The Bancorp, Inc. — 2013 Form 10-K Summary
Business context and reporting period
The Bancorp, Inc. is a financial holding company whose primary subsidiary is The Bancorp Bank. This annual report covers the fiscal year ended December 31, 2013; it is not a quarterly filing. The Bank combines commercial and consumer lending, concentrated in the Philadelphia-Wilmington region, with national affinity-group banking and payment services, including prepaid cards, healthcare accounts, card processing and private-label banking.
Financial performance and condition
| Metric | 2013 | 2012 |
|---|---|---|
| Interest income | $106.6 million | $96.9 million |
| Net interest income | $95.8 million | $85.4 million |
| Provision for loan and lease losses | $29.5 million | $22.4 million |
| Noninterest income | $83.4 million | $49.6 million |
| Noninterest expense | $110.8 million | $88.2 million |
| Net income | $25.1 million | $16.6 million |
| Diluted earnings per share | $0.66 | $0.50 |
| Net interest margin | 2.44% | 2.58% |
- At year-end, total assets were $4.706 billion, loans net of allowance were $1.920 billion, cash and cash equivalents were $1.238 billion, investment securities totaled about $1.350 billion, deposits were $4.273 billion, and shareholders’ equity was $359.6 million.
- Operating cash flow was $49.0 million. Investing activities used $745.9 million, principally for securities purchases and loan growth; financing activities provided $966.7 million, mainly from deposit growth. Cash increased $269.9 million during the year.
- Average deposits grew 18% to $3.70 billion. Average earning assets rose 19.3% to $4.04 billion, while deposit costs remained low. Management attributed margin pressure to low asset yields and high balances held at the Federal Reserve.
- The company and Bank were reported as well capitalized. At year-end, company total risk-based and Tier 1 risk-based capital ratios were 15.83% and 14.57%; the Bank’s were 12.66% and 11.40%. The Bank’s leverage ratio was 6.72%.
- Year-end debt included $13.4 million of subordinated debentures and $21.2 million of repurchase agreements. There were no outstanding FHLB advances or borrowings on the Bank’s credit lines; available facilities included a $406.2 million FHLB line and $49.0 million of correspondent-bank lines.
Changes versus the prior year
- Net income increased 51.0%, reflecting growth in fee income and net interest income, partly offset by higher credit-loss provisions and operating expenses.
- Noninterest income rose 67.6%. Prepaid-card fees increased to $45.3 million from $33.3 million, and gain on loan sales rose to $17.2 million from $1.9 million.
- Noninterest expense increased 25.6%, including a $13.0 million increase in salaries and benefits, driven by staffing in prepaid cards, compliance, loan sales and infrastructure.
- Loan balances grew more slowly than deposits: year-end deposits increased 29.0% to $4.273 billion, while loans net of deferred fees and costs increased to $1.958 billion from $1.903 billion. The excess funding contributed to higher cash and securities balances.
- Credit indicators weakened. Nonperforming assets rose to $67.0 million from $33.9 million; nonaccrual loans increased to $40.6 million from $25.2 million; and other real estate owned climbed to $26.3 million from $4.2 million. Net charge-offs were $24.4 million, versus $19.0 million in 2012.
- Net interest margin declined 14 basis points to 2.44%. Accumulated other comprehensive income fell to $0.6 million from $10.2 million, largely reflecting the change in unrealized securities values.
Outlook, risks and unusual items
- The filing provides no numerical earnings or revenue guidance. Management described a strategy of growing commercial lending and affinity-group deposits, generating fee income, and deploying excess funds while maintaining liquidity and capital.
- Management said it expected the company and Bank to meet targeted capital ratios under the new capital rules, which begin taking effect in 2015. It did not expect the final Volcker Rules to have a material operational impact.
- Key business risks include concentrated commercial and construction lending in the Philadelphia-Wilmington area; higher delinquencies, charge-offs and foreclosed property; dependence on prepaid-card and affinity-group relationships for fee income and deposits; and interest-rate sensitivity. The top 20 affinity groups accounted for $2.19 billion of deposits at year-end.
- Other material risks include regulatory and compliance costs, third-party service-provider reliance, payment-card fraud and cybersecurity, and possible disruption from changes in payment-network or prepaid-card regulation. Loan commitments were $590.1 million and standby letters of credit were $22.4 million at year-end.
- The Bank paid a $172,000 civil money penalty in 2012 under an administrative agreement with the FDIC, which also required additional quarterly reporting. The filing says routine legal proceedings were not expected to have a material effect. Management reported no subsequent events requiring recognition or disclosure.
- The company had no cash dividend on common stock and said it did not expect to pay one in the foreseeable future. Its independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether the sharp increase in nonperforming assets and OREO, especially commercial-loan problem credits, leads to further charge-offs, provisions or reserve needs.
- Whether prepaid-card and other affinity-group revenue and deposits remain durable, and how concentrated the largest relationships are.
- Whether deposit growth can be deployed into appropriately priced loans and investments without further compressing net interest margin.
- How the securities portfolio’s rate sensitivity, unrealized losses and trust-preferred holdings affect earnings, liquidity and regulatory capital.
- How the company’s capital ratios and liquidity evolve as Basel III requirements phase in and loan commitments are funded.