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TBBK > SEC Filings for TBBK > Form 10-K on 17-Mar-2014All Recent SEC Filings

Show all filings for BANCORP, INC.

Form 10-K for BANCORP, INC.


17-Mar-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion provides information to assist in understanding our financial condition and results of operations. This discussion should be read in conjunction with our consolidated financial statements and related notes appearing in Item 8 of this report.

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 consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. Actual results could differ from those estimates. We believe that the determination of our allowance for loan and lease losses and our determination of the fair value of financial instruments involve a higher degree of judgment and complexity than our other significant accounting policies.

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

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

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

We periodically review our investment portfolio to determine whether unrealized losses on securities are temporary, based on evaluations of the creditworthiness of the issuers or guarantors, and underlying collateral, as applicable. In addition, we consider the continuing performance of the securities. We recognize credit losses through the consolidated statement of operations. If management believes market value losses are temporary and that we have the ability and intention to hold those securities to maturity, we recognize the reduction in other comprehensive income, through equity. We evaluate whether an other than temporary impairment exists by considering primarily the following factors: (a) the length of time and extent to which the fair value has been less than the amortized cost of the security, (b) changes in the financial condition, credit rating and near-term prospects of the issuer, (c) whether the issuer is current on contractually obligated interest and principal payments, (d) changes in the financial condition of the security's underlying collateral and (e) the payment structure of the security. If other than temporary impairment is determined, we estimate expected future cash flows to determine the credit loss amount with a quantitative and qualitative process that incorporates information received from third-party sources along with internal assumptions and judgments regarding the future performance of the security.

We account for our stock-based compensation plans based on the fair value of the awards made, which include stock options, restricted stock, and performance based shares. To assess the fair value of the awards made, management makes assumptions as to expected stock price volatility, option terms, forfeiture rates and dividend rates. All of these estimates and assumptions may be susceptible to significant change that may impact earnings in future periods.


We account for income taxes under the liability method whereby we determine deferred tax assets and liabilities based on the difference between the carrying values on our consolidated financial statements and the tax basis of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. Deferred tax expense (benefit) is the result of changes in deferred tax assets and liabilities.

Results of Operations

Overview: Net interest income continued its upward trend in 2013 and 2012, notwithstanding historically low market interest rates resulting from continuing Federal Reserve Bank actions to maintain low rates for extended periods. As a result, asset yields declined to a greater degree than rates on deposits which are now minimally in excess of 0%. Net interest income grew primarily because of loan growth and a strategy to significantly expand the investment securities portfolio. Non interest income has continued its upward trend as each major category thereof continued to trend upward. Additional personnel for prepaid cards, loan production and infrastructure were reflected in higher non interest expense. Compliance personnel and other costs also continued to grow significantly.

Net Income: 2013 compared to 2012. Net income for 2013 was $25.1 million, compared to net income of $16.6 million for 2012. The $8.5 million, or 51.0%, increase reflected a $32.4 million increase in noninterest income (excluding securities gains and other-than-temporary impairment (OTTI)), and a $10.3 million increase in net interest income which were partially offset by a $7.1 million increase in the provision for loan and lease losses and a $22.6 million increase in non-interest expense. The increase in non-interest income reflected a $12.0 million increase in prepaid card fees which reflected higher volumes of transactions and accounts. The increase also reflected a $15.3 million increase in gain on sale of loans resulting from the sale of a greater amount of loans. Higher net interest income resulted primarily from higher securities and loan balances and reductions in interest expense, while deposits grew significantly in 2013. Of the $22.6 million increase in non-interest expense, $13.0 million resulted from higher salaries and employee benefits primarily as a result of staff additions. The increase reflected staff additions to our prepaid card, regulatory compliance and commercial loan sales departments to accommodate their growth. Diluted earnings per share of $0.66 for 2013 compared to a diluted earnings per share of $0.50 for 2012, an increase of 32%.

Net Income: 2012 compared to 2011. Net income for 2012 was $16.6 million, compared to net income of $8.9 million for 2011. The $7.7 million, or 86.4% increase, reflected a $19.3 million increase in noninterest income (excluding securities gains and other-than-temporary impairment (OTTI)), and a $9.0 million increase in net interest income which were partially offset by a $940,000 increase in the provision for loan and lease losses and a $16.0 million increase in non-interest expense. The higher non-interest income primarily resulted from higher prepaid card fees which resulted from processing higher volumes of transactions. Higher net interest income resulted primarily from higher loan and investment balances and lower deposit costs. Prepaid card, institutional banking, healthcare and card payment processing deposits all grew significantly in 2012. Of the $16.0 million increase in non-interest expense, $8.9 million resulted from higher salaries and employee benefits primarily as a result of staff additions. The increase reflected staff additions to our call center operations, prepaid cards, regulatory compliance, the SBA loan department and deposit and loan support functions. Loss on sale and writedowns on other real estate owned increased $2.0 million and data processing expense increased $1.3 million. Diluted earnings per share of $0.50 for 2012 compared to a diluted earnings per share of $0.28 for 2011, an increase of 79%.

Net Interest Income: 2013 compared to 2012. Our net interest income for 2013 increased to $95.8 million, an increase of $10.3 million or 12.1%, from $85.4 million for 2012, reflecting a respective $9.7 million or 10% increase in interest income to $106.6 million from $96.9 million for 2012. The increase in net interest income resulted primarily from higher balances of securities and loans while interest expense was reduced. Our average loans and leases increased 10.5% to $2.01 billion in 2013 from $1.82 billion for 2012, while related interest income increased $4.8 million on a tax equivalent basis. Our average investment securities increased 80% to $1.06 billion for 2013 from $586.4 million for 2012, while related interest income increased $5.6 million on a tax equivalent basis. We increased our investment portfolio in 2012 to increase yields earned on funds which would otherwise be invested in lower yielding overnight investments. The impact of the reductions in rates by the Federal Reserve which began in the second half of 2007 continued as rates remained at historic lows in 2013. Interest expense decreased by $643,000 in 2013, reflecting lower deposit rates.

Our net interest margin (calculated by dividing net interest income by average interest-earning assets) for 2013 decreased 14 basis points to 2.44% from 2.58% for 2012. The decrease in net interest margin resulted primarily from disproportionately high balances at the Federal Reserve Bank, resulting from continuing high deposit growth, and continued downward pressure on loan and securities yields. Deposits invested at the Federal Reserve Bank bore interest at only 25 basis points. For 2013 the average yield on our interest-earning assets decreased to 2.71% from 2.92% for 2012, a decrease of 21 basis points. The cost of total deposits decreased


to 0.27% for 2013 from 0.33% for 2012, a decrease of 6 basis points. The cost of total deposits and interest bearing liabilities decreased to 0.29% in 2013 compared to 0.36% in 2012, a decrease of 7 basis points. This decrease reflected our continuing decreases in deposit rates and changes in the mix of our deposits, in particular a significant increase in demand and interest checking deposits. In 2013, average demand and interest checking deposits amounted to $3.19 billion, compared to $2.67 billion in 2012, an increase of 19%. The increase primarily reflected increased balances in prepaid card and institutional banking deposits. In 2013, average total deposits increased 18% to $3.70 billion, compared to $3.15 billion in 2012. The growth reflected increases in balances associated with our prepaid card, institutional banking, card payment processing and healthcare categories.

Net Interest Income: 2012 compared to 2011. Our net interest income for 2012 increased to $85.4 million, an increase of $9.0 million or 11.8%, from $76.4 million for 2011, reflecting a respective $8.4 million or 9.5%, increase in interest income to $96.9 million from $88.4 million. The increase in net interest income resulted from higher balances of securities and loans and lower deposit costs. Our average loans and leases increased 8.6% to $1.82 billion in 2012 from $1.68 billion for 2011, while related interest income increased $3.7 million on a tax equivalent basis. Our average investment securities increased 60.0% to $586.4 million for 2012 from $366.5 million for 2011, while related interest income increased $3.9 million on a tax equivalent basis. The impact of the reductions in rates by the Federal Reserve which began in the second half of 2007 continued as rates remained at historic lows in 2012. Interest expense decreased by $624,000 in 2012, reflecting lower deposit rates.

Our net interest margin (calculated by dividing net interest income by average interest-earning assets) for 2012 decreased to 2.58% from 2.96% for 2011, a decrease of 38 basis points. The decrease in the net interest margin resulted primarily from significant deposit growth , the offsetting balances for which were maintained at the Federal Reserve Bank and continued downward pressure on loan and investment yields. Deposits invested at the Federal Reserve Bank bore interest at only 25 basis points. For 2012 the average yield on our interest-earning assets decreased to 2.92% from 3.42% for 2011, a decrease of 50 basis points. The cost of total deposits decreased to 0.33% for 2012 from 0.43% for 2011, a decrease of 10 basis points. The cost of total deposits and interest bearing liabilities amounted to 0.36% in 2012 compared to 0.46% in 2011, a decrease of 10 basis points. This decrease reflected our continuing decreases in deposit rates and changes in the mix of our deposits, in particular a significant increase in demand and interest checking deposits. In 2012, average demand and interest checking deposits increased 22% to $2.67 billion, compared to $2.18 billion in 2011. The increase reflected increased balances in prepaid card and institutional banking deposits. In 2012, average total deposits increased 23% to $3.15 billion, compared to $2.56 billion in 2011, an increase of 23%. The growth reflected increases in balances associated with our prepaid card, institutional banking, card payment processing and other accounts.

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,
                                                                   2013                                               2012
                                                   Average                            Average         Average                            Average
                                                   Balance             Interest        Rate           Balance             Interest        Rate
                                                                                   (dollars in thousands)
Assets:
Interest-earning assets:
Loans net of unearned fees and costs **      $         1,996,042    $       82,448     4.13%    $         1,807,770    $       77,685     4.30%
Leases - bank qualified*                                  16,209               910     5.61%                 13,571               826     6.09%
Investment securities-taxable                            811,440            15,999     1.97%                482,463            13,378     2.77%
Investment securities-nontaxable*                        246,490             7,320     2.97%                103,900             4,331     4.17%
Interest earning deposits at Federal
Reserve Bank                                             931,468             2,328     0.25%                974,762             2,433     0.25%
Federal funds sold and securities sold
under agreements to resell                                34,589               425     1.23%                    425                 7     1.65%
Net interest earning assets                            4,036,238           109,430     2.71%              3,382,891            98,660     2.92%

Allowance for loan and lease losses                      (38,560)                                           (32,320)
Other assets                                             110,584                                            127,485
                                             $         4,108,262                                $         3,478,056

Liabilities and Shareholders' Equity:

Deposits:


                                       39

--------------------------------------------------------------------------------


Demand and interest checking             $         3,185,919    $        7,851    0.25%    $         2,666,493    $        7,691    0.29%
Savings and money market                             500,113             2,133    0.43%                455,860             2,401    0.53%
Time                                                  17,443               182    1.04%                 26,624               356    1.34%
Total deposits                                     3,703,475            10,166    0.27%              3,148,977            10,448    0.33%

Repurchase agreements                                 18,442                54    0.29%                 22,508                95    0.42%
Subordinated debt                                     13,401               548    4.09%                 13,401               869    6.48%
Total deposits and interest bearing
liabilities                                        3,735,318            10,768    0.29%              3,184,886            11,412    0.36%

Other liabilities                                     25,277                                             9,438
Total liabilities                                  3,760,595                                         3,194,324

Shareholders' equity                                 347,667                                           283,732
                                         $         4,108,262                               $         3,478,056

Net interest income on tax equivalent
basis *                                                         $       98,662                                    $       87,248

Tax equivalent adjustment                                                2,880                                             1,804

Net interest income                                             $       95,782                                    $       85,444

Net interest margin *                                                             2.44%                                             2.58%

* Full taxable equivalent basis, using a 35% statutory tax rate. ** Includes loans held for sale.

                                                       Year ended December 31,
                                                                2011
                                                Average                             Average
                                                Balance             Interest         Rate
                                                                   (dollars in
Assets:                                                            thousands)
Interest-earning assets:
Loans net of unearned fees and costs **   $         1,671,940    $       74,347      4.45%
Leases - bank qualified*                                4,976               438      8.80%
Investment securities-taxable                         289,002             9,682      3.35%
Investment securities-nontaxable*                      77,509             4,111      5.30%
Interest earning deposits at Federal
Reserve Bank                                          588,689             1,461      0.25%
Federal funds sold and securities sold
under agreements to resell                                   -                 -     0.00%
Net interest earning assets                         2,632,116            90,039      3.42%

Allowance for loan and lease losses                   (26,999)
Other assets                                          255,444
                                          $         2,860,561

Liabilities and Shareholders' Equity:
Deposits:
Demand and interest checking              $         2,175,972    $        8,035      0.37%
Savings and money market                              355,094             2,550      0.72%
Time                                                   31,066               354      1.14%
Total deposits                                      2,562,132            10,939      0.43%


Short-term borrowings                                     745                 3     0.40%
Repurchase agreements                                  23,113               231     1.00%
Subordinated debt                                      13,401               863     6.44%
Total deposits and interest bearing
liabilities                                         2,599,391            12,036     0.46%

Other liabilities                                       9,138
Total liabilities                                   2,608,529

Shareholders' equity                                  252,032
                                          $         2,860,561

Net interest income on tax equivalent
basis *                                                          $       78,003

Tax equivalent adjustment                                                 1,597

Net interest income                                              $       76,406

Net interest margin *                                                               2.96%

* Full taxable equivalent basis, using a 35% statutory tax rate. ** Includes loans held for sale.

In 2013, average interest-earning assets increased to $4.04 billion, an increase of $653.3 million, or 19.3%, from 2012. The increase reflected increased average balances of loans of $190.9 million, or an 10.5% increase, and increased average balances of investment securities of $471.6 million, or a 80.4% increase. Average demand deposits and interest checking deposits increased $519.4 million, or a 19.5% increase. Average savings and money market deposits increased $44.3 million, or a 9.7% increase. The Bank experienced growth in prepaid, institutional banking, card payment processing, healthcare and other deposit categories. Prepaid, institutional banking and card payment processing balances increased primarily due to the acquisition of new clients as a result of marketing efforts.


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 2011 through 2013 on a tax equivalent basis. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.

                                                           2013 versus 2012                                       2012 versus 2011
                                                           Due to change in:                                      Due to change in:
                                             Volume              Rate               Total            Volume              Rate             Total
                                                                                       (in thousands)
Interest income:
Taxable loans net of unearned discount   $        7,590    $         (2,827)   $        4,763    $        5,694    $        (2,356)   $       3,338
Bank qualified tax free leases net of
unearned discount                                   140                 (56)               84               472                (84)             388
Investment securities-taxable                     4,548              (1,927)            2,621             4,977             (1,281)           3,696
Investment securities-nontaxable                  3,781                (792)            2,989               593               (373)             220
Interest earning deposits                          (108)                  3              (105)              964                  8              972
Federal funds sold                                  418                    -              418                 7                   -               7
Total interest earning assets                    16,369              (5,599)           10,770            12,707             (4,086)           8,621
Interest expense:
Demand and interest checking             $        1,498    $         (1,338)   $          160    $        1,811    $        (2,155)   $        (344)
Savings and money market                            279                (547)             (268)           (2,457)             2,308             (149)
Time                                               (106)                (68)             (174)               (9)                11                2
Total deposit interest expense                    1,671              (1,953)             (282)             (655)               164             (491)
Short-term borrowings                                  -                   -                 -               (2)                (1)              (3)
Subordinated debt                                      -               (321)             (321)                 -                 6                6
Other borrowed funds                                (15)                (26)              (41)               (6)              (130)            (136)
Total interest expense                            1,656              (2,300)             (644)             (663)                39             (624)
Net interest income:                     $       14,713    $         (3,299)   $       11,414    $       13,370    $        (4,125)   $       9,245

Provision for Loan and Lease Losses. Our provision for loan and lease losses was $29.5 million for 2013, $22.4 million for 2012, and $21.5 million for 2011. The increases in the provision are based on our evaluation of the adequacy of our allowance for loan and lease losses, particularly in light of current economic conditions. That evaluation reflected the impact of higher levels of charge-offs which totaled $25.6 million, $21.3 million and $16.1 million respectively, in 2013, 2012 and 2011. At December 31, 2013, our allowance for loan and lease losses amounted to $38.2 million or 1.95% of total loans. We believe that our allowance is adequate to cover expected losses. For more information about our provision and allowance for loan and lease losses and our loss experience see "Financial Condition -Allowance for Loan and Lease Losses" and "-Summary of Loan and Lease Loss Experience," below.

Non-Interest Income. Non-interest income was $83.5 million for 2013, compared to $49.8 million for 2012 and $30.6 million for 2011 before other than temporary impairment on securities of $20,000, $202,000 and $75,000 in those respective years. The $33.7 million, or 67.6%, increase in non-interest income in 2013 compared to 2012 reflected the $12.0 million impact of increases in transaction volumes and accounts on prepaid card fees. Prepaid card fees increased 36.1%, to . . .

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