The Bancorp 10-Q 2012
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For the quarterly period ended: March 31, 2012
For the transition period from: to
Commission file number: 51018
THE BANCORP, INC.
(Exact name of registrant as specified in its charter)
Registrant's telephone number, including area code: (302) 385-5000
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 [X] No ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
As of May 2, 2012 there were 33,101,281 outstanding shares of common stock, $1.00 par value.
THE BANCORP, INC
Form 10-Q Index
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
The accompanying notes are an integral part of these statements.
The accompanying notes are an integral part of these statements.
THE BANCORP, INC. AND SUBSIDIARY
NOTES TO THE CONSOLDIATED FINANCIAL STATEMENTS
Note 1. Formation and Structure of Company
The Bancorp, Inc. (the Company) is a Delaware corporation and a registered financial 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 other banking services nationally, which include prepaid debit cards, health savings accounts, wealth management and private label banking. The principal medium for the delivery of the Company’s banking services is the Internet.
Note 2. Significant Accounting Policies
Basis of Presentation
The financial statements of the Company, as of March 31, 2012 and for the three month period ended March 31, 2012 and 2011, are unaudited. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted in this Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission. However, in the opinion of management, these interim financial statements include all necessary adjustments to fairly present the results of the interim periods presented. The unaudited interim consolidated financial statements should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 (Form 10-K report). The results of operations for the three month period ended March 31, 2012 may not necessarily be indicative of the results of operations for the full year ending December 31, 2012.
Note 3. Share-based Compensation
The Company recognizes compensation expense for stock options in accordance with FASB ASC topic 718, Stock Based Compensation. The expense of the option is generally measured at fair value at the grant date with compensation expense recognized over the service period, which is 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. At March 31, 2012, the Company had three stock-based compensation plans, which are more fully described in its Form 10-K report and the portions of the Company’s Proxy Statement dated March 21, 2012, incorporated therein by reference.
The Company granted 500,000 common stock options in the first quarter of 2012, 40,000 with a vesting period of one year and 460,000 with a vesting period of four years. The weighted-average fair value of the stock options issued was $5.06. During the first quarter of 2011, the Company granted no stock options. There were 5,000 stock options exercised for the three month period ending March 31, 2012 and no stock options exercised for the three month period ending March 31, 2011.
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:
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, Stock Based Compensation, stock based compensation expense for the three month period ended March 31, 2012 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.
As of March 31, 2012, there was a total of $7.0 million of unrecognized compensation cost related to unvested awards under share-based plans. This cost is expected to be recognized over a weighted average period of 2.9 years. Related compensation expense for the three months ended March 31, 2012 and 2011 was $630,000 and $416,000 respectively.
A summary of the status of the Company’s equity compensations plans is presented below.
A summary of the status of the Company’s stock appreciation rights is presented below.
Note 4. Earnings Per Share
The Company calculates earnings per share under FASB ASC topic 260, Earnings Per Share. Basic earnings per share exclude dilution and are computed by dividing income available to common shareholders by the weighted average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock.
The following tables show the Company’s earnings per share for the periods presented:
Stock options for 1,604,115 shares, exercisable at prices between $10.00 and $25.43 per share, were outstanding at March 31, 2012 but were not included in the dilutive shares because the exercise price per share was greater than the average market price.
Stock options for 2,201,115 shares and stock appreciation rights for 60,000 shares, exercisable at prices between $7.81 and $25.43 share, were outstanding at March 31, 2011 but were not included in the dilutive shares because the exercise share price was greater than the average market price.
Note 5. 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 at March 31, 2012 and December 31, 2011 are summarized as follows (in thousands):
Investments in Federal Home Loan and Atlantic Central Bankers Bank stock are recorded at cost and amounted to $4.8 million at March 31, 2012 and $5.1 million at December 31, 2011.
The amortized cost and fair value of the Company’s investment securities at March 31, 2012, by contractual maturity are shown below (in thousands). Expected maturities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
At March 31, 2012 and December 31, 2011, investment securities with a book value of approximately $41.7 million and $44.6 million, respectively, were pledged to secure securities sold under repurchase agreements as required or permitted by law.
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 Company did not recognize any other-than-temporary impairment charges in the first three months of 2012 as compared to $75,000 on one trust preferred pooled security in the first three months of 2011. The amount of the credit impairment was calculated by estimating the discounted cash flows for those securities.
The table below indicates the length of time individual securities had been in a continuous unrealized loss position at March 31, 2012 (dollars in thousands):
The table below indicates the length of time individual securities had been in a continuous unrealized loss position at December 31, 2011 (dollars in thousands):
The other debt securities included in the held-to-maturity classification on the Company’s balance sheet at March 31, 2012 consist of four single issuer trust preferred securities issued by either banks or insurance companies and two pooled issuer trust preferred securities, whose collateral is made up of trust preferred securities issued by banks. The amortized cost of the single issuer trust preferred securities was $16.3 million, of which two securities totaling $4.3 million were issued by two different banks and two securities totaling $12.0 million were issued by two different insurance companies. The two pooled trust preferred securities had an aggregate amortized cost of $1.6 million.
The Company has evaluated the securities in the above tables and has concluded that none of these securities has impairment that is other-than-temporary. 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 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 after 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, which includes four single issuer trust preferred securities and two pooled trust preferred 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, is performed at the security level. 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 6. Loans
The Company analyzes credit risk prior to making loans, on an individual loan basis. The Company considers relevant aspects of the borrowers’ financial position and cash flow, past borrower performance, management’s knowledge of market conditions, side collateral and the ratio of the loan amount to estimated collateral value in making its credit determinations.
Major classifications of loans are as follows (in thousands):
The Company has identified twenty-eight 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 $21.4 million at March 31, 2012, of which $17.2 million had a specific reserve of $8.8 million. The remaining $4.2 million of impaired loans did not have a reserve. Included within the impaired loans at March 31, 2012 are seven troubled debt restructured loans with a balance of $7.8 million with a total specific reserve of $3.3 million. 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 $357,000 in first quarter 2012 if interest on impaired loans had been accrued. The balance of impaired loans was $17.6 million at December 31, 2011, of which $14.5 million had specific reserves of $5.9 million. The Company did not recognize interest income on impaired loans in first quarter ended March 31, 2012 and 2011, respectively.
The following table provides information about impaired loans at March 31, 2012 and December 31, 2011 (in thousands):
The following tables summarize the Company’s non-accrual loans, loans past due 90 days and other real estate owned for the periods indicated (the Company had no non-accrual leases at March 31, 2012 or December 31, 2011):
* Included in the non-accrual loans as of March 31, 2012 are five troubled debt restructured loans. $748,000 in commercial mortgage, $3.2 million in commercial, and $3.4 million in construction.
The Company’s loans that were modified and considered troubled debt restructurings in the three month period ended March 31, 2012 and year ended December 31, 2011 were already included in non-accrual and non-performing loan totals and are further detailed as follows (dollars in thousands):