The Bancorp, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing was signed March 13, 2020. The company is a financial holding company whose primary subsidiary, The Bancorp Bank, generates most revenue and income.
Business context
The company focuses on specialty lending—securities- and insurance-backed credit lines, small-business/SBA lending, vehicle and equipment leasing, and commercial real estate loans originated for sale or securitization. Its payments business provides prepaid and debit card accounts, card and ACH processing, and affinity banking services. Philadelphia-based commercial lending was discontinued in 2014; related assets remain held for sale.
Financial performance
| Metric | 2019 | 2018 |
|---|---|---|
| Interest income | $179.6 million | $148.0 million |
| Net interest income | $141.3 million | $120.8 million |
| Provision for loan and lease losses | $4.4 million | $3.6 million |
| Non-interest income | $104.1 million | $153.8 million |
| Non-interest expense | $168.5 million | $151.3 million |
| Income before tax, continuing operations | $72.5 million | $119.8 million |
| Net income, continuing operations | $51.3 million | $87.5 million |
| Net income, including discontinued operations | $51.6 million | $88.7 million |
| Diluted EPS, including discontinued operations | $0.90 | $1.55 |
| Net interest margin | 3.32% | 3.19% |
Non-interest income included $65.0 million from the 2018 sale of the Safe Harbor IRA portfolio; the company recorded no comparable gain in 2019. Prepaid, debit-card and related fees rose 19.2% to $65.1 million, and gains on commercial loans originated for sale rose 17.4% to $24.1 million. Excluding the 2018 IRA sale gain and 2019 civil penalties, management reported pretax income of $81.4 million in 2019 versus $54.8 million in 2018.
Interest expense increased to $38.3 million from $27.1 million. Average loan yield rose to 5.25% from 4.92%, while the cost of deposits and interest-bearing liabilities rose to 0.92% from 0.70%. Salaries and benefits increased 18.1% to $94.3 million, reflecting incentive compensation and investment in technology and business infrastructure.
Fourth-quarter context: 2019 continuing-operations net income was $2.9 million, versus $6.1 million in fourth-quarter 2018; total net income was $1.9 million versus $7.1 million. Quarterly results were uneven, including $7.5 million of FDIC penalties recorded in the fourth quarter of 2019.
Balance sheet, cash flow and capital
- Total assets were $5.66 billion, up from $4.44 billion. Total deposits were $5.05 billion, up from $3.94 billion; the increase included $475 million of time deposits used to fund commercial real estate loan originations.
- Loans, net of fees and costs, were $1.82 billion, versus $1.50 billion. Commercial loans held for sale were $1.18 billion, versus $688.5 million. Available-for-sale securities were $1.32 billion; total investment securities were approximately $1.41 billion.
- Cash and cash equivalents were $944.5 million, versus $554.3 million. Operating cash flow was negative $493.1 million; investing cash flow was negative $233.3 million, while financing cash flow was positive $1.12 billion, principally reflecting deposit growth. Cash increased $390.2 million during the year.
- Shareholders’ equity was $484.5 million, versus $406.8 million. Book value per share was $8.52. The company reported no cash dividends and stated it did not then plan to pay them.
- At year-end, long-term borrowings were $41.0 million and subordinated debentures were $13.4 million. No amounts were outstanding on the Bank’s FHLB or Federal Reserve credit lines. Average short-term borrowings during 2019 were $129.0 million.
- The company and Bank were reported as well capitalized. Company/Bank total risk-based capital ratios were 19.45%/19.11%; leverage ratios were 9.63%/9.46%.
- Credit quality weakened on several measures: non-performing loans rose to $9.1 million from $5.5 million; non-performing assets were 0.16% of assets versus 0.12%. The allowance was $10.2 million, or 0.56% of loans, compared with $8.7 million, or 0.58%, a year earlier. Net charge-offs were $2.8 million versus $2.0 million.
Material changes, outlook and risks
- Regulatory costs and constraints: The Bank paid a $7.5 million FDIC civil money penalty in 2019 relating principally to legacy BSA/AML deficiencies and delays in corrective actions; the company also recorded a $1.4 million SEC penalty resolving an investigation into earlier financial-statement restatements. The SEC settlement was made without admitting or denying allegations. The Federal Reserve terminated its supervisory letter in the fourth quarter of 2019, but the Bank’s FDIC consent-order restrictions remained relevant.
- The Bank submitted its BSA corrective-action report at year-end 2019; it was still under regulatory review. Until regulatory approval, restrictions on certain new prepaid programs, independent sales organizations and merchant-related ACH activity could limit growth. The Bank completed the consumer restitution plan required under a separate consent order in January 2020; approximately $1.59 million was paid to consumers, of which about $4,353 was paid by the Bank.
- Management outlook: Management expected to continue selling commercial loans into securitizations in 2020 and reinvesting proceeds from discontinued assets in continuing lending lines. It cautioned that loan-sale pricing and reinvestment returns depend on market conditions. No specific earnings or revenue guidance was provided.
- Credit and liquidity risks: The filing cites loan losses, collateral values, loan-sale market disruption, interest-rate changes, deposit concentration, and dependence on third-party affinity relationships. Most deposits were classified as brokered under existing FDIC guidance. A proposed FDIC rule could permit reclassification of certain deposits, but adoption and approval were uncertain. Unused loan commitments were $2.34 billion, predominantly securities-backed lines that historically were mostly undrawn.
- Subsequent events: The filing noted that COVID-19-related economic uncertainty was likely to negatively affect net interest income, but the potential overall financial impact was unknown. It also disclosed emergency Federal Reserve rate cuts in March 2020, which management said could reduce net interest income absent offsetting loan growth.
- Other significant exposures: A February 2020 borrower became delinquent on vehicle loans totaling $15.7 million; recovery and timing were uncertain. A Delaware False Claims Act suit over unclaimed prepaid-card balances remained pending after a motion to dismiss was denied in February 2020; the company could not determine whether the outcome would be material. The filing also identified LIBOR transition risk and anticipated a $1 million to $3 million allowance increase upon CECL adoption in first-quarter 2020.
- The independent auditor gave an unqualified opinion on the financial statements and internal controls; management also concluded internal control over financial reporting was effective at year-end.
Investor verification priorities
- Track regulatory review and approval of the BSA report, remaining consent-order requirements, and any effect on payment-program growth, deposits or expenses.
- Reconcile reported earnings with the prior-year $65.0 million IRA-sale gain and 2019 penalties; assess whether underlying fee growth and expense trends persist.
- Review loan delinquency and non-performing trends, allowance adequacy, the $15.7 million vehicle exposure, and the expected CECL transition adjustment.
- Assess commercial loan securitization volumes, gain-on-sale economics, held-for-sale balances and the valuation of discontinued assets and the $39.2 million unconsolidated investment.
- Monitor deposit mix and concentration, brokered-deposit treatment, time-deposit renewals, available liquidity and the status of the pending unclaimed-property litigation.