Note S—Regulatory Matters

It is the policy of the Federal Reserve that financial holding companies should pay cash dividends on common stock only from income available over the past year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. The policy provides that financial holding companies should not maintain a level of cash dividends that undermines the financial holding company’s ability to serve as a source of strength to its banking subsidiaries.

Various federal and state statutory provisions limit the amount of dividends that subsidiary banks can pay to their holding companies without regulatory approval. Under Delaware banking law, the Bank’s directors may declare dividends on common or preferred stock of so much of its net profits as they judge expedient, but the Bank must, before the declaration of a dividend on common stock from net profits, carry 50% of its net profits from the preceding period for which the dividend is paid to its surplus fund until its surplus fund amounts to 50% of its capital stock and thereafter must carry 25% of its net profits for the preceding period for which the dividend is paid to its surplus fund until its surplus fund amounts to 100% of its capital stock.

In addition to these explicit limitations, federal and state regulatory agencies are authorized to prohibit a banking subsidiary or financial holding company from engaging in an unsafe or unsound practice. Depending upon the circumstances, the agencies could take the position that paying a dividend would constitute an unsafe or unsound banking practice. The Bank has entered into consent orders with the FDIC which prohibits the Bank from paying dividends without prior FDIC approval. The Company had also received a Supervisory Letter from the Federal Reserve pursuant to which the Company might not pay dividends without prior Federal Reserve approval. The requirement for Federal Reserve approval was lifted in fourth quarter 2019 at which time the letter was terminated.

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification of the Company and the Bank are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Moreover, capital requirements may be modified based upon regulatory rules or by regulatory discretion at any time reflecting a variety of factors including deterioration in asset quality.


					To be well
					capitalized under
			For capital		prompt corrective
	Actual		adequacy purposes		action provisions
	Amount	Ratio	Amount	Ratio	Amount	Ratio
	(dollars in thousands)
As of December 31, 2019
Total capital
(to risk-weighted assets)
The Bancorp, Inc.	$ 486,372	19.45%	$ 200,074	>=8.00	N/A	N/A
The Bancorp Bank	478,033	19.11%	200,068	8.00	250,085	>= 10.00%

Tier I capital
(to risk-weighted assets)
The Bancorp, Inc.	476,134	19.04%	150,055	>=6.00	N/A	N/A
The Bancorp Bank	467,796	18.71%	150,051	6.00	200,068	>= 8.00%

Tier I capital
(to average assets)
The Bancorp, Inc.	476,134	9.63%	197,837	>=4.00	N/A	N/A
The Bancorp Bank	467,796	9.46%	197,831	4.00	247,289	>= 5.00%

Common equity tier 1
(to risk-weighted assets)
The Bancorp, Inc.	476,134	19.04%	100,037	>=4.00	N/A	N/A
The Bancorp Bank	467,796	18.71%	112,538	4.50	162,555	>= 6.50%

As of December 31, 2018
Total capital
(to risk-weighted assets)
The Bancorp, Inc.	$ 424,682	21.07%	$ 161,238	>=8.00	N/A	N/A
The Bancorp Bank	416,077	20.61%	161,506	8.00	201,882	>= 10.00%

Tier I capital
(to risk-weighted assets)
The Bancorp, Inc.	416,029	20.64%	120,928	>=6.00	N/A	N/A
The Bancorp Bank	407,425	20.18%	121,129	6.00	161,506	>= 8.00%

Tier I capital
(to average assets)
The Bancorp, Inc.	416,029	10.11%	168,160	>=4.00	N/A	N/A
The Bancorp Bank	407,425	9.70%	171,019	4.00	213,774	>= 5.00%

Common equity tier 1
(to risk-weighted assets)
The Bancorp, Inc.	416,029	20.64%	80,619	>=4.00	N/A	N/A
The Bancorp Bank	407,425	20.18%	90,847	4.50	131,223	>= 6.50%

As of December 31, 2019, the Company and the Bank met all regulatory requirements for classification as well capitalized under the regulatory framework for prompt corrective action. Effective January 1, 2015, capital rules were modified as part of a multi-year phase in period. The new rules emphasize common equity capital of which the vast majority of the Company and the Bank’s capital is comprised.

The Bank has entered into several consent orders with the FDIC relating to several aspects of its operations as follows.

2014 Consent Order. On June 5, 2014, the Bank entered into a Stipulation and Consent to the Issuance of a Consent Order with the FDIC, which we refer to as the 2014 Consent Order. The Bank took this action without admitting or denying any charges of unsafe or unsound banking practices or violations of law or regulation relating to the Bank’s BSA compliance program. The 2014 Consent Order requires the Bank to take certain affirmative actions to comply with its BSA obligations. Satisfaction of the requirements of the 2014 Consent Order is subject to the review of the FDIC and the Delaware State Bank Commissioner. The Bank has and expects to continue to expend significant management and financial resources to address the Bank’s BSA compliance program. Expenses associated with the required look back review were significant in 2015 and 2016. The look back review was completed in the third quarter of 2016. The 2014 Consent Order restricts the Bank from signing and boarding new independent sales organizations, establishing new non-benefit reloadable prepaid card programs and originating Automated Clearing House transactions for new merchant-related payments until the Bank submits to the FDIC and the Delaware State Bank Commissioner a report summarizing the completion of certain BSA-related corrective actions (“BSA Report”). Until the BSA Report is approved by the FDIC and Delaware State Bank Commissioner, those aspects of the growth of our card payment processing and prepaid card operations will be affected, which, unless offset by growth from existing customers and new customers in other areas of our prepaid card operations, could reduce growth of our deposits and non-interest income and, possibly, limit our ability to raise additional capital on acceptable terms. The Bank provided the FDIC and the Delaware State Bank Commissioner with the required BSA Report as of December 31, 2019 and it is under review by the regulators.

On August 27, 2015, the Bank entered into an Amendment to Consent Order, or the 2014 Consent Order Amendment, with the FDIC, amending the 2014 Consent Order. The Bank took this action without admitting or denying any additional charges of unsafe or unsound banking practices or violations of law or regulation relating to continued weaknesses in the Bank’s BSA compliance program. The 2014 Consent Order Amendment provides that the Bank shall not declare or pay any dividend without the prior written consent of the FDIC and for certain assurances regarding management.

2015 Consent Order. On December 23, 2015, the Bank entered into a Stipulation and Consent to the Issuance of an Amended Consent Order, Order for Restitution, and Order to Pay Civil Money Penalty with the FDIC, which we refer to as the 2015 Consent Order. The Bank took this action without admitting or denying any violations of law or regulation. The 2015 Consent Order amended and restated and superceded in its entirety the terms of a prior Consent Order issued in 2012. The 2015 Consent Order the Bank agreed to increase its supervision of third-party relationships, develop new written compliance and related internal audit compliance programs, develop a new third-party risk management program and screen new third-party relationships. The 2015 Consent Order also addressed FDIC allegations regarding electronic fund transfer, or EFT, error resolution practices, account termination practices and fee practices of various third parties with whom the Bank had previously provided, or currently provides, deposit-related products, whom we refer to as Third Parties. The 2015 Consent Order directs the Bank’s Board of Directors to establish a Complaint and Error Claim Oversight and Review Committee, which we refer to as the Complaint and Error Claim Committee to review and oversee the Bank’s processes and practices for handling, monitoring and resolving consumer complaints and EFT error claims (whether received directly or through Third Parties) and to review management's plans for correcting any weaknesses that may be found in such processes and practices. The Bank’s Board of Directors appointed the required Complaint and Error Claim Committee on January 29, 2016. The 2015 Consent Order also requires the Bank to implement a corrective action plan, or CAP, to remediate and provide restitution to those prepaid cardholders who asserted or attempted to assert, or were discouraged from initiating EFT error claims, and to provide restitution to cardholders harmed by EFT error resolution practices. The 2015 Consent Order requires that if, through the CAP, the Bank identifies prepaid cardholders who have been adversely affected by a denial or failure to resolve an EFT error claim, the Bank will ensure that monetary restitution is made. The Bank completed its implementation of the CAP on January 15, 2020. As of the completion date, $1,592,469 of restitution was paid to consumers of which $ $4,352 was paid by the Bank and the remaining amount by Third Parties. The 2015 Consent Order also imposed a $3 million civil money penalty on the Bank, which the Bank has paid and which was recognized as expense in the fourth quarter of 2015.

2018 CMP Order and 2018 Restitution Order. On March 7, 2018, the Bank entered into a Stipulation and Consent to Order for Restitution and Order To Pay Civil Money Penalty with the FDIC, which we refer to as the 2018 Restitution Order and 2018 CMP Order, respectively. The Bank took this action without admitting or denying any alleged violations of law or regulation. The FDIC’s action principally emanated from one of the Bank’s third-party payment processors (“Third-Party Processor”) that suffered an internal system programming glitch. This inadvertently resulted in consumers that engaged in signature-based point of sale transactions during the period from December 2010 to November 2014 being charged a greater fee than what was disclosed by the Bank. The FDIC alleged the Bank’s incorrect fee imposition due to the Third-Party Processor error was an unfair or deceptive act or practice and violated Section 5 of the Federal Trade Commission Act. The 2018 CMP Order imposed a $2 million civil money penalty on the Bank which the Bank has paid, and was recognized as expense on September 30, 2017. The civil money penalty was not subject to any indemnification or recovery from any third party. The 2018 Restitution Order required the Bank to develop a written Restitution Plan, subject to independent audit and FDIC non-objection, to ensure impacted consumers are compensated for any incorrectly charged fees. The 2018 Restitution Order required the Bank to make such reimbursements if not otherwise made by the Third-Party Processor and the Bank is indemnified by the Third-Party Processor for such reimbursements. Impacted consumers were reimbursed by the Third-Party Processor at its own expense. On December 19, 2019, the FDIC concluded the Bank had fully complied with the 2018 Restitution Order and issued an order terminating the 2018 Restitution Order.

On December 18, 2019, the Bank’s Board of Directors, without admitting or denying any violations of law, regulation or the provisions of the 2014 Consent Order, executed a Stipulation and Consent to the Issuance of an Order to Pay Civil Money Penalty in the amount of $7.5 million based on supervisory findings during the period of 2013 to 2019 related principally to deficiencies in the Bank’s legacy Bank Secrecy Act/Anti-Money Laundering (BSA/AML) Programs and alleged violations of law during the period, as well as the length of time the Bank has taken to fully implement the corrective actions required by the 2014 Consent Order. The Bank paid this amount, and it was recognized as an expense in the Company’s financial statements in the fourth quarter of 2019.