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Section 1: 10-Q (10-Q)

20190630 Q2



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q



 

 

 

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



 

SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended:     June 30, 2019





 

 



 

 

 

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    No

    Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes   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. 

 



 

 



 

 

Large accelerated filer   

Accelerated filer    

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



    Securities registered pursuant to Section 12(b) of the Act:



 

 

Title of Each Class

Trading Symbol(s)

Name of each Exchange on Which Registered

Common Stock

TBBK

Nasdaq Global Select

As of July 30, 2019, there were 56,774,956 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, 2019 (unaudited) and December 31, 2018

4



 

 



Unaudited Consolidated Statements of Operations – Three and six months ended June 30, 2019 and 2018

5



 

 



Unaudited Consolidated Statements of Comprehensive Income – Six months ended June 30, 2019 and 2018

7



 

 



Unaudited Consolidated Statements of Changes in Shareholders’ Equity – Six months ended June 30, 2019 and 2018

8



 

 



Unaudited Consolidated Statements of Cash Flows – Six months ended June 30, 2019 and 2018

10



 

 



Notes to Unaudited Consolidated Financial Statements

11



 

 

Item 2.

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

40



 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

61



 

 

Item 4.

Controls and Procedures

61



 

 

Part II Other Information



 

 

Item 1.

Legal Proceedings

62

Item 6.

Exhibits

63



 

 

Signatures

 

63



 

 







 


 



PART I – FINANCIAL INFORMATION



Item 1. Financial Statements



THE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS





 

 

 

 



 

June 30,

 

December 31,



 

2019

 

2018



 

(unaudited)

 

 



 

(in thousands)

ASSETS

 

 

 

 

Cash and cash equivalents

 

 

 

 

Cash and due from banks

 

$                   27,450 

 

$                     2,440 

Interest earning deposits at Federal Reserve Bank

 

284,823 

 

551,862 

Total cash and cash equivalents

 

312,273 

 

554,302 



 

 

 

 

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

 

1,361,779 

 

1,236,324 

Investment securities, held-to-maturity (fair value $83,362 and $83,391, respectively)

 

84,414 

 

84,432 

Commercial loans held-for-sale, at fair value

 

934,452 

 

688,471 

Loans, net of deferred loan fees and costs

 

1,561,451 

 

1,501,976 

Allowance for loan and lease losses

 

(9,989)

 

(8,653)

Loans, net

 

1,551,462 

 

1,493,323 

Federal Home Loan Bank and Atlantic Central Bankers Bank stock

 

6,342 

 

1,113 

Premises and equipment, net

 

17,380 

 

18,895 

Accrued interest receivable

 

14,567 

 

12,753 

Intangible assets, net

 

3,081 

 

3,846 

Deferred tax asset, net

 

14,574 

 

21,622 

Investment in unconsolidated entity, at fair value

 

58,012 

 

59,273 

Assets held-for-sale from discontinued operations

 

169,109 

 

197,831 

Other assets

 

76,123 

 

65,726 

Total assets

 

$              4,603,568 

 

$              4,437,911 



 

 

 

 

LIABILITIES

 

 

 

 

Deposits

 

 

 

 

Demand and interest checking

 

$              3,964,905 

 

$              3,904,638 

Savings and money market

 

26,841 

 

31,076 

Total deposits

 

3,991,746 

 

3,935,714 



 

 

 

 

Securities sold under agreements to repurchase

 

93 

 

93 

Short-term borrowings

 

45,000 

 

 -

Subordinated debentures

 

13,401 

 

13,401 

Long-term borrowings

 

41,334 

 

41,674 

Other liabilities

 

53,862 

 

40,253 

Total liabilities

 

4,145,436 

 

4,031,135 



 

 

 

 

SHAREHOLDERS' EQUITY

 

 

 

 

Common stock - authorized, 75,000,000 shares of $1.00 par value; 56,874,956 and 56,446,088

 

 

 

 

shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively

 

56,875 

 

56,446 

Treasury stock, at cost (100,000 shares)

 

(866)

 

(866)

Additional paid-in capital

 

368,771 

 

366,181 

Accumulated earnings (deficit)

 

28,463 

 

(817)

Accumulated other comprehensive income (loss)

 

4,889 

 

(14,168)

Total shareholders' equity

 

458,132 

 

406,776 



 

 

 

 

Total liabilities and shareholders' equity

 

$              4,603,568 

 

$              4,437,911 



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,



 

2019

 

2018

 

2019

 

2018



 

(in thousands, except per share data)

Interest income

 

 

 

 

 

 

 

 

Loans, including fees

 

$               29,948 

 

$               21,971 

 

$              60,447 

 

$               45,273 

Investment securities:

 

 

 

 

 

 

 

 

Taxable interest

 

11,634 

 

10,770 

 

22,164 

 

20,469 

Tax-exempt interest

 

43 

 

49 

 

90 

 

109 

Federal funds sold/securities purchased under agreements to resell

 

 -

 

475 

 

 -

 

889 

Interest earning deposits

 

2,455 

 

2,095 

 

4,957 

 

3,927 



 

44,080 

 

35,360 

 

87,658 

 

70,667 

Interest expense

 

 

 

 

 

 

 

 

Deposits

 

8,823 

 

5,639 

 

17,693 

 

10,608 

Short-term borrowings

 

526 

 

 

1,029 

 

113 

Subordinated debentures

 

192 

 

178 

 

387 

 

338 



 

9,541 

 

5,826 

 

19,109 

 

11,059 

Net interest income

 

34,539 

 

29,534 

 

68,549 

 

59,608 

Provision for loan and lease losses

 

600 

 

900 

 

2,300 

 

1,600 

Net interest income after provision for loan and lease losses

 

33,939 

 

28,634 

 

66,249 

 

58,008 



 

 

 

 

 

 

 

 

Non-interest income

 

 

 

 

 

 

 

 

Service fees on deposit accounts

 

14 

 

1,646 

 

61 

 

3,222 

ACH, card and other payment processing fees

 

2,521 

 

2,142 

 

4,824 

 

3,994 

Prepaid card and related fees

 

15,840 

 

14,073 

 

32,003 

 

28,355 

Net realized and unrealized gains (losses) on commercial loans

 

 

 

 

 

 

 

 

originated for sale

 

(148)

 

(454)

 

10,615 

 

11,275 

Change in value of investment in unconsolidated entity

 

 -

 

(1,732)

 

 -

 

(2,903)

Leasing related income

 

1,027 

 

1,108 

 

1,722 

 

1,595 

Affinity fees

 

 -

 

85 

 

 -

 

187 

Other

 

495 

 

172 

 

889 

 

410 

Total non-interest income

 

19,749 

 

17,040 

 

50,114 

 

46,135 



 

 

 

 

 

 

 

 

Non-interest expense

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

21,826 

 

18,897 

 

45,666 

 

39,970 

Depreciation and amortization

 

966 

 

982 

 

1,940 

 

2,013 

Rent and related occupancy cost

 

1,444 

 

1,375 

 

2,872 

 

2,734 

Data processing expense

 

1,223 

 

1,356 

 

2,492 

 

3,361 

Printing and supplies

 

202 

 

305 

 

342 

 

494 

Audit expense

 

396 

 

613 

 

863 

 

1,082 

Legal expense

 

1,534 

 

1,770 

 

2,858 

 

4,201 

Amortization of intangible assets

 

383 

 

383 

 

766 

 

766 

FDIC insurance

 

2,095 

 

2,929 

 

4,024 

 

5,148 

Software

 

3,060 

 

2,995 

 

5,981 

 

6,286 

Insurance

 

617 

 

673 

 

1,211 

 

1,294 

Telecom and IT network communications

 

318 

 

313 

 

643 

 

639 

Consulting

 

1,007 

 

863 

 

1,642 

 

1,528 

Civil money penalty (adjustment)

 

 -

 

 -

 

 -

 

(290)

Lease termination expense

 

908 

 

395 

 

908 

 

395 

Other

 

3,540 

 

3,461 

 

6,540 

 

6,738 

Total non-interest expense

 

39,519 

 

37,310 

 

78,748 

 

76,359 

Income from continuing operations before income taxes

 

14,169 

 

8,364 

 

37,615 

 

27,784 

Income tax expense

3,575 

 

2,209 

 

9,610 

 

7,608 

Net income from continuing operations

 

$               10,594 

 

$                 6,155 

 

$              28,005 

 

$               20,176 

Discontinued operations

 

 

 

 

 

 

 

 

5

 


 

Income (loss) from discontinued operations before income taxes

 

919 

 

(50)

 

1,724 

 

106 

Income tax expense (benefit)

163 

 

(36)

 

449 

 

Income (loss) from discontinued operations, net of tax

 

756 

 

(14)

 

1,275 

 

105 

Net income

 

$               11,350 

 

$                 6,141 

 

$              29,280 

 

$               20,281 



 

 

 

 

 

 

 

 

Net income per share from continuing operations - basic

 

$                   0.19 

 

$                   0.11 

 

$                  0.50 

 

$                   0.36 

Net income per share from discontinued operations - basic

 

$                   0.01 

 

$                         - 

 

$                  0.02 

 

$                         - 

Net income per share - basic

 

$                   0.20 

 

$                   0.11 

 

$                  0.52 

 

$                   0.36 



 

 

 

 

 

 

 

 

Net income per share from continuing operations - diluted

 

$                   0.19 

 

$                   0.11 

 

$                  0.49 

 

$                   0.36 

Net income per share from discontinued operations - diluted

 

$                   0.01 

 

$                         - 

 

$                  0.02 

 

$                         - 

Net income per share - diluted

 

$                   0.20 

 

$                   0.11 

 

$                  0.51 

 

$                   0.36 



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 three months ended June 30,

 

For the six months ended June 30,



2019

 

2018

 

2019

 

2018



(in thousands)



 

 

 

 

 

 

 

Net income

$                   11,350 

 

$                    6,141 

 

$                  29,280 

 

$                  20,281 

Other comprehensive income net of reclassifications into net income:

 

 

 

 

 

 

 



 

 

 

 

 

 

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 Securities available-for-sale:

 

 

 

 

 

 

 

Change in net unrealized gain (loss) during the period

14,246 

 

(6,087)

 

26,090 

 

(18,745)

Reclassification adjustments for losses included in income

 -

 

 -

 

 -

 

(26)

Amortization of losses previously held as available-for-sale

 

11 

 

15 

 

21 

Other comprehensive income (loss)

14,254 

 

(6,076)

 

26,105 

 

(18,750)



 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 Securities available-for-sale:

 

 

 

 

 

 

 

Change in net unrealized gain (loss) during the period

3,845 

 

(1,643)

 

7,044 

 

(5,061)

Reclassification adjustments for losses included in income

 -

 

 -

 

 -

 

(7)

Amortization of losses previously held as available-for-sale

 

 

 

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

 

 

 

 

 

 

 

income (loss)

3,847 

 

(1,640)

 

7,048 

 

(5,062)



 

 

 

 

 

 

 

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

10,407 

 

(4,436)

 

19,057 

 

(13,688)

Comprehensive income

$                   21,757 

 

$                    1,705 

 

$                  48,337 

 

$                    6,593 



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, 2019

(in thousands, except share data)



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 



 

Common

 

 

 

 

 

Additional

 

Accumulated

 

other

 

 



 

stock

 

Common

 

Treasury

 

paid-in

 

earnings

 

comprehensive

 

 



 

shares

 

stock

 

stock

 

capital

 

(deficit)

 

income/(loss)

 

Total



 

 

 

 

Balance at January 1, 2019

 

56,446,088 

 

$           56,446 

 

$           (866)

 

$         366,181 

 

$              (817)

 

$               (14,168)

 

$              406,776 

Net income

 

 -

 

 -

 

 -

 

 -

 

17,930 

 

 -

 

17,930 

Common stock issued from restricted shares,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net of tax benefits

 

121,916 

 

122 

 

 -

 

(122)

 

 -

 

 -

 

 -

Stock-based compensation

 

 -

 

 -

 

 -

 

1,424 

 

 -

 

 -

 

1,424 

Other comprehensive income net of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

reclassification adjustments and tax

 

 -

 

 -

 

 -

 

 -

 

 -

 

8,650 

 

8,650 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2019

 

56,568,004 

 

$           56,568 

 

$           (866)

 

$         367,483 

 

$           17,113 

 

$                 (5,518)

 

$              434,780 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 -

 

 -

 

 -

 

 -

 

11,350 

 

 -

 

11,350 

Common stock issued from restricted shares,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net of tax benefits

 

306,952 

 

307 

 

 -

 

(307)

 

 -

 

 -

 

 -

Stock-based compensation

 

 -

 

 -

 

 -

 

1,595 

 

 -

 

 -

 

1,595 

Other comprehensive income net of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

reclassification adjustments and tax

 

 -

 

 -

 

 -

 

 -

 

 -

 

10,407 

 

10,407 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2019

 

56,874,956 

 

$           56,875 

 

$           (866)

 

$         368,771 

 

$           28,463 

 

$                   4,889 

 

$              458,132 



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

8

 


 

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

 

Accumulated

 

other

 

 



 

stock

 

Common

 

Treasury

 

paid-in

 

earnings

 

comprehensive

 

 



 

shares

 

stock

 

stock

 

capital

 

(deficit)

 

income/(loss)

 

Total



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2018

 

55,861,150 

 

$           55,861 

 

$           (866)

 

$         363,196 

 

$          (89,485)

 

$                 (4,557)

 

$              324,149 

Net income

 

 -

 

 -

 

 -

 

 -

 

14,140 

 

 -

 

14,140 

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

 

433,344 

 

433 

 

 -

 

(433)

 

 -

 

 -

 

 -

Stock-based compensation

 

 -

 

 -

 

 -

 

743 

 

 -

 

 -

 

743 

Other comprehensive loss net of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

reclassification adjustments and tax

 

 -

 

 -

 

 -

 

 -

 

 -

 

(9,252)

 

(9,252)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2018

 

56,307,884 

 

$           56,307 

 

$           (866)

 

$         363,613 

 

$          (75,354)

 

$               (13,809)

 

$              329,891 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 -

 

 -

 

 -

 

 -

 

6,141 

 

 -

 

6,141 

Common stock issued from restricted shares,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net of tax benefits

 

102,641 

 

104 

 

 -

 

(103)

 

 -

 

 -

 

Stock-based compensation

 

 -

 

 -

 

 -

 

950 

 

 -

 

 -

 

950 

Other comprehensive loss net of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

reclassification adjustments and tax

 

 -

 

 -

 

 -

 

 -

 

 -

 

(4,436)

 

(4,436)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 these consolidated statements.





9

 


 





THE BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS









 

 

 

 



 

 

 

 



 

For the six months



 

ended June 30,



 

2019

 

2018



 

(in thousands)

Operating activities

 

 

 

 

Net income from continuing operations

 

$            28,005 

 

$            20,176 

Net income from discontinued operations

 

1,275 

 

105 

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

 

 

 

 

Depreciation and amortization

 

2,706 

 

2,779 

Provision for loan and lease losses

 

2,300 

 

1,600 

Net amortization of investment securities discounts/premiums

 

8,640 

 

8,017 

Stock-based compensation expense

 

3,019 

 

1,693 

Loans originated for sale

 

(766,645)

 

(252,109)

Sale of commercial loans originated for resale

 

491,158 

 

316,314 

Gain on sales of loans originated for resale

 

(11,193)

 

(11,646)

Loss on sale of fixed assets

 

 -

 

15 

Fair value adjustment on investment in unconsolidated entity

 

 -

 

2,903 

Writedown of other real estate owned

 

 -

 

45 

Change in fair value of loans held-for-sale

 

(1,274)

 

2,437 

Change in fair value of derivatives

 

1,852 

 

(2,066)

Gain on sales of investment securities

 

 -

 

(26)

Increase in accrued interest receivable

 

(1,814)

 

(910)

Increase in other assets

 

(6,361)

 

(11,145)

Change in fair value of discontinued loans held-for-sale

 

 -

 

960 

Decrease in discontinued assets held-for-sale

 

 -

 

3,653 

Decrease in other liabilities

 

(372)

 

(15,715)

 Net cash provided by (used in) operating activities

 

(248,704)

 

67,080 



 

 

 

 

Investing activities

 

 

 

 

Purchase of investment securities available-for-sale

 

(148,717)

 

(157,980)

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

 

82,440 

 

105,305 

Net increase in loans

 

(57,465)

 

(115,518)

Net decrease in discontinued loans held-for-sale

 

23,537 

 

58,006 

Purchases of premises and equipment

 

(598)

 

(144)

Return of investment in unconsolidated entity

 

1,261 

 

33,296 

Decrease in discontinued assets held-for-sale

 

5,185 

 

3,576 

 Net cash used in investing activities

 

(94,357)

 

(73,459)



 

 

 

 

Financing activities

 

 

 

 

Net increase (decrease) in deposits

 

56,032 

 

(461,562)

Net decrease in securities sold under agreements to repurchase

 

 -

 

(56)

Proceeds of short-term borrowings

 

45,000 

 

 -

Proceeds from the issuance of common stock

 

 -

 

112 

 Net cash provided by (used in) financing activities

 

101,032 

 

(461,506)



 

 

 

 

 Net decrease in cash and cash equivalents

 

(242,029)

 

(467,885)



 

 

 

 

Cash and cash equivalents, beginning of period

 

554,302 

 

908,935 



 

 

 

 

Cash and cash equivalents, end of period

 

$          312,273 

 

$          441,050 



 

 

 

 

Supplemental disclosure:

 

 

 

 

Interest paid

 

$            19,045 

 

$            10,944 

Taxes paid

 

$            10,132 

 

$              1,036 

Non-cash investing and financing activities

 

 

 

 

Investment securities received in securitization transaction

 

$            41,633 

 

$            28,365 











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

10

 


 

THE BANCORP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED 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) and cash value of insurance-backed lines of credit (IBLOC), leasing (direct lease financing), Small Business Administration (SBA) loans and loans generated for sale into capital markets primarily through commercial loan securitizations (CMBS).  Through the Bank, the Company also provides banking services nationally, which include prepaid cards, private label banking, deposit accounts to investment advisors’ customers, 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, 2019 and for the three and six month periods ended June 30, 2019 and 2018, 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, 2018 (2018 Form 10-K Report).  The results of operations for the six month period ended June 30, 2019 may not necessarily be indicative of the results of operations for the full year ending December 31, 2019.

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 Codification (ASC) 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 the 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 American Standards Update (ASU) 2014-09, “Revenue from Contracts with Customers” are largely consistent with previous practices already implemented and applied by the Company.  The vast majority of the Company’s services related to its revenues are performed, earned and recognized monthly.

11

 


 



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.



Leases



The Company determines if an arrangement is a lease at inception.  Operating lease right-of-use (ROU) assets and operating lease liabilities are included in our consolidated financial statements.  ROU assets represent our right-of-use of an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments pursuant to our leases.  The ROU assets and liabilities are recognized at commencement of the lease based on the present value of lease payments over the lease term.  To determine the present value of lease payments, the Company uses its incremental borrowing rate.  The lease term may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option.  Lease expense is recognized on a straight-line basis over the lease term. 

 

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, 2019, the Company had three active stock-based compensation plans which are described in the Company’s 2018 Annual Report on the Form 10-K.



The Company granted 65,104 stock options with a vesting period of 4 years during the six month period ended June 30, 2019.  The weighted average grant-date fair value was $3.84.  The Company did not grant stock options during the six month period ended June 30, 2018.  There were no common stock options exercised in the six month period ended June 30, 2019, and 23,125 common stock options were exercised during the six month period ended June 30, 2018. 



A summary of the  Company’s stock options is presented below.







 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

Weighted average

 

 



 

 

 

 

remaining

 

 



 

 

Weighted average

 

contractual

 

Aggregate



Shares

 

exercise price

 

term (years)

 

intrinsic value

Outstanding at January 1, 2019

1,276,500 

 

$                     8.23 

 

3.77 

 

$               511,200 

Granted

65,104 

 

8.57 

 

3.63 

 

 -

Exercised

 -

 

 -

 

 -

 

 -

Expired

 -

 

 -

 

 -

 

 -

Forfeited

 -

 

 -

 

 -

 

 -

Outstanding at June 30, 2019

1,341,604 

 

$                     8.25 

 

3.58 

 

$            1,297,966 

Exercisable at June 30, 2019

1,201,500 

 

$                     8.32 

 

3.05 

 

$            1,112,430 



12

 


 

The Company granted 930,831 restricted stock units (RSUs) in the first six months of 2019 of which 863,331 have a vesting period of 3 years and 67,500 have a vesting period of one year.  At issuance, the 930,831 RSUs granted in the first six months of 2019 had a fair value of $8.57 per unit.  In the first six months of 2018, the Company granted 507,792 RSUs, of which 440,292 had a vesting period of 2.8 years and 67,500 had a vesting period of one year.  The 507,792 RSUs granted in the first six months of 2018 had a fair value of $11.07.    



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, 2019

850,937 

 

$                  8.84 

 

1.44 

Granted

930,831 

 

8.57 

 

2.47 

Vested

(428,868)

 

8.26 

 

 

Forfeited

(17,296)

 

8.96 

 

 

Outstanding at June 30, 2019

1,335,604 

 

$                  8.84 

 

2.12 



As of June 30, 2019, there was a total of $10.2 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 2.1 years.  Related compensation expense for the six months ended June 30, 2019 and 2018 was $3.0 million and $1.7 million, respectively.  The total issuance date fair value of RSUs vested and options exercised during the six months ended June 30, 2019 and 2018 was $3.5 million and $2.9 million, respectively.  The total intrinsic value of the options exercised and stock units vested in those respective periods was $4.0 million and $5.8 million, respectively.



For the periods ended June 30, 2019 and 2018, the Company estimated fair value of each stock option grant on the date of grant using the Black-Scholes options pricing model with the following weighted average assumptions:







 

 

 



 

 

 



June 30,



2019

 

2018

Risk-free interest rate

2.63% 

 

 -

Expected dividend yield

 -

 

 -

Expected volatility

41.83% 

 

 -

Expected lives (years)

1.0 - 6.3

 

 -



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 718, Stock Based Compensation, stock based compensation expense for the period ended June 30, 2019 is based on awards that are ultimately expected to vest and has been reduced for estimated forfeitures.  The Company estimated forfeitures using historical data based upon the groups identified by management. 





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.



13

 


 

The following tables show the Company’s earnings per share for the periods presented:







 

 

 

 

 

 



 

 

 

 

 

 



 

For the three months ended



 

June 30, 2019



 

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

 

$               10,594

 

56,702,182 

 

$                  0.19

Effect of dilutive securities

 

 

 

 

 

 

Common stock options and restricted stock units

 

 -

 

495,251 

 

 -

Diluted earnings per share

 

 

 

 

 

 

Net earnings available to common shareholders

 

$               10,594

 

57,197,433 

 

$                  0.19







 

 

 

 

 

 



 

 

 

 

 

 



 

For the three months ended



 

June 30, 2019



 

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

 

$                    756

 

56,702,182 

 

$                  0.01

Effect of dilutive securities

 

 

 

 

 

 

Common stock options and restricted stock units

 

 -

 

495,251 

 

 -

Diluted earnings per share

 

 

 

 

 

 

Net earnings available to common shareholders

 

$                    756

 

57,197,433 

 

$                  0.01