The Bancorp, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2016. Unless otherwise noted, financial amounts below are in millions of dollars. The company is a financial holding company whose bank provides specialty lending, prepaid-card and payment services. Commercial lending operations discontinued in 2014 are reported separately as discontinued operations.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net interest income | $20.9 | $17.0 | $41.4 | $33.6 |
| Provision for loan and lease losses | $1.1 | $0.5 | $1.1 | $1.2 |
| Non-interest income | $9.5 | $24.7 | $28.2 | $45.5 |
| Non-interest expense | $57.1 | $46.4 | $112.3 | $87.3 |
| Net loss from continuing operations | $(17.8) | $(2.5) | $(28.4) | $(4.3) |
| Net income (loss), including discontinued operations | $(31.4) | $0.2 | $(42.3) | $0.4 |
| Basic and diluted loss per share | $(0.83) | — | $(1.12) | $0.01 |
Margins and revenue drivers: Second-quarter net interest margin was 2.73%, up from 2.23%; first-half margin was 2.56%, versus 2.23%. Management attributed the improvement to higher loan yields and reduced low-yielding Federal Reserve balances. Prepaid-card fees rose 21% to $13.5 million in Q2 and 12% to $27.1 million for the first half. By contrast, the change in value of the investment in an unconsolidated entity was a $13.9 million Q2 loss and a $13.1 million first-half loss.
Cash flow: Operating activities provided $24.2 million in the first half, compared with $75.7 million used in the prior-year period. Investing activities used $253.3 million and financing activities used $354.7 million. Cash and cash equivalents fell $583.7 million to $571.5 million, primarily amid deposit outflows and investment and loan activity.
Financial position and material changes
- At June 30, total assets were $4.40 billion, down from $4.77 billion at year-end 2015. Total shareholders’ equity was $290.3 million, compared with $320.0 million; the accumulated deficit was $57.7 million.
- Total loans, net of deferred fees and costs, were $1.18 billion, up from $1.08 billion at year-end. Direct lease financing rose to $315.6 million from $231.5 million; securities-backed lines of credit rose to $607.0 million from $575.9 million.
- Available-for-sale and held-to-maturity investment securities totaled approximately $1.42 billion, up from $1.16 billion at year-end. Commercial loans held for sale were $441.6 million, down from $489.9 million.
- Deposits declined 8% to $4.06 billion from $4.41 billion, reflecting planned exits of higher-cost relationships. Time deposits fell to $101.2 million from $428.5 million.
- Reported debt included $13.4 million of subordinated debentures; repurchase-agreement liabilities were $0.3 million. The company reported no outstanding Federal Home Loan Bank or Federal Reserve borrowing-line advances at June 30. Available secured lines were $527 million at the Federal Home Loan Bank and $160 million at the Federal Reserve.
- The allowance for loan and lease losses was $5.4 million, or 0.46% of loans, versus $4.4 million, or 0.41%, at year-end. Nonperforming loans increased to $6.3 million from $2.3 million; nonaccrual loans were $3.1 million and loans 90 days past due were $3.2 million.
- At June 30, the company and bank remained classified as “well capitalized.” The bank’s Tier 1 leverage ratio was 6.35% and total risk-based capital ratio was 12.12%; these were lower than 6.90% and 14.18%, respectively, at year-end.
Management commentary, outlook, risks, and unusual items
- Quarterly third-party valuations produced losses tied primarily to three lending relationships: a $13.9 million reduction in the unconsolidated-entity investment and a $13.6 million after-tax loss from discontinued operations for Q2. The first-half discontinued-operations loss was $13.9 million.
- Bank Secrecy Act (BSA) lookback consulting expense was $27.7 million for the first half. Management said the consultant completed the lookback in July 2016 and expected third-quarter and later expense to be significantly reduced. Suspicious activity reports resulting from the review had been filed.
- Management said a newly appointed CEO and management team were developing a plan to significantly reduce non-interest expense, with implementation expected to begin in Q4 2016 and principal impact in 2017. The filing gives no quantified earnings guidance; management cautioned that first-half results may not indicate full-year results.
- The bank remains subject to FDIC consent-order requirements, including restrictions on certain prepaid-card and payment activities pending regulatory approval. The bank may not pay dividends without prior FDIC approval; the holding company also requires Federal Reserve approval for dividends and certain other actions. The company disclosed that future access to bank dividends or alternative holding-company funding is uncertain.
- On August 5, 2016, after quarter-end, the company raised approximately $74 million in a private placement: 7.56 million common shares at $4.50 and 40,000 mandatorily convertible preferred shares at $1,000 each. The preferred shares carry a stated 12% annual cash dividend beginning October 1, 2016 while outstanding, subject to terms and regulatory requirements, and convert following shareholder approval. A further 1.025 million-share insider subscription at $4.50 was contingent on approvals.
- On July 27, 2016, the company agreed to settle a securities class action for $17.5 million, subject to court approval; the company said insurance carriers would fund the settlement. The company also disclosed an SEC subpoena concerning its prior financial restatement and an IRS audit notice for tax years 2012–2014. A shareholder books-and-records demand and possible derivative action were disclosed; reasonably possible losses could not be estimated.
- The filing notes that prior financial statements for 2010 through September 2014 were restated, primarily for earlier recognition of losses on discontinued commercial loans. The company said disclosure controls were effective at a reasonable-assurance level and reported no material change in internal control over financial reporting during the first half.
Most important facts for investors to verify
- Whether the $17.5 million class-action settlement receives court approval and is fully covered by insurance.
- Progress and costs associated with FDIC consent orders, BSA remediation, and the SEC investigation of the restatement.
- Whether the $74 million private placement and contingent insider subscription improve capital and liquidity as expected, and the dilution and dividend implications of preferred-stock conversion.
- Performance and valuation of the remaining discontinued loan portfolio and the unconsolidated-entity notes, including recoveries from the three troubled lending relationships.
- Trends in nonperforming loans, allowance adequacy, deposit outflows, regulatory capital ratios, and implementation of the planned expense reductions.