temporary impairment charges on debt securities in 2009. Under the
new guidance, an impairment on a debt security is deemed to be
other-than-temporary if it meets the following conditions: 1) we intend to sell
or it is more likely than not we will be required to sell the security before a
recovery in value, or 2) we do not expect to recover the entire amortized cost
basis of the security. If we intend to sell or it is more likely than not we
will be required to sell the security before a recovery in value, a charge is
recorded in net realized capital losses equal to the difference between the fair
value and amortized cost basis of the security. For those other-than-temporarily
impaired debt securities which do not meet the first condition and for which we
do not expect to recover the entire amortized cost basis, the difference
between the security’s amortized cost basis and the fair value is separated into
the portion representing a credit impairment, which is recorded in net realized
capital losses, and the remaining impairment, which is recorded in other
comprehensive income. Generally, a security’s credit impairment is the
difference between its amortized cost basis and its best estimate of expected
future cash flows discounted at the security’s effective yield prior to
impairment. The previous amortized cost basis less the impairment recognized in
net realized capital losses becomes the security’s new cost basis. As prescribed
by the new guidance, for 2009, we recognized an other-than-temporary impairment
charge of $2.2 million related to a preferred bond classified in our
held-to-maturity portfolio. We reevaluated all of the relevant information
available for the other-than-temporary impairment charge in 2008 and determined
that the charges were related to credit loss.
The
following table presents the book value and the approximate fair value for each
major category of our investment securities portfolio. At December 31, 2009,
2008 and 2007, our investments were categorized as either available-for-sale or
held-to-maturity (in thousands).
|
Available-for-sale
|
Held-to-maturity
|
|||||||||||||||
|
December
31, 2009
|
December
31, 2009
|
|||||||||||||||
|
Amortized
|
Fair
|
Amortized
|
Fair
|
|||||||||||||
|
cost
|
value
|
cost
|
value
|
|||||||||||||
|
U.S.
Government agency securities
|
$ | 27,000 | $ | 26,759 | $ | - | $ | - | ||||||||
|
Obligations
of states and political subdivisions
|
29,344 | 31,153 | - | - | ||||||||||||
|
Mortgage-backed
securities
|
7,929 | 8,048 | - | - | ||||||||||||
|
Other
securities
|
21,005 | 20,953 | 21,468 | 15,415 | ||||||||||||
|
Federal
Home Loan and Atlantic Central
|
||||||||||||||||
|
Bankers
Bank stock
|
6,565 | 6,565 | - | - | ||||||||||||
| $ | 91,843 | $ | 93,478 | $ | 21,468 | $ | 15,415 | |||||||||
|
Available-for-sale
|
Held-to-maturity
|
|||||||||||||||
|
December
31, 2008
|
December
31, 2008
|
|||||||||||||||
|
Amortized
|
Fair
|
Amortized
|
Fair
|
|||||||||||||
|
cost
|
value
|
cost
|
value
|
|||||||||||||
|
U.S.
Government agency securities
|
$ | 59,982 | $ | 60,876 | $ | - | $ | - | ||||||||
|
Mortgage-backed
securities
|
15,102 | 15,021 | - | - | ||||||||||||
|
Other
securities
|
807 | 711 | 23,529 | 18,408 | ||||||||||||
|
Federal
Home Loan and Atlantic Central
|
||||||||||||||||
|
Bankers
Bank stock
|
6,321 | 6,321 | - | - | ||||||||||||
| $ | 82,212 | $ | 82,929 | $ | 23,529 | $ | 18,408 | |||||||||
|
Available-for-sale
|
||||||||
|
December
31, 2007
|
||||||||
|
Amortized
|
Fair
|
|||||||
|
cost
|
value
|
|||||||
|
U.S.
Government agency securities
|
$ | 59,967 | $ | 60,319 | ||||
|
Mortgage-backed
securities
|
13,982 | 13,353 | ||||||
|
Other
securities
|
46,002 | 42,871 | ||||||
|
Federal
Home Loan and Atlantic Central
|
||||||||
|
Bankers
Bank stock
|
5,672 | 5,672 | ||||||
| $ | 125,623 | $ | 122,215 | |||||
Investment
securities with a carrying value of $6.7 million at December 31,
2009, $30.9 million at December 31, 2008 and $73.7 million at
December 31, 2007, were pledged as collateral for Federal Home Loan Bank
advances and to secure securities sold under repurchase agreements as required
or permitted by law.
The
following tables show the contractual maturity distribution and the weighted
average yields of our investment securities portfolio as of December 31,
2009 (dollars in thousands):
|
After
|
After
|
|||||||||||||||||||||||||||
|
one to
|
five
to
|
Over
|
||||||||||||||||||||||||||
|
five
|
Average
|
ten
|
Average
|
ten
|
Average
|
|||||||||||||||||||||||
|
Available-for-sale
|
years
|
yield
|
years
|
yield
|
years
|
yield
|
Total
|
|||||||||||||||||||||
|
U.S.
Government agencies
|
$ | 26,759 | 3.53 | % | $ | 26,759 | ||||||||||||||||||||||
|
Mortgage-backed
securities
|
8,048 | 5.49 | % | 8,048 | ||||||||||||||||||||||||
|
Obligations
of states and
|
||||||||||||||||||||||||||||
|
political
subdivisions*
|
31,153 | 5.34 | % | 31,153 | ||||||||||||||||||||||||
|
Other
securities
|
16,962 | 4.96 | % | 3,991 | 5.29 | % | 20,953 | |||||||||||||||||||||
|
Federal
Home Loan and Atlantic
|
||||||||||||||||||||||||||||
|
Central
Banks Bank Stock
|
6,565 | 6,565 | ||||||||||||||||||||||||||
|
Total
|
$ | 16,962 | $ | 3,991 | $ | 72,525 | $ | 93,478 | ||||||||||||||||||||
|
Weighted
average yield
|
4.96 | % | 5.29 | % | 4.63 | % | ||||||||||||||||||||||
* The
yield shown, if adjusted to its taxable equivalent, would approximate
8.02%.
|
After
|
||||||||||||||||||||
|
five
to
|
Over
|
|||||||||||||||||||
|
ten
|
Average
|
ten
|
Average
|
|||||||||||||||||
|
Held-to-maturity
|
years
|
yield
|
years
|
yield
|
Total
|
|||||||||||||||
|
Other
debt securities
|
$ | 3,332 | 7.11 | % | $ | 18,136 | 4.26 | % | $ | 21,468 | ||||||||||
|
Total
|
$ | 3,332 | $ | 18,136 | $ | 21,468 | ||||||||||||||
| 7.11 | % | 4.26 | % | |||||||||||||||||
Loan Portfolio:
We have
developed an extensive credit policy to cover all facets of our lending
activities. All of the commercial loans in our portfolio go through our loan
committee for approval. The Bank’s Chief Executive Officer, Mrs.
Cohen, who has over 30 years experience in banking and real estate lending,
chairs our loan committee. The remainder of the committee is made up of our
President, Chief Lending Officer, head commercial lender, lenders, loan analysts
and our Chief Credit Officer, who is present to insure adherence to both
regulatory compliance and our internal credit policy. All of the key committee
members have lengthy experience and have had similar positions at substantially
larger institutions.
We
originate substantially all of our portfolio loans, although from time to time
we purchase individual residential mortgages, leases and lease pools and in two
instances in 2008 purchased participation in loans originated by an affiliated
third party, of which one was paid off in 2008. Where a proposed loan exceeds
our lending limit, we typically sell a participation in the loan to another
financial institution. At December 31, 2009, we had $66.0 million in
participations sold. We typically require that all commercial mortgages and
construction loans be secured, generally by real estate. At December 31, 2009,
commercial, construction and commercial mortgage loans made up $1.2 billion, or
77.4%, of our total loan portfolio. We expect that the percentage of our loan
portfolio represented by commercial, construction and commercial mortgage loans
will remain at or about the current percentage for the foreseeable future.
However, from time to time we consider acquisitions of loan or lease portfolios
and, as a result of any such acquisition, the percentage could
change.
The
following table summarizes our loan portfolio by loan category for the periods
indicated (in thousands):
|
December
31,
|
December
31,
|
December
31,
|
December
31,
|
December
31,
|
||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
Amount
|
Amount
|
Amount
|
Amount
|
Amount
|
||||||||||||||||
|
Commercial
|
$ | 402,232 | $ | 353,219 | $ | 325,166 | $ | 199,397 | $ | 119,654 | ||||||||||
|
Commercial
mortgage(1)
|
569,434 | 488,986 | 369,124 | 327,639 | 190,153 | |||||||||||||||
|
Construction
|
207,184 | 305,889 | 307,614 | 275,079 | 168,149 | |||||||||||||||
|
Total
commercial loans
|
1,178,850 | 1,148,094 | 1,001,904 | 802,115 | 477,956 | |||||||||||||||
|
Direct
financing leases, net
|
78,802 | 85,092 | 89,519 | 92,947 | 81,162 | |||||||||||||||
|
Residential
mortgage(2)
|
85,759 | 57,636 | 50,193 | 62,413 | 62,378 | |||||||||||||||
|
Consumer
loans and others
|
178,608 | 157,446 | 144,882 | 108,374 | 61,017 | |||||||||||||||
| 1,522,019 | 1,448,268 | 1,286,498 | 1,065,849 | 682,513 | ||||||||||||||||
|
Deferred
loan costs (fees)
|
1,703 | 1,081 | 291 | (1,030 | ) | (931 | ) | |||||||||||||
|
Total
loans, net of deferred loan costs (fees)
|
$ | 1,523,722 | $ | 1,449,349 | $ | 1,286,789 | $ | 1,064,819 | $ | 681,582 | ||||||||||
|
(1)
|
At
December 31, 2009, our loans secured by owner occupied properties amounted
to $104. 0 million or 18.3% of commercial
mortgages.
|
|
(2)
|
Includes
loans held for sale of $3.0 million at December 31, 2006 and $805,000 at
December 31, 2005. There were no loans available-for-sale in the other
reported periods.
|
At
December 31, 2009, construction loans included $100.1 million of 1-4 family
construction and $107.1 million of commercial construction, land acquisition and
development.
The
following table presents selected loan categories by maturity for the periods
indicated:
|
December
31, 2009
|
||||||||||||||||
|
Within
|
One
to Five
|
After
|
||||||||||||||
|
One
Year
|
Years
|
Five
Years
|
Total
|
|||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Commercial
and commercial mortgage
|
$ | 447,457 | $ | 375,432 | $ | 148,777 | $ | 971,666 | ||||||||
|
Construction
|
181,163 | 21,204 | 4,817 | $ | 207,184 | |||||||||||
| $ | 628,620 | $ | 396,636 | $ | 153,594 | $ | 1,178,850 | |||||||||
|
Loans
at fixed rates
|
$ | 145,483 | $ | 27,257 | $ | 172,740 | ||||||||||
|
Loans
at variable rates
|
$ | 251,153 | $ | 126,337 | $ | 377,490 | ||||||||||
|
Total
|
$ | 396,636 | $ | 153,594 | $ | 550,230 | ||||||||||
Allowance for Loan and Lease Losses:
We evaluate the adequacy of our allowance for loan and lease losses on at
least a quarterly basis to ensure that our provision for loan losses is in the
amount necessary to maintain our allowance for loan losses at a level that is
appropriate, based on management’s estimate of probable losses. Our estimates of
loan and lease losses are intended to, and, in management’s opinion, do, meet
the criteria for accrual of loss contingencies in accordance with ASC topic 450,
Contingencies
, and ASC
topic 310,
Receivables
.
The process of evaluating the adequacy of our allowance has two basic elements:
first, the identification of problem loans or leases based on current financial
information and the fair value of the underlying collateral; and second, a
methodology for estimating general loss reserves. For loans or leases classified
as “special mention,” “substandard” or “doubtful,” we reserve the estimated
losses at the time we classify the loan or lease. This “specific” portion of the
allowance is the total of potential, although unconfirmed, losses for
individually classified loans. In this process, specific reserves are
established based on an analysis of the most probable sources of repayment and
liquidation of collateral. While each impaired loan is individually evaluated,
not every loan requires a reserve when the collateral and estimated cash flows
exceed the current balance.
The
second phase of our analysis represents an allocation of the allowance. This
methodology analyzes pools of loans that have similar characteristics and
applies historical loss experience and other factors for each pool (including
management’s experience with similar loan and lease portfolios at other
institutions, the historic loss experience of our peers and review of
statistical information from various industry reports to determine its allocable
portion of the allowance. This estimate is intended to represent the potential
unconfirmed and inherent losses within the portfolio. Individual loan pools are
created for major loan categories: commercial loans, commercial mortgages,
construction loans and direct lease financing, and for the various types of
loans to individuals. We augment historical experience for each loan pool by
accounting for such items as current economic conditions, current loan portfolio
performance, loan policy or management changes, loan concentrations, increases
in our lending limit, the average loan size, and other factors as appropriate.
Our Chief Risk Officer, who reports directly to our audit committee, oversees
the loan review department processes and measures the adequacy of the allowance
independently of management. The loan review department’s oversight parameters
include borrower relationships over $3.0 million and loans that are 90 days or
more past due or which have been previously adversely classified. Pursuant to
these parameters, approximately 70% of our loans are subject to that
department’s oversight on an annual basis.
Although
we consider our allowance for loan and lease losses to be adequate based on
information currently available, future additions to the allowance may be
necessary due to changes in economic conditions, our ongoing loss experience and
that of our peers, changes in management’s assumptions as to future
delinquencies, recoveries and losses, deterioration of specific credits and
management’s intent with regard to the disposition of loans and
leases.
The
following table presents an allocation of the allowance for loan and lease
losses among the types of loans or leases in our portfolio at December 31, 2009,
2008, 2007, 2006 and 2005 (dollars in thousands):
|
December
31, 2009
|
December
31, 2008
|
December
31, 2007
|
||||||||||||||||||||||
|
%
Loan
|
%
Loan
|
%
Loan
|
||||||||||||||||||||||
|
Type
to
|
Type
to
|
Type
to
|
||||||||||||||||||||||
|
Allowance
|
Total Loans
|
Allowance
|
Total Loans
|
Allowance
|
Total Loans
|
|||||||||||||||||||
|
Commercial
|
$ | 4,696 | 26.43 | % | $ | 3,172 | 24.39 | % | $ | 2,290 | 25.28 | % | ||||||||||||
|
Commercial
mortgage
|
7,041 | 37.42 | % | 6,124 | 33.76 | % | 2,845 | 28.69 | % | |||||||||||||||
|
Construction
|
4,356 | 13.61 | % | 5,543 | 21.12 | % | 2,220 | 23.91 | % | |||||||||||||||
|
Direct
financing leases, net
|
151 | 5.18 | % | 340 | 5.88 | % | 682 | 6.96 | % | |||||||||||||||
|
Consumer
loans
|
460 | 11.73 | % | 603 | 10.87 | % | 691 | 11.26 | % | |||||||||||||||
|
Residential
mortgage
|
2,178 | 5.63 | % | 1,430 | 3.98 | % | 1,181 | 3.90 | % | |||||||||||||||
|
Unallocated
|
241 | - | 149 | - | 324 | - | ||||||||||||||||||
| $ | 19,123 | 100.00 | % | $ | 17,361 | 100.00 | % | $ | 10,233 | 100.00 | % | |||||||||||||
|
December
31, 2006
|
December
31, 2005
|
|||||||||||||||||||||||
|
%
Loan
|
%
Loan
|
|||||||||||||||||||||||
|
Type
to
|
Type
to
|
|||||||||||||||||||||||
|
Allowance
|
Total Loans
|
Allowance
|
Total Loans
|
|||||||||||||||||||||
|
Commercial
|
$ | 1,666 | 18.71 | % | $ | 1,200 | 17.53 | % | ||||||||||||||||
|
Commercial
mortgage
|
2,440 | 30.74 | % | 1,697 | 27.86 | % | ||||||||||||||||||
|
Construction
|
2,080 | 25.81 | % | 1,118 | 24.64 | % | ||||||||||||||||||
|
Direct
financing leases, net
|
1,005 | 8.72 | % | 975 | 11.89 | % | ||||||||||||||||||
|
Consumer
loans
|
517 | 10.17 | % | 365 | 8.94 | % | ||||||||||||||||||
|
Residential
mortgage
|
684 | 5.85 | % | 139 | 9.14 | % | ||||||||||||||||||
|
Unallocated
|
8 | - | 19 | - | ||||||||||||||||||||
| $ | 8,400 | 100.00 | % | $ | 5,513 | 100.00 | % | |||||||||||||||||
Summary of Loan and Lease Loss
Experience
. The following table summarizes our credit loss experience for
each of the periods indicated:
|
December
31,
|
||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
Balance
in the allowance for loan and lease losses at
|
||||||||||||||||||||
|
beginning
of period
|
$ | 17,361 | $ | 10,233 | $ | 8,400 | $ | 5,513 | $ | 3,593 | ||||||||||
|
Loans
charged-off:
|
||||||||||||||||||||
|
Commercial
|
6,314 | 733 | 2,545 | 8 | 123 | |||||||||||||||
|
Construction
|
4,546 | 2,744 | 1,084 | - | - | |||||||||||||||
|
Lease
financing
|
49 | 55 | 35 | 93 | 70 | |||||||||||||||
|
Residential
mortgage
|
328 | 1,992 | - | - | - | |||||||||||||||
|
Consumer
|
127 | 9 | 8 | - | 2 | |||||||||||||||
|
Total
|
11,364 | 5,533 | 3,672 | 101 | 195 | |||||||||||||||
|
Recoveries:
|
||||||||||||||||||||
|
Commercial
|
53 | - | 73 | 12 | 15 | |||||||||||||||
|
Construction
|
32 | 152 | 10 | - | - | |||||||||||||||
|
Lease
financing
|
27 | 5 | 8 | - | - | |||||||||||||||
|
Residential
mortgage
|
12 | - | - | - | - | |||||||||||||||
|
Consumer
|
2 | 4 | 14 | 1 | - | |||||||||||||||
|
Total
|
126 | 161 | 105 | 13 | 15 | |||||||||||||||
|
Net
charge-offs
|
11,238 | 5,372 | 3,567 | 88 | 180 | |||||||||||||||
|
Provision
charged to operations
|
13,000 | 12,500 | 5,400 | 2,975 | 2,100 | |||||||||||||||
|
Balance
in allowance for loan and lease losses at end
|
||||||||||||||||||||
|
of
period
|
$ | 19,123 | $ | 17,361 | $ | 10,233 | $ | 8,400 | $ | 5,513 | ||||||||||
|
Net
charge-offs/average loans
|
0.76 | % | 0.38 | % | 0.30 | % | 0.01 | % | 0.03 | % | ||||||||||
The
increase in charge-offs in 2009 compared to prior years was primarily the result
of defaults of three commercial loans, two commercial real estate and one
residential construction loan. The charge-offs in 2008 were primarily comprised
of one residential mortgage loan and one construction loan.
Non-Performing Loans
. Loans
are considered to be non-performing if they are on a non-accrual basis or terms
have been renegotiated to provide a reduction or deferral of interest or
principal because of a weakening in the financial position of the borrowers. 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. The following table summarizes our
non –performing loans, other real estate owned and our loans past due 90 days or
more still accruing interest.
|
December
31,
|
||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
Non-accrual
loans
|
$ | 12,270 | $ | 8,729 | $ | 1,169 | $ | - | $ | - | ||||||||||
|
Total
Non-performing loans
|
12,270 | 8,729 | 1,169 | - | - | |||||||||||||||
|
Other
real estate owned
|
459 | 4,600 | - | - | - | |||||||||||||||
|
Total
Non-performing assets
|
$ | 12,729 | $ | 13,329 | $ | 1,169 | $ | - | $ | - | ||||||||||
|
Loans
past due 90 days or more
|
12,994 | 4,055 | 8,673 | 668 | 538 | |||||||||||||||
Non-accrual
loans increased $3.5 million to $12.3 million at December 31, 2009, as compared
to $8.7 million at December 31, 2008. The higher level of non-accrual loans was
mainly due to increases in the non-accrual status of commercial loans of $3.4
million, commercial mortgages of $591,000 and consumer loans of
$149,000. The increases were partially offset by decreases in the
non-accrual construction loans of $320,000 and non-accrual residential mortgages
of $270,000. The increase in non-accrual commercial loans included
one relationship totaling $2.0 million and three relationships totaling $1.5
million. The 2008 non-accrual balance was primarily due to increases in
residential construction and commercial mortgages non-accruals.
Deposits
. A
primary source for funding is deposit accumulation. We offer a variety of
deposit accounts with a range of interest rates and terms, including savings
accounts, checking accounts, money market savings accounts and certificates of
deposit. While the flow of deposits is influenced significantly by general
economic conditions, changes in money market rates, prevailing interest rates
and competition, we expect continued growth in private label banking, stored
value (prepaid), healthcare accounts and merchant card processing
balances. We maintain deposits for various affiliated companies
totaling approximately $10.4 million at December 31, 2009, as compared to
$24.9 million at December 31, 2008. The majority of these deposits are
short-term in nature and rates are consistent with market rates. At December 31,
2009, we had total deposits of $1.65 billion as compared to $1.52 billion at
December 31, 2008. The increase is primarily a result of growth in our
transaction deposits, as time deposits decreased $238.0 million during the same
period. The following table presents the average balance and rates
paid on deposits for the periods indicated:
|
December
31, 2009
|
December
31, 2008
|
December
31, 2007
|
||||||||||||||||||||||
|
Average
|
Average
|
Average
|
Average
|
Average
|
Average
|
|||||||||||||||||||
|
balance
|
Rate
|
balance
|
Rate
|
balance
|
Rate
|
|||||||||||||||||||
|
(
dollars in thousands)
|
||||||||||||||||||||||||
|
Demand
(non-interest bearing)
|
$ | 529,477 | - | $ | 242,859 | - | $ | 88,889 | - | |||||||||||||||
|
Interest
checking
|
365,715 | 1.46 | % | 183,996 | 2.44 | % | 93,491 | 3.04 | % | |||||||||||||||
|
Savings
and money market
|
516,356 | 1.39 | % | 498,156 | 2.81 | % | 520,365 | 4.56 | % | |||||||||||||||
|
Time
|
151,791 | 1.65 | % | 455,165 | 3.99 | % | 424,448 | 5.35 | % | |||||||||||||||
|
Total
deposits
|
$ | 1,563,339 | 0.96 | % | $ | 1,380,176 | 2.66 | % | $ | 1,127,193 | 4.37 | % | ||||||||||||
At
December 31, 2009, we had $137.2 million of certificate of deposit accounts
maturing in one year or less. At December 31, 2009, 2008 and 2007,
approximately 7.6%, 23.5% and 30.6% respectively, of deposits consisted of
institutional (brokered) deposits. Such funding has become a
significantly less important component of our funding mix in 2009.
The
remaining maturity of certificates of deposit greater than $100,000 as of
December 31, 2009, was as follows:
|
Amount
|
||||
|
(in
thousands)
|
||||
|
Three
months or less
|
$ | 6,276 | ||
|
Three
to six months
|
2,605 | |||
|
Six
to twelve months
|
3,049 | |||
|
Greater
than twelve months
|
5,635 | |||
|
Total
|
$ | 17,565 | ||
Borrowings:
We had $100.0
million at December 31, 2009, $61.0 million at December 31, 2008, and $90.0
million at December 31, 2007, in advances outstanding from the Federal Home
Loan Bank and other financial institutions. The advances mature on a daily basis
and are collateralized with investment securities and loans. We also use the
federal funds market to cover short-term (generally one day or less) cash
demands. To a lesser extent, we have used securities sold under agreements to
repurchase to fund short-term cash demands. The Bank also has several
lines of credit, which we discussed in “Liquidity and Capital
Resources”. We had no outstanding balances on these lines of credit
at December 31, 2009. We do not have any policy prohibiting us from incurring
debt. We anticipate that, under current circumstances, any borrowing, other than
through the federal funds market, securities sold under agreements to repurchase
or the lines of credit will continue to be from the Federal Home Loan Bank
system.
|
As
of or for the year ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(dollars
in thousands)
|
||||||||||||
|
Securities
sold under repurchase agreements
|
||||||||||||
|
Balance
at year-end
|
$ | 2,588 | $ | 9,419 | $ | 3,846 | ||||||
|
Average
during the year
|
2,175 | 2,568 | 3,006 | |||||||||
|
Maximum
month-end balance
|
3,847 | 9,419 | 6,798 | |||||||||
|
Weighted
average rate during the year
|
1.18 | % | 1.99 | % | 1.73 | % | ||||||
|
Rate
at December 31
|
1.02 | % | 1.57 | % | 2.07 | % | ||||||
|
Short-term
borrowings and federal funds
|
||||||||||||
|
purchased
|
||||||||||||
|
Balance
at year-end
|
$ | 100,000 | $ | 61,000 | $ | 90,000 | ||||||
|
Average
during the year
|
44,895 | 123,558 | 86,049 | |||||||||
|
Maximum
month-end balance
|
105,000 | 203,250 | 230,000 | |||||||||
|
Weighted
average rate during the year
|
0.73 | % | 2.58 | % | 5.14 | % | ||||||
|
Rate
at December 31
|
0.65 | % | 0.67 | % | 3.84 | % | ||||||
As of
December 31, 2009, we have two established statutory business trusts: The
Bancorp Capital Trust II and The Bancorp Capital Trust III
(Trusts). In each case, we own all the common securities of the
trust. These trusts issued preferred capital securities to investors
and invested the proceeds in us through the purchase of junior subordinated
debentures issued by us. These debentures are the sole assets of the
trusts.
|
|
·
|
The
$10.3 million of debentures issued to The Bancorp Capital Trust II on
November 28,
2007,
mature on March 15, 2038 and bear interest at an annual fixed rate of
7.55% through March 15, 2013, and for each successive distribution date at
an annual rate equal to 3-month LIBOR plus
3.25%.
|
|
|
·
|
The
$3.1 million of debentures issued to The Bancorp Capital Trust III on
November 28, 2007 mature on March 15, 2038, and currently bear interest at
a floating annual rate equal to 3-month LIBOR plus
3.25%.
|
Shareholders’
equity
At
December 31, 2009, we had $245.2 million in shareholders’ equity. During the
third quarter of 2009, the Company completed a stock offering and issued 11.5
million shares of its common stock at a price of $5.75 per share resulting in
gross proceeds of approximately $66.1 million. The Company recorded $11.5
million in common stock and $50.6 million in additional paid in capital from the
stocking offering. Additionally, the Company converted all of its shares of
series A preferred stock, which had a liquidation value $1,081,360 into 117,372
shares of its common stock.
During
2009, we had $32,000 and $2.3 million in dividends accrued on our Series A and B
preferred stock, respectively. In the second quarter of 2009, we finalized our
valuation of the allocated fair value of the common stock warrants that were
issued in conjunction with the Series B preferred stock that we issued to the
U.S. Treasury Department through our participation in the TARP Capital Purchase
Program. The final valuation of the warrants resulted in $7.3 million being
allocated to additional paid-in capital from preferred stock. We recognized
accretion of $1.5 million related to the common stock warrants during
2009.
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 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, 2009 were our commitments to extend credit, which were
approximately $301.8 million, and standby letters of credit, which were
approximately $14.4 million, at December 31, 2009.
Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and many require the
payment of a fee. Standby letters of credit are conditional commitments issued
that guarantee the performance of a customer to a third party. Since we expect
that many of the commitments or letters of credit we issue will not be fully
drawn upon, the total commitment or letter of credit amounts do not necessarily
represent future cash requirements. We evaluate each customer’s creditworthiness
on a case-by-case basis. We base the amount of collateral we obtain when we
extend credit on our credit evaluation of the customer. Collateral held varies
but may include real estate, marketable securities, pledged deposits, equipment
and accounts receivable.
Contractual
Obligations and Other Commitments
The
following table sets forth our contractual obligations and other commitments,
including off-balance sheet commitments, representing required and potential
cash outflows as of December 31, 2009:
|
Total
|
Less
than
one year
|
One
to
three
years
|
Four
to
five
years
|
After
five
years
|
||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
Minimum
annual rentals on
|
||||||||||||||||||||
|
noncancellable
operating leases
|
$ | 12,464 | $ | 2,047 | $ | 4,125 | $ | 3,251 | $ | 3,041 | ||||||||||
|
Remaining
contractual maturities of
|
||||||||||||||||||||
|
time
deposits
|
142,820 | 137,185 | 4,942 | - | 693 | |||||||||||||||
|
Loan
commitments
|
301,840 | 82,934 | 32,747 | 2,678 | 183,481 | |||||||||||||||
|
Subordinated
debenture
|
13,401 | - | - | - | 13,401 | |||||||||||||||
|
Interest
expense on subordinated
|
||||||||||||||||||||
|
debenture
(2)
|
24,262 | 860 | 1,720 | 1,720 | 19,962 | |||||||||||||||
|
Dividends
on preferred stock
(1)
|
29,273 | 2,261 | 4,522 | 6,426 | 16,064 | |||||||||||||||
|
Standby
letters of Credit
|
14,369 | 10,207 | 4,162 | - | - | |||||||||||||||
|
Total
|
$ | 538,429 | $ | 235,494 | $ | 52,218 | $ | 14,075 | $ | 236,642 | ||||||||||
|
(1)
Term is unlimited, presentation assumes a 10 year term for this
table.
|
||||
| (2) Presentation assumes a weighted average interest rate of 6.62%. |
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 18, to the
consolidated financial statements included in this report and is incorporated
herein by this reference.
Information
with respect to quantitative and qualitative disclosures about market risk is
included in the information provided under “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” at Item 7
hereof.
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors and Shareholders
The
Bancorp, Inc.
We have
audited the accompanying consolidated balance sheets of The Bancorp, Inc. (a
Delaware Corporation) and its subsidiary as of December 31, 2009 and 2008, and
the related consolidated statements of operations, shareholders’ equity and cash
flows for each of the three years in the period ended December 31, 2009. These
consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As
discussed in Note B to the consolidated financial statements, the Company
adopted FASB ASC 820 Fair Value Measurements and Disclosures, in
2008.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of The Bancorp, Inc. and its
subsidiary as of December 31, 2009 and 2008, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2009 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), The Bancorp, Inc. and its subsidiary’s internal
control over financial reporting as of December 31, 2009, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) and our report dated
March 16, 2010 expressed an unqualified opinion.
/s/ Grant
Thornton LLP
Philadelphia,
Pennsylvania
March 16,
2010
|
THE
BANCORP, INC. AND SUBSIDIARY
|
||||||||
|
|
||||||||
|
December
31,
|
December
31,
|
|||||||
|
2009
|
2008
|
|||||||
|
(in
thousands)
|
||||||||
|
ASSETS
|
||||||||
|
Cash
and cash equivalents
|
||||||||
|
Cash
and due from banks
|
$ | 135,246 | $ | 90,744 | ||||
|
Interest
bearing deposits
|
219,213 | 1,033 | ||||||
|
Federal
funds sold
|
- | 87,729 | ||||||
|
Total
cash and cash equivalents
|
354,459 | 179,506 | ||||||
|
Investment
securities, available-for-sale, at fair value
|
93,478 | 82,929 | ||||||
|
Investment
securities, held-to-maturity (fair value $15,415 and $18,408,
respectively)
|
21,468 | 23,529 | ||||||
|
Loans,
net of deferred loan costs
|
1,523,722 | 1,449,349 | ||||||
|
Allowance
for loan and lease losses
|
(19,123 | ) | (17,361 | ) | ||||
|
Loans,
net
|
1,504,599 | 1,431,988 | ||||||
|
Premises
and equipment, net
|
7,942 | 8,279 | ||||||
|
Accrued
interest receivable
|
7,722 | 7,799 | ||||||
|
Intangible
assets, net
|
10,005 | 11,005 | ||||||
|
Other
real estate owned
|
459 | 4,600 | ||||||
|
Deferred
tax asset, net
|
20,875 | 22,847 | ||||||
|
Other
assets
|
22,527 | 19,893 | ||||||
|
Total
assets
|
$ | 2,043,534 | $ | 1,792,375 | ||||
|
LIABILITIES
|
||||||||
|
Deposits
|
||||||||
|
Demand
(non-interest bearing)
|
$ | 506,641 | $ | 334,498 | ||||
|
Savings,
money market and interest checking
|
1,005,048 | 804,502 | ||||||
|
Time
deposits
|
125,255 | 357,831 | ||||||
|
Time
deposits, $100,000 and over
|
17,565 | 23,016 | ||||||
|
Total
deposits
|
1,654,509 | 1,519,847 | ||||||
|
Securities
sold under agreements to repurchase
|
2,588 | 9,419 | ||||||
|
Short-term
borrowings
|
100,000 | 61,000 | ||||||
|
Accrued
interest payable
|
362 | 2,475 | ||||||
|
Subordinated
debenture
|
13,401 | 13,401 | ||||||
|
Other
liabilities
|
27,471 | 5,830 | ||||||
|
Total
liabilities
|
1,798,331 | 1,611,972 | ||||||
|
SHAREHOLDERS'
EQUITY
|
||||||||
|
Preferred
stock - authorized 5,000,000 shares, series A, $0.01
par value; 0 and 108,136
|
- | 1 | ||||||
|
shares
issued and outstanding at December 31, 2009 and 2008,
respectively
|
||||||||
|
Series
B, $1,000 liquidation value, 45,220 shares issued and
outstanding
|
39,411 | 39,028 | ||||||
|
at
December 31, 2009 and 2008, respectively
|
||||||||
|
Common
stock - authorized, 50,000,000 shares of $1.00 par value; 26,181,291 and
14,563,919
|
||||||||
|
shares
issued and outstanding at December 31, 2009 and 2008,
respectively
|
26,181 | 14,563 | ||||||
|
Additional
paid-in capital
|
196,875 | 145,156 | ||||||
|
Accumulated
deficit
|
(17,175 | ) | (17,517 | ) | ||||
|
Accumulated
other comprehensive loss
|
(89 | ) | (828 | ) | ||||
|
Total
shareholders' equity
|
245,203 | 180,403 | ||||||
|
Total
liabilities and shareholders' equity
|
$ | 2,043,534 | $ | 1,792,375 | ||||
The
accompanying notes are an integral part of these statements.
|
THE
BANCORP, INC. AND SUBSIDIARY
|
||||||||||||
|
|
||||||||||||
|
For
the year ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(in
thousands, except per share data)
|
||||||||||||
|
Interest
income
|
||||||||||||
|
Loans,
including fees
|
$ | 73,304 | $ | 87,966 | $ | 96,690 | ||||||
|
Interest
on investment securities:
|
||||||||||||
|
Taxable
interest
|
5,017 | 6,104 | 6,699 | |||||||||
|
Tax-exempt
interest
|
1,347 | - | - | |||||||||
|
Federal
funds sold
|
234 | 954 | 3,072 | |||||||||
|
Interest
bearing deposits
|
87 | 38 | 76 | |||||||||
| 79,989 | 95,062 | 106,537 | ||||||||||
|
Interest
expense
|
||||||||||||
|
Deposits
|
15,042 | 36,645 | 49,313 | |||||||||
|
Securities
sold under agreements to repurchase
|
26 | 51 | 52 | |||||||||
|
Short-term
borrowings
|
329 | 3,193 | 4,419 | |||||||||
|
Subordinated
debt
|
883 | 954 | 84 | |||||||||
| 16,280 | 40,843 | 53,868 | ||||||||||
|
Net
interest income
|
63,709 | 54,219 | 52,669 | |||||||||
|
Provision
for loan and lease losses
|
13,000 | 12,500 | 5,400 | |||||||||
|
Net
interest income after provision for loan and lease losses
|
50,709 | 41,719 | 47,269 | |||||||||
|
Non-interest
income
|
||||||||||||
|
Service
fees on deposit accounts
|
1,375 | 1,184 | 901 | |||||||||
|
Merchant
credit card deposit fees
|
705 | 973 | 1,004 | |||||||||
|
Stored
value processing fees
|
7,965 | 8,768 | 369 | |||||||||
|
Gain/loss
on sales of investment securities
|
1,106 | - | (2 | ) | ||||||||
|
Other
than temporary impairment on securities available-for-sale
(1)
|
(2,225 | ) | (19,886 | ) | - | |||||||
|
Leasing
income
|
1,183 | 115 | 2,104 | |||||||||
|
ACH
processing fees
|
543 | 265 | 299 | |||||||||
|
Other
|
1,167 | 978 | 2,939 | |||||||||
|
Total
non-interest income (loss)
|
11,819 | (7,603 | ) | 7,614 | ||||||||
|
Non-interest
expense
|
||||||||||||
|
Salaries
and employee benefits
|
23,317 | 21,302 | 14,917 | |||||||||
|
Depreciation
and amortization
|
2,710 | 2,495 | 1,644 | |||||||||
|
Rent
and related occupancy cost
|
2,592 | 2,167 | 1,303 | |||||||||
|
Data
processing expense
|
6,756 | 4,157 | 2,914 | |||||||||
|
Advertising
|
870 | 776 | 653 | |||||||||
|
Audit
expense
|
1,697 | 1,653 | 1,422 | |||||||||
|
Legal
expense
|
1,975 | 1,007 | 640 | |||||||||
|
Amortization
of intangible assets
|
1,001 | 1,001 | - | |||||||||
|
Losses
on sale of other real estate owned
|
1,700 | - | - | |||||||||
|
FDIC
insurance
|
3,112 | 795 | 444 | |||||||||
|
Impairment
of goodwill
|
- | 51,888 | - | |||||||||
|
Other
|
10,448 | 10,147 | 7,268 | |||||||||
|
Total
non-interest expense
|
56,178 | 97,388 | 31,205 | |||||||||
|
Net
income before income taxes
|
6,350 | (63,272 | ) | 23,678 | ||||||||
|
Income
tax provision (benefit)
|
2,248 | (20,892 | ) | 9,338 | ||||||||
|
Net
income (loss)
|
4,102 | (42,380 | ) | 14,340 | ||||||||
|
Less
preferred stock dividends and accretion
|
(3,760 | ) | (243 | ) | (68 | ) | ||||||
|
Income
allocated to Series A preferred shareholders
|
- | - | (115 | ) | ||||||||
|
Net
income (loss) available to common shareholders
|
$ | 342 | $ | (42,623 | ) | $ | 14,157 | |||||
|
Net
income (loss) per share - basic
|
$ | 0.02 | $ | (2.93 | ) | $ | 1.02 | |||||
|
Net
income (loss) per share - diluted
|
$ | 0.02 | $ | (2.93 | ) | $ | 0.98 | |||||
|
(1)
|
Other-than-temporary
impairment was due to credit loss and therefore did not include
amounts due to market conditions.
|
The
accompanying notes are an integral part of these statements.
|
THE
BANCORP INC. AND SUBSIDIARY
|
||||||||||||||||||||||||||||||||
|
CONSOLIDATED
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
|
||||||||||||||||||||||||||||||||
|
Years
ended December 31, 2009, 2008 and 2007
|
||||||||||||||||||||||||||||||||
|
(in
thousands except share data)
|
||||||||||||||||||||||||||||||||
|
Retained
|
Accumulated
|
|||||||||||||||||||||||||||||||
|
Additional
|
earnings
|
other
|
||||||||||||||||||||||||||||||
|
Common
Stock
|
Common
|
Preferred
|
paid-in
|
(Accumulated
|
comprehensive
|
Comprehensive
|
||||||||||||||||||||||||||
|
shares
|
Stock
|
Stock
|
capital
|
deficit)
|
loss
|
income (loss)
|
Total
|
|||||||||||||||||||||||||
|
Balance
at December 31, 2006
|
13,724,023 | 13,724 | 1 | 125,572 | 10,834 | (1,270 | ) | 148,861 | ||||||||||||||||||||||||
|
Net
Income
|
14,340 | 14,340 | 14,340 | |||||||||||||||||||||||||||||
|
Preferred
Shares converted to Common Shares
|
7,043 | 7 | (7 | ) | - | |||||||||||||||||||||||||||
|
Common
Stock issued from stock-based compensation
|
||||||||||||||||||||||||||||||||
|
grants,
net of excess tax benefits
|
106,671 | 106 | 1,523 | 1,629 | ||||||||||||||||||||||||||||
|
Common
Stock issued during the acquisition
|
||||||||||||||||||||||||||||||||
|
of
Stored Value Solutions
|
722,733 | 723 | 11,389 | 12,112 | ||||||||||||||||||||||||||||
|
Cash
dividends on Series A preferred stock
|
(68 | ) | (68 | ) | ||||||||||||||||||||||||||||
|
Stock-based
compensation
|
331 | 331 | ||||||||||||||||||||||||||||||
|
Other
comprehensive loss, net of
|
||||||||||||||||||||||||||||||||
|
reclassification
adjustments and tax
|
- | - | - | - | - | (946 | ) | (946 | ) | (946 | ) | |||||||||||||||||||||
| $ | 13,394 | |||||||||||||||||||||||||||||||
|
Balance
at December 31, 2007
|
14,560,470 | $ | 14,560 | $ | 1 | $ | 138,808 | $ | 25,106 | $ | (2,216 | ) | $ | 176,259 | ||||||||||||||||||
|
Net
Income (loss)
|
(42,380 | ) | (42,380 | ) | (42,380 | ) | ||||||||||||||||||||||||||
|
Preferred
Shares converted to Common Shares
|
3,449 | 3 | (3 | ) | - | |||||||||||||||||||||||||||
|
Series
B Preferred stock issued to the U.S. Treasury
|
38,969 | 38,969 | ||||||||||||||||||||||||||||||
|
Common
stock warrant
|
6,251 | 6,251 | ||||||||||||||||||||||||||||||
|
Cash
dividends on preferred stock
|
(184 | ) | (184 | ) | ||||||||||||||||||||||||||||
|
Accretion
of the discount on series B preferred shares
|
59 | (59 | ) | - | ||||||||||||||||||||||||||||
|
Stock-based
compensation
|
100 | 100 | ||||||||||||||||||||||||||||||
|
Other
comprehensive income, net of
reclassification adjustments and
tax
|
- | - | - | - | - | 1,388 | 1,388 | 1,388 | ||||||||||||||||||||||||
| $ | (40,992 | ) | ||||||||||||||||||||||||||||||
|
Balance
at December 31, 2008
|
14,563,919 | $ | 14,563 | $ | 39,029 | $ | 145,156 | $ | (17,517 | ) | $ | (828 | ) | $ | 180,403 | |||||||||||||||||
|
Net
Income
|
4,102 | 4,102 | 4,102 | |||||||||||||||||||||||||||||
|
Cash
dividends on preferred shares
|
(2,293 | ) | (2,293 | ) | ||||||||||||||||||||||||||||
|
Common
stock warrant
|
(1,084 | ) | 1,084 | - | ||||||||||||||||||||||||||||
|
Common
stock offering, net of offering costs
|
11,500,000 | 11,500 | 50,599 | 62,099 | ||||||||||||||||||||||||||||
|
Series
A preferred shares converted to common shares
|
117,372 | 118 | (1 | ) | (117 | ) | - | |||||||||||||||||||||||||
|
Accretion
of the discount on series B preferred shares
|
1,467 | - | (1,467 | ) | - | |||||||||||||||||||||||||||
|
Stock-based
compensation expense
|
153 | 153 | ||||||||||||||||||||||||||||||
|
Other
comprehensive income, net of
|
||||||||||||||||||||||||||||||||
|
reclassification
adjustments and tax
|
- | - | - | - | - | 739 | 739 | 739 | ||||||||||||||||||||||||
| $ | 4,841 | |||||||||||||||||||||||||||||||
|
Balance
at December 31, 2009
|
26,181,291 | $ | 26,181 | $ | 39,411 | $ | 196,875 | $ | (17,175 | ) | $ | (89 | ) | $ | 245,203 | |||||||||||||||||
The
accompanying notes are an integral part of these statements.
|
THE
BANCORP, INC. AND SUBSIDIARY
|
||||||||||||
|
|
||||||||||||
|
(in
thousands)
|
||||||||||||
|
Years
ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Operating
activities
|
||||||||||||
|
Net
income (loss)
|
$ | 4,102 | $ | (42,380 | ) | $ | 14,340 | |||||
|
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities
|
||||||||||||
|
Depreciation
and amortization
|
3,881 | 3,476 | 1,644 | |||||||||
|
Provision
for loan and lease losses
|
13,000 | 12,500 | 5,400 | |||||||||
|
Net
amortization of investment securities discounts/premiums
|
70 | 165 | (514 | ) | ||||||||
|
(Gain)
Loss on sale of investment securities
|
(1,106 | ) | - | 2 | ||||||||
|
Stock-based
compensation expense
|
153 | 100 | 331 | |||||||||
|
Mortgage
loans originated for sale
|
(5,977 | ) | (5,016 | ) | (6,831 | ) | ||||||
|
Sale
of mortgage loans originated for resale
|
6,008 | 5,034 | 6,866 | |||||||||
|
Gain
on sale of mortgage loans originated for resale
|
(31 | ) | (18 | ) | (35 | ) | ||||||
|
Impairment
of goodwill
|
- | 51,888 | - | |||||||||
|
Deferred
income tax expense (benefit)
|
1,239 | (19,254 | ) | 171 | ||||||||
|
Gain
on sales of fixed assets
|
(39 | ) | (10 | ) | (2 | ) | ||||||
|
Net
gain on sales of loans
|
- | - | (3 | ) | ||||||||
|
Other
than temporary impairment on securities available-for-sale
|
2,225 | 19,886 | - | |||||||||
|
Loss
on sale of other real estate owned
|
1,700 | - | - | |||||||||
|
(Increase)
decrease in accrued interest receivable
|
(189 | ) | 1,612 | (1,149 | ) | |||||||
|
(Decrease)
in interest payable
|
(2,113 | ) | (2,390 | ) | (1,611 | ) | ||||||
|
Decrease
(increase) in other assets
|
(2,909 | ) | (20,891 | ) | 235 | |||||||
|
Increase
(decrease) in other liabilities
|
27,15 7 | (2,126 | ) | 1,568 | ||||||||
|
Net
cash provided by operating activities
|
47,171 | 2,576 | 20,412 | |||||||||
|
Investing
activities
|
||||||||||||
|
Purchase
of investment securities available-for-sale
|
(151,398 | ) | (13,514 | ) | (21,129 | ) | ||||||
|
Proceeds
from redemptions and repayment on securities
available-for-sale
|
55,260 | 11,631 | 12,231 | |||||||||
|
Proceeds
from sales of investment securities available-for-sale
|
87,837 | - | 1,308 | |||||||||
|
Net
cash paid due to acquisitions, net of cash acquired
|
- | (50,423 | ) | |||||||||
|
Proceeds
from sale of other real estate owned
|
2,900 | - | ||||||||||
|
Net
increase in loans
|
(85,605 | ) | (167,894 | ) | (225,156 | ) | ||||||
|
Proceeds
from sale of fixed assets
|
162 | 164 | 135 | |||||||||
|
Purchases
of premises and equipment
|
(2,496 | ) | (4,268 | ) | (1,989 | ) | ||||||
|
Net
cash used in investing activities
|
(93,340 | ) | (173,881 | ) | (285,023 | ) | ||||||
|
Financing
activities
|
||||||||||||
|
Net
increase in deposits
|
129,147 | 247,044 | 209,063 | |||||||||
|
Net
increase (decrease) in securities sold under agreements to
repurchase
|
(6,831 | ) | 5,573 | (4,299 | ) | |||||||
|
(Repayment)
proceeds from short term borrowings
|
39,000 | (29,000 | ) | (10,000 | ) | |||||||
|
Proceeds
from issuance of common stock, net of cost
|
62,099 | - | ||||||||||
|
Proceeds
from issuance of subordinated debt
|
- | - | 13,401 | |||||||||
|
Proceeds
from issuance of preferred stock
|
- | 45,220 | - | |||||||||
|
Net
proceeds from the exercise of share based payments
|
- | - | 1,284 | |||||||||
|
Excess
tax benefits from share based payment arrangements
|
- | - | 267 | |||||||||
|
Dividends
paid on Series A and B preferred stock
|
(2,293 | ) | (184 | ) | (68 | ) | ||||||
|
Net
cash provided by financing activities
|
221,122 | 268,653 | 209,648 | |||||||||
|
Net
(decrease) increase in cash and cash equivalents
|
174,953 | 97,348 | (54,963 | ) | ||||||||
|
Cash
and cash equivalents, beginning of year
|
179,506 | 82,158 | 137,121 | |||||||||
|
Cash
and cash equivalents, end of year
|
$ | 354,459 | $ | 179,506 | $ | 82,158 | ||||||
|
Supplemental
disclosure:
|
||||||||||||
|
Interest
paid
|
$ | 18,394 | $ | 43,318 | $ | 55,479 | ||||||
|
Taxes
paid
|
$ | 1,401 | $ | 5,291 | $ | 7,903 | ||||||
|
Transfer
of assets from loans to other real estate owned
|
$ | 459 | $ | 4,600 | $ | 1,566 | ||||||
The
accompanying notes are an integral part of these statements.
THE
BANCORP, INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Note
A—Formation and Structure of Company
The
Bancorp, Inc. (the Company) is a Delaware corporation and a registered bank
holding company with a wholly owned subsidiary bank, The Bancorp Bank (the
Bank). The Bank is a Delaware chartered commercial bank located in Wilmington,
Delaware and is a Federal Deposit Insurance Corporation (FDIC) insured
institution. Through the Bank, the Company provides retail and commercial
banking services in the Philadelphia, Pennsylvania and Wilmington, Delaware
areas and related other banking services nationally, which include private label
banking, health savings accounts and prepaid debit cards. The principal medium
for the delivery of the Company’s deposit services is the Internet.
Prior to
September 30, 2009, the Company was registered as a financial holding company.
Because the Company had not engaged in businesses which are specific to a
financial holding company, it changed to a more simplified bank holding company
structure.
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 Accounting Policies
1. Basis
of Presentation
The
accounting and reporting policies of the Company conform to accounting
principles generally accepted in the United States of America and predominant
practices within the banking industry. The consolidated financial statements
include the accounts of the Company and the Bank. All inter-company balances
have been eliminated.
The
preparation of 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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those revenues.
The
principal estimates that are particularly susceptible to a significant change in
the near term relate to the allowance for loan and lease losses. The evaluation
of the adequacy of the allowance for loan and lease losses includes, among other
factors, an analysis of historical loss rates by category, applied to current
loan totals. However, actual losses may be higher or lower than historical
trends, which vary. Actual losses on specified problem loans, which also are
provided for in the evaluation, may vary from those estimated loss percentages,
which are established based upon a limited number of potential loss
classifications.
The
Company periodically reviews its investment portfolio to determine whether
unrealized losses on securities are temporary, based on evaluations of the
creditworthiness of the issuers or guarantors, and underlying collateral, as
applicable. In addition, it considers the continuing performance of the
securities. Credit losses are recognized through the income statement. If
management believes market value losses are temporary and it believes that it
has the ability and intention to hold those securities to maturity, the
reduction in value is recognized in other comprehensive income, through
equity.
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 deferred tax asset it is more likely than not to realize.
Realization of deferred tax assets is dependent upon the amount of taxable
income expected in future periods, as tax benefits require taxable income to be
realized. If a valuation allowance is required, the deferred tax asset on the
consolidated balance sheet is reduced via a corresponding income tax expense in
the consolidated statement of operations.
2. Cash
and Cash Equivalents
Cash and
cash equivalents are defined as cash on hand and amounts due from banks with an
original maturity of three months or less and federal funds sold.
3.
Investment Securities
Investments
in debt securities which the Company has both the ability and intent to hold to
maturity are carried at cost, adjusted for the amortization of premiums and
accretion of discounts computed by the level interest method. Investments in
debt and equity securities which management believes may be sold prior to
maturity due to changes in interest rates, prepayment risk, liquidity
requirements, or other factors, are classified as available-for-sale. Net
unrealized gains for such securities, net of tax effect, are reported as other
comprehensive income and excluded from the determination of net income. The
unrealized losses for both the held-to-maturity and available-for-sale
securities were evaluated to determine if credit loss existed. If a credit loss
is determined, other than temporary charge is recorded within the statement of
operations. 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.
In April
2009, the Financial Accounting Standards Board (FASB) updated the guidance
related to the recognition and presentation of other-than-temporary impairments
which modifies the recognition of other-than-temporary impairment (“impairment”)
for debt securities. This new guidance is also applied to certain equity
securities with debt-like characteristics (collectively “debt securities”).
Under this new guidance, an impairment on a debt security is deemed to be
other-than-temporarily impaired if it meets the following conditions: 1) the
Company intends to sell or it is more likely than not the Company will be
required to sell the security before a recovery in value, or 2) the Company does
not expect to recover the entire amortized cost basis of the security. If the
Company intends to sell or it is more likely than not the Company will be
required to sell the security before a recovery in value, a charge is
recorded in earnings equal to the difference between the fair value and
amortized cost basis of the security. For those other-than-temporarily impaired
debt securities which do not meet the first condition and for which the Company
does not expect to recover the entire amortized cost basis, the difference
between the security’s amortized cost basis and the fair value is separated into
the portion representing a credit impairment, which is recorded in earnings, and
the remaining impairment, which is recorded in other comprehensive income
(“OCI”). Generally, the Company determines a security’s credit impairment as the
difference between its amortized cost basis and its best estimate of expected
future cash flows discounted at the security’s effective yield prior to
impairment. The previous amortized cost basis less the impairment recognized in
net realized capital losses becomes the security’s new cost basis. The Company
accretes the new cost basis to the estimated future cash flows over the expected
remaining life of the security by prospectively adjusting the security’s yield,
if necessary.
The
Company evaluates whether a credit impairment exists by considering primarily
the following factors: (a) the length of time and extent to which the fair value
has been less than the amortized cost of the security, (b) changes in the
financial condition, credit rating and near-term prospects of the issuer, (c)
whether the issuer is current on contractually obligated interest and principal
payments, (d) changes in the financial condition of the security’s underlying
collateral and (e) the payment structure of the security. The Company’s best
estimate of expected future cash flows used to determine the credit loss amount
is a quantitative and qualitative process that incorporates information received
from third-party sources along with certain internal assumptions and judgments
regarding the future performance of the security. The Company’s best estimate of
future cash flows involves assumptions including, but not limited to, various
performance indicators, such as historical and projected default and recovery
rates, credit ratings, current delinquency rates, loan-to-value ratios and the
possibility of obligor refinancing. These assumptions require the use of
significant management judgment and include the probability of issuer default
and estimates regarding timing and amount of expected recoveries which may
include estimating the underlying collateral value. In addition, projections of
expected future debt security cash flows may change based upon new information
regarding the performance of the issuer and/or underlying collateral such as
changes in the projections of the underlying property value estimates. The
Company recognized an other-than-temporary impairment charge of $2.2 million
representing the amortized cost of a single trust preferred security in its
held-to-maturity portfolio. The amount of this credit impairment was calculated
by estimating the discounted cash flows for that security. The Company
reevaluated the other-than-temporary impairment charge in 2008, based on the
clarifying guidance issued in 2009, and determined the other-than-temporary
impairment charge in 2008 was related to credit loss.
FASB
ASC 815,
Derivatives and
Hedging,
requires that entities recognize all derivatives as either
assets or liabilities in the statement of financial condition and measure those
instruments at fair value. Depending upon the effectiveness of the hedge and/or
the transaction being hedged, any changes in the fair value of the derivative
instrument is either recognized in earnings in the current year, deferred to
future periods, or recognized in other comprehensive income. Changes in the fair
value of all derivative instruments not recognized as hedge accounting are
recognized in current year earnings. The Company did not engage in hedging as of
December 31, 2009 and 2008.
4. Loans
and Allowance for Loan and Lease Losses
Loans
that management has the intent and ability to hold for the foreseeable future or
until maturity or payoff are stated at the amount of unpaid principal and are
net of unearned discount, unearned loan fees and an allowance for loan and lease
losses. The allowance for loan and lease losses is established through a
provision for loan and lease losses charged to expense. Loan principal
considered to be uncollectible by management is charged against the allowance
for loan and lease losses. The allowance is an amount that management believes
will be adequate to absorb possible losses on existing loans that may become
uncollectible based upon an evaluation of known and inherent risks in the loan
portfolio. The evaluation takes into consideration such factors as changes in
the nature and size of the loan portfolio, overall portfolio quality, specific
problem loans, and current economic conditions which may affect the borrowers’
ability to pay. The evaluation also details historical losses by loan category,
the resulting loss rates for which are projected at current loan total amounts.
Loss estimates for specified problem loans are also detailed.
Interest
income is accrued as earned on a simple interest basis. Accrual of interest is
discontinued on a loan when management believes, after considering economic and
business conditions and collection efforts that the borrower’s financial
condition is such that collection of interest is doubtful. When a loan is placed
on non-accrual status, all accumulated accrued interest receivable applicable to
periods prior to the current year is charged off to the allowance for loan and
lease losses. Interest that had accrued in the current year is reversed out of
current period income. Loans 90 days or more past due and still accruing
interest must have both principal and accruing interest adequately secured and
must be in the process of collection.
The
Company accounts for impaired loans in accordance with FASB ASC topic 310,
Receivables
. This standard
requires that a creditor measure impairment based on the present value of
expected future cash flows discounted at the loan’s effective interest rate,
except that as a practical expedient, a creditor may measure impairment based on
a loan’s observable market price, or the fair value of the collateral if the
loan is collateral-dependent. Regardless of the measurement method, a creditor
must measure impairment based on the fair value of the collateral when the
creditor determines that foreclosure is probable.
Loans
originated and intended for sale in the secondary market are carried at the
lower of cost or estimated fair value in the aggregate. Net unrealized losses,
if any, are recognized through a valuation allowance by charges to income.
Servicing is not retained on residential mortgage sales. At December 31, 2009
and 2008, the Company had no loans available-for-sale.
FASB ASC
460,
Guarantees
,
requires a guarantor entity, at the inception of a guarantee covered by the
measurement provisions of the interpretation, to record a liability for the fair
value of the obligation undertaken in issuing the guarantee. The Company
previously did not record an initial liability when guaranteeing obligations,
except for fees received at issuance, unless it became probable that the Company
would have to perform under the guarantee.
5.
Premises and Equipment
Premises
and equipment, including leasehold improvements, are stated at cost less
accumulated depreciation. Depreciation expense is computed on the straight-line
method over the useful lives of the assets. Leasehold improvements are
depreciated over the shorter of the estimated useful lives of the improvements
or the terms of the related leases.
6.
Internal Use Software
The
Company capitalizes costs associated with internally developed and/or purchased
software systems for new products and enhancements to existing products that
have reached the application stage and meet recoverability tests. Capitalized
costs include external direct costs of materials and services utilized in
developing or obtaining internal use software, payroll and payroll related
expenses for employees who are directly associated with and devote time to the
internal use software project and interest costs incurred, if material, while
developing internal use software. 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 three to seven years. As of December 31, 2009 and 2008,
the Company had capitalized total software costs of approximately $591,000 and
$265,000, respectively. The Company recorded amortization expense of
approximately $172,000, $18,000 and $133,000 for the years ended
December 31, 2009, 2008, and 2007, 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 financial statements 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 financial statements
only after determining that the relevant tax authority would more likely than
not sustain the position following an audit. For tax positions meeting the
more-likely-than-not threshold, the amount recognized in the 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. At the adoption date, the Company applied this policy to all tax
positions for which the statute of limitations remained open, but the adoption
did not materially impact the Company’s consolidated balance sheet or statement
of operations. Any interest and penalties related to uncertain tax positions
are recognized in income tax (benefit) expense in the consolidated
statement of operations.
8.
Share-Based Compensation
The
Company recognizes compensation expense for stock options in accordance with
FASB ASC topic 718,
Compensation—Stock
Compensation
. The expense of the option is generally measured at fair
value at the grant date with compensation expense recognized over the service
period, which is usually the vesting period. For grants subject to a service
condition, the Company utilizes the Black-Scholes option-pricing model to
estimate the fair value of each option on the date of grant. The Black-Scholes
model takes into consideration the exercise price and expected life of the
options, the current price of the underlying stock and its expected volatility,
the expected dividends on the stock and the current risk-free interest rate for
the expected life of the option. The Company’s estimate of the fair value of a
stock option is based on expectations derived from historical experience and may
not necessarily equate to its market value when fully vested. In accordance with
ASC topic 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 the lower of cost or estimated fair market
value less cost of disposal. When property is acquired, the excess, if any, of
the loan balance over fair market value is charged to the allowance for loan and
lease losses. Periodically thereafter, the asset is reviewed for subsequent
declines in the estimated fair market value. Subsequent declines, if any, and
holding costs, as well as gains and losses on subsequent sale, are included in
the consolidated statements of operations. We recorded $459,000 and $4.6 million
in other real estate owned at December 31, 2009 and 2008,
respectively.
10.
Advertising Costs
The
Company expenses advertising costs as incurred.
11.
Earnings (loss) per Share
The
Company calculates earnings per share under the FASB ASC 260,
Earnings Per Share.
Basic
earnings (loss) per share exclude dilution and are computed by dividing income
(loss) available to common shareholders by the weighted average common shares
outstanding during the period. Diluted earnings (loss) 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.
|
Year
ended December 31, 2009
|
||||||||||||
|
Income
|
Shares
|
Per
share
|
||||||||||
|
(numerator)
|
(denominator)
|
amount
|
||||||||||
|
(dollars
in
thousands except for per share amount)
|
||||||||||||
|
Basic
earnings per share
|
||||||||||||
|
Net
income available to common shareholders
|
$ | 342 | 18,794,590 | $ | 0.02 | |||||||
|
Effect
of dilutive securities
|
||||||||||||
|
Share
based compensation awards
|
||||||||||||
|
Common
stock warrants
|
- | 529,745 | - | |||||||||
|
Diluted
earnings per share
|
||||||||||||
|
Net
income available to common stockholders
|
||||||||||||
|
plus
assumed conversions
|
$ | 342 | 19,324,335 | $ | 0.02 | |||||||
Stock
options for 1,322,864 shares of common stock at exercise prices of $10.00 to
$25.43 per share were outstanding at December 31, 2009 but were not
included in the dilutive shares because the exercise price was greater than the
average market price.
For the
year ended December 31, 2008, the Company had a loss of $2.93
per share with weighted average shares of 14,563,182. Convertible
Series A preferred stock of 108,136 shares and stock options for 1,503,737 of
common stock at exercise prices of $10.00 to $25.43 per share were outstanding
but were not included in the computation of diluted loss per share because we
had a net loss for the period.
|
Year
ended December 31, 2007
|
||||||||||||
|
Income
|
Shares
|
Per
share
|
||||||||||
|
(numerator)
|
(denominator)
|
amount
|
||||||||||
|
(dollars
in
thousands except for per share amount)
|
||||||||||||
|
Basic
earnings per share
|
||||||||||||
|
Net
income available to common shareholders
|
$ | 14,157 | 13,859,066 | $ | 1.02 | |||||||
|
Effect
of dilutive securities
|
||||||||||||
|
Options
|
- | 537,003 | (0.04 | ) | ||||||||
|
Diluted
earnings per share
|
||||||||||||
|
Net
income available to common stockholders
|
||||||||||||
|
plus
assumed conversions
|
$ | 14,157 | 14,396,069 | $ | 0.98 | |||||||
At
December 31, 2007, 111,585 shares of convertible Series A Preferred Stock
were outstanding but were not included in the computation of diluted earnings
per share because, upon their assumed conversion to common stock, they were
anti-dilutive to diluted earnings per share. Stock options for
12,000 shares of common stock at exercise prices of $24.18 to $25.43 per share
were outstanding at December 31, 2007 but were not included in the weighted
average shares because the exercise price was greater than the average market
price.
12.
Variable Interest Entities
As of
December 31, 2009, the Company had two statutory business trusts, The Bancorp
Capital Trust II and The Bancorp Capital Trust III (the Trusts) which qualify as
variable interest entities under the ASC section 810,
Consolidation.
Accordingly,
the Company is not considered the primary beneficiary and therefore the trusts
are not consolidated in the Company’s financial statements. The trusts are
accounted for under the equity method of accounting.
13. Other
Comprehensive Income
Other comprehensive income (loss)
consists of revenues, expenses, gains, and losses that bypass the statement of
operations and are reported directly in a separate component of
equity.
The
income tax effects allocated to comprehensive income (loss) are as follows (in
thousands):
|
December
31, 2009
|
|||||||||||||
|
Before tax
|
Tax benefit
|
Net of
|
|||||||||||
|
amount
|
(expense)
|
tax amount
|
|||||||||||
|
Unrealized
losses on investment securities
|
|||||||||||||
|
Unrealized
gain arising during period
|
$ | 2,024 | $ | 688 | $ | 1,336 | |||||||
|
Less:
Reclassification adjustments for gains realized in net
income
|
1,106 | 384 | 722 | ||||||||||
|
Reclassification
adjustments for OTTI on HTM (1) realized in net loss
|
(140 | ) | (49 | ) | (91 | ) | |||||||
|
Amortization
of unrealized losses on HTM (1) securities previously held as
AFS
|
53 | 19 | 34 | ||||||||||
|
Other
comprehensive income, net
|
$ | 1,111 | $ | 372 | $ | 739 | |||||||
|
(1)
|
Reclassifications
from other comprehensive income (loss) into net income (loss) are
recorded over the life of the security or upon the determination of
other-than-temporary impairment (OTTI).
|
||||||||||||
|
December
31, 2008
|
|||||||||||||
|
Before tax
|
Tax benefit
|
Net of
|
|||||||||||
|
amount
|
(expense)
|
tax amount
|
|||||||||||
|
Unrealized
losses on investment securities
|
|||||||||||||
|
Unrealized
losses arising during period
|
$ | (8,635 | ) | $ | 3,022 | $ | (5,613 | ) | |||||
|
Less:
Reclassification adjustments for OTTI on AFS realized in
|
|||||||||||||
|
net
loss
|
(8,000 | ) | 2,800 | (5,200 | ) | ||||||||
|
Reclassification
adjustments for OTTI on HTM (1) realized in
|
|||||||||||||
|
net
loss
|
(2,869 | ) | 1,004 | (1,865 | ) | ||||||||
|
Amortization
of unrealized losses on HTM (1) securities previously held as
AFS
|
98 | (34 | ) | 64 | |||||||||
|
Other
comprehensive income, net
|
$ | 2,136 | $ | (748 | ) | $ | 1,388 | ||||||
|
(1)
|
Unrealized
losses on investment securities transferred from available-for-sale (AFS)
to held-to-maturity (HTM) on July 1, 2008 are included in other
comprehensive income. Reclassifications from other comprehensive income
(loss) into net income (loss) are recorded over the life of the security
or upon the determination of other-than-temporary impairment
(OTTI).
|
||||||||||||
|
December
31, 2007
|
||||||||||||
|
Before tax
|
Tax benefit
|
Net of
|
||||||||||
|
amount
|
(expense)
|
tax amount
|
||||||||||
|
Unrealized
losses on investment securities
|
||||||||||||
|
Unrealized
losses arising during period
|
$ | (1,484 | ) | $ | 538 | $ | (946 | ) | ||||
|
Less
reclassification adjustment for gains realized in net
losses
|
- | - | - | |||||||||
|
Other
comprehensive loss, net
|
$ | (1,484 | ) | $ | 538 | $ | (946 | ) | ||||
14.
Restrictions on Cash and Due from Banks
The Bank
is required to maintain reserves against customer demand deposits by keeping
cash on hand or balances with the Federal Reserve Bank. The amount of those
reserves and cash balances at December 31, 2009 and 2008 were approximately
$91.4 million and $24.0 million, respectively.
15. Other
Identifiable Intangible Assets
The
Company accounts for its customer list in accordance with FASB ASC 350,
Intangibles—Goodwill and
Other.
The acquisition of the Stored Value Solutions
division of Marshall Bank First in 2007 resulted in a customer list intangible
of $12.0 million which is being amortized over a 12 year period.
Amortization expense is $1.0 million per year.
The gross
carrying value and accumulated amortization related to the customer list
intangible at December 31, 2009 and 2008 are presented below.
| December 31, | |||||||||||||||||||
| 2009 | 2008 | ||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | ||||||||||||||||
| (in thousands) | |||||||||||||||||||
|
Customer
list intangible
|
$ | 12,006 | $ | 2,001 | $ | 12,006 | $ | 1,001 | |||||||||||
16.
Business Segments
FASB ASC
280,
Segment Reporting
,
establishes standards for the way business enterprises report information about
operating segments in annual financial statements. The Company had one
reportable segment in 2009, 2008 and 2007 which consisted
of Community Banking.
17.
Reclassifications
Certain
reclassifications have been made to the 2008 and 2007 financial statements to
conform to the 2009 presentation.
18.
Recent Accounting Pronouncements
Financial
Accounting Standards Board (“FASB”) Accounting Standards
Codification
In July 2009, the FASB implemented the FASB Accounting
Standards Codification (the “Codification”) as the single source of
authoritative U.S. generally accepted accounting principles. The
Codification simplifies the classification of accounting standards into one
online database under a common referencing system, organized into eight
different areas, ranging from industry-specific to general financial statement
matters. Use of the Codification is effective for interim and annual periods
ending after September 15, 2009. The Company began to use the Codification
on the effective date and it had no impact on our financial statements. However,
throughout these consolidated financial statements, all references to prior
FASB, AICPA and EITF accounting pronouncements have been removed and all non-SEC
accounting guidance is referred to in terms of the applicable subject
matter.
Transfers of
financial assets
In February 2008, the FASB issued guidance on the
accounting for transfers of financial assets and repurchase financing
transactions. Under this guidance, the initial transfer of a financial asset and
a repurchase financing involving the same asset that is entered into
contemporaneously with, or in contemplation of, the initial transfer, is
presumptively linked and are considered part of the same arrangement. This
guidance was effective for new transactions entered into in fiscal years
beginning after November 15, 2008. The adoption did not have a material
impact on our financial position or results of operations.
Employers’
disclosures about postretirement benefit plan assets
In December
2008, the FASB issued guidance which requires more detailed disclosures about
employers’ plan assets, including investment strategies, major categories of
plan assets, concentrations of risk within plan assets, and valuation techniques
used to measure the fair value of plan assets. These new disclosures are
applicable for the first fiscal year ending after December 15, 2009. The
adoption did not have a material impact on our financial position or results of
operations.
Interim
disclosures about fair value of financial instruments
In April 2009,
the FASB issued guidance that fair value disclosures required for financial
instruments on an annual basis be presented for all interim reporting periods
beginning with the first interim period ending after June 15, 2009 with
earlier application permitted. The Company adopted the disclosure requirements
effective January 1, 2009. See Note Q, “Fair Value of Financial
Instruments,” in these consolidated financial statements for the expanded
disclosure.
The recognition
and presentation of other-than-temporary impairment
In April 2009,
the FASB issued guidance which amends the recognition and presentation of
other-than-temporary impairment of debt securities. Under this guidance, if the
Company does not have the intention to sell and it is more-likely-than-not it
will not be required to sell the debt security, the Company is required to
segregate the difference between fair value and amortized cost into credit loss
and market value changes with only the credit loss recognized in earnings and
market value changes recorded to other comprehensive income. Where the Company’s
intent is to sell the debt security or where it is more-likely-than-not that the
Company will be required to sell the debt security, the entire difference
between the fair value and the amortized cost basis is recognized in earnings.
The guidance also requires additional disclosures regarding the calculation of
credit losses and the factors considered in reaching a conclusion that the
investment is not other-than-temporarily impaired and is effective for all
reporting periods ending after June 15, 2009, with earlier adoption
permitted.
The
Company recorded a $2.2 million impairment charge related with a
held-to-maturity security. The amount of impairment related to credit was
calculated by estimating the cash flows for each security, the performance of
the security and the class of share owned by the company. Based on
that information, the other-than-temporary impairment charge in 2008 was
determined to be related to credit loss.
Subsequent
events
In May 2009, the FASB issued guidance which establishes
general standards of accounting for and disclosure of events that occur after
the balance sheet date but before financial statements are issued or available
to be issued. This guidance was effective for interim or annual financial
periods ending after June 15, 2009, and shall be applied prospectively. The
Company has evaluated subsequent events and provided the appropriate disclosures
on the subsequent events identified.
Transfers of
Financial Assets
In June 2009, which is codified in ASC 860,
Transfers and Servicing,
which requires more information about transfers of financial assets, including
securitization transactions and a company’s continuing exposure to the risks
related to the transfer of financial assets. It eliminates the concept of a
“qualifying special-purpose entity” and changes the requirements for
derecognizing financial assets. This pronouncement is effective for first annual
reporting period beginning after November 15, 2009. The adoption of this
pronouncement is not anticipated to have a material impact on the Company’s
consolidated financial statements.
Amendments to
FASB Interpretation No. 46(R)
In June 2009, which is codified in ASC
810
, Consolidation
,
which improves financial reporting by enterprises involved with
variable interest entities and changes how a company determines when an entity
that is insufficiently capitalized or is not controlled through voting (or
similar rights) should be consolidated. The determination of whether a company
is required to consolidate an entity is based on, among other things, an
entity’s purpose and design and a company’s ability to direct the activities of
the entity that most significantly impact the entity’s economic performance.
This pronouncement is effective for the first annual reporting period beginning
after November 15, 2009. The adoption of this pronouncement is not anticipated
to have a material impact on the Company’s consolidated financial
statements.
Fair Value
Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value
Measurements,
In January 2010, the FASB issued the Accounting Standards
Updates No. 2010-06 amended ASC subtopic 820-10 and requires new disclosures
about the transfer in and out of the levels 1 and 2 as well as a reconciliation
about the activity in level 3 fair value to present separately information about
purchases, sales, insurance, and settlements. In addition, it also amended the
subtopic 820-10 to disclose the fair value for each class of assets and
liabilities as well as disclosing about inputs and valuation techniques.
This update is effective
for interim and annual reporting periods beginning after December 15, 2009
except for the disclosures about purchases, sales, issuances, and settlements in
the roll forward of activity in level 3 fair value measurements, which is
effective for years beginning after December 15, 2010. The Company
has included the appropriate disclosures in “Note Q-Fair Value
Measurements.”
19.
Stored Value Processing Fees
The
Company recognizes stored value processing fees in the periods in which they are
earned by performance of the related services. These fees are
transactional-based and include interchange fees and usage fees on the cards.
The Company records this revenue, net of costs such as association fees and
interchange costs.
Note
C—Subsequent events
The
Company evaluated its financial statements for subsequent events
through the date of
financial statement issuance. The Company is not aware of any subsequent events
which would require recognition or disclosure in the financial statements except
as follows:
Acquisitions
On April
1, 2009, the Company entered into a Stock Purchase Agreement with
American Home Mortgage Holdings, Inc. and its wholly-owned subsidiary, American
Home Bank, a federal savings association (“AHB”) to acquire all of the
outstanding shares of capital stock of AHB. Due to continuing delays in
attempting to consummate this transaction, the stock purchase agreement has been
terminated. The Company is currently pursuing the establishment of a de
novo Federal Savings Bank to be located in southern New Jersey, contiguous with
our Philadelphia/ Wilmington area market. The pursuit of establishing that
institution replaces the pursuit of the AHB acquisition. The application for the
Federal Savings Bank will entail all of the allowable activities of such
institutions, which includes generating mortgage loans, various deposit accounts
and other banking services.
Repurchase
and retirement of preferred stock
On March
10, 2010, we repurchased 100% of the preferred stock issued under the United
States Treasury Capital Purchase Program as further described in Note J,
totaling $45.2 million. The Company will record a non-cash charge of
$5.6 million for the unaccreted discount related to these preferred shares. In
2009, $3.7 million of annualized accretion and dividends related to this
preferred stock were recognized.
Note
D—Investment Securities
The
amortized cost, gross unrealized gains and losses, and fair values of the
Company’s investment securities classified as available-for-sale and
held-to-maturity are summarized as follows (in thousands):
|
Available-for-sale
|
December
31, 2009
|
|||||||||||||||
|
Gross
|
Gross
|
|||||||||||||||
|
Amortized
|
unrealized
|
unrealized
|
Fair
|
|||||||||||||
|
cost
|
gains
|
losses
|
value
|
|||||||||||||
|
U.S.
Government agency securities
|
$ | 27,000 | $ | - | $ | (241 | ) | $ | 26,759 | |||||||
|
Obligations
of states and political subdivisions
|
29,344 | 1,809 | - | 31,153 | ||||||||||||
|
Mortgage-backed
securities
|
7,929 | 119 | - | 8,048 | ||||||||||||
|
Other
debt securities
|
21,005 | 326 | (378 | ) | 20,953 | |||||||||||
|
Federal
Home Loan and Atlantic Central Bankers Bank stock
|
6,565 | - | - | 6,565 | ||||||||||||
| $ | 91,843 | $ | 2,254 | $ | (619 | ) | $ | 93,478 | ||||||||
|
Held-to-maturity
|
December
31, 2009
|
|||||||||||||||
|
Gross
|
Gross
|
|||||||||||||||
|
Amortized
|
unrealized
|
unrealized
|
Fair
|
|||||||||||||
|
cost
|
gains
|
losses
|
value
|
|||||||||||||
|
Other
debt securities
|
$ | 21,468 | $ | - | $ | (6,053 | ) | $ | 15,415 | |||||||
| $ | 21,468 | $ | - | $ | (6,053 | ) | $ | 15,415 | ||||||||
|
Available-for-sale
|
December
31, 2008
|
|||||||||||||||
|
Gross
|
Gross
|
|||||||||||||||
|
Amortized
|
unrealized
|
unrealized
|
Fair
|
|||||||||||||
|
cost
|
gains
|
losses
|
value
|
|||||||||||||
|
U.S.
Government agency securities
|
$ | 59,982 | $ | 894 | $ | - | $ | 60,876 | ||||||||
|
Mortgage-backed
securities
|
15,102 | 380 | (461 | ) | 15,021 | |||||||||||
|
Other
debt securities
|
807 | - | (96 | ) | 711 | |||||||||||
|
Federal
Home Loan and Atlantic Central Bankers Bank stock
|
6,321 | - | - | 6,321 | ||||||||||||
| $ | 82,212 | $ | 1,274 | $ | (557 | ) | $ | 82,929 | ||||||||
|
Held-to-maturity
|
December
31, 2008
|
|||||||||||||||
|
Gross
|
Gross
|
|||||||||||||||
|
Amortized
|
unrealized
|
unrealized
|
Fair
|
|||||||||||||
|
cost
|
gains
|
losses
|
value
|
|||||||||||||
|
Other
debt securities
|
$ | 23,529 | $ | - | $ | (5,121 | ) | $ | 18,408 | |||||||
| $ | 23,529 | $ | - | $ | (5,121 | ) | $ | 18,408 | ||||||||
The
amortized cost and fair value of the Company’s investment securities at
December 31, 2009, by contractual maturity are shown below. Expected
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
|
Available
-
for
-
sale
|
Held
-
to
-
maturity
|
|||||||||||||||
|
Amortized
|
Fair
|
Amortized
|
Fair
|
|||||||||||||
|
cost
|
value
|
cost
|
value
|
|||||||||||||
|
Due
before one year
|
$ | - | $ | - | $ | - | $ | - | ||||||||
|
Due
after one year through five years
|
17,005 | 16,962 | - | - | ||||||||||||
|
Due
after five years through ten years
|
4,000 | 3,991 | 3,332 | 2,820 | ||||||||||||
|
Due
after ten years
|
64,273 | 65,960 | 18,136 | 12,595 | ||||||||||||
|
Federal
Home Loan and Atlantic
|
||||||||||||||||
|
Central
Bankers Bank stock
|
6,565 | 6,565 | - | - | ||||||||||||
| $ | 91,843 | $ | 93,478 | $ | 21,468 | $ | 15,415 | |||||||||
At
December 31, 2009 and 2008, investment securities with a book value of
approximately $6.7 million and $30.9 million, respectively, were pledged to
secure securities sold under repurchase agreements and Federal Home Loan Bank
advances as required or permitted by law.
The fair
value of the Company’s investment portfolio is based on the market value
provided by an independent market data provider and from the calculation of the
present value of cash flows from securities. Available-for-sale securities fair
values are based on the fair market value supplied by the third-party market
data provider while held-to-maturity securities are based on the present value
of cash flows, which discounts expected cash flows from principal and interest
using yield to maturity at the measurement date. The Company periodically
reviews its investment portfolio to determine whether unrealized losses are
temporary, based on an evaluations of the creditworthiness of the
issuers/guarantors as well as the underlying collateral if applicable, in
addition to the continuing performance of the securities. The FASB issued
further clarifying guidance in 2009 related to the recognition of
other–than-temporary impairment charges on debt securities. The Company
recognized an other-than-temporary impairment charge of $2.2 million
representing the amortized cost of a single trust preferred security in its
held-to-maturity portfolio. The amount of this credit impairment, was calculated
by estimating the discounted cash flows for that security. The Company
reevaluated the other-than-temporary impairment charge in 2008, based on the
clarifying guidance issued in 2009, and determined the other-than-temporary
impairment charge in 2008 was related to credit loss.
The table
below indicates the length of time individual securities had been in a
continuous unrealized loss position at December 31, 2009 (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
|
1 | $ | 26,759 | $ | (241 | ) | $ | - | $ | - | $ | 26,759 | $ | (241 | ) | |||||||||||||
|
Other
debt securities
|
3 | 9,970 | (29 | ) | 658 | (349 | ) | 10,628 | (378 | ) | ||||||||||||||||||
|
Total
temporarily impaired
|
||||||||||||||||||||||||||||
|
investment
securities
|
4 | $ | 36,729 | $ | (270 | ) | $ | 658 | $ | (349 | ) | $ | 37,387 | $ | (619 | ) | ||||||||||||
|
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
|
||||||||||||||||||||||||||||
|
Other
debt securities
|
7 | $ | - | $ | - | $ | 15,415 | $ | (6,053 | ) | $ | 15,415 | $ | (6,053 | ) | |||||||||||||
|
Total
temporarily impaired
|
||||||||||||||||||||||||||||
|
investment
securities
|
7 | $ | - | $ | - | $ | 15,415 | $ | (6,053 | ) | $ | 15,415 | $ | (6,053 | ) | |||||||||||||
The table
below indicates the length of time individual securities had been in a
continuous unrealized loss position at December 31, 2008 (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
|
||||||||||||||||||||||||||||
|
Mortgage-backed
securities
|
11 | $ | - | $ | - | $ | 1,079 | $ | (461 | ) | $ | 1,079 | $ | (461 | ) | |||||||||||||
|
Other
debt securities
|
1 | - | - | 711 | (96 | ) | 711 | (96 | ) | |||||||||||||||||||
|
Total
temporarily impaired
|
||||||||||||||||||||||||||||
|
investment
securities
|
12 | $ | - | $ | - | $ | 1,790 | $ | (557 | ) | $ | 1,790 | $ | (557 | ) | |||||||||||||
|
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
|
||||||||||||||||||||||||||||
|
Other
debt securities
|
8 | $ | 1,439 | $ | (430 | ) | $ | 16,969 | $ | (4,691 | ) | $ | 18,408 | $ | (5,121 | ) | ||||||||||||
|
Total
temporarily impaired
|
||||||||||||||||||||||||||||
|
investment
securities
|
8 | $ | 1,439 | $ | (430 | ) | $ | 16,969 | $ | (4,691 | ) | $ | 18,408 | $ | (5,121 | ) | ||||||||||||
Management
has evaluated the securities in the above tables and has concluded that none of
these securities have impairment that is other-than-temporary. Management
evaluates whether a credit impairment exists by considering primarily the
following factors: (a) the length of time and extent to which the fair value has
been less than the amortized cost of the security, (b) changes in the financial
condition, credit rating and near-term prospects of the issuer, (c) whether the
issuer is current on contractually obligated interest and principal payments,
(d) changes in the financial condition of the security’s underlying collateral
and (e) the payment structure of the security. Management’s best estimate of
expected future cash flows which is used to determine the credit loss amount is
a quantitative and qualitative process that incorporates information received
from third-party sources along with internal assumptions and judgments regarding
the future performance of the security. The Company concluded that most of the
securities that are in an unrealized loss position are in a loss position
because of changes in interest rates since the securities were purchased. The
securities that have been in an unrealized loss position for 12 months or longer
include other securities whose market values are sensitive to interest rates and
changes in credit quality. The Company’s unrealized loss for the debt securities
is primarily related to general market conditions and the resultant lack of
liquidity in the market. The severity of the impairments in relation to the
carrying amounts of the individual investments is consistent with market
developments. The Company’s analysis for each investment, performed at the
security level, shows that the credit quality of the individual bonds ranges
from good to deteriorating. As a result of its review, the Company concluded
that other-than-temporary impairment did not exist due to the Company’s ability
and intention to hold these securities to recover their amortized cost
basis.
Note
E—Loans
Major
classifications of loans are as follows (in thousands):
|
December
31,
|
December
31,
|
|||||||
|
2009
|
2008
|
|||||||
|
Commercial
|
$ | 402,232 | $ | 353,219 | ||||
|
Commercial
mortgage
|
569,434 | 488,986 | ||||||
|
Construction
|
207,184 | 305,889 | ||||||
|
Total
commercial loans
|
1,178,850 | 1,148,094 | ||||||
|
Direct
financing leases, net
|
78,802 | 85,092 | ||||||
|
Residential
mortgage
|
85,759 | 57,636 | ||||||
|
Consumer
loans and others
|
178,608 | 157,446 | ||||||
| 1,522,019 | 1,448,268 | |||||||
|
Deferred
loan costs
|
1,703 | 1,081 | ||||||
|
Total
loans, net of deferred loan costs
|
$ | 1,523,722 | $ | 1,449,349 | ||||
|
Supplemental
loan data:
|
||||||||
|
Construction
1-4 family
|
$ | 100,088 | $ | 163,718 | ||||
|
Construction
commercial, acquisition and development
|
107,096 | 142,171 | ||||||
|
|
$ | 207,184 | $ | 305,889 | ||||
The
Company has identified twenty-six loans as impaired, where it is probable that
interest and principal will not be collected according to the contractual terms
of the loan agreement. The balance of these impaired loans was $18.7
million at December 31, 2009, of which $11.7 million had a specific
valuation allowance of $3.2 million and $7.0 million of which did not
have a valuation allowance. The average amount of impaired loans was $13.2
million for the year ended December 31, 2009. The Company recognizes income on
impaired loans when they are placed into non-accrual status on a cash basis when
the loans are both current and the collateral on the loan is sufficient to cover
the outstanding obligation to the Company. If these factors do not exist, the
Company will not recognize income on such loans. Interest income would have
increased by $776,000 if interest on impaired loans had been accrued. The
balance of the Company’s impaired loans was $8.7 million, at December 31, 2008,
with a specific valuation allowance of $3.1 million. The average amount of
impaired loans was $7.6 million for the year ended December 31, 2008.
Interest income would have increased by $109,000 in 2008 if interest on impaired
loans had been accrued. The balance of the Company’s impaired loans was $1.2
million at December 31, 2007, with a specific valuation allowance of $175,000.
The average amount of impaired loans was $1.7 million in 2007. Interest income
would have increased by $110,000 in 2007 if interest on impaired loans had been
accrued. The Company did not have any impaired loans as of December 31, 2006.
The Company recognized interest income of $465,000 on impaired loans in 2009 and
did not recognize interest income on impaired loans in 2008 or
2007.
The
following table summarizes the Company’s non-accrual loans, loans past due 90
days and other real estate owned at December 31, 2009 and 2008,
respectively:
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
(in
thousands)
|
||||||||
|
Non-accrual
loans
|
$ | 12,270 | $ | 8,729 | ||||
|
Loans
past due 90 days or more
|
$ | 12,994 | $ | 4,055 | ||||
Changes
in the allowance for loan and lease losses are as follows (in
thousands):
|
December
31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Balances
at the beginning of the year
|
$ | 17,361 | $ | 10,233 | $ | 8,400 | ||||||
|
Charge-offs
|
(11,364 | ) | (5,533 | ) | (3,672 | ) | ||||||
|
Recoveries
|
126 | 161 | 105 | |||||||||
|
Provision
charged to operations
|
13,000 | 12,500 | 5,400 | |||||||||
|
Balances
at end of year
|
$ | 19,123 | $ | 17,361 | $ | 10,233 | ||||||
Note
F—Premises and Equipment
Premises
and equipment are as follows (in thousands):
|
December
31,
|
|||||||||
|
Estimated
|
|||||||||
|
useful lives
|
2009
|
2008
|
|||||||
|
Furniture,
fixtures, and equipment
|
3
to 12 years
|
$ | 19,191 | $ | 17,431 | ||||
|
Leasehold
improvements
|
6
to 10 years
|
4,483 | 4,225 | ||||||
| 23,674 | 21,656 | ||||||||
|
Accumulated
depreciation
|
(15,732 | ) | (13,377 | ) | |||||
| $ | 7,942 | $ | 8,279 | ||||||
Note
G—Deposits
At
December 31, 2009, the scheduled maturities of certificates of deposit are
as follows (in thousands):
|
2010
|
$ | 137,185 | ||
|
2011
|
4,942 | |||
|
2016
|
693 | |||
| $ | 142,820 |
Note
H—Debt
|
|
1.
|
Short-term
borrowings
|
The Bank
maintains $73.0 million in unsecured lines of credit that bear interest at
variable rates and are renewed annually. At December 31, 2009, the Company did
not borrow any funds under these lines of credit. There was $1.0 million
outstanding under a line of the credit at December 31, 2008. The Company had
approved overnight borrowing capacity with the Federal Home Loan Bank of
Pittsburgh of up to $529.4 million at December 31, 2009. Borrowings under this
arrangement have a variable interest rate. As of December 31, 2009, there
was $100.0 million of outstanding borrowings from the Federal Home Loan Bank at
a rate of 0.65%. The details of these categories are presented
below:
|
As
of or for the year ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(dollars
in thousands)
|
||||||||||||
|
Short-term
borrowings and federal funds
|
||||||||||||
|
purchased
|
||||||||||||
|
Balance
at year-end
|
$ | 100,000 | $ | 61,000 | $ | 90,000 | ||||||
|
Average
during the year
|
44,895 | 123,558 | 86,049 | |||||||||
|
Maximum
month-end balance
|
105,000 | 203,250 | 230,000 | |||||||||
|
Weighted
average rate during the year
|
0.73 | % | 2.58 | % | 5.14 | % | ||||||
|
Rate
at December 31
|
0.65 | % | 0.67 | % | 3.84 | % | ||||||
|
|
2.
|
Securities
sold under agreements to repurchase
|
Securities
sold under agreements to repurchase generally mature within 30 days from the
date of the transactions. The detail of securities sold under agreements to
repurchase is presented below:
|
As
of or for the year ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(dollars
in thousands)
|
||||||||||||
|
Balance
at year-end
|
$ | 2,588 | $ | 9,419 | $ | 3,846 | ||||||
|
Average
during the year
|
2,175 | 2,568 | 3,006 | |||||||||
|
Maximum
month-end balance
|
3,847 | 9,419 | 6,798 | |||||||||
|
Weighted
average rate during the year
|
1.18 | % | 1.99 | % | 1.73 | % | ||||||
|
Rate
at December 31
|
1.02 | % | 1.57 | % | 2.07 | % | ||||||
|
|
3.
|
Guaranteed
Preferred Beneficiary Interest in Company’s Subordinated
Debt
|
As of
December 31, 2009, the Company had established two statutory business trusts:
The Bancorp Capital Trust II and The Bancorp Capital Trust III
(Trusts). In each case, the Company owns all the common securities of
the trust. These trusts issued preferred capital securities to
investors and invested the proceeds in the Company through the purchase of
junior subordinated debentures issued by the Company. These
debentures are the sole assets of the trusts.
|
|
·
|
The
$10.3 million of debentures issued to The Bancorp Capital Trust II on
November 28,
2007
mature on March 15, 2038, and bear interest at an annual fixed rate of
7.55% through March 15, 2013, and for each distribution date at an annual
rate equal to 3-month LIBOR plus
3.25%.
|
|
|
·
|
The
$3.1 million of debentures issued to The Bancorp Capital Trust III on
November 28, 2007 mature on March 15, 2038, and bear interest at a
floating annual rate equal to 3-month LIBOR plus 3.25%, except for the
first interest period thereafter ended on March 15, 2008, where interest
was at an annual rate of 8.33%.
|
In March
2005, the Federal Reserve Board adopted a final rule that allows the continued
limited inclusion of outstanding and prospective issuances of trust preferred
securities in Tier 1 capital of bank holding companies. Under the final rule,
trust preferred securities and other restricted core capital elements will be
subject to stricter quantitative limits. The Board’s final rule limits
restricted core capital elements to 25% of all core capital elements, net of
goodwill, less any associated deferred tax liability. Amounts of restricted core
capital elements in excess of these limits generally may be included in Tier 2
capital. The final rule provides a five-year transition period ending March 31,
2009, for application of the quantitative limits. In addition, the requirement
for trust preferred securities to include a call option has been eliminated, and
standards for the junior subordinated debt underlying trust preferred securities
eligible for Tier 1 capital treatment have been clarified. The Company has
evaluated the effects of the rule and concluded that the rule did not have an
impact on its capital ratios.
Note
I—Shareholders’ Equity
The
Company completed a common stock offering in August 2009 and issued 11.5 million
shares of its common stock at a price of $5.75 per share resulting in proceeds
of approximately $62.1 million, net of $4.0 million in costs.
Note
J—Preferred Stock
The
Company paid the 6% annual dividend on its Series A Preferred Stock for 2009,
2008 and 2007 in the form of quarterly cash dividends which amounted to $32,000,
$65,000 and $68,000, respectively. Additionally, all 108,136 outstanding
shares of Series A preferred stock, which had a liquidation value of $1.1
million, were converted into 117,372 shares of its common stock in the third
quarter of 2009.
Under the
Emergency Economic Stabilization Act of 2008, the United States Treasury
Department implemented the Trouble Asset Relief Program (TARP) Capital Purchase
Program (CPP), whereby the Treasury Department committed to purchase up to $250
billion of senior preferred shares from qualifying banks, savings associations,
and bank holding companies engaged only in financial activities. On December 12,
2008, under the CPP, the Company issued 45,220 shares of Series B preferred
stock to the Treasury Department for a purchase price of $45.2 million. The
Series B stock has a 5% annual dividend rate for the first five years and a 9%
annual dividend thereafter if the preferred shares are not redeemed by the
Company. The Company may not redeem the Series B preferred stock until the three
year anniversary, except with proceeds from the sale of qualifying equity
securities of the Company. In conjunction with the purchase of our Series B
preferred stock, the Treasury Department also received warrants to purchase
common stock.
On
December 12, 2008, the Company also issued a warrant to purchase 1,960,405
shares of the Company’s common stock (par value $1.00 per share) to the Treasury
Department. The warrant has a 10-year term and is immediately exercisable
at an exercise price, subject to antidilution adjustments, of $3.46 per share.
Pursuant to standard terms of the Securities Purchase Agreement with the
Treasury Department for the CPP, as a result of raising “qualifying capital” of
at least $45.2 million prior to December 31, 2009, the number of shares issuable
under the warrant delivered to the Treasury Department as part of the CPP were
reduced by 50%. As a result, the number of shares exercisable under the warrant
was reduced from 1,960,405 shares to 980,203 shares.
The
proceeds from the Treasury Department are allocated to the Series B Preferred
Stock and the warrant based on their relative fair value. The fair value of the
Series B Preferred Stock was determined through a discounted future cash flow
model. A Black-Scholes pricing model was used to calculate the fair value of the
warrant. The Black-Scholes model includes assumptions regarding the Company’s
dividend yield, stock price volatility, and the risk-free interest rate. The
table below outlines the assumptions used to calculate our
discount:
|
Risk-free
interest rate
|
|
2.60%
|
|
Expected
dividend yield
|
|
0.00%
|
|
Expected
volatility
|
|
66.82%
|
|
Expected
life
|
|
10.00
years
|
The
Company finalized the valuation during the six months ended June 30, 2009 and
calculated a discount on the preferred stock in the amount of approximately $7.3
million which is being amortized over a 5 year period. The effective yield on
the amortization of the Series B Preferred Stock is approximately 8.24%. The
final valuation of the warrant resulted in an additional $1.1 million being
allocated to additional paid-in capital from preferred stock.
In
determining net income (loss) available to common shareholders, the periodic
amortization and the cash dividend on the preferred stock are subtracted from
net income (loss). In 2009, the Company paid $2.3 million in dividends on
its Series B preferred stock and also recognized accretion of $1.5 million on
the Series B preferred stock.
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 $493,000, $489,000 and
$274,000 for the years ended December 31, 2009, 2008 and 2007,
respectively.
Supplemental
Executive Retirement Plan
In 2005,
the Company began contributing to a supplemental executive retirement plan for
its Chief Executive Officer that provides annual retirement benefits when the
chief executive officer reaches age 70, based on the average salary of the Chief
Executive Officer’s three highest compensated years during the preceding 10 year
period. The Company expensed $503,000, $453,000 and $407,000 for this plan for
the years ended December 31, 2009, 2008, and 2007 respectively.
Note
L—Income Taxes
The
components of the income taxes (benefit) included in the statements of
operations are as follows:
|
For
the years ended
|
||||||||||||
|
December
31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Current tax
provision (benefit)
|
||||||||||||
|
Federal
|
$ | 552 | $ | (1,323 | ) | $ | 7,786 | |||||
|
State
|
457 | (45 | ) | 1,381 | ||||||||
| 1,009 | (1,368 | ) | 9,167 | |||||||||
|
Deferred
tax provision (benefit)
|
1,239 | (19,524 | ) | 171 | ||||||||
| $ | 2,248 | $ | (20,892 | ) | $ | 9,338 | ||||||
The
differences between applicable income tax expense and the amounts computed by
applying the statutory federal income tax rate of 34%, 34% and 35% for 2009,
2008 and 2007, respectively, are as follows:
|
For
the years ended
|
||||||||||||
|
December
31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Computed
tax expense at statutory rate
|
$ | 2,159 | $ | (21,512 | ) | $ | 8,284 | |||||
|
State
taxes
|
354 | (548 | ) | 878 | ||||||||
|
Tax
exempt interest income
|
(458 | ) | - | - | ||||||||
|
Impairment
of non-taxable goodwill
|
- | 1,343 | - | |||||||||
|
Other
|
193 | (175 | ) | 176 | ||||||||
| $ | 2,248 | $ | (20,892 | ) | $ | 9,338 | ||||||
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 are as follows:
|
For
the years ended
|
||||||||
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
(in
thousands)
|
||||||||
|
Deferred
tax assets:
|
||||||||
|
Allowance
for loan and lease losses
|
$ | 5,804 | $ | 5,205 | ||||
|
Deferred
compensation
|
698 | 527 | ||||||
|
State
taxes
|
791 | 868 | ||||||
|
Fair
value of loans and leases from acquisition
|
- | 2 | ||||||
|
Nonqualified
stock options
|
2 | 2 | ||||||
|
Stock
appreciation rights
|
46 | 21 | ||||||
|
Net
operating loss carry forwards
|
127 | 244 | ||||||
|
Depreciation
|
- | 340 | ||||||
|
Tax
deductible goodwill
|
14,174 | 15,193 | ||||||
|
Unrealized
losses on investment securities available-for-sale
|
- | 445 | ||||||
|
Total
deferred tax assets
|
$ | 21,642 | $ | 22,847 | ||||
|
Deferred
tax liabilities:
|
||||||||
|
Unrealized
gains on investment securities available-for-sale
|
73 | - | ||||||
|
Depreciation
|
491 | - | ||||||
|
Other
|
203 | - | ||||||
|
Total
deferred tax liabilities
|
767 | - | ||||||
|
Net
deferred tax asset included in other assets
|
$ | 20,875 | $ | 22,847 | ||||
As a
result of the Company adoption of the
accounting for uncertain tax provisions in 2007, income
taxes payable increased by approximately $47,000 which included penalties and
interest of approximately $2,000. The Company recognized this as an adjustment
to retained earnings in the first quarter of 2007. A reconciliation of the
beginning and ending amount of unrecognized tax benefits is as
follows:
|
For
the years ended
|
||||||||||||
|
December
31,
|
||||||||||||
|
2009
|
2008
|
,2007 | ||||||||||
|
(in
thousands)
|
||||||||||||
|
Beginning
balance, January 1,
|
$ | 47 | $ | 47 | $ | 47 | ||||||
|
Increases
in tax provisions for prior years
|
- | - | - | |||||||||
|
Decreases
in tax provisions for prior years
|
- | - | - | |||||||||
|
Gross
unrecognized tax benefits at December 31,
|
$ | 47 | $ | 47 | $ | 47 | ||||||
The
Company files federal and state returns in jurisdictions with varying statutes
of limitations. The 2006 through 2009 tax years generally remain subject to
examination by federal and most state tax authorities.
Note
M—Stock-Based Compensation
In June
2005, the Company adopted an omnibus equity compensation plan (the 2005 plan).
Employees and directors of the Company and the Bank are eligible to participate
in the 2005 plan. An aggregate of 1,000,000 shares of common stock were
reserved. Options guaranteed under the 2005 plan expire on the tenth anniversary
of their grant.
In
December 2003, the Bank adopted a stock option plan (the 2003 plan). Employees
and directors of the Company and the Bank were eligible to participate in the
2003 plan. An aggregate of 760,000 shares of common stock for the Bank had been
reserved. Options expire on the tenth anniversary of their grant. Under the 2003
plan, 501,000 options were granted. As a result of the reorganization of the
Company and the Bank, the Bank’s plan terminated and the options theretofore
granted under the Bank’s plan were converted into options to purchase 576,101
shares of the Company’s common stock.
In
October 1999, the Company adopted a stock option plan (the 1999 Plan). Employees
and directors of the Company and the Bank were eligible to participate in the
1999 Plan. An aggregate of 1,000,000 shares of common stock were reserved under
the 1999 Plan, with no more than 75,000 shares being issuable to non-employee
directors. Options vest over four years and expire on the tenth anniversary of
the grant.
A summary
of the status of the Company’s stock option plans 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, 2009
|
1,503,737 | $ | 12.12 | |||||||||||||
|
Granted
|
- | - | ||||||||||||||
|
Exercised
|
- | - | ||||||||||||||
|
Cancelled/forfeited
|
29,373 | 13.13 | ||||||||||||||
|
Expired
|
151,500 | 10.00 | ||||||||||||||
|
Outstanding
at December 31, 2009
|
1,322,864 | $ | 12.34 | 3.98 | $ | - | ||||||||||
|
Exercisable
at December 31, 2009
|
1,312,864 | 3.95 | $ | - | ||||||||||||
A summary
of the Company’s stock appreciation rights is presented below:
|
Average
|
||||||||||||
|
Weighted-
|
Remaining
|
|||||||||||
|
Average
|
Contractual
|
|||||||||||
|
Shares
|
Price
|
Term
|
||||||||||
|
Outstanding at beginning of the year
|
60,000 | $ | 11.41 | |||||||||
|
Granted
|
- | - | - | |||||||||
|
Exercised
|
- | - | - | |||||||||
|
Forfeited
|
- | - | - | |||||||||
|
Outstanding at end of period
|
60,000 | $ | 11.41 | 2.25 | ||||||||
A summary
of the status of the Company’s non-vested shares under the plans as of December
31, 2009, and changes during the year then ended, is presented
below:
|
Weighted-
|
||||||||
|
Average
|
||||||||
|
Grant-Date
|
||||||||
|
Shares
|
Fair Value
|
|||||||
|
Non-Vested Options
|
||||||||
|
Non-vested
at January 1, 2009
|
12,000 | $ | 8.93 | |||||
|
Granted
|
- | - | ||||||
|
Vested
|
2,000 | 9.36 | ||||||
|
Forfeited
|
- | |||||||
|
Non-vested
at December 31, 2009
|
10,000 | $ | 8.85 | |||||
The
Company did not grant any stock options in 2009 and 2008. The Company
issued 96,671 common shares in connection with stock options exercised for the
year ended December 31, 2007. For the year ended December 31, 2008, the
Company granted 60,000 stock appreciation rights that have vesting periods of
four years.
The
weighted-average grant-date fair value of options granted during the year ended
December 31, 2007 was $6.05. The fair value of the stock appreciation rights per
share was $4.90 for the year ended December 31, 2008. There were no options
exercised in 2009 and 2008. The total intrinsic value of options exercised
during 2007 was $986,000. Intrinsic value is measured using the fair market
value price of the Company’s common stock on the date of exercise less the
applicable exercise price.
As of
December 31, 2009, there was a total of $164,500 of unrecognized
compensation cost related to non-vested awards under share-based plans. This
cost is expected to be recognized over a weighted average period of 1.25
years.
For the
years ended December 31, 2009, 2008 and 2007, the Company estimated the fair
value of each grant on the date of grant using the Black-Scholes options-pricing
model with the following weighted average assumptions:
|
December 31,
|
|||||
|
2009
|
2008
|
2007
|
|||
|
Risk-free
interest rate
|
-
|
2.65%
|
4.56%
|
||
|
Expected
dividend yield
|
-
|
-
|
-
|
||
|
Expected
volatility
|
-
|
42.79%
|
29.46%
|
||
|
Expected
lives (years)
|
-
|
5.5
|
5.4
|
||
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 topic
718,
Compensation—Stock
Compensation,
stock based
compensation expense for the year ended December 31, 2009 is based on awards
that are ultimately expected to vest and has been reduced for estimated
forfeitures. The Company estimates forfeitures using historical data based upon
the groups identified by management.
Note
N—Transactions with Affiliates
The
Company entered into a sublease for office space in Philadelphia, Pennsylvania
and a technical support agreement with RAIT Financial Trust (RAIT) commencing in
October 2000. The agreement was amended in June 2008. The Chairman of RAIT is
the Chairman and Chief Executive Officer of the Bank and the Chief Executive
Officer of the Company. The former Chief Executive Officer of RAIT, who is also
a RAIT trustee, is the Chairman of the Company and a director and Chairman of
the Executive Committee of the Bank. Under the technical support agreement, RAIT
paid the Company $45,000 for the year ended December 31, 2008 and $78,000 for
the year ended December 31, 2007. In 2008, the technical support agreement
terminated. RAIT paid the Company approximately $306,700, $412,000 and $454,000
for rent for the years ended December 31, 2009, 2008 and 2007,
respectively.
The
Company subleased office space to Cohen & Company, Inc. and provided
technical support and telephone service to Cohen & Company commencing in
July 2002. While the agreements were terminated in June 2006, the agreement
continued on a month to month basis through June 2007. Cohen & Company
paid the Company approximately $37,000 in rent for 2007. Cohen & Company
paid $27,000 for the year ended December 31, 2007 for technical support and
telephone system support services. The Chairman of the Company, who is also a
director and Chairman of the Executive Committee of the Bank, is Chairman, Chief
Executive Officer and Chief Investment Officer of Cohen &
Company.
The Bank
maintains deposits for various affiliated companies totaling approximately $10.4
million and $24.9 million as of December 31, 2009 and 2008, respectively. The
majority of these deposits are short-term in nature and rates are consistent
with market rates.
The Bank
has entered into lending transactions in the ordinary course of business with
directors, executive officers, principal stockholders and affiliates of such
persons on the same terms as those prevailing for comparable transactions with
other borrowers. At December 31, 2009, these loans were current as to principal
and interest payments, and did not involve more than normal risk of
collectability. At December 31, 2009, loans to these related parties amounted to
$7.4 million. During the year ended December 31, 2009, the Bank made new loans
to related parties of $117,000 and received repayments of $1.5
million.
The Bank
participated in two loans in 2008 that were originated by RAIT, one of which was
paid off in 2008. The outstanding participation was $21.6 million at
December 31, 2009. The Bank has a senior position on the loan.
The
Company paid rent and property tax to the prior owner of Mears Motor Livery,
currently a vice president of the Bank, for space in Florida of $83,000, $95,000
and $79,000 for the years ended December 31, 2009, 2008 and 2007,
respectively.
Note
O—Commitments and Contingencies
1.
Operating Leases
The
Company leased its operations facility for a term expiring on
August 31, 2018, and has leased its executive offices for a term
expiring in 2014. The Company also has leases for other offices in
Pennsylvania, Maryland and Florida that expire through 2012. The Company also
leases space in South Dakota for its Payment Solutions division (formerly Stored
Value Solutions). The lease on this space expires on November 30,
2014. These leases require the Company to pay the real estate taxes
and insurance on the leased properties. The approximate future minimum annual
rental payments required by these leases are as follows (in
thousands):
|
Year ending December 31,
|
||||
|
2010
|
$ | 2,047 | ||
|
2011
|
2,051 | |||
|
2012
|
2,074 | |||
|
2013
|
1,965 | |||
|
2014
|
1,286 | |||
|
Thereafter
|
3, 041 | |||
| $ | 12 , 464 | |||
The
Company has provided a letter of credit as security for its payment of rent and
other fees under one of the leases that totaled $65,106 at December 31,
2009. This letter of credit reduces annually based upon rental payments
made.
Rent
expense for the years ended December 31, 2009, 2008 and 2007 was
approximately $2,211,500, $1,659,000 and $970,000, net of rental
charged to RAIT and Cohen & Company of approximately $324,5000, $412,000 and
$491,000, respectively.
2. Legal
Proceedings
Various
actions and proceedings are currently pending to which The Bancorp, Inc. or one
or more of its subsidiary is a party. These actions and proceedings
arise out of routine operations and, in management’s opinion, are not expected
to have material impact on the Company’s financial position or results of
operations.
Note
P—Financial Instruments with Off-Balance-Sheet Risk and Concentrations of Credit
Risk
The
Company is 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 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
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.
The
approximate contract amounts and maturity term for 2009 of the Company’s credit
commitments are as follows:
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
(in
thousands)
|
||||||||
|
Financial
instruments whose contract amounts represent credit risk
|
||||||||
|
Commitments
to extend credit
|
$ | 301,840 | $ | 299,389 | ||||
|
Standby
letters of credit
|
14,369 | 17,672 | ||||||
| $ | 316,209 | $ | 317,061 | |||||
Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Company evaluates each customer’s creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Company upon extension of credit, is based on management’s credit
evaluation.
Standby
letters of credit are conditional commitments issued by the Company to guarantee
the performance of a customer to a third party. Those guarantees are primarily
issued to support public and private borrowing arrangements, including
commercial paper, bond financing and similar transactions. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. The Company holds residential or
commercial real estate, accounts receivable, inventory and equipment as
collateral supporting those commitments for which collateral is deemed
necessary. Based upon periodic analysis of the Company’s standby letters of
credit, management has determined that a reserve is not necessary at December
31, 2009. The Company reduces any potential liability on its standby letters of
credit based upon its estimate of the proceeds obtainable upon the liquidation
of the collateral held. Fair values of unrecognized financial instruments,
including commitments to extend credit and the fair value of letters of credit,
are considered immaterial. The standby letters of credit expire as follows:
$10.2 million in 2010, $1.9 million in 2011 and the remaining $2.3 million in
2012.
Note
Q—Fair Value of Financial Instruments
The FASB
ASC 825,
Financial
Instruments
, requires disclosure of the estimated fair value of an
entity’s assets and liabilities considered to be financial instruments. For the
Company, as for most financial institutions, the majority of its assets and
liabilities are considered to be financial instruments. However, many of such
instruments lack an available trading market as characterized by a willing buyer
and willing seller engaging in an exchange transaction. Also, it is the
Company’s general practice and intent to hold its financial instruments to
maturity whether or not categorized as “available-for-sale” and not to engage in
trading or sales activities, except for certain loans. For fair value disclosure
purposes, the Company utilized certain fair value measurement criteria as
required under the FASB ASC 820,
Fair Value Measurements and
Disclosures
, and explained below.
Estimated
fair values have been determined by the Company using the best available data
and an estimation methodology 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.
For cash
and cash equivalents, including cash and due from banks, the Federal Reserve and
federal funds sold, the recorded book values of $354.4 million and $179.5
million as of December 31, 2009 and 2008, respectively, approximate fair values.
The estimated fair values of investment securities are based on quoted market
prices, if available, or by an estimated methodology based on management’s
inputs. The fair value of the Company’s investment securities held-to-maturity
are based on using “unobservable inputs” that are the best information available
in the circumstances.
The net
loan portfolio at December 31, 2009 and 2008 has been valued using the present
value of discounted cash flow where market prices were not available. The
discount rate used in these calculations is the estimated current market rate
adjusted for credit risk. The carrying value of accrued interest approximates
fair value.
The estimated fair values of demand
deposits (
i.e.
interest-and noninterest-bearing
checking accounts, savings, and certain types of money market accounts) are
equal to the amount
payable on demand at the reporting date (i.e.
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.
The fair
values of certificates of deposit and subordinated debentures are estimated
using a discounted cash flow calculation that applies current interest rates to
discount expected cash flows. Based upon time deposit maturities at December 31,
2009, the carrying values approximate their fair values. The carrying amount of
accrued interest payable approximates its fair value.
|
December
31, 2009
|
December
31, 2008
|
|||||||||||||||
|
|
Carrying
|
Estimated
|
Carrying
|
Estimated
|
||||||||||||
|
amount
|
fair
value
|
amount
|
fair
value
|
|||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Cash
and cash equivalents
|
$ | 354,459 | $ | 354,459 | $ | 179,506 | $ | 179,506 | ||||||||
|
Investment
securities available-for-sale
|
93,478 | 93,478 | 82,929 | 82,929 | ||||||||||||
|
Investment
securities held-to-maturity
|
21,468 | 15,415 | 23,529 | 18,408 | ||||||||||||
|
Loans
receivable, net
|
1,523,722 | 1,499,199 | 1,449,349 | 1,441,195 | ||||||||||||
|
Certificates
of deposit
|
142,820 | 142,818 | 380,847 | 381,395 | ||||||||||||
|
Subordinated
debentures
|
13,401 | 9,152 | 13,401 | 9,364 | ||||||||||||
|
Securities
sold under agreements to repurchase
|
2,588 | 2,588 | 9,419 | 9,419 | ||||||||||||
|
Short
term borrowings
|
100,000 | 100,000 | 61,000 | 61,000 | ||||||||||||
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.
In
addition, FASB 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. The
assets measured at fair value on a recurring basis, segregated by fair value
hierarchy, are summarized below (in thousands):
|
Fair Value Measurements at Reporting Date
Using
|
||||||||||||||||
|
Description
|
Quoted
Prices in Active
Markets for Identical
|
Significant
Other
Observable
|
Significant
Unobservable
|
|||||||||||||
|
Investment
|
Assets
|
Inputs
|
Inputs
|
|||||||||||||
|
December
31, 2009
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
|||||||||||||
|
U.S.
Government agency securities
|
$ | 26,759 | - | $ | 26,759 | - | ||||||||||
|
Obligations
of states and
political
subdivisions
|
31,153 | - | 31,153 | - | ||||||||||||
|
Mortgage-backed
securities
|
8,048 | - | 8,048 | - | ||||||||||||
|
Other
debt securities
|
20,953 | - | 20,296 | 657 | ||||||||||||
|
Federal
Home Loan and Atlantic
|
||||||||||||||||
|
Central
Bankers Bank stock
|
6,565 | - | - | 6,565 | ||||||||||||
| $ | 93,478 | $ | - | $ | 86,256 | $ | 7,222 | |||||||||
The
Company’s Level 3 assets are listed below (in thousands).
|
Fair
Value Measurements Using
|
||||
|
Significant
Unobservable Inputs
|
||||
|
(Level
3)
|
||||
|
Available-for
-sale
|
||||
|
securities
|
||||
|
Beginning
Balance
|
$ | 7,032 | ||
|
Included
in other comprehensive income (loss)
|
(252 | ) | ||
|
Purchases,
issuances, and settlements
|
442 | |||
|
Transfers
in —
|
- | |||
|
Ending
Balance
|
$ | 7,222 | ||
|
The
amount of total gains or losses for the period included in earnings (or
change
in net assets) attributable to the change in unrealized gains
or
losses relating to assets still held at the reporting date
|
$ | - | ||
|
|
||||
Assets
measured at fair value on a nonrecurring basis, segregated by fair value
hierarchy, during the period ended December 31, 2009 are summarized below (in
thousands):
|
Fair Value Measurements at Reporting Date
Using
|
||||||||||||||||
|
Quoted
Prices in Active
|
Significant
Other
|
Significant
|
||||||||||||||
|
Markets
for Identical
|
Observable
|
Unobservable
|
||||||||||||||
|
Assets
|
Inputs
|
Inputs
|
||||||||||||||
|
Description
|
December
31, 2009
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
||||||||||||
|
Impaired
loans
|
$ | 15,483 | - | - | $ | 15,483 | ||||||||||
|
Other
real estate owned
|
$ | 459 | - | $ | 459 | - | ||||||||||
Impaired
loans that are collateral dependent have been presented at their fair value,
less costs to sell, of $18.7 million through the establishment of specific
reserves of $3.2 million or by recording charge-offs when the carrying value
exceeds the fair value. Valuation techniques consistent with the market approach
and/or cost approach were used to measure fair value and primarily included
observable inputs for the individual impaired loans being evaluated such as
recent sales of similar assets or observable market data for operational or
carrying costs. In cases where such inputs were unobservable, the loan balance
is reflected within the Level 3 hierarchy. The fair value of other real estate
owned is based on an appraisal of the property using the market approach
for valuation.
Note
R—Regulatory Matters
It is the
policy of the Federal Reserve that bank 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 bank
holding companies should not maintain a level of cash dividends that undermines
the bank 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 bank holding company from
engaging in an unsafe or unsound practice. Depending upon the circumstances, the
agencies could take the position that paying a dividend would constitute an
unsafe or unsound banking practice.
The Bank
and Company are subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possible additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Company’s consolidated financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Company and the
Bank must meet specific capital guidelines that involve quantitative measures of
their assets, liabilities and certain off-balance-sheet items as calculated
under regulatory accounting practices. The capital amounts and classification of
the Company and the Bank are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
Quantitative
measures established by regulations to ensure capital adequacy require the
Company and the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets, and of Tier I capital to average assets.
As of
December 31, 2009, the Company and the Bank met all regulatory requirements for
classification as well capitalized under the regulatory framework for prompt
corrective action.
|
To
be well
|
||||||||||||||||||||||||
|
capitalized
under
|
||||||||||||||||||||||||
|
For
Capital
|
prompt
corrective
|
|||||||||||||||||||||||
|
Actual
|
adequacy
purposes
|
action
provisions
|
||||||||||||||||||||||
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||||||
|
AS
OF DECEMBER 31, 2009
|
||||||||||||||||||||||||
|
Total
Capital
|
||||||||||||||||||||||||
|
(to
risk-weighted assets)
|
||||||||||||||||||||||||
|
Company
|
$ | 259,658 | 17.06 | % | $ | 121,730 |
>=8.00
|
N/A | N/A | |||||||||||||||
|
Bank
|
185,629 | 12.22 | % | 121,504 | 8.00 | 151,880 |
>=
10.00%
|
|||||||||||||||||
|
Tier
I capital
|
||||||||||||||||||||||||
|
(to
risk-weighted assets)
|
||||||||||||||||||||||||
|
Company
|
240,636 | 15.81 | % | 60,865 |
>=4.00
|
N/A | N/A | |||||||||||||||||
|
Bank
|
166,642 | 10.97 | % | 60,752 | 4.00 | 91,128 |
>=
6.00%
|
|||||||||||||||||
|
Tier
I capital
|
||||||||||||||||||||||||
|
(to
average assets)
|
||||||||||||||||||||||||
|
Company
|
240,636 | 12.68 | % | 75,903 |
>=4.00
|
N/A | N/A | |||||||||||||||||
|
Bank
|
166,642 | 8.78 | % | 75,903 | 4.00 | 94,878 |
>=
5.00%
|
|||||||||||||||||
|
AS
OF DECEMBER 31, 2008
|
||||||||||||||||||||||||
|
Total
Capital
|
||||||||||||||||||||||||
|
(to
risk-weighted assets)
|
||||||||||||||||||||||||
|
Company
|
$ | 194,066 | 12.87 | % | $ | 120,590 |
>=8.00
|
N/A | N/A | |||||||||||||||
|
Bank
|
179,169 | 11.91 | % | 120,368 | 8.00 | 150,460 |
>=
10.00%
|
|||||||||||||||||
|
Tier
I capital
|
||||||||||||||||||||||||
|
(to
risk-weighted assets)
|
||||||||||||||||||||||||
|
Company
|
176,705 | 11.72 | % | 60,295 |
>=4.00
|
N/A | N/A | |||||||||||||||||
|
Bank
|
161,808 | 10.75 | % | 60,184 | 4.00 | 90,276 |
>=
6.00%
|
|||||||||||||||||
|
Tier
I capital
|
||||||||||||||||||||||||
|
(to
average assets)
|
||||||||||||||||||||||||
|
Company
|
176,705 | 10.10 | % | 69,961 |
>=4.00
|
N/A | N/A | |||||||||||||||||
|
Bank
|
161,808 | 9.24 | % | 70,059 | 4.00 | 87,574 |
>=
5.00%
|
|||||||||||||||||
Note
S—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.
|
Three
months ended
|
||||||||||||||||
|
2009
|
March 31,
|
June 30,
|
September 30,
|
December 31,
|
||||||||||||
|
(in
thousands, except per share data)
|
||||||||||||||||
|
Interest
income
|
$ | 19,417 | $ | 20,068 | $ | 20,024 | $ | 20,480 | ||||||||
|
Net
interest income
|
14,916 | 15,969 | 15,975 | 16,849 | ||||||||||||
|
Provision
for loan and lease losses
|
3,000 | 2,500 | 3,500 | 4,000 | ||||||||||||
|
Non-interest
income
|
3,328 | 3,803 | 3,113 | 1,575 | ||||||||||||
|
Non-interest
expense
|
13,253 | 15,533 | 13,018 | 14,374 | ||||||||||||
|
Income
tax expense
|
781 | 632 | 818 | 17 | ||||||||||||
|
Net
income
|
1,210 | 1,107 | 1,752 | 33 | ||||||||||||
|
Net
income (loss) available to common shareholders
|
363 | 125 | 786 | (932 | ) | |||||||||||
|
Net
income (loss) per share - basic
|
0.03 | 0.01 | 0.04 | (0.04 | ) | |||||||||||
|
Net
income (loss) per share - diluted
|
0.03 | 0.01 | 0.04 | (0.04 | ) | |||||||||||
|
Three
months ended
|
||||||||||||||||
|
2008
|
March 31,
|
June 30,
|
September 30,
|
December 31,
|
||||||||||||
|
(in
thousands, except per share data)
|
||||||||||||||||
|
Interest
income
|
$ | 25,243 | $ | 23,508 | $ | 23,895 | $ | 22,416 | ||||||||
|
Net
interest income
|
12,896 | 12,921 | 13,497 | 14,905 | ||||||||||||
|
Provision
for loan and lease losses
|
1,350 | 3,350 | 4,100 | 3,700 | ||||||||||||
|
Non-interest
income (loss)
|
3,476 | (5,251 | ) | 2,672 | (8,500 | ) | ||||||||||
|
Non-interest
expense
|
10,362 | 11,210 | 11,674 | 64,142 | ||||||||||||
|
Income
tax expense (benefit)
|
1,833 | (2,619 | ) | 136 | (20,242 | ) | ||||||||||
|
Net
income (loss)
|
2,827 | (4,271 | ) | 259 | (41,195 | ) | ||||||||||
|
Net
income available to common shareholders
|
2,789 | (4,256 | ) | 241 | (41,397 | ) | ||||||||||
|
Net
income (loss) per share - basic
|
0.19 | (0.29 | ) | 0.02 | (2.84 | ) | ||||||||||
|
Net
income (loss) per share - diluted
|
0.19 | (0.29 | ) | 0.02 | (2.84 | ) | ||||||||||
Note
T—Condensed Financial Information—Parent Only
Condensed
Balance Sheet
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
(in
thousands)
|
||||||||
|
Assets
|
||||||||
|
Cash
and due from banks
|
$ | 71,928 | $ | 14,255 | ||||
|
Investment
in bank subsidiaries
|
184,209 | 178,506 | ||||||
|
Other
assets
|
2,792 | 2,220 | ||||||
|
Total
assets
|
$ | 258,929 | $ | 194,981 | ||||
|
Liabilities
and stockholders' equity
|
||||||||
|
Other
liabilities
|
$ | 325 | $ | 177 | ||||
|
Trust
preferred
|
13,401 | 13,401 | ||||||
|
Notes
payable
|
- | 1,000 | ||||||
|
Shareholders'
equity
|
245,203 | 180,403 | ||||||
|
Total
Liabilities and shareholders' equity
|
$ | 258,929 | $ | 194,981 | ||||
Condensed
Statement of Operations
|
December
31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Income
|
||||||||||||
|
Other
income
|
$ | 266 | $ | 159 | $ | 144 | ||||||
|
Total
Income
|
266 | 159 | 144 | |||||||||
|
Expense
|
||||||||||||
|
Interest
on subordinated debentures
|
883 | 954 | 84 | |||||||||
|
Interest
on notes payable
|
15 | 747 | - | |||||||||
|
Non-interest
expense
|
622 | 261 | 475 | |||||||||
|
Total
Expense
|
1,520 | 1,962 | 559 | |||||||||
|
Equity
in undistributed income (loss) of subsidiary
|
4,963 | (41,156 | ) | 14,726 | ||||||||
|
Net
income (loss) before tax benefit
|
3,709 | (42,959 | ) | 14,311 | ||||||||
|
Income
tax (benefit)
|
(393 | ) | (579 | ) | (29 | ) | ||||||
|
Net
Income (loss)
|
4,102 | (42,380 | ) | 14,340 | ||||||||
|
Less
preferred dividends and accretion
|
(3,760 | ) | (243 | ) | (68 | ) | ||||||
|
Income
allocated to Series A preferred shareholders
|
- | - | (115 | ) | ||||||||
|
Net
income (loss) available to common shareholders
|
$ | 342 | $ | (42,623 | ) | $ | 14,157 | |||||
Condensed
Statements of Cash Flows
|
December
31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Operating
activities
|
||||||||||||
|
Net
income (loss)
|
$ | 4,102 | $ | (42,380 | ) | $ | 14,340 | |||||
|
Increase in
other assets
|
(572 | ) | (799 | ) | (1,060 | ) | ||||||
|
Increase
in other liabilities
|
300 | 277 | 389 | |||||||||
|
Equity
in undistributed (income) loss of
subsidiary
|
(4,963 | ) | 41,156 | (14,726 | ) | |||||||
|
Net
cash used in operating activities
|
(1,133 | ) | (1,746 | ) | (1,057 | ) | ||||||
|
Investing
activities
|
||||||||||||
|
Contribution
to subsidiary
|
- | (33,500 | ) | (21,000 | ) | |||||||
|
Net
cash used in investing activities
|
- | (33,500 | ) | (21,000 | ) | |||||||
|
Financing
activities
|
||||||||||||
|
Dividends
on preferred stock
|
(2,293 | ) | (184 | ) | (68 | ) | ||||||
|
Proceeds
from the issuance of trust preferred securities
|
- | - | 13,401 | |||||||||
|
Proceeds
(repayment) from short term borrowings
|
(1,000 | ) | 1,000 | - | ||||||||
|
Proceeds
from the issuance of Series B preferred stock
|
- | 45,220 | - | |||||||||
|
Proceeds
from the issuance of common stock, net of costs
|
62,099 | - | - | |||||||||
|
Proceeds
from the exercise of common stock options
|
- | - | 1,284 | |||||||||
|
Excess
tax benefit from share based payment arrangements
|
- | - | 267 | |||||||||
|
Net
cash provided by financing activities
|
58,806 | 46,036 | 14,884 | |||||||||
|
Net
(decrease) increase in cash and cash equivalents
|
57,673 | 10,790 | (7,173 | ) | ||||||||
|
Cash
and cash equivalents, beginning of year
|
14,255 | 3,465 | 10,638 | |||||||||
|
Cash
and cash equivalents, end of year
|
$ | 71,928 | $ | 14,255 | $ | 3,465 | ||||||
None
Disclosure
Controls and Procedures
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our reports under the Securities
Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed,
summarized, and reported within the time periods specified in the SEC’s rules
and forms, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and our Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures,
our management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and our management necessarily was required to apply
its judgment in evaluating the cost-benefit relationship of possible controls
and procedures.
Under the
supervision of our Chief Executive Officer and Chief Financial Officer, we have
carried out an evaluation of the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this report. Based upon that
evaluation, our chief executive officer and chief financial officer concluded
that our disclosure controls and procedures are effective at the reasonable
assurance level.
Changes
in Internal Control Over Financial Reporting
There has
been no change in our internal control over financial reporting that occurred
during the quarter ended December 31, 2009 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
Management’s
Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Pursuant to the rules and regulations of the
Securities and Exchange Commission, internal control over financial reporting is
a process designed by, or under the supervision of, our principal executive and
principal financial officers and effected by our Board of Directors, management
and other personnel, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that:
• pertain
to the maintenance of records that in reasonable detail accurately and fairly
reflect the transactions and dispositions of our assets;
• provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures are being made only in
accordance with authorizations of our management and directors; and
• provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect
on our 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.
Management
has evaluated the effectiveness of its internal control over financial reporting
as of December 31, 2009 based on the control criteria established in a report
entitled
Internal
Control—Integrated Framework
, issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on such evaluation, management
has concluded that our internal control over financial reporting was effective
as of December 31, 2009.
Our
independent registered public accounting firm has issued a report on our
internal control over financial reporting. This report appears in
section iii, below.
(iii)
Report of Independent Registered Public Accounting Firm
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors and Shareholders
The
Bancorp, Inc.
We have
audited The Bancorp, Inc. (a Delaware corporation) and its subsidiary’s internal
control over financial reporting as of December 31, 2009, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Bancorp, Inc.’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 Bancorp, Inc. and its subsidiary’s internal control
over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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.
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.
In our
opinion, The Bancorp, Inc. and its subsidiary maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2009, based on criteria established in 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), the consolidated balance sheets of
The Bancorp, Inc. and its subsidiary as of December 31, 2009 and 2008, and the
related consolidated statements of operations, shareholders’ equity, and cash
flows for each of the three years in the period ended December 31, 2009 and our
report dated March 16, 2010 expressed an unqualified opinion
/s/ Grant
Thornton LLP
Philadelphia,
Pennsylvania
March 16,
2010
None
Information
included in the 2010 Proxy Statement to be filed is incorporated herein by
reference.
Information
included in the 2010 Proxy Statement to be filed is incorporated herein by
reference.
Information
included in the 2010 Proxy Statement to be filed is incorporated herein by
reference.
Information
included in the 2010Proxy Statement to be filed is incorporated herein by
reference.
Information
included in the 2010 Proxy Statement to be filed is incorporated herein by
reference.
|
(a)
|
The
following documents are filed as part of this Annual Report on Form
10-K:
|
|
2.
|
Financial Statement
Schedules
|
None
|
3.
|
Exhibits
|
|
Exhibit No.
|
Description
|
||
|
3.1
|
Certificate
of Incorporation
(1)
|
||
|
3.2
|
Bylaws
(1)
|
||
|
3.3
|
Certificate of Designations for
Fixed Rate
Cumulative
Perpetual Preferred Stock, Series
B
(2)
|
||
|
4.1
|
Specimen
stock certificate
(1)
|
||
|
4.2
|
Specimen
Series B Preferred stock certificate
(2)
|
||
|
4.3
|
Warrant
for Purchase of Shares of Common Stock
(2)
|
||
|
4.4
|
Letter Agreement, dated December
12, 2008, between the registrant and the United States Treasury
Department, which includes the Securities Purchase Agreement attached
thereto
(2)
|
||
|
10.1
|
1999 Stock Option Plan (the “1999
SOP”)
(3)
|
||
|
10.2
|
Form
of Grant of Non-Qualified Stock Options under the 1999 SOP
(3)
|
|
|
10.3
|
Form
of Grant of Incentive Stock Options under the 1999 SOP
(3)
|
|
|
10.4
|
The
Bancorp, Inc. 2005 Omnibus Equity Compensation Plan (the “2005 Plan”)
(4)
|
|
|
10.5
|
Form
of Grant of Non-qualified Stock Option under the 2005 Plan
(5)
|
|
|
10.6
|
Form
of Grant of Incentive Stock Option under the 2005 Plan
(5)
|
|
|
10.7
|
Form
of Stock Unit Award Agreement under the 2005 Plan
(6)
|
|
|
10.8
|
Employee
and Non-employee Director Non-cash Compensation Plan
(1)
|
|
|
10.9
|
Sublease
and Technical Support Agreement with RAIT Investment Trust
(1)
|
|
|
12.1
|
|
|
|
21.1
|
||
|
23.1
|
||
|
31.1
|
||
|
31.2
|
||
|
32.1
|
||
|
32.2
|
||
|
(1)
|
Filed
previously as an exhibit to our Registration Statement on Form S-4,
registration number 333-117385, and by this reference incorporated
herein.
|
|
(2)
|
Filed
previously as an exhibit to our current report on Form 8-K filed December
16, 2008, and by this reference incorporated
herein.
|
|
(3)
|
Filed
previously as an exhibit to our Registration Statement on Form S-8,
registration number 333-124339, and by this reference incorporated
herein.
|
|
(4)
|
Filed
previously as an appendix to the definitive proxy statement on Schedule
14A filed on May 2, 2005, and by this reference incorporated
herein.
|
|
(5)
|
Filed
previously as an exhibit to our current report on Form 8-K filed
December 30, 2005, and by this reference incorporated
herein.
|
|
(6)
|
Filed
previously as an exhibit to our current report on Form 8-K filed
January 20, 2006, and by this reference incorporated
herein.
|
|
(7)
|
Filed
previously as an exhibit to our quarterly report on Form 10-Q for the
quarter ended June 30, 2007.
|
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
|
THE
BANCORP, INC. (Registrant)
|
||||
|
March
16, 2010
|
By:
|
/s/
Betsy Z. Cohen
|
||
|
Betsy
Z. Cohen
|
||||
|
Chief
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/
Betsy Z. Cohen
BETSY
Z. COHEN
|
Chief
Executive Officer and Director
(Principal
executive officer)
|
March
16, 2010
|
||
|
/s/
Frank M. Mastrangelo
FRANK
M. MASTRANGELO
|
President,
Chief Operating Officer and Director
|
March
16, 2010
|
||
|
/s/
Daniel G. Cohen
DANIEL
G. COHEN
|
Director
|
March
16, 2010
|
||
|
/s/
Walter T. Beach
WALTER
T. BEACH
|
Director
|
March
16, 2010
|
||
|
/s/
Michael J. Bradley
MICHAEL
J. BRADLEY
|
Director
|
March
16, 2010
|
||
|
/s/
Matthew Cohn
MATTHEW
COHN
|
Director
|
March
16, 2010
|
||
|
/s/
Leon A. Huff
LEON
A. HUFF
|
Director
|
March
16, 2010
|
||
|
/s/
William H. Lamb
WILLIAM
H. LAMB
|
Director
|
March
16, 2010
|
||
|
/s/
James J. McEntee III
JAMES
J. MCENTEE III
|
Director
|
March
16, 2010
|
||
|
/s/
Linda Schaeffer
LINDA
SCHAEFFER
|
Director
|
March
16, 2010
|
||
|
/s/
Joan Specter
JOAN
SPECTER
|
Director
|
March
16, 2010
|
||
|
/s/
Paul Frenkiel
PAUL
FRENKIEL
|
Executive
Vice President of Strategy,
Chief
Financial Officer and Secretary
|
March
16, 2010
|
||
88
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A . Risk FactorsItem 1B . Unresolved Staff CommentsItem 2 . PropertiesItem 3 . Legal ProceedingsItem 4 . [reserved and Omitted Pursuant To Sec Release No. 33- 9089A. ]Part IIItem 5 . Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6 . Selected Financial DataItem 7A . Quantitative and Qualitative Disclosures About Market RiskItem 8 . Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A . Controls and ProceduresItem 9B . Other InformationPart IIIItem 10 . Directors and Executive Officers Of The RegistrantItem 11 . Executive CompensationItem 12 . Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13 . Certain Relationships and Related TransactionsItem 14 . Principal Accountant Fees and ServicesPart IVItem 15 . Exhibits and Financial Statement and Schedules