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 1A, under the caption "Risk Factors," in our Annual Report on Form 10-K for the year ended December 31, 2011 and in other of our public filings with the Securities and Exchange Commission. These risks and uncertainties could cause actual results to differ materially from those expressed or implied in this Form 10-Q. We caution readers not place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances after the date of this report 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, 2011.

We are a Delaware financial 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 banking services, which include private label banking, healthcare accounts, prepaid and debit cards, and merchant card processing 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 especially 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 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, merchant processing, healthcare accounts and prepaid card programs are a source of fee income and low-cost deposits.

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, our determination of the fair value of financial instruments, and income tax involve a higher degree of judgment and complexity than our other significant accounting policies.

We determine our allowance for loan and lease losses with the objective of maintaining a reserve level we believe to be sufficient to absorb our estimated probable credit losses. We base our determination of the adequacy of the allowance on periodic evaluations of our loan portfolio and other relevant factors. However, this evaluation is inherently subjective as it requires material estimates, including, among others, expected default probabilities, the amount of loss we may incur on a defaulted loan, expected commitment usage, the amounts and timing of expected future cash flows on impaired loans, value of collateral, estimated losses on consumer loans and residential mortgages, and general amounts for historical loss experience. We also evaluate economic conditions and uncertainties in estimating losses and inherent risks in our loan portfolio. To the extent actual outcomes differ from our estimates, we may need additional provisions for loan losses. Any such additional provisions for loan losses will be a direct charge to our earnings. See "Allowance for Loan and Lease Losses".

The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. We estimate the fair value of a financial instrument using a variety of valuation methods. Where financial instruments are actively traded and have quoted market prices, quoted market prices are used for fair value. When the financial instruments are not actively traded, other observable market inputs, such as quoted prices of securities with similar characteristics, may be used, if available, to determine fair value. When observable market prices do not exist, we estimate fair value. Our valuation methods and inputs consider factors such as types of underlying assets or liabilities, rates of estimated credit losses, interest rate or discount rate and collateral. Our best estimate of fair value involves assumptions including, but not limited to, various performance indicators, such as historical and projected default and recovery rates, credit ratings, current delinquency rates, loan-to value ratios and the possibility of obligor refinancing.

At the end of each quarter, we assess the valuation hierarchy for each asset or liability measured. From time to time, assets or liabilities may be transferred within hierarchy levels due to changes in availability of observable market inputs to measure fair value at the measurement date. Transfers into or out of hierarchy levels are based upon the fair value at the beginning of the reporting period.

We periodically review our investment portfolio to determine whether unrealized losses on securities are temporary, based on evaluations of the creditworthiness of the issuers or guarantors, and underlying collateral, as applicable. In addition, we consider the continuing performance of the securities. We recognize credit losses through the income statement. If management believes market value losses are temporary and that we have the ability and intention to hold those securities to maturity, we recognize the reduction in other comprehensive income, through equity.

We 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.

Current Developments
As described in "Recent Developments" in our September 30, 2011 Form 10-Q and December 31, 2011 Form 10-K, the Bank was previously notified by the FDIC that a formal action would be commenced as a result of various compliance and third-party risk management issues, including alleged violations of Section 5 of the Federal Trade Commission Act, emanating from certain overdraft charging practices of one of the Bank's former customers. In order to avoid a formal action, and without admitting or denying any liability, the Bank entered into a Stipulation for Entry of a Consent Order ("Order") in connection with this matter. The Order was issued by the FDIC on August 7, 2012. Pursuant to the Order, the Bank's directorate agreed to increase its oversight of compliance matters and the Bank agreed to various compliance-related actions including, but not limited to, strengthening its compliance management system and audit controls, developing and implementing a third-party risk management program, and providing the FDIC with notice of any new relationships or agreements with third party product contributors. The Bank also agreed to pay a civil money penalty of $172,000, which was accrued in second quarter 2012. The Bank's former customer, and not the Bank, was ordered to pay restitution; however the Order provides that the Bank could be required to establish a restitution account in the event restitution is unpaid by the former customer. Our former customer has advised us that substantially all restitution has been made, and based on our review of financial information of the former customer, we do not believe the Bank will have any residual restitution obligations under the Order.

As previously reported in our September 30, 2011 Form 10-Q and December 31, 2011 Form 10-K, after receiving notification of the alleged violations, the Bank made significant changes to its compliance risk management systems, including the addition of staff and the development and implementation of enhanced compliance, third party risk management, and audit controls. Accordingly, we believe that compliance with numerous requirements of the Order have been or are in the process of being substantially completed. These efforts and other compliance-related matters have and will increase our non-interest expense.

In addition to the above-referenced Order, we are a co-defendant with our former customer in two suits, both commenced in July 2012, one in Mississippi and one in Connecticut, and each purporting to be a class action, alleging that certain debit card transaction fees and ATM transaction fees imposed, and received solely by our former customer were improperly disclosed by it to its clients. We believe each of these suits to be without merit to the extent they seek to hold the Bank liable. Moreover, because our former customer contractually agreed to indemnify the Bank for such liabilities, we do not believe that an adverse result in either suit will materially affect us. We expect the Bank will incur legal fees in connection with its defense in these two actions, however these costs are also subject to indemnification by our former customer.

On May 4, 2012 final termination of the above-referenced former customer relationship was achieved. All amounts, including the former customers' deposits, were maintained at the Federal Reserve Bank; accordingly, there was no material impact our liquidity. Total deposits at June 30, 2012 after the termination of that customer were $2.8 billion compared to $2.2 billion at June 30, 2011.

Results of Operations

Second quarter 2012 to second quarter 2011

Net Income: Net income for the second quarter of 2012 was $3.9 million, compared to $660,000 for the second quarter of 2011. The $3.2 million, or 484% increase, reflected a $2.6 million increase in net interest income and a $2.8 million increase in non-interest income (excluding other-than-temporary impairment) which were partially offset by a $2.9 million increase in non-interest expense. Non-interest income (excluding other-than-temporary-impairment) increased to $10.6 million in second quarter 2012 from $7.8 million in second quarter 2011, primarily due to increases in prepaid card fees, which reflected an increased volume of accounts and related transaction fees. Other non-interest income categories increased as a result of both volume of transactions and service charges on certain health savings accounts. Net interest income increased to $20.9 million primarily as a result of higher loan and investment security interest. The provision for loan and lease losses decreased $2.7 million in second quarter 2012, compared to second quarter 2011. Diluted earnings per share were $0.12 in second quarter 2012 compared to $0.02 in the second quarter of 2011. Return on average assets was 0.46% and return on average equity was 5.54% for the second quarter of 2012, as compared to 0.10% and 1.02%, respectively, for the second quarter of 2011.

Net Interest Income: Our net interest income for second quarter 2012 increased to $20.9 million, an increase of $2.6 million or 14.4% from $18.3 million in second quarter 2011. Our interest income for second quarter 2012 increased to $23.9 million, an increase of $2.6 million or 12.0% from $21.4 million for second quarter 2011. The increase in interest income resulted primarily from higher balances of loans and investment securities. Investment security balances have been trending higher to levels more consistent with our peer ratios for securities to average assets. Our average investment securities increased to $541.8 million for second quarter 2012 from $346.7 million for second quarter 2011, while related interest income increased $1.1 million. Our average loans and leases increased to $1.79 billion for second quarter 2012 from $1.65 billion for second quarter 2011, while related interest income increased $1.1 million.

Our net interest margin (calculated by dividing net interest income by average interest earning assets) for second quarter 2012 decreased to 2.59% from 3.13% in second quarter of 2011, a decrease of 54 basis points. The decrease in the net interest margin resulted primarily from increases in deposit seasonality and deposit growth in excess of immediate funding needs. Such deposits were invested at the Federal Reserve Bank for liquidity purposes, but bore interest at only 25 basis points. Federal Reserve Bank deposits are included in interest earning deposits in the balance sheet, thereby lowering the net interest margin. In second quarter 2012, the average yield on our loans decreased to 4.30% from 4.40% for second quarter 2011, a decrease of 10 basis points. However, we also experienced a 13 basis point decrease in the cost of our deposits to 0.37% from 0.50%. Yields on taxable investment securities were lower at 3.09% compared to 3.46%, respectively, a decrease of 37 basis points as a result of new purchases with shorter average lives which typically have lower yields and lower market rates on such purchases.. Average interest earning deposits increased $564.4 million to $954.2 million in second quarter 2012 from $389.8 million in second quarter 2011, reflecting continued deposit growth as well as increases related to seasonality. These funds earn interest at a rate of 25 basis points which caused our asset yield and net interest margin to decrease in second quarter 2012. The interest cost of total deposits and interest bearing liabilities amounted to 0.40% for second quarter 2012 compared to 0.53% in second quarter 2011. The decrease is the result of continuing decreases in both our deposit rates due to the decrease in market interest rates, as well as changes in the mix of our deposits and, in particular, a significant increase in demand and interest checking deposits. In second quarter 2012, average demand and interest checking deposits amounted to $2.58 billion, compared to $1.98 billion in second quarter 2011. Deposit growth continued in wealth management, health savings, merchant processing and prepaid cards. In second quarter 2012, average deposits amounted to $3.06 billion, compared to $2.33 billion in second quarter 2011.

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,
                                            2012                                         2011
                            Average                      Average         Average                       Average
                           Balance        Interest        Rate          Balance        Interest         Rate
                                   (dollars in thousands)                       (dollars in thousands)
Assets:
Interest earning
assets:
Loans net of unearned
discount                 $ 1,780,071     $  19,125           4.30 %   $ 1,642,867     $   18,084           4.40 %
Leases - bank
qualified*                    13,770           207           6.01 %         4,820            100           8.30 %
Investment
securities-taxable           435,903         3,371           3.09 %       270,535          2,340           3.46 %
Investment
securities-nontaxable*       105,869         1,096           4.14 %        76,123          1,007           5.29 %
 Interest earning
deposits at Federal
Reserve Bank                 954,213           605           0.25 %       389,794            230           0.24 %
Net interest earning
assets                     3,289,826        24,404           2.97 %     2,384,139         21,761           3.65 %

Allowance for loan and
lease losses                 (32,101 )                                    (26,463 )
Other assets                 126,547                                      271,564
                         $ 3,384,272                                  $ 2,629,240

Liabilities and
shareholders' equity:
Deposits:
Demand and interest
checking                 $ 2,580,647     $   2,094           0.32 %   $ 1,978,071     $    2,188           0.44 %
Savings and money
market                       448,571           626           0.56 %       336,244            654           0.78 %
Time                          29,862           106           1.42 %        12,812             43           1.34 %
Total deposits             3,059,080         2,826           0.37 %     2,327,127          2,885           0.50 %

Repurchase agreements         22,255            24           0.43 %        19,832             26           0.52 %
Subordinated debt             13,401           217           6.48 %        13,401            216           6.45 %
Total deposits and
interest bearing
liabilities                3,094,736         3,067           0.40 %     2,360,360          3,127           0.53 %

Other liabilities              9,551                                        9,668
Total liabilities          3,104,287                                    2,370,028

Shareholders' equity         279,985                                      259,212
                         $ 3,384,272                                  $ 2,629,240

Net interest income on tax
equivalent basis *                       $  21,337                                    $   18,634

Tax equivalent
adjustment                                     456                                           377

Net interest income                      $  20,881                                    $   18,257

Net interest margin *                                        2.59 %                                        3.13 %

* Full taxable equivalent basis, using a 35% statutory tax rate.

For second quarter 2012, average interest earning assets increased to $3.29 billion, an increase of $905.7 million or 38.0% from second quarter 2011. The increase reflected increased average balances of loans and leases of $146.2 million or 8.9%, and increased average balances of investment securities of $195.1 million or 56.3%. Average demand and interest checking deposits increased $602.6 million or 30.5%. Average savings and money market deposits increased $112.3 million or 33.4%. The Bank experienced growth in deposits relating to prepaid, wealth management, healthcare, merchant acquiring and other categories. Prepaid and merchant acquiring balances increased primarily due to the acquisition of new clients and processors.

Provision for Loan and Lease Losses. Our provision for loan and lease losses was $4.3 million for the second quarter of 2012 compared to $7.0 million for the second quarter of 2011. The decrease in the provision is based on our evaluation of the adequacy of our allowance for loan and leases losses, particularly in light of current economic conditions. That evaluation reflected the impact of lower levels of net charge-offs which totaled $4.6 million in second quarter 2012 compared to $5.1 million in second quarter 2011. Additionally, in the second quarter of 2011, the provision reflected $713,000 of increases in reserves on specific loans while in the second quarter of 2012 such reserves were decreased by $1.5 million. At June 30, 2012, our allowance for loan and lease losses amounted to $31.2 million or 1.73% of total loans as compared to $29.6 million or 1.69% of total loans at December 31, 2011. We believe that our allowance is adequate to cover expected losses For more information about our provision and allowance for loan and lease losses and our loss experience, see "Financial Condition-Allowance for loan and lease losses", "-Summary of loan and lease loss experience," "-Net charge-offs," and "-Non-performing loans, loans 90 days delinquent and still accruing, and troubled debt restructurings," below.

Non-Interest Income. Non-interest income was $10.6 million in second quarter 2012 compared to $7.8 million in second quarter 2011 before OTTI of $126,000 in the second quarter of 2012. The $2.8 million or 35.8% increase in second quarter 2012 compared to second quarter 2011 primarily reflected increases in prepaid card transaction volume. Those increases were reflected in a $2.7 million or 60.9% increase in prepaid fees to $7.1 million for second quarter 2012 from $4.4 million for second quarter 2011. Second quarter prepaid income is impacted by our electronic tax refund business which increased significantly over the prior year period and which is concentrated in the first quarter. It also reflected increases in service fees on deposit accounts of $258,000 or 43.8% to $847,000 for second quarter 2012 from $589,000 for second quarter 2011 reflecting the institution of monthly service charges on certain health savings accounts. Affinity fees increased $229,000, or 64.5% to $584,000 for second quarter 2012 from $355,000 for second quarter 2011. This increase resulted primarily from an increase in fees from one affinity relationship. Other non-interest income decreased $147,000 or 34.5% to $279,000 for second quarter 2012 from $426,000 from second quarter 2011. This decrease was primarily due to a $233,000 legal settlement in favor of the Bank in 2011. Gain on sales of securities of $603,000 in 2011 resulted when long term maturities were replaced with shorter term maturities to begin to position the portfolio for the possibility of higher interest rates.

Non-Interest Expense. Total non-interest expense was $21.0 million for second quarter 2012, an increase of $2.9 million or 16.0% over $18.1 million for second quarter 2011. Salaries and employee benefits amounted to $9.1 million, an increase of $1.5 million or 20.5% over $7.6 million for second quarter 2011. The increase in salaries and employee benefits reflected staff additions and expense related to customer service and a significantly expanded call center, compliance and prepaid cards and a $226,000 increase in employee stock option expense. It also reflected annual salary increases between 0% and 3.0% for our staff. Depreciation and amortization increased $125,000 or 17.3% to $848,000 in second quarter 2012 from $723,000 in second quarter 2011 which reflected increased depreciation costs related to equipment for staff additions and increased amortization costs for internally developed software costs related to our affinity programs. Rent and occupancy increased $61,000 or 8.3% to $795,000 in second quarter 2012 from $734,000 in second quarter 2011 which reflected additional prepaid card, compliance and other office rent. Data processing increased $552,000 or 25.4% to $2.7 million in second quarter 2012 from $2.2 million in second quarter 2011 due to an increased number of deposit accounts and related transaction volume. Printing and supplies increased $60,000 or 15.1% to $458,000, in second quarter 2012 from $398,000 in second quarter 2011 reflecting increased deposit account volume. Audit expense increased $23,000 or 9.2% to $273,000 for second quarter 2012 from $250,000 in second quarter 2011, reflecting higher information technology (IT) and data security audit costs. Legal expense decreased $89,000 or 12.8% to $607,000 for second quarter 2012 from $696,000 in second quarter 2011, as a result of a variety of matters. Federal Deposit Insurance Corporation (FDIC) insurance expense increased $43,000 or 6.0% to $754,000 for second quarter 2012 from $711,000 in second quarter 2011. This increase resulted primarily from growth in deposits. Software, maintenance and equipment expense increased $102,000 or 26.8% to $483,000 in second quarter 2012 from $381,000 in second quarter 2011. This increase included software and hardware for the Small Business Administration (SBA) lending unit and for loan, prepaid card, and deposit products, increased security, regulatory compliance costs and storage. Other real estate owned expense increased $63,000 or 19.9% to $380,000 in second quarter 2012 from $317,000 in second quarter 2011. The increase resulted from expense on a greater number of properties. Other non-interest expense increased $436,000 or 12.4% to $3.9 million in second quarter 2012 from $3.5 million in second quarter of 2011. The $436,000 increase resulted primarily from increases in telephone expense of $122,000 and losses related to prepaid cards of $113,000. Other expense also included a $172,000 accrual for a civil money penalty based upon communications with the FDIC in the second quarter of 2012.

Income Taxes. Income tax expense was $2.2 million for second quarter 2012 compared to $289,000 in second quarter 2011, an increase of $1.9 million. The increase resulted primarily from an increase in taxable income. Our effective tax rate for second quarter 2012 was 35.8% compared to 30.5% in second quarter 2011 reflecting the greater impact of tax exempt income on lower pre-tax income in the prior year.

First six months of 2012 to first six months of 2011

Net Income: Net income for the first six months of 2012 was $7.8 million, compared to $3.3 million for the first six months of 2011. The $4.5 million, or 133.8% increase, reflected a $5.3 million increase in net interest income and a . . .