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| TBBK > SEC Filings for TBBK > Form 10-Q on 11-Aug-2008 | All Recent SEC Filings |
11-Aug-2008
Quarterly Report
Forward-Looking Statements
When used in this Form 10-Q, the words "believes" "anticipates" "expects" and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties more particularly described in Item 1, under the caption "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2007. These risks and uncertainties could cause actual results to differ materially. Readers are cautioned not place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly release the results of any revisions to forward-looking statements which we may make to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events except as required by applicable law.
In the following discussion we provide information about our results of operations, financial condition, liquidity and asset quality. We intend that this information facilitate your understanding and assessment of significant changes and trends related to our financial condition and results of operations. You should read this section in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operation" included in our Annual Report on Form 10-K for the year ended December 31, 2007.
Critical Accounting Policies and Estimates
Our accounting and reporting policies conform with accounting principles generally accepted in the United States of America and general practices within the financial services industry. The preparation of financial statements in conformity with GAAP 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 historical loss experience. We also evaluate economic conditions, uncertainties in estimating losses and inherent risks in the 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 that would reduce our earnings.
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
Second quarter 2008 to second quarter 2007
Net Loss: Net loss for the second quarter of 2008 was $4.3 million, compared to net income of $3.9 million for the second quarter of 2007. The net loss for the second quarter of 2008 was the result of a $8.3 million impairment on securities, as management had determined that these investments had become "other than
temporarily impaired". The impairment charge is included in current period earnings. Diluted loss per share was $0.29 in the second quarter of 2008 as compared to diluted earnings of $0.27 for the second quarter of 2007. Return on average assets was (1.04%) and return on average equity was (9.41%) for the second quarter of 2008, as compared to 1.17% and 10.13%, respectively for the second quarter of 2007.
Net Interest Income: Our interest income for the second quarter of 2008 decreased to $23.5 million from $26.2 million in the second quarter of 2007, while our net interest income increased to $12.9 million from $12.8 million. Our average loans increased to $1.396 billion for the second quarter of 2008 from $1.133 billion for the second quarter of 2007. The reason for the decreases in our interest income was the reductions in rates by the Federal Reserve Board, or FRB, beginning in the second half of 2007 through the second quarter of 2008. The reduction in interest income was partially offset by the interest income generated by the organic growth of our loan portfolio which increased on average $263.7 million over the second quarter of 2007.
Our net interest margin for the second quarter 2008 decreased to 3.34% from 3.89% for the second quarter of 2007, a decrease of 55 basis points (.55%). The margin decline was due to the rate reductions by the FRB, 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 FRB and the related reductions in the rates payable by our loan assets.
For the second quarter of 2008 the average yield on our interest-earning assets decreased to 6.07% from 7.95% for the second quarter of 2007, a decrease of 188 basis points (1.88%). The decrease in yields is the result of the FRB rate reductions. As stated above, a significant portion of our loans are tied to prime which has decreased 325 basis points since the third quarter of 2007. Cost of interest-bearing deposits decreased to 3.28% for the second quarter of 2008 from 4.80% for the second quarter of 2007, a decrease of 152 basis points (1.52%). Average interest-bearing deposits increased to $1.131 billion from $1.079 billion, an increase of $52.3 million or 4.9%. The increase in average demand deposits of $75.5 million is the result of our acquisition of Stored Value Solutions, or SVS, division of Marshall BankFirst and its related deposit accounts.
Average Daily Balances. The following table presents the average daily balances of assets, liabilities and stockholders' 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:
Three Months Ended June 30,
2008 2007
Average Average Average Average
Balance Interest Rate Balance Interest Rate
(dollars in thousands)
Assets:
Interest-earning assets:
Loans net of unearned discount $ 1,396,421 $ 21,942 6.29 % $ 1,132,682 $ 23,610 8.34 %
Investment securities 127,544 1,432 4.49 % 112,343 1,601 5.70 %
Interest bearing deposits 3,069 11 1.43 % 1,031 1 0.39 %
Federal funds sold 21,566 123 2.28 % 70,432 946 5.37 %
Net interest-earning assets 1,548,600 23,508 6.07 % 1,316,488 26,158 7.95 %
Allowance for loan and lease losses (11,875 ) (9,221 )
Other assets 113,646 36,374
$ 1,650,371 $ 1,343,641
Liabilities and Shareholders' Equity:
Deposits:
Demand (non-interest bearing) $ 145,227 $ 69,710
Interest bearing deposits
Interest checking 176,080 $ 986 2.24 % 92,148 $ 718 3.12 %
Savings and money market 478,368 2,991 2.50 % 574,436 6,988 4.87 %
Time 476,468 5,283 4.44 % 412,020 5,248 5.09 %
Total interest bearing deposits 1,130,916 9,260 3.28 % 1,078,604 12,954 4.80 %
FHLB advances 155,338 917 2.36 % 26,626 361 5.42 %
Other borrowed funds 2,300 12 2.09 % 3,886 31 3.19 %
Trust Preferred 13,401 236 7.04 % - -
Notes payable 15,055 162 4.30 % - -
Net interest bearing liabilities 1,317,010 10,587 3.22 % 1,109,116 13,346 4.81 %
Other liabilities 6,626 9,977
Total liabilities 1,468,863 1,188,803
Shareholders' equity 181,508 154,838
$ 1,650,371 $ 1,343,641
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Net yield on average interest earning assets $ 12,921 3.34 % $ 12,812 3.89 %
In the second quarter of 2008, average interest-earning assets increased to $1.549 billion, an increase of $232.1 million, or 17.6%, from the second quarter of 2007.
Provision for Loan and Lease Losses. Our provision for loan and lease losses was $3.4 million for the second quarter of 2008 compared to $750,000 for the second quarter of 2007. For more information about our provisions 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 $3.0 million before an impairment loss of $8.3 million for the second quarter of 2008 as compared to $1.7 million for the second quarter of 2007, an increase of $1.3 million. The primary reason for the increase in our core non interest income was a result of $2.0 million of earnings for prepaid card fees as the result of our acquisition of SVS on November 30, 2007. Leasing income decreased to $74,000 from $931,000, a decrease of $857,000 or 92.1.0%, which is due to a large leasing relationship that ended in 2007. The $8.3 million impairment on securities was attributable to an impairment charge against two structured finance securities. Sharp declines in the market valuations of the securities, which were purchased in 2004 and 2005, coupled with uncertainty about market conditions, led management to determine that these investments had become "other than temporarily impaired" under GAAP.
Non-Interest Expense. Total non-interest expense was $11.2 million for the second quarter of 2008, as compared to $7.3 million for second quarter of 2007, an increase of $3.9 million or 53.5%. Salaries and employee benefits amounted to $5.2 million for the second quarter of 2008 as compared to $3.3 million for the second quarter of 2007, an increase of $1.9 million or 56.5%. Our salary expense grew from the addition of 91 employees from the acquisition of SVS. Occupancy expense increased to $1.2 million from $730,000 for the second quarter of 2008, an increase of $446,000 or 61.1%. The increase is a result of two new office space leases as a result of our acquisition of SVS. And, an increase in depreciation and amortization as a result of $2.5 million in fixed assets. Data processing expense increased $392,000 from $678,000 during the second quarter of 2007 to $1.1 million during the second quarter of 2008. This increase is a result of growth in our account base, in particular health savings accounts in our affinity group programs, as well as upgrades to our computer system. Professional fees increased $241,000 to $803,000 as a result of increased costs of internal auditing and legal fees associated with regulatory and compliance matters. Other expense increased $706,000 to $2.6 million during the second quarter of 2008 from $1.8 million during the second quarter of 2007, or 38.2%. This is a result of increases in cost of loans, other operational expense, and FDIC insurance expense. Our loan related expenses increased from $117,500 to $219,400 from June 30, 2007 as compared to June 30, 2008. The increase in loan related expenses is primarily due to the increase in costs associated with managing our loan portfolio. FDIC insurance
increased 216.6% or $138,200, from $63,800 as a result of increased insurance assessments. Other operational expense increased $90,200 from $378,300 during the second quarter of 2007 to $468,500 during the second quarter of 2008 primarily due to an increase in costs related to expanding our retirement account line of business.
First six months of 2008 to first six months of 2007
Net Loss: Net loss for the first six months of 2008 was $1.5 million, compared to net income of $7.4 million for the first six months of 2007. The net loss for the first six months of 2008 was the result of a $8.3 million impairment on securities, as management had determined that these investments had become "other than temporarily impaired". The impairment charge is included in current period earnings. Diluted loss per share was $0.10 in the first six months of 2008 as compared to $0.51 for the first six months of 2007. Return on average assets was (0.18%) and return on average equity was (1.61%) for first six months of 2008, as compared to 1.13% and 9.84%, respectively for the first six months of 2007.
Net Interest Income: Our interest income for the first six months of 2008 decreased to $48.8 million from $51.7 million in the first six months of 2007, while our net interest income increased to $25.8 million from $25.4 million. Our average loans increased to $1.363 billion for first six months of 2008 from $1.103 billion for the first six months of 2006. As stated above, the primary reason for the decreases in our interest income was the reductions in rates by the FRB beginning in the second half of 2007 through the second quarter of 2008. The reduction in interest income was partially offset by the interest income generated by organic growth of our loan portfolio.
Our net interest margin for the first six months of 2008 decreased to 3.40% from 3.88% for the first six months of 2007, a decrease of 48 basis points (.48%). The margin decline, as stated above, was due to the rate reductions by the FRB, as a significant portion of the interest rates on the loans varied with prime, while our ability to reprice our liabilities (principally, deposits and debt facilities) typically lags behind the reductions by the FRB and the related reductions in the rates payable by our loan assets.
In the first six months of 2008 the average yield on our interest-earning assets decreased to 6.43% from 7.91% for first six months of 2007, a decrease of 148 basis points (1.48%). The decrease in yields is the result of the FRB rate reductions. As stated above, a significant portion of our loans are tied to prime which has decreased 325 basis points since the third quarter of 2007. Cost of interest-bearing deposits decreased to 3.60% for the first six months of 2008 from 4.77% for the first six months of 2007, a decrease of 117 basis points (1.17%). Average interest-bearing deposits increased to $1.131 billion from $1.050 billion, an increase of $80.3 million or 7.6%, due principally to the acquisition of SVS and its related deposits.
Average Daily Balances. The following table presents the average daily balances of assets, liabilities and stockholders' 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:
Six Month Ended June 30,
2008 2007
Average Average Average Average
Balance Interest Rate Balance Interest Rate
(dollars in thousands)
Assets:
Interest-earning assets:
Loans net of unearned discount 1,363,494 $ 45,231 6.63 % $ 1,102,655 $ 46,111 8.36 %
Investment securities 124,862 3,038 4.87 % 113,819 3,277 5.76 %
Interest bearing deposits 3,171 29 1.83 % 1,031 1 0.19 %
Federal funds sold 25,137 453 3.60 % 89,451 2,312 5.17 %
Net interest-earning assets 1,516,664 48,751 6.43 % 1,306,956 51,701 7.91 %
Allowance for loan and lease losses (11,403 ) (8,985 )
Other assets 118,034 35,815
$ 1,623,295 $ 1,333,786
Liabilities and Shareholders' Equity:
Deposits:
Demand (non-interest bearing) $ 146,974 $ 70,822
Interest bearing deposits
Interest checking 155,626 $ 1,891 2.43 % 86,835 $ 1,285 2.96 %
Savings and money market 540,521 8,075 2.99 % 513,541 11,925 4.64 %
Time 434,531 10,404 4.79 % 449,971 11,836 5.26 %
Total interest bearing deposits 1,130,678 20,370 3.60 % 1,050,347 25,046 4.77 %
Short term borrowings 137,257 1,889 2.75 % 43,188 1,174 5.44 %
Repurchase agreements 2,521 26 2.06 % 6,579 115 3.50 %
Subordinated debt 13,203 485 7.35 % - -
Long term payable 7,610 164 4.31 % - -
Net interest bearing liabilities 1,291,269 22,934 3.55 % 1,100,114 26,335 4.79 %
Other liabilities 5,071 10,347
Total Liabilities 1,443,314 1,181,283
Shareholders' equity 179,981 152,503
$ 1,623,295 $ 1,333,786
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Net yield on average interest earning assets $ 25,817 3.40 % $ 25,366 3.88 %
Provision for Loan and Lease Losses. Our provision for loan and lease losses was $4.7 million for the first six months of 2008 compared to $1.5 million for the first six months of 2007. For more information about our provisions 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 $6.5 million before an impairment loss of $8.3 million for the second quarter of 2008 as compared to $3.2 million for the second quarter of 2007, an increase $3.3 million. The primary reason for the increase in our core non interest income was a result of $4.5 million of earnings for prepaid card fees as the result of our acquisition of SVS. Leasing income decreased to $290,000 from $1.5 million, a decrease of $1.2 million or 80.7%, which is due to a large leasing relationship that ended in 2007. The $8.3 million impairment on securities was attributable to an impairment charge against two structured finance securities. Sharp declines in the market valuations of the securities, which were purchased in 2004 and 2005, coupled with uncertainty about market conditions, led management to determine that these investments had become "other than temporarily impaired" under GAAP.
Non-Interest Expense. Total non-interest expense was $21.6 million for the first six months of 2008, as compared to $14.7 million for the first six months of 2007, an increase of $6.8 million or 46.4%. Salaries and employee benefits amounted to $10.1 million for the first six months of 2008 as compared to $6.9 million for the first six months of 2007. The increase in salaries and employee benefits resulted from an increase in commercial lending and private client staffs as well as the addition of the SVS staff. Occupancy expense increased to $2.3 million from $1.5 million for the six months ended June 30, 2008, an increase of $795,000 or 54.6% from the same time period in 2007. The increase is a result of two new office space leases as a result of our acquisition of SVS. And, an increase in depreciation and amortization as a result of $2.5 million in fixed assets. Data processing expense increased to $2.0 million for the six months ended June 30, 2008 from $1.4 million for the same period in 2007. This increase of approximately $686,000 is a result of growth in our account base, in particular health savings accounts in our affinity group programs, as well as upgrades to our computer system. Professional fees increased $160,000 to $1.3 million as a result of increased costs of internal auditing and legal fees associated with regulatory and compliance matters. Other expense increased to $5.0 million from $3.5 million, an increase of $1.5 million. This is a result of
increases in loan process costs, other operational expense, and FDIC insurance expense. Our loan related expenses increased from $169,200 to $419,000 from June 30, 2007 as compared to June 30, 2008. The increase in loan related expenses is primarily due to the increase in costs associated with managing our loan portfolio. FDIC insurance increased 321.8% or $285,300, from $88,600 as a result of increased insurance assessments. Other operational expense increased $246,300 from $653,800 for the six months ended June 30, 2007 to $900,100 for the same period in 2008 primarily due to an increase in cost related to expanding our retirement account line of business.
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.
The primary source of funds for our financing activities has been cash inflows from net increases in deposits, which were $36.0 million in the first six months of 2008. We have also used sources outside of our core deposit products to fund our loan growth, including Federal Home Loan Bank advances and repurchase agreements. As of June 30, 2008, we had $150.0 million of outstanding Federal Home Loan Bank advances and $2.0 million in repurchase agreements. We also had $20 million outstanding on the bank stock loan included in long-term borrowings.
Funding was directed primarily at cash outflows required for loans, which were $141.5 million in the first six months of 2008. At June 30, 2008, we had outstanding commitments to fund loans, including unused lines of credit, of $418.9 million.
Our subsidiary bank must comply with capital adequacy guidelines issued by the FDIC. A bank must, in general, have a Tier 1 leverage ratio of 5.0%, a ratio of Tier I capital to risk-weighted assets of 6.0% and a ratio of total capital to risk-weighted assets of 10.0% in order to be considered "well capitalized." A Tier I leverage ratio is the ratio of Tier 1 capital to average assets for the period. "Tier I capital" includes common shareholders' equity, certain qualifying perpetual preferred stock and minority interests in equity accounts of consolidated subsidiaries, less goodwill. At June 30, 2008 the bank was "well capitalized" under banking regulations.
The following table sets forth our regulatory capital amounts and ratios for the periods indicated:
Tier 1 capital Tier 1 capital Total capital
to average to risk-weighted to risk-weighted
assets ratio assets ratio assets ratio
AS OF JUNE 30, 2008:
The Company 8.09 % 8.73 % 9.70 %
The Bancorp Bank 9.10 % 9.83 % 10.80 %
"Well capitalized" institution
(under FDIC regulations) 5.00 % 6.00 % 10.00 %
AS OF DECEMBER 31, 2007:
The Company 9.18 % 10.15 % 10.95 %
The Bancorp Bank 8.86 % 9.81 % 10.61 %
"Well capitalized" institution
(under FDIC regulations) 5.00 % 6.00 % 10.00 %
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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 a bank's interest margin resulting from changes in market interest rates.
We monitor and control interest rate risk through a variety of techniques, including use of traditional interest rate sensitivity analysis (also known as "gap analysis"). 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 are estimated to reprice during each time period and cumulatively through the end of each time period.
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 . . .
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