bancorp10q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549


FORM 10-Q

(Mark One)

[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended:     March 31, 2011
 
OR
 
[  ]
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
 
 
(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 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  ¨    No  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

(Check one):                  Large accelerated filer [ ]                                                 Accelerated filer [X]
Non-accelerated filer [ ]                                                      Smaller reporting company [ ]
(Do not check if a smaller
  reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes [ ]  No [X]

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.


As of May 2, 2011 there were 33,196,281 outstanding shares of common stock, $1.00 par value.

 
 
 

 

 
THE BANCORP, INC

Form 10-Q Index

 
Page
   
Part I Financial Information
Item 1.
Financial Statements:
   
  Consolidated Balance Sheets – March 31, 2011 (unaudited) and December 31, 2010
   
  Unaudited Consolidated Statements of Operations – Three months ended March 31, 2011 and 2010
   
  Unaudited Consolidated Statements of Changes in Shareholders’ Equity – Three months ended March 31, 2011 5
   
  Unaudited Consolidated Statements of Cash Flows – Three months ended March 31, 2011 and 2010
   
  Unaudited Notes to Consolidated Financial Statements 7
   
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations 21
   
Item 3.
Quantitative and Qualitative Disclosures About Market Risk 35
   
Item 4.
Controls and Procedures
   
Part II Other Information
   
   
Item 6.
Exhibits 36
   
Signatures
 
 
 
 
2

 
 

 
PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

THE BANCORP, INC. AND SUBSIDIARY
 
 
             
   
March 31,
   
December 31,
 
   
2011
   
2010
 
   
(unaudited)
     
   
(in thousands)
 
ASSETS
           
Cash and cash equivalents
           
Cash and due from banks
  $ 223,420     $ 157,411  
Interest bearing deposits
    630,524       314,908  
Total cash and cash equivalents
    853,944       472,319  
                 
Investment securities, available-for-sale, at fair value
    273,643       231,165  
Investment securities, held-to-maturity (fair value $17,537 and $16,550, respectively)
    21,298       21,364  
Loans, net of deferred loan costs
    1,636,253       1,619,195  
Allowance for loan and lease losses
    (25,802 )     (24,063 )
Loans, net
    1,610,451       1,595,132  
Premises and equipment, net
    8,533       8,767  
Accrued interest receivable
    8,807       8,878  
Intangible assets, net
    8,754       9,005  
Other real estate owned
    3,379       2,115  
Deferred tax asset, net
    23,817       24,365  
Other assets
    24,071       22,613  
Total assets
  $ 2,836,697     $ 2,395,723  
                 
LIABILITIES
               
Deposits
               
Demand (non-interest bearing)
  $ 1,412,656     $ 945,605  
Savings, money market and interest checking
    1,105,226       975,973  
Time deposits
    1,397       90,862  
Time deposits, $100,000 and over
    11,830       11,657  
Total deposits
    2,531,109       2,024,097  
                 
Securities sold under agreements to repurchase
    19,783       14,383  
Short-term borrowings
    -       87,000  
Federal funds purchased
    -       49,000  
Accrued interest payable
    149       124  
Subordinated debenture
    13,401       13,401  
Other liabilities
    14,654       8,812  
Total liabilities
    2,579,096       2,196,817  
                 
SHAREHOLDERS' EQUITY
               
Common stock - authorized, 50,000,000 shares of $1.00 par value; 33,196,281 and 26,181,281
               
shares issued and outstanding at March 31, 2011 and December 31, 2010, respectively
    33,196       26,181  
Additional paid-in capital
    240,640       192,711  
Accumulated deficit
    (15,507 )     (18,195 )
Accumulated other comprehensive loss
    (728 )     (1,791 )
Total shareholders' equity
    257,601       198,906  
                 
Total liabilities and shareholders' equity
  $ 2,836,697     $ 2,395,723  
                 
 The accompanying notes are an integral part of these statements.
               


 
 
3

 
 

THE BANCORP, INC. AND SUBSIDIARY
 
 
             
   
For the three months ended March 31,
 
   
2011
   
2010
 
   
(in thousands, except per share data)
 
Interest income
           
Loans, including fees
  $ 18,293     $ 17,916  
Interest on investment securities:
               
Taxable interest
    1,557       1,308  
Tax-exempt interest
    672       390  
Interest bearing deposits
    515       351  
      21,037       19,965  
Interest expense
               
Deposits
    2,605       3,458  
Securities sold under agreements to repurchase
    16       7  
Short-term borrowings
    3       5  
Subordinated debt
    215       215  
      2,839       3,685  
Net interest income
    18,198       16,280  
Provision for loan and lease losses
    4,672       4,148  
Net interest income after provision for loan and lease losses
    13,526       12,132  
                 
Non-interest income
               
Service fees on deposit accounts
    635       381  
Merchant credit card deposit and ACH fees
    569       486  
Stored value income
    4,755       2,815  
Gain on sales of investment securities
    -       750  
Other than temporary impairment on securities available-for-sale (1)
    (75 )     -  
Leasing income
    704       664  
Debit card income
    372       170  
Other
    785       228  
Total non-interest income
    7,745       5,494  
                 
Non-interest expense
               
Salaries and employee benefits
    6,980       6,372  
Depreciation and amortization
    729       722  
Rent and related occupancy cost
    699       623  
Data processing expense
    2,393       1,613  
Printing and supplies
    282       414  
Audit expense
    260       291  
Legal expense
    500       354  
Amortization of intangible assets
    250       250  
Loss on sale of other real estate owned
    52       20  
FDIC Insurance
    1,212       756  
Software, maintenance and equipment
    366       258  
Other
    3,429       2,534  
Total non-interest expense
    17,152       14,207  
Net income before income tax
    4,119       3,419  
Income tax provision
    1,431       1,233  
Net income
    2,688       2,186  
Less preferred stock dividends and accretion
    -       (6,242 )
Net income (loss) available to common shareholders
  $ 2,688     $ (4,056 )
Net income (loss) per share - basic
  $ 0.10     $ (0.15 )
Net income (loss) per share - diluted
  $ 0.10     $ (0.15 )
                 
(1) Other than temporary impairment was due to credit loss and therefore did not include amounts due to market conditions.
 
                 
 The accompanying notes are an integral part of these statements.
               


 
4

 

 
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the three months ended March 31, 2011
(in thousands, except share data)
 
 
                           
Accumulated
             
   
Common
         
Additional
         
other
             
   
stock
   
Common
   
paid-in
   
Accumulated
   
comprehensive
   
Comprehensive
       
   
shares
   
stock
   
capital
   
deficit
   
loss
   
income
   
Total
 
                                           
Balance at January 1, 2011
    26,181,281     $ 26,181     $ 192,711     $ (18,195 )   $ (1,791 )         $ 198,906  
Net income
                            2,688             $ 2,688       2,688  
Issuance of common stock
    7,015,000       7,015       47,513       -       -       -       54,528  
Stock-based compensation
    -       -       416       -       -       -       416  
Other comprehensive income, net of
                                                       
reclassification adjustments and tax
    -       -       -       -       1,063       1,063       1,063  
                                            $ 3,751          
Balance at March 31, 2011
    33,196,281     $ 33,196     $ 240,640     $ (15,507 )   $ (728 )           $ 257,601  
 
 
 
5

 

 
 
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
 
(dollars in thousands)
 
       
   
For the three months ended
 
   
March 31,
 
   
2011
   
2010
 
Operating activities
           
Net income
  $ 2,688     $ 2,186  
Adjustments to reconcile net income to net cash
               
  provided by (used in) operating activities
               
Depreciation and amortization
    979       972  
Provision for loan and lease losses
    4,672       4,148  
Net amortization of investment securities discounts/premiums
    105       12  
Stock-based compensation expense
    416       23  
Mortgage loans originated for sale
    (458 )     -  
Sale of mortgage loans originated for resale
    454       -  
Gain on sale of mortgage loans originated for resale
    (4 )     -  
Deferred income tax benefit
    -       (3 )
(Gain) loss on sales of fixed assets
    (2 )     16  
Other than temporary impairment on securities available-for-sale
    75       -  
Loss on sales of other real estate owned
    52       20  
Gain on sales of investment securities
    -       750  
Decrease in accrued interest receivable
    71       133  
Increase (decrease) in interest payable
    25       (226 )
(Increase) decrease in other assets
    (1,571 )     57  
Increase (decrease) in other liabilities
    5,842       (21,070 )
  Net cash provided by (used in) operating activities
    13,344       (12,982 )
                 
Investing activities
               
Purchase of  investment securities available-for-sale
    (79,256 )     (99,493 )
Proceeds from redemptions and repayment on securities available-for-sale
    38,275       25,997  
Proceeds from sale of other real estate owned
    173       -  
Proceeds from sales of investment securities available-for-sale
    -       10,438  
Net increase in loans
    (21,472 )     (6,903 )
Proceeds from sale of fixed assets
    39       -  
Purchases of premises and equipment
    (418 )     (861 )
  Net cash used in investing activities
    (62,659 )     (70,822 )
                 
Financing activities
               
Net increase in deposits
    507,012       207,774  
Net increase in securities sold under agreements to repurchase
    5,400       5,657  
Repayment of short-term borrowings and federal funds purchased
    (136,000 )     (100,000 )
Proceeds from issuance of common stock
    54,528       -  
Redemption of preferred stock
    -       (45,220 )
Dividends paid on Series B preferred stock
    -       (433 )
  Net cash provided by financing activities
    430,940       67,778  
                 
  Net increase (decrease) in cash and cash equivalents
    381,625       (16,026 )
                 
Cash and cash equivalents, beginning of year
    472,319       354,459  
                 
Cash and cash equivalents, end of period
  $ 853,944     $ 338,433  
                 
Supplemental disclosure:
               
Interest paid
  $ 2,814     $ 3,967  
Taxes paid
  $ 575     $ 26  
Transfers of loans to other real estate owned
  $ 1,489     $ 189  



 
6

 

 
THE BANCORP, INC. AND SUBSIDIARY
NOTES TO THE CONSOLDIATED FINANCIAL STATEMENTS

Note 1. Formation and Structure of Company

The Bancorp, Inc. (the Company) is a Delaware corporation and a registered financial holding company with a wholly owned subsidiary bank, The Bancorp Bank (the Bank). The Bank is a Delaware chartered commercial bank located in Wilmington, Delaware and is a Federal Deposit Insurance Corporation (FDIC) insured institution. Through the Bank, the Company provides retail and commercial banking services in the Philadelphia, Pennsylvania and Wilmington, Delaware areas and other banking services nationally, which include prepaid debit cards, health savings accounts, wealth management and private label banking. The principal medium for the delivery of the Company’s banking services is the Internet.

Note 2. Significant Accounting Policies

Basis of Presentation
 
The financial statements of the Company, as of March 31, 2011 and for the three month periods ended March 31, 2011 and 2010, 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, 2010 (Form 10-K report). The results of operations for the three month periods ended March 31, 2011 may not necessarily be indicative of the results of operations for the full year ending December 31, 2011.
 
Note 3. Share-based Compensation

The Company accounts for its share-based compensation according to the FASB Accounting Standards Codification (ASC) topic 718, Compensation—Stock Compensation, that addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. Under ASC topic 718, all forms of share-based payments to employees, including employee stock options and phantom stock units, are treated the same as other forms of compensation by recognizing the related cost in income. The expense of the award generally is measured at fair value at the grant date. The impact of the ASC topic 718 is reflected in net earnings and related per share amounts for the three months ended March 31, 2011 and 2010. At March 31, 2011, the Company had three stock-based compensation plans, which are more fully described in its Form 10-K report.

The fair value of each grant of stock options and stock appreciation rights is estimated on the date of the grant using the Black-Scholes option pricing model. The significant assumptions utilized in applying the Black-Scholes options-pricing model are the risk-free interest rate, expected term, dividend yield and expected volatility. The risk-free interest rate is the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term used in the assumption for the model. The expected term of an option or stock appreciation right is based on historical experience of similar awards. The dividend yield is determined by dividing per share and stock appreciation rights unit dividends by the grant date stock price. The expected volatility is based on the volatility of the Company’s stock price over a historical period as comparable as possible to the expected term. The Company did not grant any share-based compensation in the first quarter of 2011 or 2010.

As of March 31, 2011, there was $4,560,000 of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under the plans; that cost is expected to be recognized over a weighted average period of 3.06 years. There were no stock options exercised for the three month periods ending March 31, 2011 and 2010. Related compensation expense for the three months ended March 31, 2011 and 2010 was $416,000 and $23,000 respectively. The following tables are a summary of activity in the plans for the periods shown:



 
7

 

 
For the three months ended March 31, 2011

       
                         
Stock options:
             
Weighted-
       
               
average
       
         
Weighted
   
remaining
       
         
average
   
contractual
   
Aggregate
 
         
exercise
   
term
   
intrinsic
 
   
Shares
   
price
   
(years)
   
value
 
   
(in thousands, except per share data)
 
                         
Outstanding at January 1, 2011
    2,244,864     $ 10.71              
Granted
    -       -       -       -  
Exercised
    -       -       -       -  
Forfeited
    (3,749 )     10.87       -       -  
Outstanding at March 31, 2011
    2,241,115     $ 10.71       6.43     $ -  
Exercisable at March 31, 2011
    1,105,115               3.39     $ -  

Stock appreciation rights:
             
Average
 
               
remaining
 
         
Weighted-
   
contractual
 
         
average
   
term
 
   
Shares
   
price
   
(years)
 
                   
Outstanding at beginning of the year
    60,000     $ 11.41        
Granted
    -       -       -  
Exercised
    -       -       -  
Expired/forfeited
    -       -       -  
Outstanding at end of period
    60,000     $ 11.41       6.96  
                         

Note 4. Earnings Per Share

Basic earnings per share is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period.

Diluted earnings per share is calculated by dividing net income available to common shareholders by the weighted average number of common shares and common share equivalents.  The Company’s only outstanding common share equivalents are stock appreciation rights and options to purchase its common stock.

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

   
For the three months ended
 
   
March 31, 2011
 
   
Income
   
Shares
   
Per share
 
   
(numerator)
   
(denominator)
   
amount
 
   
(dollars in thousands except per share data)
 
Basic earnings per share
                 
Net income available to common shareholders
  $ 2,688       28,051,948     $ 0.10  
Effect of dilutive securities
                       
Stock options
    -       6,385       -  
Diluted earnings per share
                       
Net income available to common shareholders
  $ 2,688       28,058,333     $ 0.10  
 
 
 
8

 

 
Stock options for 2,201,115 shares and stock appreciation rights for 60,000 shares, exercisable at a weighted average price of $10.78 per share, were outstanding at March 31, 2011 but were not included in the diluted earnings per share computation because the exercise price per share was greater than the average market price of the common stock.

   
For the three months ended
 
   
March 31, 2010
 
   
Income
   
Shares
   
Per share
 
   
(numerator)
   
(denominator)
   
amount
 
   
(dollars in thousands except per share data)
 
Basic loss per share
                 
Net loss available to common shareholders
  $ (4,056 )     26,181,281     $ (0.15 )
Effect of dilutive securities
                       
Stock options
    -       -       -  
Diluted loss per share
                       
Net loss available to common shareholders
  $ (4,056 )     26,181,281     $ (0.15 )
 
Stock options for 1,322,864 shares, common stock warrants for 980,203 shares and stock appreciation rights for 60,000 shares, exercisable at prices between $3.46 and $25.43 per share, were outstanding during the three months ended March 31, 2010 but were not included in the diluted loss per share computation because the Company had a net loss available to common shareholders for the period.

Note 5. Investment Securities

The amortized cost, gross unrealized gains and losses, and fair values of the Company’s investment securities classified as available-for-sale and held-to-maturity at March 31, 2011 and December 31, 2010 are summarized as follows (in thousands):

Available-for-sale
 
March 31, 2011
 
         
Gross
   
Gross
       
   
Amortized
   
unrealized
   
unrealized
   
Fair
 
   
cost
   
gains
   
losses
   
value
 
U.S. Government agency securities
  $ 5,789     $ -     $ -     $ 5,789  
Tax-exempt obligations of states and political subdivisions
    76,620       389       (1,707 )     75,302  
Taxable obligations of states and political subdivisions
    28,864       242       (367 )     28,739  
Mortgage-backed securities
    127,915       903       (82 )     128,736  
Other debt securities
    27,892       1,511       (254 )     29,149  
Federal Home Loan and Atlantic Central
                               
  Bankers Bank stock
    5,928       -       -       5,928  
    $ 273,008     $ 3,045     $ (2,410 )   $ 273,643  
                                 

Held-to-maturity
 
March 31, 2011
 
         
Gross
   
Gross
       
   
Amortized
   
unrealized
   
unrealized
   
Fair
 
   
cost
   
gains
   
losses
   
value
 
Other debt securities - single issuers
  $ 19,534     $ 927     $ (4,369 )   $ 16,092  
Other debt securities - pooled
    1,764       -       (319 )     1,445  
    $ 21,298     $ 927     $ (4,688 )   $ 17,537  


 
9

 

 
Available-for-sale
 
December 31, 2010
 
         
Gross
   
Gross
       
   
Amortized
   
unrealized
   
unrealized
   
Fair
 
   
cost
   
gains
   
losses
   
value
 
Tax-exempt obligations of states and political subdivisions
  $ 78,046     $ 335     $ (3,070 )   $ 75,311  
Taxable obligations of states and political subdivisions
    28,870       261       (454 )     28,677  
Mortgage-backed securities
    76,275       704       (64 )     76,915  
Other debt securities
    42,700       1,510       (186 )     44,024  
Federal Home Loan and Atlantic Central
                               
  Bankers Bank stock
    6,238       -       -       6,238  
    $ 232,129     $ 2,810     $ (3,774 )   $ 231,165  
                                 
                                 
Held-to-maturity
 
December 31, 2010
 
           
Gross
   
Gross
         
   
Amortized
   
unrealized
   
unrealized
   
Fair
 
   
cost
   
gains
   
losses
   
value
 
Other debt securities - single issuers
  $ 19,526     $ 128     $ (4,632 )   $ 15,022  
Other debt securities - pooled
    1,838       -       (310 )     1,528  
    $ 21,364     $ 128     $ (4,942 )   $ 16,550  


Available-for-sale security fair values are based on the fair market value supplied by a third-party market data provider while held-to-maturity securities are based on the present value of cash flows, which discounts expected cash flows from principal and interest using yield to maturity at the measurement date.

The other debt securities included in the held-to-maturity classification on the Company’s balance sheet at March 31, 2011 consist of five single issuer trust preferred securities issued by either banks or insurance companies and two pooled issuer trust preferred securities, whose collateral is made up of trust preferred securities issued by banks. The amortized cost of the single issuer trust preferred securities was $19.5 million, of which three securities totaling $7.5 million were issued by three different banks and two securities totaling $12.0 million were issued by two different insurance companies. The two pooled trust preferred securities had an aggregate amortized cost of $1.8 million.

The Company periodically reviews its investment portfolio for other-than-temporary impairment. An investment is impaired if the fair value of the investment is less than its amortized cost basis. An impairment in a debt security is considered to be other-than-temporary (a) if a credit loss exists, which occurs when the present value of the cash flows expected to be collected is less than the amortized cost basis for the security or (b) if either of the following conditions is met: an entity that holds a security has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery.  The Company recognized other-than-temporary impairment charges of $75,000 in the first quarter of 2011 on one of its pooled trust preferred securities in its held-to-maturity portfolio.  The Company concluded that the remaining unrealized losses on the held-to-maturity securities are driven by interest rate and current economic conditions; however, the Company believes that the resulting unrealized losses are temporary. The Company has the ability to continue to hold the securities to their maturity.

The amortized cost and fair value of the Company’s investment securities at March 31, 2011, by contractual maturity, are shown below (in thousands). Expected maturities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.


 
10

 
 
   
Available-for-sale
   
Held-to-maturity
 
   
Amortized
   
Fair
   
Amortized
   
Fair
 
   
cost
   
value
   
cost
   
value
 
Due before one year
  $ 20,742     $ 20,737     $ -     $ -  
Due after one year through five years
    41,592       43,134       -       -  
Due after five years through ten years
    15,597       15,390       18,008       14,702  
Due after ten years
    189,149       188,454       3,290       2,835  
Federal Home Loan and Atlantic
                               
  Central Bankers Bank stock
    5,928       5,928       -       -  
    $ 273,008     $ 273,643     $ 21,298     $ 17,537  

At March 31, 2011 and December 31, 2010, investment securities with a book value of approximately $29.0 million and $19.8 million, respectively, were pledged as collateral under repurchase agreements and Federal Home Loan Bank advances as required or permitted by law. There were no gross gains on sales of securities in the first three months of 2011 as compared to gains of $750,000 in the first three months of 2010.

The table below indicates the length of time individual securities had been in a continuous unrealized loss position at March 31, 2011 (dollars in thousands):
 
 
March 31, 2011                      
Available-for-sale
       
Less than 12 months
 
12 months or longer
   
Total
 
   
Number of
securities
   
Fair
Value
   
Unrealized
losses
   
Fair
Value
   
Unrealized
losses
   
Fair Value
   
Unrealized
losses
 
Description of Securities
                                         
Tax-exempt obligations of states and
                                         
     political subdivisions
    51     $ 41,050     $ (1,707 )   $ -     $ -     $ 41,050     $ (1,707 )
Taxable obligations of states and
                                                       
     political subdivisions
    13       11,844       (367 )     -       -       11,844       (367 )
Mortgage-backed securities
    8       13,618       (82 )     -       -       13,618       (82 )
Other securities
    2       1,988       (12 )     655       (242 )     2,643       (254 )
Total temporarily impaired
                                                       
     investment securities
    74     $ 68,500     $ (2,168 )   $ 655     $ (242 )   $ 69,155     $ (2,410 )
                                                         
                                                         
 
March 31, 2011
                     
Held-to-maturity
       
Less than 12 months
 
12 months or longer
   
Total
 
   
Number of
securities
   
Fair
Value
   
Unrealized
losses
   
Fair
Value
   
Unrealized
losses
   
Fair Value
   
Unrealized
losses
 
Description of Securities
                                         
Other debt securities - single issuers
    2     $ -     $ -     $ 1,445     $ (319 )   $ 1,445     $ (319 )
Other debt securities - pooled
    2       -       -       7,691       (4,369 )     7,691       (4,369 )
Total temporarily impaired
                                                       
     investment securities
    4     $ -     $ -     $ 9,136     $ (4,688 )   $ 9,136     $ (4,688 )
 
December 31, 2010
                       
Available-for-sale
       
Less than 12 months
   
12 months or longer
   
Total
 
   
Number of
securities
   
Fair
Value
   
Unrealized
losses
   
Fair
Value
   
Unrealized
losses
   
Fair Value
   
Unrealized
losses
 
Description of Securities
                                         
Tax-exempt obligations of states and
                                         
     political subdivisions
    65     $ 54,685     $ (3,070 )   $ -     $ -     $ 54,685     $ (3,070 )
Taxable obligations of states and
                                                       
     political subdivisions
    15       14,060       (454 )     -       -       14,060       (454 )
Mortgage-backed securities
    8       26,021       (64 )     -               26,021       (64 )
Other securities
    11       16,771       (24 )     748       (162 )     17,519       (186 )
Total temporarily impaired
                                                       
     investment securities
    99     $ 111,537     $ (3,612 )   $ 748     $ (162 )   $ 112,285     $ (3,774 )
                                                         
                                                         
 
 
 
11

 
 
December 31, 2010
                       
Held-to-maturity
       
Less than 12 months
   
12 months or longer
   
Total
 
   
Number of securities
   
Fair Value
   
Unrealized losses
   
Fair Value
   
Unrealized losses
   
Fair Value
   
Unrealized losses
 
Description of Securities
                                         
Other debt securities - single issuers
    3     $ -     $ -     $ 10,606     $ (4,632 )   $ 10,606     $ (4,632 )
Other debt securities - pooled
    2       -       -       1,528       (310 )     1,528       (310 )
Total temporarily impaired
                                                       
     investment securities
    5     $ -     $ -     $ 12,134     $ (4,942 )   $ 12,134     $ (4,942 )

Management evaluates whether a credit impairment exists by considering primarily the following factors: (a) the length of time and extent to which the fair value has been less than the amortized cost of the security, (b) changes in the financial condition, credit rating and near-term prospects of the issuer, (c) whether the issuer is current on contractually obligated interest and principal payments, (d) changes in the financial condition of the security’s underlying collateral and (e) the payment structure of the security. The Company’s best estimate of expected future cash flows, which is used to determine the credit loss amount, is a quantitative and qualitative process that incorporates information received from third-party sources along with internal assumptions and judgments regarding the future performance of the security. The Company concluded that most of the securities that are in an unrealized loss position are in a loss position because of changes in interest rates since the securities were purchased. The securities that have been in an unrealized loss position for 12 months or longer include other securities whose market values are sensitive to interest rates and changes in credit quality. The Company’s unrealized loss for the debt securities, which includes five single issue trust preferred securities and two pooled trust preferred securities, is primarily related to general market conditions and the resultant lack of liquidity in the market. The severity of the impairments in relation to the carrying amounts of the individual investments is consistent with market developments. The Company’s analysis of each investment is performed at the security level.  However, as a result of its review, the Company did record $75,000 in other than temporary impairment in the first quarter of 2011 on one pooled trust preferred security which it owns.

Note 6. Loans

Major classifications of loans are as follows (in thousands):

   
March 31,
   
December 31,
 
   
2011
   
2010
 
             
Commercial
  $ 430,081     $ 441,799  
Commercial mortgage (1)
    601,046       580,780  
Construction
    202,105       203,120  
Total commercial loans
    1,233,232       1,225,699  
Direct financing leases, net
    107,624       103,289  
Residential mortgage
    94,682       93,004  
Consumer loans and others
    197,876       194,320  
      1,633,414       1,616,312  
Deferred loan costs
    2,839       2,883  
Total loans, net of deferred loan costs
  $ 1,636,253     $ 1,619,195  
                 
Supplemental loan data:
               
Construction 1-4 family
  $ 96,240     $ 100,689  
Construction commercial, acquisition and development
    105,865       102,431  
 
  $ 202,105     $ 203,120  
                 
(1) At March 31, 2011, our owner occupied loans amounted to $136 million, or 22.7% of commercial mortgages.
 
 
 
 
12

 

 
The Company identifies a loan as impaired where it is probable that interest and principal will not be collected according to the contractual terms of the loan agreement. Total impaired loans were $14.2 million at March 31, 2011, of which $13.2 million had specific valuation allowances of $4.1 million. The remaining $1.0 million of impaired loans did not have a valuation allowance. The balance of impaired loans was $15.3 million at December 31, 2010, which had a specific valuation allowance of $5.3 million.

The Company recognizes income on impaired loans after they are placed into non-accrual status on a cash basis only when the loans are both current and the collateral on the loan is sufficient to cover the outstanding obligation to the Company. If these factors do not exist, the Company will not recognize income on such loans.  Interest income would have increased by $95,000 in first quarter 2011 if interest on impaired loans had been accrued. The Company did not recognize any interest income on impaired loans in first quarter ended March 31, 2011 and 2010, respectively.

The following table provides information about impaired loans at March 31, 2011 and December 31, 2010 (in thousands):

   
Recorded
investment
   
Unpaid
principal
balance
   
Related
allowance
 
March 31, 2011
                 
Without an allowance recorded
                 
Construction
  $ 251     $ 1,560     $ -  
Commercial mortgage
    774       774       -  
Commercial
    -       -       -  
Consumer
    -       -       -  
Residential
    -       -       -  
With an allowance recorded
                       
Construction
    1,444       1,444       611  
Commercial mortgage
    2,011       2,011       419  
Commercial
    2,544       2,544       1,347  
Consumer - home equity
    633       633       428  
Residential
    6,571       6,544       1,340  
Total
                       
Construction
  $ 1,695     $ 3,004     $ 611  
Commercial
  $ 5,329     $ 5,329     $ 1,766  
Consumer
  $ 633     $ 633     $ 428  
Residential
  $ 6,571     $ 6,544     $ 1,340  
                         
December 31, 2010
                       
Without an allowance recorded
                       
Commercial mortgage
  $ -     $ -     $ -  
Commercial
    -       -       -  
Consumer
    -       -       -  
Residential
    -       -       -  
With an allowance recorded
                       
Construction
    4,881       4,881       2,644  
Commercial mortgage
    1,650       1,650       284  
Commercial
    2,280       2,280       1,316  
Consumer - home equity
    960       960       117  
Residential
    5,526       5,622       970  
Total
                       
Construction
  $ 4,881     $ 4,881     $ 2,644  
Commercial
  $ 3,930     $ 3,930     $ 1,600  
Consumer
  $ 960     $ 960     $ 117  
Residential
  $ 5,526     $ 5,622     $ 970  
 
 
 
13

 

 
   
Average
recorded
investment
   
Interest
income
recognized
 
March 31, 2011
           
Without an allowance recorded
       
Construction
  $ 905     $ -  
Commercial mortgage
    774          
Commercial
    -       -  
Consumer
    -       -  
Residential
    -       -  
With an allowance recorded
         
Construction
    2,382       -  
Commercial mortgage
    1,831       -  
Commercial
    2,412       -  
Consumer - home equity
    797       -  
Residential
    6,048       -  
Total
               
Construction
  $ 3,287     $ -  
Commercial
  $ 5,017     $ -  
Consumer
  $ 797     $ -  
Residential
  $ 6,048     $ -  

The following tables summarize the Company’s non-accrual loans, loans past due 90 days and other real estate owned for the periods indicated (the Company had no non-accrual leases at March 31, 2011 or December 31, 2010):

   
March 31,
   
December 31,
 
   
2011
   
2010
 
   
(in thousands)
 
             
Non-accrual loans
           
          Construction
  $ 1,695     $ 4,881  
          Commercial mortgage
    2,785       1,650  
          Commercial
    2,544       2,280  
          Consumer
    633       960  
          Residential
    6,571       5,526  
Total non-accrual loans
    14,228       15,297  
                 
Loans past due 90 days or more
    3,028       2,219  
Total non-performing loans
    17,256       17,516  
Other real estate owned
    3,379       2,115  
Total non-performing assets
  $ 20,635     $ 19,631  
                 
An analysis of the changes in the allowance for loan and lease losses by loan category is as follows (in thousands):
 
 
 
14

 

 
                                                 
         
Commercial
         
Residential
         
Direct financing
             
   
Commercial
   
mortgage
   
Construction
   
mortgage
   
Consumer
   
leases, net
   
Unallocated
   
Total
 
March 31, 2011
                                               
Beginning balance
  $ 6,051     $ 9,501     $ 5,030     $ 2,115     $ 578     $ 164     $ 624     $ 24,063  
Charge-offs
    (4 )     (102 )     (2,143 )     (31 )     (668 )     -       -       (2,948 )
Recoveries
    2       12       1       -       -       -       -       15  
Provision
    1,322       (639 )     1,737       752       1,199       31       270       4,672  
Ending balance
  $ 7,371     $ 8,772     $ 4,625     $ 2,836     $ 1,109     $ 195     $ 894     $ 25,802  
                                                                 
Ending balance:
Individually evaluated
for impairment
  $ 1,347     $ 419     $ 611     $ 1,340     $ 428     $ -     $ -     $ 4,145  
                                                                 
Ending balance:
Collectively evaluated
for impairment
  $ 6,024     $ 8,353     $ 4,014     $ 1,496     $ 681     $ 195     $ 894     $ 21,657  
                                                                 
                                                                 
Loans:
                                                               
Ending balance
  $ 430,081     $ 601,046     $ 202,105     $ 94,682     $ 197,876     $ 107,624     $ 2,839     $ 1,636,253  
                                                                 
Ending balance:
Individually evaluated
for impairment
  $ 2,544     $ 2,785     $ 1,695     $ 6,571     $ 633     $ -     $ -     $ 14,228  
                                                                 
Ending balance:
Collectively evaluated
for impairment
  $ 427,537     $ 598,261     $ 200,410     $ 88,111     $ 197,243     $ 107,624     $ 2,839     $ 1,622,025  
                                                                 
                                                                 
                                                                 
December 31, 2010
                                                               
Beginning balance
  $ 5,181     $ 7,041     $ 4,356     $ 1,699     $ 460     $ 151     $ 235     $ 19,123  
Charge-offs
    (4,453 )     (9,060 )     -       (1,254 )     (618 )     (3 )     -       (15,388 )
Recoveries
    232       47       4       742       6       10       -       1,041  
Provision
    5,091       11,473       670       928       730       6       389       19,287  
Ending balance
  $ 6,051     $ 9,501     $ 5,030     $ 2,115     $ 578     $ 164     $ 624     $ 24,063  
                                                                 
Ending balance: Individually
evaluated
for impairment
    1,316       284       2,644       970       117       -       -       5,331  
                                                                 
Ending balance:
Collectively evaluated
for impairment
    4,735       9,217       2,386       1,145       461       164       624       18,732  
                                                                 
                                                                 
Loans:
                                                               
Ending balance
  $ 444,259     $ 580,780     $ 203,120     $ 93,147     $ 194,600     $ 103,289     $ -     $ 1,619,195  
                                                                 
Ending balance:
Individually evaluated
for impairment
  $ 2,280     $ 1,650     $ 4,881     $ 5,526     $ 960     $ -     $ -     $ 15,297  
                                                                 
Ending balance:
Collectively
evaluated
for impairment
  $ 441,979     $ 579,130     $ 198,239     $ 87,621     $ 193,640     $ 103,289     $ -     $ 1,603,898  
 
 
 
15

 

 

   
March 31,
 
   
2010
 
       
Balance in the allowance for loan and lease losses at
     
beginning of period
  $ 19,123  
         
Loans charged-off:
       
Commercial
    2,728  
Construction
    -  
Lease financing
    -  
Residential mortgage
    223  
Consumer
    44  
Total
    2,995  
         
Recoveries:
       
Commercial
    79  
Construction
    1  
Lease financing
    -  
Residential mortgage
    -  
Consumer
    1  
Total
    81  
Net charge-offs
    2,914  
Provision charged to operations
    4,148  
Balance in allowance for loan and lease losses at end
       
of period
  $ 20,357  
Net charge-offs/average loans
    0.19 %
 
The Company did not have loans acquired with deteriorated credit quality at either March 31, 2011 or December 31, 2010.

A detail of the Company’s delinquent loans by loan category is as follows (in thousands):
Age Analysis of Past Due Loans
 
                                           
   
30-59 Days
   
60-89 Days
   
Greater Than
         
Total
         
Total
 
March 31, 2011
 
Past Due
   
Past Due
   
90 Days
   
Nonaccrual
   
Past Due
   
Current
   
Loans
 
Commercial
  $ 594     $ 7,076     $ 1,612     $ 2,544     $ 11,826     $ 418,255     $ 430,081  
Commercial mortgage
    2,356       -       824       2,785       5,965       595,081       601,046  
Construction
    -       1,961       391       1,695       4,047       198,058       202,105  
Direct financing leases, net
    2,087       188       193       -       2,468       105,156       107,624  
Consumer - other
    35       2       8       -       45       153,554       153,599  
Consumer - home equity
    330       -       -       633       963       43,314       44,277  
Residential mortgage
    -       3,360       -       6,571       9,931       84,751       94,682  
Unamortized costs
    -       -       -       -       -       2,839       2,839  
    $ 5,402     $ 12,587     $ 3,028     $ 14,228     $ 35,245     $ 1,601,008     $ 1,636,253  
                                                         
December 31, 2010
                                                       
Commercial
  $ -     $ 100     $ 285     $ 2,280     $ 2,665     $ 439,134     $ 441,799  
Commercial mortgage
    774       -       824       1,650       3,248       577,532       580,780  
Construction
    -       391       -       4,881       5,272       197,848       203,120  
Direct financing leases, net
    816       192       49       -       1,057       102,232       103,289  
Consumer - other
    -       2       12       -       14       148,715       148,729  
Consumer - home equity
    330       -       -       960       1,290       44,301       45,591  
Residential mortgage
    -       -       1,050       5,526       6,576       86,428       93,004  
Unamortized costs
    -       -       -       -       -       2,883       2,883  
    $ 1,920     $ 685     $ 2,220     $ 15,297     $ 20,122     $ 1,599,073     $ 1,619,195  
 
 
 
16

 

 
The following table classifies loans by categories which are used throughout the industry as of March 31, 2011 and December 31, 2010 (in thousands):

                                     
                           
Commercial
   
Residential
 
   
Commercial
   
Construction
   
mortgage
   
mortgage
 
   
3/31/2011
   
12/31/2010
   
3/31/2011
   
12/31/2010
   
3/31/2011
   
12/31/2010
   
3/31/2011
   
12/31/2010
 
Risk Rating
                                               
Pass
  $ 296,482     $ 291,140     $ 170,813     $ 165,089     $ 473,958     $ 461,378     $ 28,217     $ 30,066  
Special Mention
    -       -       -       -       -       -       -       -  
Substandard
    15,251       6,091       6,090       5,271       3,608       3,608       9,931       6,576  
Doubtful
    -       -       -       -       -       -       -       -  
Loss
    -       -       -       -       -       -       -       -  
Unrated
    118,348       144,568       25,202       32,760       123,480       115,794       56,534       56,362  
Total
  $ 430,081     $ 441,799     $ 202,105     $ 203,120     $ 601,046     $ 580,780     $ 94,682     $ 93,004  
                                                                 
                                                                 
                                                       
                   
Direct financing
                                 
   
Consumer
   
leases, net
   
Unamortized costs
   
Total
 
   
3/31/2011
   
12/31/2010
   
3/31/2011
   
12/31/2010
   
3/31/2011
   
12/31/2010
   
3/31/2011
   
12/31/2010
 
Risk Rating
                                                               
Pass
  $ 60,457     $ 59,064     $ -     $ -     $ -     $ -     $ 1,029,927     $ 1,006,737  
Special Mention
    -       -       -       -       -       -       -       -  
Substandard
    644       1,224       -       -       -       -       35,524       22,770  
Doubtful
    -       -       -       -       -       -       -       -  
Loss
    -       -       -       -       -       -       -       -  
Unrated
    136,775       134,032       107,624       103,289       2,839       2,883       570,802       589,688  
Total
  $ 197,876     $ 194,320     $ 107,624     $ 103,289     $ 2,839     $ 2,883     $ 1,636,253     $ 1,619,195  

Note 7. Transactions with Affiliates

The Company entered into a sublease for a portion of its office space in Philadelphia, Pennsylvania with RAIT Financial Trust (RAIT) commencing in October 2000. The Chief Executive Officer of the Company was the Chairman of RAIT until December 31, 2010, at which date she retired from that position. The former Chief Executive Officer of RAIT (from December 2006 to February 2009), who was also a RAIT trustee, is the Chairman of the Company and a director and Chairman of the Executive Committee of the Bank. Rent expense for the three month periods ended March 31, 2011 and 2010, respectively, was approximately $162,000 and $161,000, net of rental charged to RAIT of approximately $73,000 and $72,000, respectively.

The Bank maintains deposits for various affiliated companies totaling approximately $136.9 million and $15.0 million as of March 31, 2011 and December 31, 2010, respectively.  The increase resulted from deposits of related interests of the Board of Directors, and is likely temporary.

The Bank 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 March 31, 2011, these loans were current as to principal and interest payments and did not involve more than normal risk of collectability. At March 31, 2011, loans to these related parties amounted to $7.0 million

The Bank has a participation in one loan at March 31, 2011 that was originated by RAIT. The outstanding principal balance of the loan was $21.7 million at March 31, 2011.  The Bank has a senior position on the loan.

 Note 8. Fair Value Measurements
 
The FASB ASC topic 825, Financial Instruments, requires disclosure of the estimated fair value of an entity’s assets and liabilities considered to be financial instruments. For the Company, as for most financial institutions, the majority of its assets and liabilities are considered to be financial instruments. However, many such instruments lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. Also, it is the Company’s general practice and intent to hold its financial instruments to maturity whether or not categorized as “available-for-sale” and not to engage in trading or sales activities, except for certain loans. For fair value disclosure purposes, the Company utilized certain value measurement criteria required under the FASB ASC 820, Fair Value Measurements and Disclosures, and explained below.
 
 
17

 
 
Estimated fair values have been determined by the Company using the best available data and an estimation methodology it believes to be suitable for each category of financial instruments. Changes in the assumptions or methodologies used to estimate fair values may materially affect the estimated amounts. Also, there may not be reasonable comparability between institutions due to the wide range of permitted assumptions and methodologies in the absence of active markets. This lack of uniformity gives rise to a high degree of subjectivity in estimating financial instrument fair values.
 
 
Cash and cash equivalents, which are comprised of cash and due from banks, the Company’s balance at the Federal Reserve and federal funds sold, had recorded book values of $853.9 million and $472.3 million as of March 31, 2011 and December 31, 2010, respectively, which approximated fair values.  The estimated fair values of investment securities are based on quoted market prices, if available, or by an estimated methodology based on management’s inputs. The fair values of the Company’s investment securities held-to-maturity are based on using “unobservable inputs” that are the best information available in the circumstances.
 
 
The net loan portfolio at March 31, 2011 and December 31, 2010 has been valued using the present value of discounted cash flow where market prices were not available. The discount rate used in these calculations is the estimated current market rate adjusted for credit risk. The carrying value of accrued interest approximates fair value.
 
 
The estimated fair values of demand, savings, money market and interest checking deposits are equal to the amount payable on demand at the reporting date (i.e. their carrying amounts). The fair values of securities sold under agreements to repurchase and short-term borrowings are equal to their carrying amounts as they are overnight borrowings.
 
The fair values of certificates of deposit and subordinated debentures are estimated using a discounted cash flow calculation that applies current interest rates to discounted expected cash flows. Based upon time deposit maturities at March 31, 2011, the carrying values approximate their fair values. The carrying amount of accrued interest payable approximates its fair value.

   
March 31, 2011
   
December 31, 2010
 
 
 
Carrying
   
Estimated
   
Carrying
   
Estimated
 
   
amount
   
fair value
   
amount
   
fair value
 
   
(in thousands)
 
Cash and cash equivalents
  $ 853,944     $ 853,944     $ 472,319     $ 472,319  
Investment securities available-for-sale
    273,643       273,643       231,165       231,165  
Investment securities held-to-maturity
    21,298       17,537       21,364       16,550  
Loans receivable, net
    1,636,253       1,611,766       1,619,195       1,597,764  
Demand deposits (non-interest bearing)
    1,412,656       1,412,656       945,605       945,605  
Savings, money market and interest checking
    1,105,226       1,105,226       975,973       975,973  
Certificates of deposit
    13,227       13,339       102,519       102,587  
Subordinated debentures and notes
    13,401       9,195       13,401       9,185  
Securities sold under agreements to repurchase
    19,783       19,783       14,383       14,383  
Short-term borrowings
    -       -       136,000       136,000  


The fair value of commitments to extend credit is estimated based on the amount of unamortized deferred loan commitment fees. The fair value of letters of credit is based on the amount of unearned fees plus the estimated cost to terminate the letters of credit. Fair values of unrecognized financial instruments, including commitments to extend credit, and the fair value of letters of credit are considered immaterial.

In addition, FASB ASC topic 820, Fair Value Measurements and Disclosures, establishes a common definition for fair value to be applied to assets and liabilities. It clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It also establishes a framework for measuring fair value and expands disclosures concerning fair value measurements. FASB ASC topic 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Level 1 valuation is based on quoted market prices for identical assets or liabilities to which the Company has access at the measurement date. Level 2 valuation is based on other observable inputs for the asset or liability, either directly or indirectly. This includes quoted prices for similar assets in active or inactive markets, inputs other than quoted prices that are observable for the asset or liability such as yield curves, volatilities, prepayment speeds, credit risks, default rates, or inputs that are derived principally from, or corroborated through, observable market data by market-corroborated reports. Level 3 valuation is based on “unobservable inputs” which the Company believes is the best information available in the circumstances. A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The assets measured at fair value on a recurring basis, segregated by fair value hierarchy level, are summarized below (in thousands):
 
 
 
18

 

 
         
Fair Value Measurements at Reporting Date Using
 
         
Quoted prices in active
   
Significant other
   
Significant
 
         
markets for identical
   
observable
   
unobservable
 
   
Fair value
   
assets
   
inputs
   
inputs
 
Description
 
March 31, 2011
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
                         
Investment
                       
U.S. Government agency securities
  $ 5,789     $ -     $ 5,789     $ -  
Obligations of states and political subdivisions
    104,041       -       104,041       -  
Mortgage-backed securities
    128,736       -       128,736       -  
Other debt securities
    29,149       -       28,494       655  
Federal Home Loan and Atlantic Central
                               
  Bankers Bank stock
    5,928       -       -       5,928  
    $ 273,643     $ -     $ 267,060     $ 6,583  
 
         
Fair Value Measurements at Reporting Date Using
 
         
Quoted prices in active
   
Significant other
   
Significant
 
         
markets for identical
   
observable
   
unobservable
 
   
Fair value
   
assets
   
inputs
   
inputs
 
Description
 
December 31, 2010
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
                         
Investment
                       
Obligations of states and political subdivisions
  $ 103,988     $ -     $ 103,988     $ -  
Mortgage-backed securities
    76,915       -       76,915       -  
Other debt securities
    44,024       -       43,276       748  
Federal Home Loan and Atlantic Central
                               
  Bankers Bank stock
    6,238       -       -       6,238  
    $ 231,165     $ -     $ 224,179     $ 6,986  

The changes in the Company’s Level 3 assets are set forth below (in thousands).

Fair Value Measurements Using
 
Significant Unobservable Inputs
 
(Level 3)
 
   
Available-for-sale
 
   
securities
 
   
March 31, 2011
   
December 31, 2010
 
Beginning balance
  $ 6,986     $ 7,222  
Transfers into level 3
    -       -  
Transfers out of level 3
    -       -  
Total gains or losses (realized/unrealized)
               
Included in earnings (or changes in net assets)
    -       (13 )
Included in other comprehensive income
    (80 )     186  
Purchases, issuances, and settlements
               
Purchases
    -       -  
Issuances
    -       -  
Sales
               
Settlements
    (323 )     (409 )
Ending balance
  $ 6,583     $ 6,986  
                 
The amount of total gains or losses for the period
               
included in earnings (or changes in net assets) attributable
         
to the change in unrealized gains or losses relating to
               
assets still held at the reporting date.
  $ -     $ -  

 
19

 

Assets measured at fair value on a nonrecurring basis, segregated by fair value hierarchy, during the periods shown are summarized below (in thousands):
         
Fair Value Measurements at Reporting Date Using
 
         
Quoted prices in active
   
Significant other
   
Significant
 
         
markets for identical
   
observable
   
unobservable
 
         
assets
   
inputs
   
inputs
 
Description
 
March 31, 2011
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
                         
Impaired loans
  $ 14,228     $ -     $ -     $ 14,228  
Other real estate owned
    3,379       -       -       3,379  
    $ 17,607     $ -     $ -     $ 17,607  
                                 
           
Fair Value Measurements at Reporting Date Using
 
           
Quoted prices in active
   
Significant other
   
Significant
 
           
markets for identical
   
observable
   
unobservable
 
           
assets
   
inputs
   
inputs
 
Description
 
December 31, 2010
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
                                 
Impaired loans
  $ 15,297     $ -     $ -     $ 15,297  
Other real estate owned
    2,115       -       -       2,115  
    $ 17,412     $ -     $ -     $ 17,412  

 
At March 31, 2011, impaired loans totaled $14.2 million with a specific reserve of $4.1 million, compared to impaired loans at December 31, 2010 of $15.3 million with a specific reserve of $5.3 million. Valuation techniques consistent with the market approach and/or cost approach were used to measure fair value and primarily included observable inputs for the individual impaired loans being evaluated such as recent sales of similar assets or observable market data for operational or carrying costs. In cases where such inputs were unobservable, the loan balance is reflected within the Level 3 hierarchy. The fair value of other real estate owned is based on an appraisal of the property using the market approach for valuation.
 
Note 9. Subsequent Events

The Company evaluated its March 31, 2011 financial statements for subsequent events through the date the financial statements were issued.  The Company is not aware of any subsequent events which would require recognition or disclosure in the financial statements.

Note 10. Reclassifications

Certain reclassifications have been made to the 2010 financial statements to conform to the 2011 presentation.  The reclassifications had no effect on net income, total assets or shareholders’ equity.

 Note 11. Recent Accounting Pronouncements

In April 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-02 Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. The amendments clarify guidance on whether a restructuring constitutes a troubled debt restructuring.  The creditor must separately conclude that both of the following exist 1) the restructuring constitutes a concession, and 2) the debtor is experiencing financial difficulties.  The amendments are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. For purposes of measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011.  Management is currently evaluating the impact that this accounting standard may have on the Company’s consolidated financial statements.
 
 
 
20

 

 
Note 12. Shareholders’ Equity

In March 2011, the Company issued 7,015,000 shares of the Company’s common stock, par value $1.00, at a public offering price of $8.25 per share in an underwritten public offering.  The sale of the common stock resulted in net proceeds to the Company, after underwriting discounts, commissions and expenses, of approximately $54.5 million.

 
Part I - 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 1A, under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010 and in other of our public filings with the Securities and Exchange Commission. These risks and uncertainties could cause actual results to differ materially from those expressed or implied in this Form 10-Q. We caution readers not place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances after the date of this report except as required by applicable law.

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, 2010.

 Overview

We are a Delaware financial holding company with a wholly owned subsidiary, The Bancorp Bank, which we refer to as the Bank. Through the Bank, we provide a wide range of commercial and retail banking services and related other banking services, which include prepaid debit cards, health savings accounts, wealth management and private label banking, to both regional and national markets.
 
Regionally, we focus on providing our banking services directly to retail and commercial customers in the Philadelphia-Wilmington metropolitan area, consisting of the 12 counties surrounding Philadelphia, Pennsylvania and Wilmington, Delaware  including Philadelphia, Delaware, Chester, Montgomery, Bucks and Lehigh Counties in Pennsylvania, New Castle County in Delaware and Mercer, Burlington, Camden, Ocean and Cape May Counties in New Jersey. We believe that changes over the past ten years in this market have created an underserved base of small and middle-market businesses and high net worth individuals that are interested in banking with a company headquartered in and with decision-making authority based in, the Philadelphia-Wilmington area. We believe that our presence in the area provides us with insights as to the local market and, as a result, with the ability to tailor our products and services, and especially the structure of our loans, more closely to the needs of our targeted customers. We seek to develop overall banking relationships with our targeted customers so that our lending operations serve as a generator of deposits and our deposit relationships serve as a source of loan assets. We believe that our regional presence also allows us to oversee and further develop our existing customer relationships.
 
Nationally, we focus on providing our services to organizations with a pre-existing customer base who can use one or more selected banking services tailored to support or complement the services provided by these organizations to their customers. These services include private label banking; credit and debit card and American Clearing House, or ACH, processing (charges processed directly to checking accounts) for merchants affiliated with independent service organizations; wealth management; healthcare savings accounts for healthcare providers and third-party plan administrators; and prepaid debit cards, also known as stored value cards, for insurers, incentive plans, large retail chains and consumer service organizations. We typically provide these services under the name and through the facilities of each organization with whom we develop a relationship. We refer to this, generally, as affinity group and private label banking. Our private label banking, card and ACH processing, health savings account and stored value card programs are a source of fee income and low-cost deposits.
 
 
Critical Accounting Policies and Estimates
 
Our accounting and reporting policies conform with accounting principles generally accepted in the United States of America, or GAAP, and general practices within the financial services industry. The preparation of financial statements in conformity with GAAP 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 reduce our earnings.
 
 
 
21

 
 
We periodically review our investment portfolio to determine whether unrealized losses are temporary, based on an evaluation of the creditworthiness of the issuers and any guarantors as well as the underlying collateral, if applicable, in addition to the continuing performance of the securities. Management also evaluates other facts and circumstances that may be indicative of an other-than-temporary impairment, or OTTI, condition.
 
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 is the result of changes in deferred tax assets and liabilities.
 
The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. We estimate the fair value of a financial instrument using a variety of valuation methods. Where financial instruments are actively traded and have quoted market prices, quoted market prices are used for fair value. When the financial instruments are not actively traded, other observable market inputs, such as quoted prices of securities with similar characteristics, may be used, if available, to determine fair value. When observable market prices do not exist, we estimate fair value. Our valuation methods consider factors such as liquidity and concentration concerns. Other factors such as model assumptions, market dislocations and unexpected correlations can affect estimates of fair value. Imprecision in estimating these factors can impact the amount of revenue or loss recorded.
 
At the end of each quarter, we assess the valuation hierarchy for each asset or liability measured. From time to time, assets or liabilities may be transferred within hierarchy levels due to changes in availability of observable market inputs to measure fair value at the measurement date. Transfers into or out of hierarchy levels are based upon the fair value at the beginning of the reporting period.
 
Current Developments
 
As described in “Recent Developments” in our September 30, 2010 Form 10-Q and December 31, 2010 Form 10-K, the advisors of a third party, through which we provide deposit accounts, notified the third party that some of its overdraft charging practices might be deemed by the FDIC to be in violation of applicable regulations.  Following this notification we and our customer changed the practices and by September 30, 2010 we believe these practices were in accordance with FDIC guidance in Financial Institution Letter number 81 issued on November 24, 2010. The FDIC has notified us that a formal action should be anticipated in connection with various compliance management issues including past overdraft charging practices, collections practices and transaction error resolution in alleged violation of Section 5 of the Federal Trade Commission Act. We believe that the alleged violations will result in an order requiring restitution, and civil money penalties may be assessed against the Bank.  Our customer has contractually indemnified the Bank for portions of such liabilities. The Bank believes that such indemnification would be collectible.  Since we plan to augment our compliance management system and will be subject to related FDIC requirements, we anticipate that our noninterest expense will increase.

 
Results of Operations
 
First quarter 2011 to first quarter 2010
 
Net Income:  Net income for the first quarter of 2011 was $2.7 million, compared to $2.2 million for the first quarter of 2010. The increase reflected a $1.9 million increase in net interest income and a $3.1 million increase in non-interest income (excluding security gains) which were partially offset by a $524,000 increase in the provision for loan and lease losses and a $2.9 million increase in non-interest expense.  In the first quarter of 2010, $750,000 of gain on sale of investment securities was realized; we had no such gains in the first quarter of 2011. Non-interest income (excluding securities gains) increased to $7.7 million from $4.7 million in first quarter 2011.  The higher non-interest income resulted primarily from increases in prepaid card income, service fees on deposit accounts and debit card income.  Higher net interest income primarily resulted from higher loan and investment security balances and from a lower cost of funds.  Diluted earnings per share were $0.10 in first quarter 2011 compared to diluted loss per share of $0.15 for first quarter 2010.  As a result of the repurchase of all preferred stock issued in connection with the TARP Capital Purchase Program, the first quarter 2010 loss per share reflected a $5.8 million charge for the unamortized accretion of the related imputed dividend cost in addition to $433,000 of related cash dividends paid prior to the repurchase.  Return on average assets was 0.36% and return on average equity was 5.07% for the first quarter of 2011, as compared to 0.37% and 4.07%, respectively, for the first quarter of 2010.
 
 
22

 
 
Net Interest Income:  Our net interest income for first quarter 2011 increased to $18.2 million, an increase of $1.9 million or 11.8% from $16.3 million in first quarter 2010, while our interest income for first quarter 2011 increased to $21.0 million, an increase of $1.1 million or 5.4% from $20.0 million for first quarter 2010.  The increase in interest income resulted primarily from higher balances of loans and securities.  Our average loans and leases increased to $1.63 billion for first quarter 2011 from $1.52 billion for first quarter 2010, while related interest income increased $377,000.  Our average investment securities increased to $263.2 million for first quarter 2011 from $161.3 million for first quarter 2010, while related interest income increased $531,000.
 
Our net interest margin (calculated by dividing net interest income by average interest earning assets) for first quarter 2011 decreased to 2.72% from 3.06% in first quarter of 2010, a decrease of 34 basis points.  The decrease in the net interest margin resulted primarily from increases in deposit seasonality which were invested at the Federal Reserve Bank.  Additionally, in first quarter 2011 the average yield on our loans decreased to 4.49% from 4.72% for first quarter 2010, a decrease of 23 basis points.  Interest earning deposits increased $361 million to $833 million in first quarter 2011 from $472 million in first quarter 2010 reflecting the seasonal deposits noted above.  These funds earn interest at a rate of 25 basis points which caused our asset yield to decrease in first quarter 2011.  Our deposit growth reflected increases in balances associated with our stored value (prepaid card), wealth management and merchant card processing accounts.  Additionally, balances from our largest affinity group have significant seasonal fluctuations, but have been maintained at least at approximately $375 million and are included in our demand (non-interest bearing) deposits. We consider amounts over that level to be seasonal and have accordingly deposited them at the Federal Reserve Bank or invested them in short-term investments. We have liquidity sources in excess of that amount, and monitor our liquidity daily.  The cost of interest bearing deposits decreased to 0.81% for first quarter 2011 from 1.14% for first quarter 2010, a decrease of 33 basis points, while the cost of interest-bearing liabilities decreased to 0.87% for first quarter 2011 from 1.20% for first quarter 2010, a decrease of 33 basis points.  Total cost of funds, including interest bearing and non-interest bearing liabilities, amounted to 0.41% for first quarter 2011 compared to 0.70% in first quarter 2010.  The decrease in cost of funds reflected our continuing decreases in deposit rates and changes in the mix of our deposits and, in particular, a significant increase in demand (non-interesting bearing) deposits.  We have been changing our deposit mix to reduce time deposits and higher cost funds in various deposit categories.  In first quarter 2011, average demand (non-interest bearing) deposits amounted to $1.65 billion, compared to $950.3 million in first quarter 2010.  The increase reflected balances from our largest affinity group as discussed previously in this paragraph.  In first quarter 2011, average deposits amounted to $2.73 billion, compared to $2.09 billion in first quarter 2010.  (See “Current Developments” for more information about the affinity group referred to above).
 
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:
 
 
   
Three months ended March 31,
 
   
2011
   
2010
 
   
Average
         
Average
   
Average
         
Average
 
   
Balance
   
Interest
   
Rate
   
Balance
   
Interest
   
Rate
 
         
(dollars in thousands)
               
(dollars in thousands)
       
Assets:
                                   
Interest earning assets:
                                   
Loans net of unearned discount
  $ 1,627,928     $ 18,260       4.49 %   $ 1,518,631     $ 17,916       4.72 %
Loans-nontaxable*
    2,344       50       8.53 %     -       -       0.00 %
Investment securities-taxable
    185,583       1,557       3.36 %     130,432       1,308       4.01 %
Investment securities-nontaxable*
    77,592       1,011       5.21 %     30,855       587       7.61 %
Interest earning  deposits
    833,085       515       0.25 %     472,388       351       0.30 %
Federal funds sold
    -       -       0.00 %     -       -       0.00 %
Net interest earning assets
    2,726,532       21,393       3.14 %     2,152,306       20,162       3.75 %
                                                 
Allowance for loan and lease losses
    (24,811 )                     (19,821 )                
Other assets
    286,553                       201,340                  
    $ 2,988,274                     $ 2,333,825                  
                                                 
Liabilities and shareholders' equity:
                                               
Deposits:
                                               
Demand (non-interest bearing) **
  $ 1,647,682     $ 425       0.10 %   $ 950,319     $ 219       0.09 %
Interest bearing deposits
                                               
Interest checking
    714,846       1,279       0.72 %     539,757       1,924       1.43 %
Savings and money market
    321,472       797       0.99 %     544,758       1,182       0.87 %
Time
    46,507       104       0.89 %     50,270       133       1.06 %
Total interest bearing deposits
    1,082,825       2,180       0.81 %     1,134,785       3,239       1.14 %
Total deposits
    2,730,507       2,605       0.38 %     2,085,104       3,458       0.66 %
                                                 
Short-term borrowings
    3,022       3       0.40 %     3,183       5       0.63 %
Repurchase agreements
    17,030       16       0.38 %     4,774       7       0.59 %
Subordinated debt
    13,401       215       6.42 %     13,401       215       6.42 %
Net interest bearing liabilities
    1,116,278       2,414       0.87 %     1,156,143       3,466       1.20 %
Total cost of funds
    2,763,960       2,839       0.41 %     2,106,462       3,685       0.70 %
                                                 
Other liabilities
    9,435                       12,658                  
Total Liabilities
    2,773,395                       2,119,120                  
                                                 
Shareholders' equity
    214,879                       214,705                  
    $ 2,988,274                     $ 2,333,825                  
                                                 
Net interest income on tax equivalent basis *
    $ 18,554                     $ 16,477          
                                                 
Tax equivalent adjustment
            356                       197          
                                                 
Net interest income
          $ 18,198                     $ 16,280          
                                                 
Net interest margin *
                    2.72 %                     3.06 %
                               
* Full taxable equivalent basis, using a 34% statutory tax rate.
                                 
** Non-interest bearing demand accounts are not paid interest. The amount shown as interest reflects the fees paid to affinity groups, which are based upon a rate index, and therefore classified as interest expense.
 
 
 
 
23

 

 
For first quarter 2011, average interest-earning assets increased to $2.73 billion, an increase of $574.2 million, or 26.7%, from first quarter of 2010.  The increase reflected increased average balances of loans and leases of $111.6 million or 7.4%, and increased average balances of investment securities of $101.9 million or 63.2%.  Average demand deposits increased $697.4 million or 73.4% while average interest checking deposits increased $175.1 million or 32.4%. Average savings and money market deposits decreased $223.3 million or 41.0%.  The reductions reflected intentional reductions of higher cost funds.  The Bank experienced growth in deposits relating to prepaid, wealth management, merchant acquiring and other categories.  Prepaid and merchant acquiring balances increased primarily due to the acquisition of new clients and processors, respectively.

Provision for Loan and Lease Losses. Our provision for loan and lease losses was $4.7 million for the first quarter of 2011 compared to $4.1 million for the first quarter of 2010.  The increases in the provision are based on our evaluation of the adequacy of our allowance for loan and leases losses, particularly in light of current economic conditions.  At March 31, 2011, our allowance for loan and lease losses amounted to $25.8 million or 1.58% of total loans.  For more information about our provision and allowance for loan and lease losses and our loss experience see “Financial Condition-Allowance for loan and lease losses”, “-Summary of loan and lease loss experience,” “-Net charge-offs,” and “-Non-performing loans and loans 90 days delinquent and still accruing” below.

Non-Interest Income. Non-interest income was $7.3 million in first quarter 2011 compared to $4.7 million in first quarter 2010 excluding a $485,000 legal settlement and OTTI of $75,000 in first quarter 2011 and before gains on securities of $750,000 in first quarter 2010. The $2.5 million, or 54.6%, increase in first quarter 2011 compared to first quarter 2010 primarily reflected increases in transaction volume revenues in prepaid (stored value) cards of $2.0 million, or 68.9% to $4.8 million for first quarter 2011 from $2.8 million for first quarter 2010.  It also reflected increases in service fees on deposit accounts of $254,000 or 66.7% to $635,000 for the first quarter of 2011 from $381,000 for first quarter 2010 reflecting the institution of monthly service charges on certain health savings accounts.  Debit card income increased $202,000, or 118.8%, to $372,000 for first quarter 2011 from $170,000 for first quarter 2010 as a result of volume from more deposit accounts.  Other non-interest income increased $557,000, or 244.3%, to $785,000 for first quarter 2011 from $228,000 from first quarter 2010.  This increase was primarily due to a $485,000 legal settlement in favor of the Bank in 2011.
 
 
 
24

 

 
Non-Interest Expense. Total non-interest expense was $17.2 million for first quarter 2011, an increase of $3.0 million, or 20.7%, over $14.2 million for first quarter 2010.  Salaries and employee benefits amounted to $7.0 million, an increase of $608,000 or 9.5% over $6.4 million for first quarter 2010.  The increase in salaries and employee benefits reflected staff additions and expense related to commercial loans including the new SBA loan division, deposit generating departments and other areas to accommodate growth, and a $393,000 increase in employee stock option expense. It also reflected annual salary increases between 0% and 1.0% to our employees.  Rent and occupancy increased $76,000, or 12.2% to $699,000 in first quarter 2011 from $623,000 in first quarter 2010 reflecting the impact of credits received in the prior year.  Data processing increased $780,000, or 48.4%, to $2.4 million in first quarter 2011 from $1.6 million in first quarter 2010 due to an increased number of deposit accounts and related transaction volume and an upgrade to both the consumer and business online banking platforms.  Printing and supplies decreased to $282,000 a decrease of $132,000, or 31.9%, from $414,000 in first quarter 2010.  Audit expense decreased $31,000, or 10.7%, to $260,000 for first quarter 2011 from $291,000 in first quarter 2010 as a result of decreases in outside and other audit costs.  Legal expense increased $146,000, or 41.2%, to $500,000 for first quarter 2011 from $354,000 in first quarter 2010 primarily due to higher loan collection costs. Federal Deposit Insurance Corporation (FDIC) insurance expense increased $456,000, or 60.3%, to $1.2 million for first quarter 2011 from $756,000 in first quarter 2010.  This increase resulted primarily from growth in deposits.  Software, maintenance and equipment expense increased $108,000, or 41.9%, to $366,000 in first quarter 2011 from $258,000 in first quarter 2010. This increase included software for a new management reporting system, increased security, storage capacity and various hardware used for loan and deposit products.  Other non-interest expense increased $895,000, or 35.3%, to $3.4 million in first quarter 2011 from $2.5 million in first quarter of 2010.  The $895,000 increase included a $243,000 increase in loan expenses reflecting expenses related to Small Business Administration loans and other new prospective commercial loan business.  It also reflected a $167,000 increase in other real estate owned expense, a $62,000 increase in insurance reflecting significant coverage enhancements and a $50,000 increase in postage due primarily to account volume.

Income Taxes.  Income tax expense was $1.4 million for first quarter 2011 compared to $1.2 million in first quarter 2010, an increase of $198,000 or 16.1%.  The increase resulted primarily from an increase in taxable income.  Our effective tax rate for first quarter 2010 was 34.7% as compared to 36.1% in first quarter 2010.  The lower tax rate primarily reflected the impact of purchases of tax exempt obligations of states and political subdivisions.

Preferred Stock Dividend and Accretion. As a result of our redemption of the preferred shares we issued to the U.S. Treasury in connection with funding we received under the Troubled Asset Relief Program (TARP) in first quarter 2010, we did not pay cash dividends or have any related accretion in first quarter 2011 as compared to cash dividends of $433,000 and $5.8 million of accretion in first quarter 2010.

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 daily operations primarily in overnight federal funds or in our interest-bearing account at the Federal Reserve.

The primary source of funds for our financing activities during the first three months of 2011 was cash inflows from net increases in deposits, which were $507.0 million. Loan repayments, also a source of funds, were exceeded by new loan disbursements during that period.  While historically we have also used sources outside of our deposit products to fund our loan growth, including Federal Home Loan Bank (FHLB) advances and repurchase agreements, as of March 31, 2011, we had no FHLB advances outstanding, as a result of deposit growth.

Funding in the first three months of 2011 included cash outflows of $79.2 million for net investment security purchases, and an outflow for loans of $21.5 million.  At March 31, 2011, we had outstanding commitments to fund loans, including unused lines of credit, of $334.5 million.

We must comply with capital adequacy guidelines issued by the FDIC. A bank must, in general, have a Tier 1 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 intangibles. At March 31, 2011 the Bank was “well capitalized” under banking regulations.
 
 
 
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The following table sets forth our regulatory capital amounts and ratios for the periods indicated:

   
Tier 1 capital
   
Tier 1 capital
   
Total capital
 
   
to average
   
to risk-weighted
   
to risk-weighted
 
   
assets ratio
   
assets ratio
   
assets ratio
 
                   
As of March 31, 2011
                 
The Company
    8.62 %     15.33 %     16.58 %
The Bancorp Bank
    6.00 %     10.69 %     11.94 %
"Well capitalized" institution (under FDIC regulations)
    5.00 %     6.00 %     10.00 %
                         
As of December 31, 2010
                       
The Company
    8.37 %     11.99 %     13.24 %
The Bancorp Bank
    7.39 %     10.60 %     11.85 %
"Well capitalized" institution (under FDIC regulations)
    5.00 %     6.00 %     10.00 %



The increase in capital ratios at March 31, 2011 compared to December 31, 2010 was the result of the common stock offering completed in the first quarter of 2011.  In March 2011, we issued 7,015,000 shares of our common stock, par value $1.00, at a public offering price of $8.25 per share in an underwritten public offering.  The sale of the common stock resulted in net proceeds to us, after underwriting discounts, commissions and expenses, of approximately $54.5 million. The decrease in the Bank’s Tier 1 capital to average assets ratio was the result of deposit seasonality in the first quarter of 2011.  (See Results of Operations – Average Daily Balances.”

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 an institution’s interest margin resulting from changes in market interest rates.

We monitor, manage and control interest rate risk through a variety of techniques, including use of traditional interest rate sensitivity analysis (also known as “gap analysis”) and an interest rate risk management model. With the interest rate risk management model, we project future net interest income and then estimate the effect of various changes in interest rates and balance sheet growth rates on that projected net interest income. We also use the interest rate risk management model to calculate the change in net portfolio value over a range of interest rate change scenarios. 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 we estimate will reprice during each time period and cumulatively through the end of each time period.
 
Both interest rate sensitivity modeling and gap analysis are done at a specific point in time and involve a variety of significant estimates and assumptions. Interest rate sensitivity modeling requires, among other things, estimates of how much and when yields and costs on individual categories of interest earning assets and interest bearing liabilities will respond to general changes in market rates, future cash flows and discount rates. 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 or repricing structure of our interest earning assets and interest bearing liabilities at March 31, 2011. We estimate the repricing characteristics of deposits based on historical performance, past experience at other institutions, wholly judgmental predictions 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.  The table does not assume any prepayment 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.
 
 
 
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    1-90     91-364     1-3     3-5    
Over 5
 
   
Days
   
Days
   
Years
   
Years
   
Years
 
   
(dollars in thousands)
 
Interest earning assets:
                                     
Loans net of deferred loan costs
  $ 856,175     $ 200,124     $ 269,506     $ 102,822     $ 207,626  
Investment securities
    7,056       23,588       48,193       38,760       177,344  
Interest earning deposits
    630,524       -       -       -       -  
Total interest earning assets
    1,493,755       223,712       317,699       141,582       384,970  
                                         
Interest bearing liabilities:
                                       
Demand deposits *
    780,188       -       -       -       -  
Interest checking
    374,852       187,426       187,426       -       -  
Savings and money market
    88,880       177,762       88,880       -       -  
Time deposits
    2,542       7,940       2,745       -       -  
Securities sold under agreements to repurchase
    19,783       -       -       -       -  
Subordinated debt
    3,401       -       -       10,000       -  
Total interest bearing liabilities
    1,269,646       373,128       279,051       10,000       -  
Gap
  $ 224,109     $ (149,416 )   $ 38,648     $ 131,582     $ 384,970  
Cumulative gap
  $ 224,109     $ 74,693     $ 113,341     $ 244,923     $ 629,893  
Gap to assets ratio
    8 %     -5 %     1 %     5 %     14 %
Cumulative gap to assets ratio
    8 %     3 %     4 %     9 %     22 %
 
* While demand deposits are non-interest bearing, related fees paid to affinity groups may reprice according to specified indices.

The methods used to analyze interest rate sensitivity in this table have 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.   Accordingly actual results can and often do differ from projections.

Financial Condition

General. Our total assets at March 31, 2011 were $2.84 billion, of which our total loans were $1.64 billion. At December 31, 2010 our total assets were $2.40 billion, of which our total loans were $1.62 billion.  Most of the increase in assets at March 31, 2011 reflected deposit inflows, some of which are seasonal, and a significant portion of which we maintained at the Federal Reserve Bank.

Interest bearing deposits and federal funds sold.  At March 31, 2011, we had a total of $630.5 million of interest-bearing deposits, comprised primarily of interest-bearing balances at the Federal Reserve Bank.

Investment securities.  For detailed information on the composition and maturity distribution of our investment portfolio, see Note 5 to the Financial Statements. Total investment securities increased to $294.9 million on March 31, 2011, an increase of $42.4 million or 16.8% from year-end 2010. The increase in investment securities was primarily a result of increased purchases of mortgaged backed securities with expected average lives in the 4-5 year range.  The purchases resulted from a strategy to deploy excess liquidity into government obligations which generally have lower capital requirements.  The purchases also carry higher yields than overnight investments which, because of the historically low rate environment, earn approximately 25 basis points.

The other securities included in the held-to-maturity classification on our balance sheet at March 31, 2011 consist of five single issuer trust preferred securities issued by either banks or insurance companies and two pooled issuer trust preferred securities, whose collateral is made up of trust preferred securities issued by banks. The amortized cost of the single issuer trust preferred securities was $19.5 million, of which three securities totaling $7.5 million were issued by three different banks and two securities totaling $12.0 million were issued by two different insurance companies. The two pooled trust preferred securities totaled $1.8 million.
 
 
 
27

 

 
Loans. Total loans increased to $1.64 billion at March 31, 2011 from $1.62 billion at December 31, 2010, an increase of $17.1 million.

The following table summarizes our loan portfolio by loan category for the periods indicated (in thousands):


   
March 31,
   
December 31,
 
   
2011
   
2010
 
             
Commercial
  $ 430,081     $ 441,799  
Commercial mortgage (1)
    601,046       580,780  
Construction
    202,105       203,120  
Total commercial loans
    1,233,232       1,225,699  
Direct financing leases, net
    107,624       103,289  
Residential mortgage
    94,682       93,004  
Consumer loans and others
    197,876       194,320  
      1,633,414       1,616,312  
Deferred loan costs
    2,839       2,883  
Total loans, net of deferred loan costs
  $ 1,636,253     $ 1,619,195  
                 
Supplemental loan data:
               
Construction 1-4 family
  $ 96,240     $ 100,689  
Construction commercial, acquisition and development
    105,865       102,431  
 
  $ 202,105     $ 203,120  
                 
(1) At March 31, 2011, our owner occupied loans amounted to $136 million, or 22.7% of commercial mortgages.
 

Allowance for loan and lease losses. We review the adequacy of our allowance for loan and lease losses on a quarterly basis to determine that the provision for loan losses is made in an amount necessary to maintain our allowance at a level that is appropriate, based on management’s estimate of inherent 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 ASC topic 450, Contingencies, and ASC topic 310, Receivables. 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. For loans or leases classified as “special mention,” “substandard” or “doubtful,” we reserve 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. In this process, specific reserves are established based on an analysis of the most probable sources of repayment and liquidation of collateral. While each impaired loan is individually evaluated, not every loan requires a reserve when the collateral and estimated cash flows exceed the current balance.

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 including management’s experience with similar loan and lease portfolios at other institutions, the historic loss experience of our peers and review of statistical information from various industry reports 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 various types of loans to individuals. We augment 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. Our Chief Risk Officer, who reports directly to our audit committee, oversees the loan review department processes and measures the adequacy of the allowance independently of management. The loan review department’s oversight parameters include borrower relationships over $3.0 million and loans that are 90 days or more past due or which have been previously adversely classified. Pursuant to these parameters, approximately 69% of our loans are subject to that department’s oversight on an annual basis.
 
 
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Although 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, our ongoing loss experience and that of our peers, changes in management’s assumptions as to future delinquencies, recoveries and losses, deterioration of specific credits and management’s intent with regard to the disposition of loans and leases.

Summary of loan and lease loss experience. The following table summarizes our credit loss experience for each of the periods indicated:

                                                 
         
Commercial
         
Residential
         
Direct financing
             
   
Commercial
   
mortgage
   
Construction
   
mortgage
   
Consumer
   
leases, net
   
Unallocated
   
Total
 
March 31, 2011
                                               
Beginning balance
  $ 6,051     $ 9,501     $ 5,030     $ 2,115     $ 578     $ 164     $ 624     $ 24,063  
Charge-offs
    (4 )     (102 )     (2,143 )     (31 )     (668 )     -       -       (2,948 )
Recoveries
    2       12       1       -       -       -       -       15  
Provision
    1,322       (639 )     1,737       752       1,199       31       270       4,672  
Ending balance
  $ 7,371     $ 8,772     $ 4,625     $ 2,836     $ 1,109     $ 195     $ 894     $ 25,802  
                                                                 
Ending balance:
Individually evaluated
for impairment
  $ 1,347     $ 419     $ 611     $ 1,340     $ 428     $ -     $ -     $ 4,145  
                                                                 
Ending balance:
Collectively evaluated
for impairment
  $ 6,024     $ 8,353     $ 4,014     $ 1,496     $ 681     $ 195     $ 894     $ 21,657  
                                                                 
                                                                 
Loans:
                                                               
Ending balance
  $ 430,081     $ 601,046     $ 202,105     $ 94,682     $ 197,876     $ 107,624     $ 2,839     $ 1,636,253  
                                                                 
Ending balance:
Individually evaluated
for impairment
  $ 2,544     $ 2,785     $ 1,695     $ 6,571     $ 633     $ -     $ -     $ 14,228  
                                                                 
Ending balance:
Collectively evaluated
for impairment
  $ 427,537     $ 598,261     $ 200,410     $ 88,111     $ 197,243     $ 107,624     $ 2,839     $ 1,622,025  
                                                                 
                                                                 
                                                                 
December 31, 2010
                                                               
Beginning balance
  $ 5,181     $ 7,041     $ 4,356     $ 1,699     $ 460     $ 151     $ 235     $ 19,123  
Charge-offs
    (4,453 )     (9,060 )     -       (1,254 )     (618 )     (3 )     -       (15,388 )
Recoveries
    232       47       4       742       6       10       -       1,041  
Provision
    5,091       11,473       670       928       730       6       389       19,287  
Ending balance
  $ 6,051     $ 9,501     $ 5,030     $ 2,115     $ 578     $ 164     $ 624     $ 24,063  
                                                                 
Ending balance:
Individually evaluated
for impairment
    1,316       284       2,644       970       117       -       -       5,331  
                                                                 
Ending balance:
Collectively evaluated
for impairment
    4,735       9,217       2,386       1,145       461       164       624       18,732  
                                                                 
                                                                 
Loans:
                                                               
Ending balance
  $ 444,259     $ 580,780     $ 203,120     $ 93,147     $ 194,600     $ 103,289     $ -     $ 1,619,195  
                                                                 
Ending balance:
Individually evaluated
for impairment
  $ 2,280     $ 1,650     $ 4,881     $ 5,526     $ 960     $ -     $ -     $ 15,297  
                                                                 
Ending balance:
Collectively evaluated
for impairment
  $ 441,979     $ 579,130     $ 198,239     $ 87,621     $ 193,640     $ 103,289     $ -     $ 1,603,898  
 
 
 
29

 

 
   
March 31,
 
   
2010
 
       
Balance in the allowance for loan and lease losses at
     
beginning of period
  $ 19,123  
         
Loans charged-off:
       
Commercial
    2,728  
Construction
    -  
Lease financing
    -  
Residential mortgage
    223  
Consumer
    44  
Total
    2,995  
         
Recoveries:
       
Commercial
    79  
Construction
    1  
Lease financing
    -  
Residential mortgage
    -  
Consumer
    1  
Total
    81  
Net charge-offs
    2,914  
Provision charged to operations
    4,148  
Balance in allowance for loan and lease losses at end
       
of period
  $ 20,357  
Net charge-offs/average loans
    0.19 %

Net charge-offs.  Net charge-offs were $2.9 million for the three months ended March 31, 2011 and 2010, respectively.  The majority of the charge-offs in the first quarter were associated with four construction loans totaling $2.1 million and four consumer loans totaling $668,000.

Non-performing loans and loans 90 days delinquent and still accruing.  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 interest, and is in the process of collection.  The following tables summarize our non-performing loans, other real estate owned and our loans past due 90 days or more still accruing interest (in thousands):

   
March 31,
   
December 31,
 
   
2011
   
2010
 
   
(in thousands)
 
             
Non-accrual loans
           
          Construction
  $ 1,695     $ 4,881  
          Commercial mortgage
    2,785       1,650  
          Commercial
    2,544       2,280  
          Consumer
    633       960  
          Residential
    6,571       5,526  
Total non-accrual loans
    14,228       15,297  
                 
Loans past due 90 days or more
    3,028       2,219  
Total non-performing loans
    17,256       17,516  
Other real estate owned
    3,379       2,115  
Total non-performing assets
  $ 20,635     $ 19,631  
                 
                 
   
March 31,
         
    2010          
   
(in thousands)
         
                 
Non-accrual loans
  $ 17,863          
Loans past due 90 days or more
    4,071          
Total non-performing loans
    21,934          
Other real estate owned
    648          
Total non-performing assets
  $ 22,582          
 
 
 
30

 

 
The following table provides information about impaired loans at March 31, 2011 and December 31, 2010 (in thousands):

   
Recorded
investment
   
Unpaid
principal
balance
   
Related
allowance
 
March 31, 2011
                 
Without an allowance recorded
                 
Construction
  $ 251     $ 1,560     $ -  
Commercial mortgage
    774       774       -  
Commercial
    -       -       -  
Consumer
    -       -       -  
Residential
    -       -       -  
With an allowance recorded
                       
Construction
    1,444       1,444       611  
Commercial mortgage
    2,011       2,011       419  
Commercial
    2,544       2,544       1,347  
Consumer - home equity
    633       633       428  
Residential
    6,571       6,544       1,340  
Total
                       
Construction
  $ 1,695     $ 3,004     $ 611  
Commercial
  $ 5,329     $ 5,329     $ 1,766  
Consumer
  $ 633     $ 633     $ 428  
Residential
  $ 6,571     $ 6,544     $ 1,340  
                         
December 31, 2010
                       
Without an allowance recorded
                       
Commercial mortgage
  $ -     $ -     $ -  
Commercial
    -       -       -  
Consumer
    -       -       -  
Residential
    -       -       -  
With an allowance recorded
                       
Construction
    4,881       4,881       2,644  
Commercial mortgage
    1,650       1,650       284  
Commercial
    2,280       2,280       1,316  
Consumer - home equity
    960       960       117  
Residential
    5,526       5,622       970  
Total
                       
Construction
  $ 4,881     $ 4,881     $ 2,644  
Commercial
  $ 3,930     $ 3,930     $ 1,600  
Consumer
  $ 960     $ 960     $ 117  
Residential
  $ 5,526     $ 5,622     $ 970  
 
 
 
31

 

 
   
Average
recorded
investment
   
Interest
income
recognized
 
March 31, 2011
           
Without an allowance recorded
       
Construction
  $ 905     $ -  
Commercial mortgage
    774          
Commercial
    -       -  
Consumer
    -       -  
Residential
    -       -  
With an allowance recorded
         
Construction
    2,382       -  
Commercial mortgage
    1,831       -  
Commercial
    2,412       -  
Consumer - home equity
    797       -  
Residential
    6,048       -  
Total
               
Construction
  $ 3,287     $ -  
Commercial
  $ 5,017     $ -  
Consumer
  $ 797     $ -  
Residential
  $ 6,048     $ -  


We had $14.2 million of non-accrual loans at March 31, 2011 compared to $15.3 million of non-accrual loans at December 31, 2010. The decrease in non-accrual loans was primarily due to the impact of $2.3 million of loan charge-offs and $1.5 million of loans transferred to other real estate owned partially offset by $2.8 million of loans placed on non-accrual status.  The majority of the additions resulted from seven loans.  Loans past due 90 days or more still accruing interest amounted to $3.0 million and $2.2 million at March 31, 2011 and December 31, 2010, respectively. The $809,000 increase reflected $2.0 million of additions partially offset by $1.1 million of loans transferred to non-accrual status and $109,000 of loan payments.

A detail of our delinquent loans by loan category is as follows (in thousands):
Age Analysis of Past Due Loans
 
                                           
   
30-59 Days
   
60-89 Days
   
Greater Than
         
Total
         
Total
 
March 31, 2011
 
Past Due
   
Past Due
   
90 Days
   
Nonaccrual
   
Past Due
   
Current
   
Loans
 
Commercial
  $ 594     $ 7,076     $ 1,612     $ 2,544     $ 11,826     $ 418,255     $ 430,081  
Commercial mortgage
    2,356       -       824       2,785       5,965       595,081       601,046  
Construction
    -       1,961       391       1,695       4,047       198,058       202,105  
Direct financing leases, net
    2,087       188       193       -       2,468       105,156       107,624  
Consumer - other
    35       2       8       -       45       153,554       153,599  
Consumer - home equity
    330       -       -       633       963       43,314       44,277  
Residential mortgage
    -       3,360       -       6,571       9,931       84,751       94,682  
Unamortized costs
    -       -       -       -       -       2,839       2,839  
    $ 5,402     $ 12,587     $ 3,028     $ 14,228     $ 35,245     $ 1,601,008     $ 1,636,253  
                                                         
December 31, 2010
                                                       
Commercial
  $ -     $ 100     $ 285     $ 2,280     $ 2,665     $ 439,134     $ 441,799  
Commercial mortgage
    774       -       824       1,650       3,248       577,532       580,780  
Construction
    -       391       -       4,881       5,272       197,848       203,120  
Direct financing leases, net
    816       192       49       -       1,057       102,232       103,289  
Consumer - other
    -       2       12       -       14       148,715       148,729  
Consumer - home equity
    330       -       -       960       1,290       44,301       45,591  
Residential mortgage
    -       -       1,050       5,526       6,576       86,428       93,004  
Unamortized costs
    -       -       -       -       -       2,883       2,883  
    $ 1,920     $ 685     $ 2,220     $ 15,297     $ 20,122     $ 1,599,073     $ 1,619,195  

 
 
 
32

 

 
The following table classifies our loans by categories which are used throughout the industry as of March 31, 2011 and December 31, 2010 (in thousands):

                                     
                           
Commercial
   
Residential
 
   
Commercial
   
Construction
   
mortgage
   
mortgage
 
   
3/31/2011
   
12/31/2010
   
3/31/2011
   
12/31/2010
   
3/31/2011
   
12/31/2010
   
3/31/2011
   
12/31/2010
 
Risk Rating
                                               
Pass
  $ 296,482     $ 291,140     $ 170,813     $ 165,089     $ 473,958     $ 461,378     $ 28,217     $ 30,066  
Special Mention
    -       -       -       -       -       -       -       -  
Substandard
    15,251       6,091       6,090       5,271       3,608       3,608       9,931       6,576  
Doubtful
    -       -       -       -       -       -       -       -  
Loss
    -       -       -       -       -       -       -       -  
Unrated
    118,348       144,568       25,202       32,760       123,480       115,794       56,534       56,362  
Total
  $ 430,081     $ 441,799     $ 202,105     $ 203,120     $ 601,046     $ 580,780     $ 94,682     $ 93,004  
                                                                 
                                                                 
                                                       
                   
Direct financing
                                 
   
Consumer
   
leases, net
   
Unamortized costs
   
Total
 
   
3/31/2011
   
12/31/2010
   
3/31/2011
   
12/31/2010
   
3/31/2011
   
12/31/2010
   
3/31/2011
   
12/31/2010
 
Risk Rating
                                                               
Pass
  $ 60,457     $ 59,064     $ -     $ -     $ -     $ -     $ 1,029,927     $ 1,006,737  
Special Mention
    -       -       -       -       -       -       -       -  
Substandard
    644       1,224       -       -       -       -       35,524       22,770  
Doubtful
    -       -       -       -       -       -       -       -  
Loss
    -       -       -       -       -       -       -       -  
Unrated
    136,775       134,032       107,624       103,289       2,839       2,883       570,802       589,688  
Total
  $ 197,876     $ 194,320     $ 107,624     $ 103,289     $ 2,839     $ 2,883     $ 1,636,253     $ 1,619,195  
 
Deposits. A primary source of funding is deposit acquisition. We offer a variety of deposit accounts with a range of interest rates and terms, including health savings, checking and money market accounts. One strategic focus is growing these accounts through affinity groups.  To offset deposit seasonality, management has historically used certificates of deposit including brokered certificates of deposit. At March 31, 2011, we had total deposits of $2.53 billion as compared to $2.02 billion at December 31, 2010, an increase of $507.0 million or 25.0%.  Increases in average deposit trends have allowed us to largely eliminate time deposits, which typically bear higher interest rates. While short term time deposits may bear lower rates in certain cases other deposits with slightly higher costs are more stable and are long term.  The following table presents the average balance and rates paid on deposits for the periods indicated (in thousands):
 
 
 
33

 
 
   
For the three months ended
   
For the year ended
 
   
March 31, 2011
   
December 31, 2010
 
   
Average
   
Average
   
Average
   
Average
 
   
balance
   
Rate
   
balance
   
Rate
 
   
(unaudited)
       
Demand (non-interest bearing) *
  $ 1,647,682       0.10 %   $ 1,011,667       0.13 %
Interest checking
    714,846       0.72 %     622,116       1.27 %
Savings and money market
    321,472       0.99 %     311,251       1.26 %
Time
    46,507       0.89 %     69,169       0.66 %
Total deposits
  $ 2,730,507       0.38 %   $ 2,014,203       0.67 %
 
* Non-interest bearing demand accounts are not paid interest.  The amount shown as interest reflects the fees paid to affinity groups, which are based upon a rate index, and therefore classified as interest expense.
 

Borrowings.  At March 31, 2011, we did not have any advances from the Federal Home Loan Bank, as compared to $87.0 million of outstanding borrowings as of December 31, 2010.  Additionally, we had $49.0 million drawn under lines of credit as of December 31, 2010 and none at March 31, 2011.  We tested our liquidity sources on the last day of the year for a single day period.  Typically, system-wide funding demand is particularly high that day.  We have rarely used these lines as our growing deposit relationships have precluded the need for additional funds.

Other liabilities.  Other liabilities increased to $14.7 million at March 31, 2011 from $8.8 million at December 31, 2010 an increase of $5.9 million.  At March 31, 2011 other liabilities included approximately $5.8 million for commitments to purchase investment securities which are scheduled to settle in the second quarter of 2011.

Shareholders’ Equity.  At March 31, 2011, we had $257.6 million in shareholders’ equity an increase of $58.7 million over December 31, 2010.  The increase was principally due to our public offering of 7,015,000 shares of our common stock at a public offering price of $8.25 per share.  The sale of the common stock resulted in net proceeds to us, after underwriting discounts, commissions and expenses, of approximately $54.5 million.

On March 10, 2010 the Company repurchased its outstanding Series B Fixed Rate Cumulative Perpetual Preferred Stock under the Troubled Assets Relief Program (TARP) for $45.2 million.  The Company accelerated the remaining accretion of the issuance discount on the TARP Preferred Stock of $5.8 million and recorded a corresponding charge to retained earnings. On September 8, 2010 the Company repurchased all of the 980,203 outstanding warrants issued to the Treasury Department and recorded a reduction to additional paid-in capital of $4.8 million.

During the first three months of 2010, $433,000 in dividends were paid on our Series B preferred stock.  We recognized accretion of $5.8 million related to discount on the TARP preferred shares during the first three months of 2010.
 
 
 
34

 
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
Except as discussed in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” 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, 2010.
 
 
Item 4. Controls and Procedures
 
 
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, 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 has been no change in our internal control over financial reporting that occurred during the quarter ended March 31, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 

 
35

 
 
PART II – OTHER INFORMATION

Item 6. Exhibits

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.


 
Signatures
   
       
   
THE BANCORP INC.
 
   
(Registrant)
 
       
       
May 9, 2011
 
/s/ Betsy Z. Cohen
 
Date
 
Betsy Z. Cohen
 
   
Chief Executive Officer
 
       
May 9, 2011
 
/s/Paul  Frenkiel
 
Date
 
Executive Vice President of Strategy,
 
   
Chief Financial Officer and Secretary
 


 
Exhibit No.
 
Description
   
3.1
Certificate of Incorporation (1)
   
3.2
Bylaws (1)
   
31.1
   
31.2
   
32.1
   
32.2

(1)
Filed previously as an exhibit to our Registration Statement on Form S-4, as amended, registration number 333-117385, and by this reference incorporated herein.
 
 
 
 
36