UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended: June 30, 2006
OR
For the transition period from: to
Commission file number: 51018
THE BANCORP, INC.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)
405 Silverside Road
Wilmington, DE 19809
(Address of principal executive offices)
(Zip code)
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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
(Check one): Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes x No ¨
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of July 28, 2006 there were 13,673,823 outstanding shares of Common Stock, $1.00 par value.
PART I – FINANCIAL INFORMATION
Item 1. Financial statements
The Bancorp, Inc. and Subsidiary
Consolidated Balance Sheets
June 30,
2006
December 31,
2005
ASSETS
Cash and cash equivalents
Cash and due from banks
Interest bearing deposits
Federal funds sold
Total cash and cash equivalents
Investment securities, available-for-sale
Loans and Leases held for sale
Loans, net of deferred loan costs
Allowance for loan and lease losses
Loans, net
Premises and equipment, net
Accrued interest receivable
Goodwill
Other assets
Total assets
LIABILITIES
Deposits
Demand (non-interest bearing)
Savings, money market and interest checking
Time deposits
Time deposits, $100,000 and over
Total deposits
Securities sold under agreements to repurchase
Federal Home Loan Bank advances
Accrued interest payable
Other liabilities
Total liabilities
SHAREHOLDERS’ EQUITY
Preferred stock - authorized 5,000,000 shares of $0.01 par value; issued and outstanding, 118,628 and 133,031 shares for June 30, 2006 and December 31, 2005, respectively
Common stock - authorized, 20,000,000 shares of $1.00 par value; issued shares 13,673,823 and 13,637,148 for June 30, 2006 and December 31, 2005, respectively
Additional paid-in capital
Retained earnings (accumulated deficit)
Accumulated other comprehensive loss
Total shareholders’ equity
Total liabilities and shareholders’ equity
The accompanying notes are an integral part of these statements.
The Bancorp Inc. and Subsidiary
Consolidated Statements of Income
Interest income
Loans, including fees
Investment securities
Interest expense
Subordinated debt
Net interest income
Provision for loan and lease losses
Net interest income after provision for loan and lease losses
Non-interest income
Service fees on deposit accounts
Merchant credit card deposit fees
Gain on sales of investment securities
Leasing income
ACH Processing Fees
Other
Total non-interest income
Non-interest expense
Salaries and employee benefits
Occupancy expense
Data processing expense
Advertising
Professional fees
Prepayment premium on subordinated debt
Total non-interest expense
Net income before income tax
Income tax
Net income
Less preferred stock dividends and accretion
Income allocated to Series A preferred shareholders
Net income available to common shareholders
Net income per share - basic
Net income per share - diluted
Weighted average shares - basic
Weighted average shares - diluted
Statements of Changes in Shareholders’ Equity
For the three months ended June 30, 2006 (unaudited) and for the year ended December 31, 2005
Balance at December 31, 2004
Net Income
Common Stock issued during the acquisition of Mears Leasing
Preferred Shares converted to Common Shares
Common Stock issued from option exercise
Common Stock issued from warrant exercise
Cash dividends on Series A preferred stock
Accretion of Series A Preferred Stock
Other comprehensive loss, net of reclassification adjustments and tax
Total other comprehensive income
Balance at December 31, 2005
Stock-based compensation
Balance at June 30, 2006 (unaudited)
Statements of Cash Flows
(in thousands)
(unaudited)
Operating activities
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization
Net amortization (accretions) of premium (discount)
Net gain on sales of investment securities
Share based compensation expense
Decrease (increase) in accrued interest receivable
Increase in interest payable
(Increase) decrease in other assets
(Decrease) increase in other liabilities
Net cash provided by operating activities
Investing activities
Purchase of investment securities
Proceeds from sales of investment securities
Proceeds from calls/maturity of investment securities
Cash paid in excess of cash equivalents from acquisition
Purchase of loans
Net increase in loans
Purchases of premises and equipment
Net cash used in investing activities
Financing activities
Net increase in deposits
Net increase in securities sold under agreements to Repurchase
Net increase (decrease) from Federal Home Loan advances
Repayment of notes payable
Dividends on Series A preferred stock
Net proceeds from the exercise of options
Net proceeds from exercise of warrants
Excess Tax benefit from share based payment arrangements
Redemption of subordinated debentures
Net cash provided by financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of period
Supplemental disclosure:
Interest Paid
Income Taxes Paid
THE BANCORP, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
Basis of Presentation
The financial statements of The Bancorp, Inc. (Company) as of June 30, 2006 and for the three and six month periods ended June 30, 2006 and 2005 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, 2005. The results of operations for the three and six month periods ended June 30, 2006 may not necessarily be indicative of the results of operations for the full year ending December 31, 2006.
Note 2. Stock-based Compensation
The Company adopted SFAS No. 123(R) on January 1, 2006 using the modified prospective application method of transition. Prior to January 1, 2006, the Company followed APB 25 and the disclosure requirement of SFAS 123(R) with pro forma disclosures of net income and earnings per share, as if the fair value-based method of accounting defined in SFAS 123 has been applied. The Company’s consolidated financial statement as of and for the second quarter of 2006 reflect the impact of adopting SFAS 123(R). In accordance with the modified prospective method, the consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R).
At January 1, 2006, the Company recognized compensation expense for the portion of outstanding awards at January 1, 2006 for which the requisite service had not yet been rendered, based on the grant-date fair value of those awards calculated under SFAS 123 for pro forma disclosures. For new grants awarded on or after January 1, 2006, the Company has chosen to continue the use of the Black-Scholes option-pricing model (as used under SFAS 123) to estimate the fair value of each option on the date of grant. In accordance with SFAS 123(R), commencing January 1, 2006, the Company estimates the number of options for which the requisite service is expected to be rendered as compared to accounting for forfeitures as they occured under SFAS 123. The Company has chosen to recognize compensation expense for new grants using the straight-line method over the vesting period.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions based on historical data used for grants at June 30, 2006 and June 30, 2005, respectively: expected volatility of 27.48% and 38%; risk-free interest rate of 4.57% and 4.26%; and an expected life of 7 years and 10 years. 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 SFAS 123(R), stock based compensation expense for the six months ended June 30, 2006 is based on awards that are ultimately expected to vest and therefore has been reduced for estimated forfeitures. The Company estimates forfeitures using historical data based upon the groups identified by management. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provision of SFAS No. 123(R) to stock-based employee compensation (in thousands).
Net income, as reported
Less stock-based compensation costs under fair value based method for all awards
Pro forma net income
Net income per share basic, as reported
Net income per share basic, pro forma
Net income per share diluted, as reported
Net income per share diluted, pro forma
There is no pro forma effect for the six months ended June 30, 2006 since stock based compensation was recorded under SFAS 123(R) in 2006.
The following table is a summary of the activity in the plans for the six months ended June 30, 2006 and changes during the period:
Outstanding at beginning of the year
Granted
Exercised
Forfeited
Outstanding at end of period
Options exercisable at end of period
The weighted-average grant-date fair value of options granted during the six months ended June 30, 2006 and 2005 was $8.45 and $8.05 respectively. The total intrinsic value of options exercised during the second quarter 2006 and 2005 was $78,000 and $0.00, respectively. The total intrinsic value of options exercised during the six months ended June 30, 2006 and 2005 were $140,000 and $0.00, respectively. Intrinsic value is measured using the fair market value price of the Company’s common stock less the applicable exercise price.
As of June 30, 2006, there was a total of $177,000 of unrecognized compensation cost related to nonvested awards under share-based plans. This cost is expected to be recognized over a weighted average period of 1.64 years.
During the first quarter of 2006 the Company granted 13,500 phantom stock units that vest on December 31, 2006. Each stock unit represents the right to receive one share of common stock of the Company at the time the unit is fully vested. The fair value of the grants was $17.50, which was the fair value of the common stock on the date of the grant. As of June 30, 2006 there was a total of $126,000 of unrecognized compensation cost related to unvested phantom stock units. This cost is expected to be recognized over a weighted average period of 0.5 years.
Note 3. Earnings Per Share
Basic earnings per share for a particular period of time is calculated by dividing net income by the weighted average number of common shares outstanding during that period.
Diluted earnings per share is calculated by dividing net income by the weighted average number of common shares and common share equivalents. The Company’s only outstanding “common share equivalents” are options to purchase its common stock.
The following table shows the Company’s earnings per share for the periods presented:
Basic earnings per share
Effect of dilutive securities
Options
Warrants
Restricted Stock
Diluted earnings per share
Net income available to common stockholders plus assumed conversions
Income
(numerator)
Shares
(denominator)
Per share
Amount
amount
Note 4. Investment securities
The amortized cost, gross unrealized gains and losses, and fair values of the Company’s investment securities available-for-sale at June 20, 2006 are summarized as follows (in thousands):
Fair
value
U.S. Government agency securities
Mortgage-backed securities
Other securities
The amortized cost and fair value of the Company’s investment securities available-for-sale at June 30, 2006, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Due before one year
Due after one year through five years
Due after five years through ten years
Due after ten years
Federal Home Loan and Atlantic Central Bankers Bank stock
Note 5. Loans
Major classifications of loans are as follows (in thousands):
Commercial
Commercial mortgage
Construction
Total commercial loans
Direct financing leases, net
Residential mortgage (1)
Consumer loans and others
Deferred loan costs
Total loans, net of deferred loan costs
Non-accrual loans
Non performing loans
Allowance for loan and lease losses to total loans
The Company did not have any impaired loans on June 30, 2006. The Company identifies a loan as impaired when it is probable that interest and principal will not be collected according to the contractual terms of the loan agreement. The Company recognizes income on impaired loans under the 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.
Note 6. Transactions with affiliates
The Company paid $0.00 and $16,900 to Cohen Bros. & Company (Cohen Bros.) for investment securities brokerage services performed for the six months ended June 30, 2006 and 2005, respectively. The Chairman of the Company is the principal of Cohen Bros. Financial LLC which owns 100% of Cohen Bros. & Company. A member of the Company’s Board of Directors is the Chief Operating Officer of Cohen Bros. & Company.
The Company entered into a sublease for office space in Philadelphia, Pennsylvania and a technical support agreement with RAIT Investment Trust (RAIT) commencing in October 2000. The Chief Executive Officer of RAIT is the Chief Executive Officer of the Company. Under the technical support agreement, which commenced in January 2001, the Company also provides technical support to RAIT for a fee of $5,000 a month. RAIT paid the Company $30,000 for such services for the six months ended June 30, 2006 and 2005. RAIT paid the Company approximately $168,000 for rent for the first six months of 2006 and $147,000 for the first six months of 2005.
The Company also has a sublease for office space in Philadelphia, Pennsylvania with Cohen Bros. commencing in July 2002. Cohen Bros. paid approximately $68,000 in rent for the six months ended June 30, 2006 and $54,000 for the six months ended June 30, 2005.
In July 2002, Cohen Bros. entered into an agreement with the Company under which Cohen Bros. pays fees of $1,000 per month for technical support and $3,600 per month for telephone system support services. Technical and telephone support fees received from Cohen Bros. were $28,000 and $39,600 for the six months ended June 30, 2006 and 2005, respectively.
The Company maintains deposits for various affiliated companies totaling approximately $77,834,000 and $115,942,000 as of June 30, 2006 and December 31, 2005, respectively. The majority of these deposits are short-term in nature and rates are consistent with market rates.
The Company has entered into lending transactions in the ordinary course of business with directors, executive officers, principal stockholders and affiliates of such persons on the same terms as those prevailing for comparable transactions with other borrowers. At June 30, 2006, these loans were current as to principal and interest payments and, in the opinion of management, do not involve more than normal risk of collectibility. At June 30, 2006 loans to these related parties amounted to $2,992,212 in outstanding principal amount.
Note 7. Reclassifications
Certain prior period amounts have been reclassified to conform to the current year’s presentation.
Note 8. Repayment of Subordinated Debentures
In March 2005, the Bancorp Capital Trust redeemed its trust preferred securities at their face value including accrued interest through March 31, 2005 and a prepayment premium representing the discounted present value of dividends payable on the trust preferred securities through June 12, 2007, the date the Company could call these securities. The proceeds for the redemption came from the Company’s redemption of its subordinated debenture to the Bancorp Capital Trust. The aggregate redemption price was $6.1 million. The Company recorded an expense of approximately $1.3 million for the three months ended March 31, 2005, reflecting a prepayment premium of $819,000 and the remaining unamortized offering expenses of $466,000.
Note 9. New Accounting Pronouncement
In July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109.” FIN 48 requires that realization of an uncertain income tax position be “more likely than not” before it can be recognized in the financial statements. Further, FIN 48 prescribes the benefit to be recorded in the financial statements as the amount most likely to be realized assuming a review by tax authorities having all relevant information and applying current conventions. FIN 48 also clarifies the financial statement classification of tax-related penalties and interest and sets forth new disclosures regarding unrecognized tax benefits. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the requirements of FIN 48 and the impact this interpretation may have on its financial statements.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation
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, 2005. 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.
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, 2005.
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 of America 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 adversely impact our earnings.
We capitalize costs associated with internally developed and purchased software systems for new products and enhancements to existing products that have reached the application stage and meet recoverability tests. Capitalized costs include external direct costs of materials and services used in developing or obtaining internal-use software, payroll and payroll related expenses for employees who are directly associated with and devote time to internal-use software projects and interest costs incurred, if material, while developing internal-use software. Capitalization of these costs begins when we complete the preliminary project stage, and ceases no later than the point at which the project is substantially complete and ready for its intended purpose.
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 2006 to second quarter 2005
Net Income: Net income for the second quarter of 2006 was $3.2 million, compared to net income of $1.9 million for the second quarter of 2005. Diluted earnings per share were $0.22 in the second quarter of 2006 as compared to $0.12 for the second quarter of 2005. Return on average assets was 1.26% and return on average equity was 9.15% for the second quarter of 2006, as compared to 1.03% and 5.92%, respectively for the second quarter of 2005.
Net Interest Income: Our interest income for the second quarter of 2006 increased to $18.9 million from $10.8 million in the second quarter of 2005, while our net interest income increased to $10.8 million from $7.4 million. Our average loans increased to $803.7 million for the second quarter of 2006 from $530.0 million for the second quarter of 2005. The primary reason for the increases in our interest income and net interest income was our ability to increase our earning assets through continued organic growth of our loan portfolio.
Our net interest margin for the second quarter 2006 increased to 4.43% from 4.20% for the second quarter of 2005, an increase of 23 basis points (.23%). The increased net interest margin resulted from the following:
In general, changes in rates immediately affect our variable rate loans, while deposit rates tend to take a longer period to adjust, which in general would mean the Company is considered to have an asset sensitive balance sheet. In a rising rate environment this would typically lead to an improving net interest margin; however; the current interest rate environment is causing liabilities to reprice over a shorter period of time. Management attributes this principally to a highly competitive deposit pricing environment. Additionally, the Company’s mix of deposits has shifted to more reliance on certificates of deposits, which generally carry a higher interest rate cost than other types of interest bearing deposits. For the second quarter of 2006 the average yield on our interest-earning assets increased to 7.76% from 6.18% for second quarter of 2005, an increase of 158 basis points (1.58%). Cost of interest-bearing deposits increased to 4.23% for the second quarter of 2006 from 2.58% for the second quarter of 2005, an increase of 165 basis points (1.65%). Average interest bearing deposits increased to $724.2 million from $486.4 million, an increase of $237.8 million or 48.9%.
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:
Assets:
Interest-earning assets:
Loans net of unearned discount
Net interest-earning assets
Liabilities and Shareholders’ Equity:
Deposits:
Interest checking
Savings and money market
Time
Total interest bearing deposits
FHLB advances
Other borrowed funds
Net interest bearing liabilities
Shareholders’ equity
Net yield on average interest earning assets
In the second quarter of 2006, average interest-earning assets increased to $975.4 million, an increase of $274.5 million, or 39.2%, from the second quarter of 2005.
Provision for Loan and Lease Losses. Our provision for loan and lease losses was $700,000 for the second quarter of 2006 compared to $550,000 for the second quarter of 2005. 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 $1.4 million for the second quarter of 2006 as compared to $1.3 million for the second quarter of 2005, an increase of $142,000 or 11.0%. The principal reasons for the increase in non-interest income were an increase in income from Automated Clearing House (ACH) processing fees and an increase in other income. Our ACH Processing fees increased $96,000 as a result of organic growth as more customers transition to ACH processing. Leasing income decreased to $405,000 from $498,000, a decrease of $93,000 or 18.7%. The decrease in income is due to the effect of rising fuel prices on the resale value of commercial vehicles in the secondary market. Approximately 94% of our lease portfolio, by cost consists of automobile leases. Other income increased to $400,000 for the second quarter of 2006 as compared to $224,000 in the same period of 2005. Approximately $165,000 of the increase was a fee we received from Mastercard after its initial public offering.
Non-Interest Expense. Total non-interest expense was $6.5 million for the second quarter of 2006, as compared to $5.1 million for second quarter of 2005, an increase of $1.4 million or 27.5%. Salaries and employee benefits amounted to $3.1 million for the second quarter of 2006 as compared to $2.5 million for the second quarter of 2005. The increase in salaries and employee benefits resulted from increases in the commercial lending and affinity group staffs relating to the growth in our loan portfolio and our private client and health savings account lines of business. Computer expense increased to $629,000 for the second quarter of 2006 an increase of $286,000 or 83.4%. The increase reflects the upgrade of our internet banking platform in 2005 and increases from growth in the health savings account portfolio. Professional fees increased to $373,000 for the second quarter of 2006, an increase of $98,000 or 35.6%. The increase reflects the increasing compliant costs that are associated with being a public company, in particular the costs associated with compliance with the Sarbanes-Oxley Act of 2002.
First six months of 2006 to first six months of 2005
Net Income: Net income for the first six months of 2006 was $6.0 million, compared to net income of $2.4 million for the first six months of 2005. Diluted earnings per share were $0.42 in the first six months of 2006 as compared to $0.15 for the first six months of 2005. Return on average assets was 1.26% and return on average equity was 8.80% for first six months of 2006, as compared to .73% and 3.91%, respectively for the first six months of 2005.
Net Interest Income: Our interest income for the first six months of 2006 increased to $35.5 million from $20.0 million in the first six months of 2005, while our net interest income increased to $21.0 million from $13.8 million. Our average loans increased to $752.8 million for first six months of 2006 from $491.7 million for the first six months of 2005. As stated above, the primary reason for the increases in our interest income and net interest income was our ability to increase our earning assets through continued organic growth of our loan portfolio.
Our net interest margin for the first six months 2006 increased to 4.53% from 4.31% for the first six months of 2005, an increase of 22 basis points (.22%). The increased net interest margin resulted from the following:
In general the first six months of 2006 the average yield on our interest-earning assets increased to 7.64% from 6.23% for first six months of 2005 an increase of 141 basis points (1.41%). Cost of interest-bearing deposits increased to 4.00% for the first six months of 2006 from 2.37% for the first six months of 2005, an increase of 163 basis points (1.63%). Average interest bearing deposits increased to $671.6 million from $450.3 million, an increase of $221.3 million or 49.1%.
Interest-bearing deposits
Total interest-bearing deposits
Net interest-bearing liabilities
Net yield on average interest-earning assets
Provision for Loan and Lease Losses. Our provision for loan and lease losses was $1.3 million for the first six months of 2006 compared to $1.1 million for the first six months of 2005. 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 $2.7 million for the first six months of 2006 as compared to $2.3 for the first six months of 2005, an increase of $428,000 or 18.6%. Gains on sales of investment securities totaled $-0- in the first six months of 2006 compared to $67,000 of gains on sale investment securities for the same period in 2005. The principal reasons for the increase in non-interest income was an increase in income from ACH processing fees as a result of organic growth as customers transition to ACH processing. Leasing income decreased $805,000 from $853,000 for first six months of 2006 over the same period in 2005. The decrease in income is due to the effect of rising fuel prices on the resale value of commercial vehicles in the secondary market. Approximately 94% of our lease portfolio, by cost consists of automobile leases. Other non-interest income was $634,000 for the first six months of 2006 as compared to $395,000 over the same period in 2005. Approximately $165,000 of the increase was a fee we received from MasterCard after its initial public offering based on processing volume by its members.
Non-Interest Expense. Total non-interest expense was $12.9 million for the first six months of 2006, as compared to $11.1 million for first six months of 2005, an increase of $1.7 million or 15.5%. Salaries and employee benefits amounted to $6.3 million for the first six months of 2006 as compared to $5.0 million for the first six months of 2005. The increase in salaries and employee benefits resulted from increases in the commercial lending and affinity group staffs relating to the growth in our loan portfolio and our private client and health savings account lines of business. Computer expense increased to $1.2 million for the first six months of 2006 an increase of $587,000 or 94.1%. The increase reflects the upgrade of our internet banking platform in 2005 and increases from growth in our health savings account portfolio. Professional fees increased to $784,000 for the first six months of 2006 an increase of $541,000 or 44.7%. The increase reflects the increasing compliance costs that are associated with being a public company, in particular the costs associated with compliance with the Sarbanes-Oxley Act of 2002. In the first quarter of 2005, we redeemed our outstanding subordinated debentures at a premium of $869,000. The redemption of the subordinated debentures, which supported our trust preferred securities, also resulted in the write-off $466,000 of the unamortized offering costs from the trust preferred securities offering in 2002. The total expense associated with the redemption of the subordinated debentures in the first quarter of 2005 was $1.3 million. Other non-interest expense increased to $2.9 million from $2.3 million, an increase of $627,000 or 27.5%. This increase is due primarily to increased printing costs and telephone expense as a result of growth in the health savings line of business as well as an increase in insurance costs.
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 $164.2 million in the six months of 2006. 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, 2006, we had $55.0 million of outstanding Federal Home Loan Bank advances and $9.6 million in repurchase agreements.
Funding was directed primarily at cash outflows required for loans, which were $161.3 million in the first six months of 2006. At June 30, 2006, we had outstanding commitments to fund loans, including unused lines of credit, of $299.6 million.
We must comply with capital adequacy guidelines issued by the Federal Deposit Insurance Corporation, or FDIC. A bank must, in general, have a 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, 2006 we were “well capitalized” under banking regulations.
The following table sets forth our regulatory capital amounts and ratios for the periods indicated:
AS OF JUNE 30, 2006
The Company
The Bancorp Bank
“Well capitalized” institution (under FDIC regulations)
AS OF DECEMBER 31, 2005:
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 and other pressures. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds interest rate sensitive assets. During a period of falling interest rates, a positive gap would tend to adversely affect net interest income, while a negative gap would tend to result in an increase in net interest income. During a period of rising interest rates, a positive gap would tend to result in an increase in net interest income while a negative gap would tend to affect net interest income adversely.
The following table sets forth the estimated maturity/repricing structure of our interest-earning assets and interest-bearing liabilities at June 30, 2006. Except as stated below, the amounts of assets or liabilities shown which reprice or mature during a particular period were determined in accordance with the contractual terms of each asset or liability. The majority of interest-bearing demand deposits and savings deposits are assumed to be “core” deposits, or deposits that will generally remain with us regardless of market interest rates. Therefore, 50% of the core interest checking deposits and 25% of core savings and money market deposits are shown as maturing or repricing within the “1 – 90 days” column with the remainder shown in the “1 – 3 years” column. We estimate the repricing characteristics of these deposits based on historical performance, past experience at other institutions and other deposit behavior assumptions. However, we may choose not to reprice liabilities proportionally to changes in market interest rates for competitive or other reasons. Payments of fixed-rate loans and mortgage-backed securities are scheduled based on their anticipated cash flow, including prepayments based on historical data and current market trends. The table does not necessarily indicate the impact of general interest rate movements on our net interest income because the repricing of certain categories of assets and liabilities is beyond our control as, for example, prepayments of loans and withdrawal of deposits. As a result, certain assets and liabilities indicated as repricing within a stated period may in fact reprice at different times and at different rate levels.
1-90
Days
1-3
Years
3-5
Interest earning assets:
Investments, available for sale
Total interest earning assets
Interest bearing liabilities:
Total interest bearing liabilities
Gap
Cumulative gap
Gap to assets ratio
Cumulative gap to assets ratio
The method used to analyze interest rate sensitivity in this table has a number of limitations. Certain assets and liabilities may react differently to changes in interest rates even though they reprice or mature in the same or similar time periods. The interest rates on certain assets and liabilities may change at different times than changes in market interest rates, with some changing in advance of changes in market rates and some lagging behind changes in market rates. Additionally, the actual prepayments and withdrawals we experience when interest rates change may deviate significantly from those assumed in calculating the data shown in the table.
Financial Condition
General. Our total assets at June 30, 2006 were $1.1 billion, of which our total loans were $842.8 million. At December 31, 2005 our total assets were $917.5 million, of which our total loans were $681.6 million. Our portfolio of commercial, commercial mortgage and construction loans grew $125.2 million, or 26.2%, from year-end 2005 to $603.1 million at June 30, 2006.
Investment portfolio. For detailed information on the composition and maturity distribution of our investment portfolio, see Note 3 to the Notes to Financial Statements contained in this Quarterly Report on Form 10-Q. Total investment securities increased to $113.7 million on June 30, 2006, an increase of $10.1 million or 9.7% from year-end 2005. Investments increased primarily due to a $10 million investment during the first quarter 2006.
Loan Portfolio. Total loans increased to $842.8 million at June 30, 2006 from $681.6 million at December 31, 2005, an increase of $161.2 million or 23.7%.
The following table summarizes our loan portfolio by loan category for the periods indicated (in thousands):
December 31,2005
Allowance for Loan and Lease Losses. Management reviews the adequacy of our allowance for loan and lease losses on at least a quarterly basis to ensure that the provision for loan losses which we charge against earnings is in an amount necessary to maintain our allowance at a level that is appropriate, based on management’s estimate of probably losses. Our estimates of loan and lease losses are intended to, and, in management’s opinion, do, meet the criteria for accrual of loss contingencies in accordance with Statement of Financial Accounting Standards, or SFAS, No. 5, Accounting for Contingencies,” and SFAS No. 114, as amended, “Accounting by Creditors for Impairment of a Loan.” The process of evaluating this adequacy has two basic elements: first, the identification of problem loans or leases based on current financial information and the fair value of the underlying collateral; and second, a methodology for estimating general loss reserves inherent in the portfolio. For loans or leases classified as “special mention,” “substandard” or “doubtful,” we record all estimated losses at the time we classify the loan or lease. This “specific” portion of the allowance is the total of potential, although unconfirmed, losses for individually classified loans. Because we immediately charge off all identified losses, no portion of the allowance for loan losses is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses.
The second phase of our analysis represents an allocation of the allowance. This methodology analyzes pools of loans that have similar characteristics and applies historical loss experience and other factors for each pool to determine its allocable portion of the allowance. This estimate is intended to represent the potential unconfirmed and inherent losses within the portfolio. Individual loan pools are created for major loan categories: commercial loans, commercial mortgages, construction loans and direct lease financing, and for the various types of loans to individuals. We augment our historical experience for each loan pool by accounting for such items as: current economic conditions, current loan portfolio performance, loan policy or management changes, loan concentrations, increases in our lending limit, the average loan size, and other factors as appropriate.
Although the performance of our loan portfolio has been above that of our peers, and we do not currently foresee a change in that performance, our analysis for purposes of deriving the historical loss component of the allowance includes factors in addition to our historical loss experience, such as management’s experience with similar loan and lease portfolios at other institutions, the historic loss experience of our peers and statistical information from various industry reports such as the FDIC’s Quarterly Banking Profile.
While we consider our allowance for loan and lease losses to be adequate based on information currently available, future additions to the allowance may be necessary due to changes in economic conditions or management’s assumptions as to future delinquencies, recoveries and losses and management’s intent with regard to the disposition of loans and leases. We review the adequacy of the allowance on at least a quarterly basis to ensure that the provision for loan and lease losses that has been charged against earnings is an amount necessary to maintain the allowance at a level that is appropriate based on management’s assessment of probably estimated losses. The following table summarizes our credit loss experience for each of the periods indicated:
Balance in the allowance for loan and lease losses at beginning of period
Loans charged-off:
Lease financing
Consumer
Total
Recoveries:
Net charge-offs (recoveries)
Provision charged to operations
Balance in allowance for loan and lease losses at end of period
Net charge-offs/average loans
Non-Performing Loans. Loans are considered to be non-performing if they are on a non-accrual basis or terms have been renegotiated to provide a reduction or deferral of interest or principal because of a weakening in the financial positions of the borrowers. A loan which is past due 90 days or more and still accruing interest remains on accrual status only when it is both adequately secured as to principal and is in the process of collection. We had $-0- non-accrual or renegotiated loans at June 30, 2006 compared to $205,000 of non-accrual loans at June 30, 2005. Loans past due 90 days or more, defined as four or more monthly payments in arrears, still accruing interest amounted to $313,000 and $1.1 million at June 30, 2006 and 2005 respectively.
Deposits. A primary source for funding our growth is through deposit accumulation. We offer a variety of deposit accounts with a range of interest rates and terms, including savings accounts, checking accounts, money market savings accounts and certificates of deposit. Management is focused on growing our core deposits accounts which include demand, interest checking, savings and money markets as these accounts typically represent low cost deposits. As we develop and grow our core deposit relationships, we have used, and continue to use, the brokered certificate of deposit market to meet loan funding needs. It is management’s expectation that core deposit growth will replace a portion of the certificates of deposit as they mature. Additionally certain products offered by the company have an element of seasonality; for example merchant processing volume is greater in the first and fourth quarters and as a result the corresponding deposits are also greater in those periods. To offset the effects of the seasonality management will use certificates of deposit for funding. At June 30, 2006, we had total deposits of $896.9 million as compared to $732.6 million at December 31, 2005, an increase of $164.3 million or 22.4%. The following table presents the average balance and rates paid on deposits for the periods indicated:
Borrowings
At June 30, 2006 we had $55.0 million in advances from the Federal Home Loan Bank. The advances mature on a daily basis and are collateralized with investment securities and loans. Additionally, we had $9.6 million in securities sold under agreements to repurchase which also mature on a daily basis.
At June 30, 2006 we had $140.7 million in shareholders’ equity. During the first six months of 2006 we issued 22,272 shares from the exercise of stock options with net proceeds to the company of approximately $277,000. Cash dividends paid on Series A preferred stock decreased to $40,000 as a result of the Company’s Solicitation of the Series A stockholders in 2005 to convert to common shares. The Company offered a conversion premium of $.60 per share. Accumulated other comprehensive loss increased $724,000 due to decreased valuations in the Company’s investment portfolio.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There has been no material change in our assessment of our sensitivity to market risk since our presentation in our Annual Report on Form 10-K for the year ended December 31, 2005 except as set forth in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in Securities and Exchange Act of 1934 reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Under the supervision of our chief executive officer and chief financial officer, we have carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective at the reasonable assurance level.
There have been no significant changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially effect, our internal control over financial reporting during our most recent quarter.
PART II – OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At our Annual Meeting of Shareholders held on May 22, 2006, pursuant to the Notice of Annual Meeting of Shareholders and Proxy Statement dated April 21, 2006, the voting results were as follows:
(a) Each of the following nominees was elected to the Board of Directors as follows:
Betsy Z. Cohen
D. Gideon Cohen
Walter T. Beach
Michael J. Bradley
Matthew Cohn
Leon A. Huff
William H. Lamb
Frank M. Mastrangelo
James J. McEntee III
Linda Schaeffer
Joan Specter
Steven N. Stein
The Exhibits furnished as part of this Quarterly Report on Form 10-Q are identified in the Exhibit Index immediately following the signature page of this Report. Such Exhibit Index is incorporated herein by reference.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
THE BANCORP INC.
(Registrant)
August 9, 2006
/s/ Betsy Z. Cohen
Date
Chief Executive Officer
/s/ Martin F. Egan
Martin F. Egan
Senior Vice President, Chief
Financial Officer and Secretary
Description