The Bancorp, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet comparisons are to December 31, 2014. The 2014 comparison is marked restated. Unless otherwise noted, figures are in millions of dollars.
Business context
Bancorp is a financial holding company whose bank subsidiary provides payment and affinity banking services, alongside specialty lending in securities-backed lines of credit, leasing, SBA loans and loans originated for sale. The company is winding down its commercial lending business, with that portfolio reported as discontinued operations and assets held for sale.
Financial results and condition
| Metric | Q1 2015 / March 31, 2015 | Comparable / prior date |
|---|---|---|
| Interest income | $19.7 | $16.6 in Q1 2014 |
| Net interest income | $16.5 | $13.7 in Q1 2014 |
| Net interest margin | 2.22% | 2.30% in Q1 2014 |
| Non-interest income | $20.8 | $23.7 in Q1 2014 |
| Non-interest expense | $40.9 | $31.2 in Q1 2014 |
| Continuing-operations net income (loss) | $(1.8) | $3.2 in Q1 2014 |
| Discontinued-operations net income (loss) | $2.0 | $(1.6) in Q1 2014 |
| Net income available to common shareholders | $0.2; basic and diluted EPS rounded to $0.00 | $1.6; EPS $0.04 in Q1 2014 |
| Operating cash flow | $(35.3) | $(151.4) in Q1 2014 |
| Cash and cash equivalents | $1,059.3 | $1,114.2 at Dec. 31, 2014 |
| Total assets | $4,848.4 | $4,986.3 at Dec. 31, 2014 |
| Total deposits | $4,492.0 | $4,621.8 at Dec. 31, 2014 |
| Shareholders’ equity | $322.1 | $319.0 at Dec. 31, 2014 |
| Loans, net of allowance | $866.7 | $871.0 at Dec. 31, 2014 |
- Net interest income rose 21%, reflecting higher average loan and investment-security balances. Average loans and leases grew to $1.23 billion from $839.9 million; average investment securities rose to $1.56 billion from $1.41 billion. Loan yield fell to 3.46% from 4.17%, which management attributed partly to a higher proportion of lower-yielding SBLOCs.
- Non-interest income declined, mainly because loan-sale gains fell to $1.7 million from $5.5 million. Prepaid-card fees were $13.1 million, down from $13.5 million.
- Expense increased 31%, including $5.7 million of BSA and lookback consulting costs, $2.9 million of FDIC insurance expense, and higher legal and consulting costs. The filing identifies the higher FDIC assessment as related to the FDIC’s reclassification of deposits as brokered.
- Investing activities provided $121.6 million, while financing activities used $141.2 million. Deposits declined $129.7 million during the quarter; cash fell $54.9 million.
- The allowance for loan and lease losses was $4.2 million, or 0.49% of loans. Non-performing loans were $4.5 million, up from $2.1 million at year-end; non-accrual loans rose to $3.7 million from $1.9 million.
- Subordinated debentures were $13.4 million. No amounts were outstanding on the $474 million FHLB line or $34 million of correspondent-bank lines. The filing reports Bancorp and the Bank as well-capitalized at March 31, with total risk-based capital ratios of 12.89% and 12.38%, respectively.
Material changes, outlook and risks
- Commercial portfolio disposal: Assets held for sale were $842.6 million, down from $887.9 million at year-end. Management’s strategic plan is to exit commercial lending and focus on specialty finance. It expected disposal proceeds to be reinvested in securities and to support continuing lending growth. A subsequent-event disclosure reports that approximately $150 million of loans were sold in Q2 2015 for a gain of about $2.2 million.
- Restatement and credit controls: Management describes prior-period restatements for earlier recognition of loan-loss provisions and charge-offs related largely to discontinued commercial lending. The filing identifies material weaknesses involving credit-file maintenance and loan evaluation, and classification of discontinued operations. Management said remediation was underway; disclosure controls and procedures were still deemed ineffective as of March 31, 2015.
- BSA/AML oversight: A 2014 FDIC consent order required enhanced compliance controls and historical transaction review. The filing reports $5.2 million of lookback consulting expense in Q1 and $9.1 million in Q2, with remaining costs not yet estimable and the review expected to finish in Q2 2016. The Bank faced restrictions on certain prepaid-card, merchant and payment activities pending regulatory action.
- Dividend and funding restrictions: Subsequent to quarter-end, a May 2015 Federal Reserve supervisory letter restricted dividends and certain other actions without prior approval. An August 2015 FDIC amendment barred Bank dividends without prior written consent. The Federal Reserve approved the September 2015 trust-preferred interest payment, but future payments require approval. Management reported approximately $10 million of holding-company cash as of August and warned that alternate funding may be needed if Bank dividends do not resume.
- Other risks: A securities class action alleges misleading disclosures concerning problem loans, reserves and BSA compliance; the case was preliminary and management said reasonably possible losses could not be estimated. The FDIC was also reviewing certain third-party card-program practices; possible civil money penalties would not be indemnified. Management cited exposure to interest-rate movements, borrower credit deterioration, loan-sale market conditions and changing deposit balances. No formal earnings guidance is provided.
Important facts for investors to verify
- Reconcile the restated prior-period figures and assess progress in fixing the identified credit-file, loan-review and discontinued-operations control weaknesses.
- Track BSA/AML remediation, remaining lookback costs, regulatory restrictions and any further FDIC or Federal Reserve actions.
- Verify the pace, pricing and realized gains or losses from commercial-loan sales, and the remaining held-for-sale balance.
- Monitor deposit trends and liquidity, the availability of Bank dividends to fund the holding company, and approvals for trust-preferred interest payments.
- Assess whether rising expenses and lower loan-sale margins are offset by recurring payment income and growth in continuing specialty-lending operations.
- Follow non-performing loans, allowance adequacy, regulatory capital ratios and developments in the securities litigation and FDIC review of card practices.