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Section 1: 10-Q (10-Q)

20180630 Q2



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



FORM 10-Q





 

 

[X]

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE



 

SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended:     June 30, 2018





 

 



 

 

[  ]

 

TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE



 

SECURITIES EXCHANGE ACT OF 1934



For the transition period from: _____ to _____



Commission file number: 51018



THE BANCORP, INC.



(Exact name of registrant as specified in its charter)





 

 

Delaware

 

23-3016517

(State or other jurisdiction of incorporation or organization)

 

(IRS Employer Identification No.)



 

 

409 Silverside Road, Wilmington, DE 19809

 

(302) 385-5000

(Address of principal executive offices and zip code)

 

(Registrant's telephone number, including area code)



    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,  a smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one): 

 



 

 



 

 

Large accelerated filer [ ]   

Accelerated filer [X]    

Non-accelerated filer [ ] 

Smaller reporting company [ ]

Emerging growth company [ ]

 



    If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) 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  July 31, 2018, there were 56,446,088 outstanding shares of common stock, $1.00 par value.



2


 

THE BANCORP, INC



Form 10-Q Index



 

 



 

Page

Part I Financial Information

Item 1

Financial Statements:

4



 

 



Consolidated Balance Sheets – June 30, 2018 (unaudited) and December 31, 2017

4



 

 



Unaudited Consolidated Statements of Operations – Three and six months ended June 30, 2018 and 2017

5



 

 



Unaudited Consolidated Statements of Comprehensive Income – Six months ended June 30, 2018 and 2017

7



 

 



Unaudited Consolidated Statements of Changes in Shareholders’ Equity – Six months ended June 30, 2018

8



 

 



Unaudited Consolidated Statements of Cash Flows – Six months ended June 30, 2018 and 2017

9



 

 



Notes to Unaudited Consolidated Financial Statements

10



 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

39



 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

60



 

 

Item 4.

Controls and Procedures

60



 

 

Part II Other Information



 

 

Item 1.

Legal Proceedings

61

Item 6.

Exhibits

62



 

 

Signatures

 

62



 

 







 


 



PART I – FINANCIAL INFORMATION



Item 1. Financial Statements



THE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS





 

 

 

 



 

June 30,

 

December 31,



 

2018

 

2017



 

(unaudited)

 

 



 

(in thousands)

ASSETS

 

 

 

 

Cash and cash equivalents

 

 

 

 

Cash and due from banks

 

$                    3,052 

 

$                    3,152 

Interest earning deposits at Federal Reserve Bank

 

373,782 

 

841,471 

Securities purchased under agreements to resell

 

64,216 

 

64,312 

Total cash and cash equivalents

 

441,050 

 

908,935 



 

 

 

 

Investment securities, available-for-sale, at fair value

 

1,305,494 

 

1,294,484 

Investment securities, held-to-maturity (fair value $85,754 and $85,345, respectively)

 

86,354 

 

86,380 

Commercial loans held for sale, at fair value

 

447,997 

 

503,316 

Loans, net of deferred loan fees and costs

 

1,506,812 

 

1,392,228 

Allowance for loan and lease losses

 

(8,014)

 

(7,096)

Loans, net

 

1,498,798 

 

1,385,132 

Federal Home Loan Bank and Atlantic Central Bankers Bank stock

 

1,113 

 

991 

Premises and equipment, net

 

18,275 

 

20,051 

Accrued interest receivable

 

11,810 

 

10,900 

Intangible assets, net

 

4,612 

 

5,377 

Other real estate owned

 

405 

 

450 

Deferred tax asset, net

 

39,779 

 

34,802 

Investment in unconsolidated entity, at fair value

 

67,994 

 

74,473 

Assets held for sale from discontinued operations

 

241,694 

 

304,313 

Other assets

 

56,499 

 

78,543 

Total assets

 

$             4,221,874 

 

$             4,708,147 



 

 

 

 

LIABILITIES

 

 

 

 

Deposits

 

 

 

 

Demand and interest checking

 

$             3,287,682 

 

$             3,806,965 

Savings and money market

 

511,598 

 

453,877 

Total deposits

 

3,799,280 

 

4,260,842 



 

 

 

 

Securities sold under agreements to repurchase

 

161 

 

217 

Subordinated debentures

 

13,401 

 

13,401 

Long-term borrowings

 

42,000 

 

42,323 

Other liabilities

 

34,485 

 

67,215 

Total liabilities

 

3,889,327 

 

4,383,998 



 

 

 

 

SHAREHOLDERS' EQUITY

 

 

 

 

Common stock - authorized, 75,000,000 shares of $1.00 par value; 56,410,525 and 55,861,150

 

 

 

 

shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively

 

56,411 

 

55,861 

Treasury stock, at cost (100,000 shares)

 

(866)

 

(866)

Additional paid-in capital

 

364,460 

 

363,196 

Accumulated deficit

 

(69,213)

 

(89,485)

Accumulated other comprehensive loss

 

(18,245)

 

(4,557)

Total shareholders' equity

 

332,547 

 

324,149 



 

 

 

 

Total liabilities and shareholders' equity

 

$             4,221,874 

 

$             4,708,147 



The accompanying notes are an integral part of these consolidated statements.



4

 


 







THE BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

For the three months ended June 30,

 

For the six months ended June 30,



 

2018

 

2017

 

2018

 

2017



 

(in thousands, except per share data)

Interest income

 

 

 

 

 

 

 

 

Loans, including fees

 

$               21,971 

 

$               20,017 

 

$               45,273 

 

$               37,646 

Investment securities:

 

 

 

 

 

 

 

 

Taxable interest

 

10,770 

 

9,138 

 

20,469 

 

18,143 

Tax-exempt interest

 

49 

 

70 

 

109 

 

142 

Federal funds sold/securities purchased under agreements to resell

 

475 

 

333 

 

889 

 

560 

Interest earning deposits

 

2,095 

 

1,255 

 

3,927 

 

2,771 



 

35,360 

 

30,813 

 

70,667 

 

59,262 

Interest expense

 

 

 

 

 

 

 

 

Deposits

 

5,639 

 

3,432 

 

10,608 

 

6,866 

Short-term borrowings

 

 

22 

 

113 

 

22 

Subordinated debentures

 

178 

 

144 

 

338 

 

282 



 

5,826 

 

3,598 

 

11,059 

 

7,170 

Net interest income

 

29,534 

 

27,215 

 

59,608 

 

52,092 

Provision for loan and lease losses

 

900 

 

350 

 

1,600 

 

1,350 

Net interest income after provision for loan and lease losses

 

28,634 

 

26,865 

 

58,008 

 

50,742 



 

 

 

 

 

 

 

 

Non-interest income

 

 

 

 

 

 

 

 

Service fees on deposit accounts

 

1,646 

 

1,520 

 

3,222 

 

3,195 

Card payment and ACH processing fees

 

2,014 

 

1,504 

 

3,706 

 

3,032 

Prepaid card fees

 

14,073 

 

13,234 

 

28,355 

 

26,781 

Realized and unrealized gains (losses) on loans originated for sale

 

(454)

 

758 

 

11,275 

 

6,141 

Gain on sale of investment securities

 

 -

 

586 

 

26 

 

1,089 

Change in value of investment in unconsolidated entity

 

(1,732)

 

 

(2,903)

 

(16)

Leasing income

 

1,108 

 

832 

 

1,595 

 

1,383 

Affinity fees

 

85 

 

149 

 

187 

 

1,170 

Gain on sale of health savings accounts

 

 -

 

2,538 

 

 -

 

2,538 

Loss from sale of European prepaid operations

 

 -

 

(3,437)

 

 -

 

(3,437)

Other

 

300 

 

486 

 

672 

 

516 

Total non-interest income

 

17,040 

 

18,173 

 

46,135 

 

42,392 



 

 

 

 

 

 

 

 

Non-interest expense

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

18,897 

 

18,108 

 

39,970 

 

36,114 

Depreciation and amortization

 

982 

 

1,119 

 

2,013 

 

2,325 

Rent and related occupancy cost

 

1,375 

 

1,398 

 

2,734 

 

2,859 

Data processing expense

 

1,356 

 

2,641 

 

3,361 

 

6,121 

Printing and supplies

 

305 

 

333 

 

494 

 

838 

Audit expense

 

613 

 

456 

 

1,082 

 

877 

Legal expense

 

1,770 

 

1,427 

 

4,201 

 

3,165 

Amortization of intangible assets

 

383 

 

377 

 

766 

 

756 

Losses on sale and write downs on other real estate owned

 

 -

 

19 

 

45 

 

19 

FDIC insurance

 

2,929 

 

3,458 

 

5,148 

 

5,523 

Software

 

2,995 

 

3,012 

 

6,286 

 

6,240 

Insurance

 

673 

 

542 

 

1,294 

 

1,220 

Telecom and IT network communications

 

313 

 

425 

 

639 

 

1,017 

Consulting

 

863 

 

706 

 

1,528 

 

1,240 

Civil money penalty adjustment

 

 -

 

 -

 

(290)

 

 -

Lease termination expense

 

395 

 

 -

 

395 

 

 -

Other

 

3,461 

 

3,342 

 

6,693 

 

6,832 

Total non-interest expense

 

37,310 

 

37,363 

 

76,359 

 

75,146 

Income from continuing operations before income taxes

 

8,364 

 

7,675 

 

27,784 

 

17,988 

Income tax expense (benefit)

2,209 

 

(9,923)

 

7,608 

 

(5,912)

5

 


 

Net income from continuing operations

 

$                 6,155 

 

$               17,598 

 

$               20,176 

 

$               23,900 

Discontinued operations

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations before income taxes

 

(50)

 

1,992 

 

106 

 

4,659 

Income tax expense (benefit)

(36)

 

726 

 

 

1,732 

Income (loss) from discontinued operations, net of tax

 

(14)

 

1,266 

 

105 

 

2,927 

Net income available to common shareholders

 

$                 6,141 

 

$               18,864 

 

$               20,281 

 

$               26,827 



 

 

 

 

 

 

 

 

Net income per share from continuing operations - basic

 

$                   0.11 

 

$                   0.32 

 

$                   0.36 

 

$                   0.43 

Net income per share from discontinued operations - basic

 

$                        - 

 

$                   0.02 

 

$                        - 

 

$                   0.05 

Net income per share - basic

 

$                   0.11 

 

$                   0.34 

 

$                   0.36 

 

$                   0.48 



 

 

 

 

 

 

 

 

Net income per share from continuing operations - diluted

 

$                   0.11 

 

$                   0.32 

 

$                   0.36 

 

$                   0.43 

Net income per share from discontinued operations - diluted

 

$                        - 

 

$                   0.02 

 

$                        - 

 

$                   0.05 

Net income per share - diluted

 

$                   0.11 

 

$                   0.34 

 

$                   0.36 

 

$                   0.48 



The accompanying notes are an integral part of these consolidated statements.

6

 


 





THE BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME







 

 

 



 

 

 



For the six months



ended June 30,



2018

 

2017



(in thousands)



 

 

 

Net income

$                  20,281 

 

$                 26,827 

Other comprehensive income net of reclassifications into net income:

 

 

 



 

 

 

Other comprehensive income (loss)

 

 

 

Change in net unrealized gain (loss) during the period

(18,745)

 

7,172 

Reclassification adjustments for gains included in income

(26)

 

(1,089)

Reclassification adjustments for foreign currency translation gains

 -

 

216 

Amortization of losses previously held as available-for-sale

21 

 

17 

Net unrealized gain (loss)

(18,750)

 

6,316 



 

 

 

Deferred tax expense

 

 

 

 Securities available-for-sale:

 

 

 

Change in net unrealized gain (loss) during the period

(5,061)

 

2,869 

Reclassification adjustments for gains included in income

(7)

 

(436)

Amortization of losses previously held as available-for-sale

 

Income tax (benefit) expense related to items of other comprehensive income

(5,062)

 

2,440 



 

 

 

Other comprehensive income (loss) net of tax and reclassifications into net income

(13,688)

 

3,876 

Comprehensive income

$                    6,593 

 

$                 30,703 



The accompanying notes are an integral part of these consolidated statements.





 

7

 


 





THE BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY





 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended June 30, 2018

(in thousands, except share data)



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 



 

Common

 

 

 

 

 

Additional

 

 

 

other

 

 



 

stock

 

Common

 

Treasury

 

paid-in

 

Accumulated

 

comprehensive

 

 



 

shares

 

stock

 

stock

 

capital

 

deficit

 

loss

 

Total



 

 

 

 

Balance at January 1, 2018

 

55,861,150 

 

$        55,861 

 

$        (866)

 

$      363,196 

 

$       (89,485)

 

$              (4,557)

 

$          324,149 

Net income

 

 -

 

 -

 

 -

 

 -

 

20,281 

 

 -

 

20,281 

Common stock issued from option exercises,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net of tax benefits

 

13,390 

 

13 

 

 -

 

107 

 

(9)

 

 -

 

111 

Common stock issued from restricted shares,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net of tax benefits

 

535,985 

 

537 

 

 -

 

(536)

 

 -

 

 -

 

Stock-based compensation

 

 -

 

 -

 

 -

 

1,693 

 

 -

 

 -

 

1,693 

Other comprehensive loss net of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

reclassification adjustments and tax

 

 -

 

 -

 

 -

 

 -

 

 -

 

(13,688)

 

(13,688)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2018

 

56,410,525 

 

$        56,411 

 

$        (866)

 

$      364,460 

 

$       (69,213)

 

$            (18,245)

 

$          332,547 



The accompanying notes are an integral part of this consolidated statement.





8

 


 





THE BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS









 

 

 

 



 

 

 

 



 

For the six months



 

ended June 30,



 

2018

 

2017



 

(in thousands)

Operating activities

 

 

 

 

Net income from continuing operations

 

$            20,176 

 

$            23,900 

Net income from discontinued operations

 

105 

 

2,927 

Adjustments to reconcile net income to net cash provided by (used in) operating activities

 

 

 

 

Depreciation and amortization

 

2,779 

 

3,081 

Provision for loan and lease losses

 

1,600 

 

1,350 

Net amortization of investment securities discounts/premiums

 

8,017 

 

3,867 

Stock-based compensation expense

 

1,693 

 

1,553 

Loans originated for sale

 

(252,109)

 

(246,172)

Sale of loans originated for resale

 

316,314 

 

133,072 

Gain on sales of loans originated for resale

 

(11,646)

 

(6,632)

Loss on sale of fixed assets

 

15 

 

28 

Loss on sale of other real estate owned

 

 -

 

19 

Fair value adjustment on investment in unconsolidated entity

 

2,903 

 

(16)

Writedown of other real estate

 

45 

 

 -

Change in fair value loans held for sale

 

2,437 

 

2,995 

Change in fair value of derivatives

 

(2,066)

 

(2,505)

Gain on sales of investment securities

 

(26)

 

(1,089)

Increase in accrued interest receivable

 

(910)

 

(291)

Increase in other assets

 

(11,145)

 

(11,747)

Change in fair value of discontinued loans held for sale

 

960 

 

 -

Decrease in discontinued assets held for sale

 

3,653 

 

5,723 

Decrease in other liabilities

 

(15,715)

 

(27,026)

 Net cash provided by (used in) operating activities

 

67,080 

 

(116,963)



 

 

 

 

Investing activities

 

 

 

 

Purchase of investment securities available-for-sale

 

(157,980)

 

(106,677)

Proceeds from sale of investment securities available-for-sale

 

 -

 

60,115 

Proceeds from redemptions and prepayments of securities available-for-sale

 

105,305 

 

192,088 

Proceeds from sale of other real estate owned

 

 -

 

85 

Net increase in loans

 

(115,518)

 

(147,894)

Net decrease in discontinued loans held for sale

 

58,006 

 

18,742 

Proceeds from sale of fixed assets

 

 -

 

366 

Purchases of premises and equipment

 

(144)

 

(385)

Change in receivable from investment in unconsolidated entity

 

33,296 

 

4,722 

Investment in unconsolidated entity

 

3,576 

 

6,084 

 Net cash (used in) provided by investing activities

 

(73,459)

 

27,246 



 

 

 

 

Financing activities

 

 

 

 

Net decrease in deposits

 

(461,562)

 

(362,220)

Net decrease in securities sold under agreements to repurchase

 

(56)

 

(1)

Common stock issuance expense

 

 -

 

(200)

Proceeds from the issuance of common stock

 

112 

 

 -

 Net cash used in financing activities

 

(461,506)

 

(362,421)



 

 

 

 

 Net decrease in cash and cash equivalents

 

(467,885)

 

(452,138)



 

 

 

 

Cash and cash equivalents, beginning of period

 

908,935 

 

999,059 



 

 

 

 

Cash and cash equivalents, end of period

 

$          441,050 

 

$          546,921 



 

 

 

 

Supplemental disclosure:

 

 

 

 

Interest paid

 

$            10,944 

 

$              7,163 

Taxes paid

 

$              1,036 

 

$                   44 











The accompanying notes are an integral part of these consolidated statements.

9

 


 

THE BANCORP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLDIATED FINANCIAL STATEMENTS



Note 1. Structure of Company

The Bancorp, Inc. (the Company) is a Delaware corporation and a registered financial holding company.  Its primary subsidiary is The Bancorp Bank (the Bank) which is wholly owned by the Company.   The Bank is a Delaware chartered commercial bank located in Wilmington, Delaware and is a Federal Deposit Insurance Corporation (FDIC) insured institution.  In its continuing operations, the Bank has four primary lines of specialty lending: securities-backed lines of credit (SBLOC), vehicle fleet and other equipment leasing, Small Business Administration (SBA) loans and commercial mortgage-backed loans (CMBS) generated for sale into commercial mortgage-backed securities markets primarily through securitizations.   Through the Bank, the Company also provides banking services nationally, which include prepaid cards, private label banking, institutional banking, card payment and other payment processing. 

The Company and the Bank are subject to regulation by certain state and federal agencies and, accordingly, they are examined periodically by those regulatory authorities.  As a consequence of the extensive regulation of commercial banking activities, the Company’s and the Bank’s businesses may be affected by state and federal legislation and regulations.

Note 2. Significant Accounting Policies



Basis of Presentation

The financial statements of the Company, as of June 30, 2018 and for the three and six month periods ended June 30, 2018 and 2017, 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 (U.S. GAAP) have been condensed or omitted in this Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission (SEC).  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, 2017  (2017 Form 10-K Report).  The results of operations for the six month period ended June 30, 2018 may not necessarily be indicative of the results of operations for the full year ending December 31, 2018.  

Revenue Recognition



The Company recognizes revenue when the performance obligations related to the transfer of goods or services under the terms of a contract are satisfied. Some obligations are satisfied at a point in time while others are satisfied over a period of time.  Revenue is recognized as the amount of consideration to which the Company expects to be entitled to in exchange for transferring goods or services to a customer.  When consideration includes a variable component, the amount of consideration attributable to variability is included in the transaction price only to the extent it is probable that significant revenue recognized will not be reversed when uncertainty associated with the variable consideration is subsequently resolved.  The Company’s contracts generally do not contain terms that require significant judgment to determine the variability impacting the transaction price.



A performance obligation is deemed satisfied when the control over goods or services is transferred to the customer. Control is transferred to a customer either at a point in time or over time. To determine when control is transferred at a point in time, the Company considers indicators, including but not limited to the right to payment for the asset, transfer of significant risk and rewards of ownership of the asset and acceptance of the asset by the customer. When control is transferred over a period of time, for different performance obligations, either the input or output method is used to measure progress for the transfer. The measure of progress used to assess completion of the performance obligation varies between performance obligations and may be based on time throughout the period of service or on the value of goods and services transferred to the customer.  As each distinct service or activity is performed, the Company transfers control to the customer based on the services performed as the customer simultaneously receives the benefits of those services. This timing of revenue recognition aligns with the resolution of any uncertainty related to variable consideration.  Costs incurred to obtain a revenue producing contract generally are expensed when incurred as a practical expedient as the contractual period for the majority of contracts is one year or less.  The Company’s revenue streams that are in the scope of Accounting Standards Update (ASU) 606 include prepaid card, card payment, ACH  and deposit processing and other fees.  The fees on those revenue streams are generally assessed and collected as the transaction occurs, or on a monthly or quarterly basis.  The Company has completed its review of the contracts and other agreements that are within scope of revenue guidance and did not identify any material changes to the timing or amount of revenue recognition.  The Company’s accounting policies did not change materially since the principles of revenue recognition in ASU 2014-09, “Revenue from Contracts with Customers” are largely consistent with previous practices applied by the Company.  The vast majority of the Company’s services related to its revenues are performed, earned and recognized monthly.



10

 


 

Prepaid card fees primarily include fees for services related to reconciliation, fraud detection, regulatory compliance and other services which are performed and earned daily or monthly and are also billed and collected on a monthly basis.  Accordingly, there is no significant component of the services the Company performs or related revenues which are deferred.  The Company earns transactional and/or interchange fees on prepaid card accounts when transactions occur and revenue is billed and collected monthly or quarterly. Certain volume or transaction based interchange expenses paid to payment networks such as Visa, reduce revenue which is presented net on the income statement. Card payment and ACH processing fees include transaction fees earned for processing merchant transactions.  Revenue is recognized when a cardholder’s transaction is approved and settled, or monthly. ACH processing fees are earned on a per item basis as the transactions are processed for third party clients and are also billed and collected monthly. Service charges on deposit accounts include fees and other charges the Company receives to provide various services, including but not limited to, account maintenance, check writing, wire transfer and other services normally associated with deposit accounts.  Revenue for these services is recognized monthly as the services are performed.  The Company’s customer contracts do not typically have performance obligations and fees are collected and earned when the transaction occurs.  The Company may, from time to time, waive certain fees for customers but generally does not reduce the transaction price to reflect variability for future reversals due to the insignificance of the amounts.  Waiver of fees reduces the revenue in the period the waiver is granted to the customer.



Note 3. Stock-based Compensation



The Company recognizes compensation expense for stock options in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 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 typically 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 718, the Company estimates the number of options for which the requisite service is expected to be rendered.  At June 30, 2018, the Company had  three active  stock-based compensation plans.  The 2018 equity compensation plan was approved at the annual meeting in May 2018 and is described in the proxy for that meeting.  The other plans are described in the Company’s 2017 Form 10-K Report.



The Company did not grant stock options during the six month periods ended June 30, 2018 and June 30, 2017.  There were 23,125 common stock options exercised in the six month period ended June 30, 2018, and no common stock options were exercised during the six month period ended June 30, 2017.    



A summary of the status of the Company’s equity compensation plans is presented below.







 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

Weighted average

 

 



 

 

 

 

remaining

 

 



 

 

Weighted average

 

contractual

 

Aggregate



Shares

 

exercise price

 

term (years)

 

intrinsic value

Outstanding at January 1, 2018

1,452,625 

 

$                     8.30 

 

4.64 

 

$                         - 

Granted

 -

 

 -

 

 -

 

 -

Exercised

(23,125)

 

9.45 

 

 -

 

 -

Expired

 -

 

 -

 

 -

 

 -

Forfeited

 -

 

 -

 

 -

 

 -

Outstanding at June 30, 2018

1,429,500 

 

$                     8.28 

 

4.15 

 

$          3,115,855 

Exercisable at June 30, 2018

1,268,250 

 

$                     8.45 

 

3.68 

 

$          2,552,155 



The Company granted 507,792 restricted stock units (RSUs) in the first six months of 2018 of which 440,292 have a vesting period of 2.8 years and 67,500 have a vesting period of one year.  The 507,792 of RSUs granted in the first six months of 2018 had a fair value of $11.07.  In the first six months of 2017, the Company granted 807,482 RSUs of which 672,482 had a vesting period of three years and 135,000 had a vesting period of one year.  Of the RSUs granted in the first six months of 2017,  799,599 had a fair value of $5.06 and 7,923 had a fair value of $6.31 at issuance.  The total issuance date fair value of RSUs vested for the six months ended June 30, 2018 and 2017 was $2.8 million and $2.6 million, respectively.



11

 


 

A summary of the status of the Company’s RSUs is presented below.





 

 

 

 

 



 

 

 

 

 



 

 

Weighted average

 

Average remaining



 

 

grant date

 

contractual



Shares

 

fair value

 

term (years)

Outstanding at January 1, 2018

1,264,454 

 

$                  5.49 

 

1.67 

Shares

 -

 

 -

 

 

Granted

507,792 

 

11.07 

 

 

Vested

(535,985)

 

5.29 

 

 

Forfeited

(9,803)

 

7.65 

 

 

Outstanding at June 30, 2018

1,226,458 

 

$                  7.88 

 

1.84 



As of June 30, 2018, there was a total of $8.9 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 approximately 1.7 years.  Related compensation expense for the six months ended June 30, 2018 and 2017 was $1.7 million and $1.6 million, respectively.  The total issuance date fair value of RSUs vested and options exercised during the six months ended June 30, 2018 and 2017 was $5.8 million and $2.6 million, respectively.



Note 4. Earnings Per Share



The Company calculates earnings per share under ASC 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:







 

 

 

 

 

 



 

 

 

 

 

 



 

For the three months ended



 

June 30, 2018



 

Income

 

Shares

 

Per share



 

(numerator)

 

(denominator)

 

amount



 

 

 

 

 

 



 

(dollars in thousands except share and per share data)

Basic earnings per share from continuing operations

 

 

 

 

 

 

Net earnings available to common shareholders

 

$                 6,155

 

56,340,816 

 

$                  0.11

Effect of dilutive securities

 

 

 

 

 

 

Common stock options

 

 -

 

800,403 

 

 -

Diluted earnings per share

 

 

 

 

 

 

Net earnings available to common shareholders

 

$                 6,155

 

57,141,219 

 

$                  0.11







 

 

 

 

 

 



 

 

 

 

 

 



 

For the three months ended



 

June 30, 2018



 

Income

 

Shares

 

Per share



 

(numerator)

 

(denominator)

 

amount



 

 

 

 

 

 



 

(dollars in thousands except share and per share data)

Basic loss per share from discontinued operations

 

 

 

 

 

 

Net loss available to common shareholders

 

$                   (14)

 

56,340,816 

 

$                      -

Effect of dilutive securities

 

 

 

 

 

 

Common stock options

 

 -

 

800,403 

 

 -

Diluted loss per share

 

 

 

 

 

 

Net loss available to common shareholders

 

$                   (14)

 

57,141,219 

 

$                      -





12

 


 



 

 

 

 

 

 



 

 

 

 

 

 



 

For the three months ended



 

June 30, 2018



 

Income

 

Shares

 

Per share



 

(numerator)

 

(denominator)

 

amount



 

 

 

 

 

 



 

(dollars in thousands except share and per share data)

Basic earnings per share

 

 

 

 

 

 

Net earnings available to common shareholders

 

$                 6,141

 

56,340,816 

 

$                  0.11

Effect of dilutive securities

 

 

 

 

 

 

Common stock options

 

 -

 

800,403 

 

 -

Diluted earnings per share

 

 

 

 

 

 

Net earnings available to common shareholders

 

$                 6,141

 

57,141,219 

 

$                  0.11



Stock options for 1,429,500 shares, exercisable at prices between $6.75 and $10.45 per share, were outstanding at June 30, 2018, and included in the dilutive shares because the exercise price per share was less than the average market price.  RSU’s are not included  as dilutive shares.







 

 

 

 

 

 



 

 

 

 

 

 



 

For the six months ended



 

June 30, 2018



 

Income

 

Shares

 

Per share



 

(numerator)

 

(denominator)

 

amount



 

(dollars in thousands except share and per share data)

Basic earnings per share from continuing operations

 

 

 

 

 

 

Net earnings available to common shareholders

 

$               20,176

 

56,241,873 

 

$                  0.36

Effect of dilutive securities

 

 

 

 

 

 

Common stock options

 

 -

 

841,424 

 

 -

Diluted earnings per share

 

 

 

 

 

 

Net earnings available to common shareholders

 

$               20,176

 

57,083,297 

 

$                  0.36







 

 

 

 

 

 



 

 

 

 

 

 



 

For the six months ended



 

June 30, 2018



 

Income

 

Shares

 

Per share



 

(numerator)

 

(denominator)

 

amount



 

(dollars in thousands except share and per share data)

Basic earnings per share from discontinued operations

 

 

 

 

 

 

Net earnings available to common shareholders

 

$                    105

 

56,241,873 

 

$                      -

Effect of dilutive securities

 

 

 

 

 

 

Common stock options

 

 -

 

841,424 

 

 -

Diluted earnings per share

 

 

 

 

 

 

Net earnings available to common shareholders

 

$                    105

 

57,083,297 

 

$                      -







 

 

 

 

 

 



 

 

 

 

 

 



 

For the six months ended



 

June 30, 2018



 

Income

 

Shares

 

Per share



 

(numerator)

 

(denominator)

 

amount



 

 

 

 

 

 



 

(dollars in thousands except share and per share data)

Basic earnings per share

 

 

 

 

 

 

Net earnings available to common shareholders

 

$               20,281

 

56,241,873 

 

$                  0.36

Effect of dilutive securities

 

 

 

 

 

 

Common stock options

 

 -

 

841,424 

 

 -

Diluted earnings per share

 

 

 

 

 

 

Net earnings available to common shareholders

 

$               20,281

 

57,083,297 

 

$                  0.36



13

 


 

Stock options for 1,429,500 shares, exercisable at prices between $6.75 and $10.45 per share, were outstanding at June 30, 2018, and included in the dilutive shares because the exercise price per share was less than the average market price.  RSU’s are not included  as dilutive shares.







 

 

 

 

 

 



 

 

 

 

 

 



 

For the three months ended



 

June 30, 2017



 

Income

 

Shares

 

Per share



 

(numerator)

 

(denominator)

 

amount



 

 

 

 

 

 



 

(dollars in thousands except share and per share data)

Basic earnings per share from continuing operations

 

 

 

 

 

 

Net earnings available to common shareholders

 

$               17,598

 

55,689,439 

 

$                  0.32

Effect of dilutive securities

 

 

 

 

 

 

Common stock options

 

 -

 

340,596 

 

 -

Diluted earnings per share

 

 

 

 

 

 

Net earnings available to common shareholders

 

$               17,598

 

56,030,035 

 

$                  0.32







 

 

 

 

 

 



 

 

 

 

 

 



 

For the three months ended



 

June 30, 2017



 

Income

 

Shares

 

Per share



 

(numerator)

 

(denominator)

 

amount



 

 

 

 

 

 



 

(dollars in thousands except share and per share data)

Basic earnings per share from discontinued operations

 

 

 

 

 

 

Net earnings available to common shareholders

 

$                 1,266

 

55,689,439 

 

$                  0.02

Effect of dilutive securities

 

 

 

 

 

 

Common stock options

 

 -

 

340,596 

 

 -

Diluted earnings per share

 

 

 

 

 

 

Net earnings available to common shareholders

 

$                 1,266

 

56,030,035 

 

$                  0.02







 

 

 

 

 

 



 

 

 

 

 

 



 

For the three months ended



 

June 30, 2017



 

Income

 

Shares

 

Per share



 

(numerator)

 

(denominator)

 

amount



 

 

 

 

 

 



 

(dollars in thousands except share and per share data)