The Bancorp, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Unaudited consolidated results. The company operates specialty lending and payments businesses; commercial lending operations are classified as discontinued and are being wound down. Financial amounts below are in millions unless noted.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net interest income | $23.5 | $17.8 | $65.0 | $51.3 |
| Non-interest income | $19.9 | $17.3 | $48.1 | $62.8 |
| Non-interest expense | $44.2 | $47.8 | $156.4 | $135.1 |
| Continuing-operations net loss | ($1.5) | ($7.6) | ($29.8) | ($11.9) |
| Discontinued-operations net income (loss) | ($24.0) | $2.0 | ($37.9) | $6.7 |
| Net loss | ($25.6) | ($5.6) | ($67.7) | ($5.2) |
| Basic and diluted loss per share | ($0.54) | ($0.15) | ($1.65) | ($0.14) |
- Q3 net interest margin was 2.69%, up from 2.34%; nine-month margin was 2.57%, up from 2.32%. Management attributed improvement to loan growth and yields, and reduced low-yielding Federal Reserve balances.
- Prepaid card fees, the largest non-interest income component, rose 6.6% to $12.2 million in Q3 and 10.0% to $39.3 million for nine months. Nine-month non-interest income fell overall, primarily reflecting a $12.3 million net decline in the value of the unconsolidated investment and lower loan-sale gains.
- At September 30, total assets were $4.22 billion, down from $4.77 billion at year-end 2015. Loans, net, were $1.20 billion versus $1.08 billion; investment securities were $1.43 billion. Deposits were $3.77 billion, down $647.8 million, or 14.7%, from year-end.
- Cash and cash equivalents were $356.1 million, compared with $1.16 billion at year-end. For the first nine months, operating cash flow was negative $130.1 million, investing cash flow negative $165.4 million, and financing cash flow negative $503.6 million.
- Short-term borrowings were $70.0 million; subordinated debentures were $13.4 million. Shareholders’ equity was $339.1 million. The company reported regulatory capital ratios above the stated “well capitalized” thresholds: the Bank’s Tier 1 leverage ratio was 7.41%, Tier 1 risk-based ratio 14.56%, total risk-based ratio 14.84%, and common equity Tier 1 ratio 14.56%.
- Nonperforming loans were $7.0 million, up from $2.3 million at December 31, 2015; the allowance for loan losses was $6.1 million, or 0.51% of loans, with 87.12% coverage of nonperforming loans. Net charge-offs for the nine months were $152,000.
Material changes and unusual items
- Continuing-operations Q3 loss narrowed year over year, as higher net interest income and lower Bank Secrecy Act (BSA) lookback consulting costs more than offset higher salaries and other expenses. The lookback consultant completed work in July 2016; management said no further related third-party fees were expected.
- The quarter included a $23.9 million fair-value charge on a discontinued commercial real estate loan secured by a Florida shopping mall. The $41.9 million principal balance became 90 days delinquent after quarter-end. Management said recovery under an additional personal guarantee is uncertain; deferred-tax valuation allowances prevented recognition of a related tax benefit.
- The company raised approximately $74.8 million in a 2016 stock offering, issuing approximately 17.5 million common shares in total, including shares converted from Series C preferred stock. This strengthened capital and liquidity but increased share count.
- Management eliminated approximately 20% of Bank staff positions near quarter-end, recording about $1.3 million of severance expense. It planned additional expense reductions, expected to begin in Q4 2016 with the principal impact in 2017.
- Assets held for sale from discontinued operations were $386.2 million, down from $583.9 million at year-end; the balance includes loans being marketed for sale. The investment in the unconsolidated entity was $157.4 million and is valued using significant unobservable inputs.
Outlook, risks and contingencies
- No specific earnings or financial guidance was provided. Management said results for the first nine months may not indicate full-year results and that proceeds from loan dispositions may not be reinvested at comparable yields.
- The CFPB’s final prepaid-card rule, released October 5, 2016, is effective principally from October 2017, with some requirements delayed to October 2018. Prepaid cards are a major source of deposits and non-interest income; the company was assessing the rule and said its financial effect could not yet be quantified.
- The Bank remains subject to FDIC consent-order requirements involving BSA compliance and consumer compliance. Restrictions include limits on certain new prepaid programs and payment activities pending regulatory approval. The Bank may not pay dividends without FDIC approval; the holding company also requires Federal Reserve approval for dividends and certain other actions. The company cautioned that access to future holding-company funding could not be assured.
- A securities class-action settlement for $17.5 million was reached, subject to court approval; the company stated insurance carriers would fully fund the payment. An SEC investigation concerns the company’s prior financial-statement restatement, and response costs could be material. An IRS audit of 2012–2014 returns was underway. A shareholder books-and-records demand contemplated possible derivative litigation; reasonably possible losses could not be estimated.
- The company had previously restated financial statements for periods through September 2014, principally for earlier recognition of losses in discontinued commercial lending. Management reported disclosure controls were effective at the reasonable-assurance level.
Investor verification priorities
- Confirm the mall-loan appraisal, subsequent delinquency status, any guarantee recovery, and whether further discontinued-portfolio impairments arise.
- Track deposit outflows, cash levels, borrowing use, committed loan funding, and whether liquidity remains adequate as deposits are managed down.
- Review asset-quality migration, nonperforming loans, allowance adequacy, and progress toward loan-review coverage targets.
- Assess the operational and financial effects of the CFPB prepaid rule and outstanding FDIC consent-order restrictions on prepaid-card growth and fees.
- Verify settlement court approval and insurance funding, SEC investigation developments and costs, IRS audit results, and any developments on the shareholder demand.
- Monitor execution and realized savings from staffing and other cost reductions, alongside the effects of share issuance and dilution.