The Bancorp, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also provides fourth-quarter results; this is an annual report, not a standalone quarterly filing. Amounts below are in U.S. dollars.
Business context
The Bancorp is a financial holding company whose primary subsidiary, The Bancorp Bank, generates most of its revenue and income. Its businesses include specialty lending (securities-backed lines of credit, vehicle and equipment leasing, SBA lending, and commercial mortgage loans originated for sale) and payments services, including prepaid cards, card processing, ACH, and affinity banking. The company had discontinued its Philadelphia commercial lending business in 2014 and continued to dispose of the related loan assets.
Financial performance and position
| Metric | 2018 | 2017 |
|---|---|---|
| Interest income | $148.0 million | $122.0 million |
| Net interest income | $120.8 million | $106.7 million |
| Net interest margin | 3.19% | 3.04% |
| Provision for loan and lease losses | $3.6 million | $2.9 million |
| Non-interest income | $153.8 million | $91.5 million |
| Non-interest expense | $151.3 million | $154.9 million |
| Continuing-operations net income | $87.5 million | $17.3 million |
| Net income available to common shareholders | $88.7 million | $21.7 million |
| Diluted earnings per share | $1.55 | $0.39 |
The $65.0 million gain on the sale of the Safe Harbor IRA (SHIRA) portfolio was the principal driver of the year-over-year increase in non-interest income and earnings. The sale was completed in 2018; the filing says the associated deposit-account service fees will largely cease. Excluding this gain, annual results were supported by higher net interest income, loan-sale gains, and payment fees.
- Fourth quarter: Net income available to common shareholders was $7.1 million and diluted EPS was $0.13. Continuing-operations income was $6.1 million.
- Assets and funding: Total assets were $4.44 billion, down from $4.71 billion. Deposits were $3.94 billion, down 7.6%, largely reflecting approximately $400 million of SHIRA-related deposit transfers. Total shareholders’ equity was $406.8 million, up from $324.1 million.
- Lending and securities: Portfolio loans were $1.50 billion, up 8.1%; commercial loans held for sale were $688.5 million, up from $503.3 million. Available-for-sale securities were $1.24 billion, down from $1.29 billion.
- Credit quality: Allowance for loan and lease losses was $8.7 million, or 0.58% of loans, compared with 0.51% a year earlier. Non-performing loans were $5.5 million versus $4.2 million; net charge-offs were $2.0 million.
- Cash flow and liquidity: Operating cash flow was negative $174.2 million; investing cash flow was positive $84.7 million; financing cash flow was negative $265.1 million. Cash and cash equivalents ended the year at $554.3 million. The Bank reported $1.08 billion of Federal Reserve borrowing capacity and a $116 million FHLB line, with no outstanding draws on those lines.
- Debt and capital: The company had $13.4 million of subordinated debentures and $41.7 million of long-term borrowings related to loans sold without qualifying for sale accounting. The company and Bank were reported well capitalized; total risk-based capital ratios were 21.07% and 20.61%, respectively, and leverage ratios were 10.11% and 9.70%.
Material changes and outlook
- Net interest income increased 13.3%, primarily from loan growth and higher yields following Federal Reserve rate increases. Average funding costs also rose, but less than yields on interest-earning assets.
- Payment processing, ACH, and prepaid fees together increased 6.0% to $63.3 million. Loan-sale gains rose to $20.5 million, reflecting greater securitization volume.
- Non-interest expense fell 2.3%, helped by a renegotiated data-processing contract and lower transaction volumes; salaries and benefits increased $4.0 million, partly reflecting compliance and incentive compensation costs.
- Net discontinued-operation assets declined to $197.8 million from $304.3 million. Management expected to continue sales or repayments in 2019 and reinvest proceeds in continuing lending businesses. The company also planned to continue commercial loan securitizations at roughly six-month intervals.
- Management stated that the December 2018 rate increase and potential further increases could support 2019 interest income, with some offset from higher funding costs. The filing provides no formal earnings or revenue guidance.
Risks, contingencies, and unusual items
- Regulatory constraints: FDIC consent orders and a Federal Reserve supervisory letter impose compliance obligations and restrict certain new payment-processing and prepaid programs. Bank dividends to the holding company require FDIC approval; holding-company dividends, debt incurrence, and certain other actions require Federal Reserve approval. The company had $14.1 million of parent-level cash and stated that regulatory approval was required for future trust-preferred interest payments.
- Compliance matters: The Bank’s BSA-related corrective actions and required regulatory reporting remained subject to regulator review. A 2018 FDIC order required a restitution plan after a processor error led to excess consumer fees in 2010–2014; the processor had reimbursed impacted consumers, while the Bank was completing documentation and audit requirements. A $2 million civil money penalty had been paid and recognized as expense in 2017.
- Legacy assets and valuations: Discontinued commercial real estate loans and the $59.3 million Walnut Street investment depend on estimated collateral values and future cash flows. A $1.9 million fourth-quarter charge related to a delinquent $30 million loan; the loan was renewed in March 2019 on revised terms.
- Other exposures: Prepaid-card fee income and deposits, third-party affinity relationships, brokered-deposit classification, interest-rate movements, credit losses, cybersecurity and vendor continuity are material business risks. The company had $1.68 billion of unused loan commitments, mostly variable-rate SBLOC lines that historically were largely undrawn.
- Legal and reporting: An SEC investigation relating to historical financial-statement restatements remained ongoing, with material response costs expected to continue. The auditor issued unqualified opinions on the 2018 financial statements and internal control over financial reporting; management also concluded internal controls were effective. The filing notes prior-period restatements for loan-loss recognition.
- Accounting outlook: The company expected adoption of the CECL credit-loss standard in 2020 to increase its allowance, though the amount was not yet determinable. Adoption of the lease standard was expected to add approximately $15.5 million of assets and lease liabilities in 2019.
Most important facts for investors to verify
- How much of 2018 earnings growth was attributable to the one-time $65 million SHIRA sale gain, and what replaces the related service-fee income?
- Whether the Bank completes required BSA and other consent-order remediation to regulators’ satisfaction, and whether restrictions on business growth or dividends change.
- Trends in deposits after the SHIRA transfer, including retention and cost of prepaid and other third-party-generated deposits.
- Credit quality and valuation assumptions for SBA, leasing, loans held for sale, discontinued real estate assets, and the Walnut Street investment.
- Whether planned loan originations and securitizations can sustain net interest income and fee revenue as rates, funding costs, and market conditions change.
- Potential CECL reserve increases, parent-company liquidity and regulatory permissions for dividends or debt-related payments.