The Bancorp, Inc. — 2016 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2016; it is not a standalone fourth-quarter filing. The company operates primarily through The Bancorp Bank, combining specialty lending (securities-backed lines of credit, or SBLOCs; leasing; SBA loans; and loans originated for resale) with prepaid-card, private-label banking, and payment-processing services. Its former commercial lending business is reported as discontinued operations and is being wound down or sold.
Financial performance and position
| Metric | 2016 | 2015 |
|---|---|---|
| Net interest income | $90.0 million | $69.9 million |
| Net interest margin | 2.74% | 2.37% |
| Provision for loan and lease losses | $3.4 million | $2.1 million |
| Non-interest income | $42.5 million | $133.1 million |
| Non-interest expense | $198.6 million | $194.1 million |
| Continuing-operations net income (loss) | $(56.8) million | $5.4 million |
| Discontinued-operations net income (loss), after tax | $(39.7) million | $8.1 million |
| Net income (loss) available to common shareholders | $(96.5) million; $(2.17) diluted EPS | $13.4 million; $0.35 diluted EPS |
| Net cash from operating activities | $(218.0) million | $(234.9) million |
At year-end 2016, total assets were $4.86 billion, total loans were $1.22 billion, commercial loans held for sale were $663.1 million, and investment securities were approximately $1.34 billion, including $1.25 billion available for sale. Cash and cash equivalents were $999.1 million. Deposits were $4.24 billion, down from $4.41 billion; shareholders’ equity was $299.0 million, down from $320.0 million.
Capital remained above regulatory well-capitalized thresholds: the company’s total risk-based capital ratio was 13.63% and leverage ratio 6.90%; the Bank’s were 13.53% and 6.84%, respectively. The Bank had no year-end borrowings outstanding on its stated FHLB and Federal Reserve credit lines. The balance sheet included $263.1 million of long-term borrowings related to a loan securitization; the company said required sale-accounting documentation was completed and the transaction was recorded as a sale in the first quarter of 2017. The holding company reported $8.3 million of cash and $13.4 million of subordinated debentures.
Changes versus the prior comparable period
- Net interest income increased 28.6%, mainly on loan growth in specialty lending and interest earned on loans awaiting resale. Average loan and lease balances rose 26.6%; the net interest margin increased 37 basis points.
- Non-interest income fell $90.6 million. The 2015 comparison included a $33.5 million gain on the sale of most of the health savings business and $14.4 million in securities gains; 2016 also included a $37.5 million loss from revaluing the retained interest in the Walnut Street securitization.
- Prepaid-card fees, the largest recurring fee source, rose 8.1% to $51.3 million. Loan-sale gains fell $7.2 million to $2.9 million amid lower sales volume and margins.
- Non-interest expense increased 2.3%. BSA lookback consulting costs declined to $29.1 million from $41.4 million, but salary expense rose $13.6 million to $82.0 million and software expense rose $3.9 million. The lookback review concluded in the third quarter, and company-wide staffing reductions lowered fourth-quarter expense.
- Discontinued-operations assets fell to $360.7 million from $583.9 million. The 2016 discontinued-operations loss included a $23.9 million write-down of loans secured by a Florida mall after the loans became non-performing; the Bank took possession of the property and intended to market it for sale.
Outlook, risks, contingencies, and unusual items
- Management outlook: Management said it planned to return to profitability in 2017, citing specialty-loan growth, staff reductions, and an identified $20 million of potential expense reductions. It cautioned that achieving the savings, and their timing and magnitude, were uncertain. Management also expected future short-term rate increases to support net interest income, with smaller increases in deposit costs.
- Regulatory constraints: FDIC consent orders and a Federal Reserve supervisory letter restrict certain prepaid-card and payment-processing growth, require regulatory approval for Bank dividends and company distributions, and constrain company dividends, new debt, and share repurchases. Some growth restrictions depend on FDIC review and approval of a BSA corrective-action report. The Bank also received a “needs to improve” CRA rating; its approved CRA strategic plan took effect July 1, 2016, while related business restrictions remained.
- Compliance, restitution, and investigations: The Bank is implementing a corrective-action plan addressing prepaid-card electronic-transfer claims. Potential restitution was not estimable; none had been paid under the plan by the filing date. The company was cooperating with an SEC investigation relating to prior-period financial statement restatements and said related costs had been material and were expected to continue. An IRS audit of 2012–2014 returns was in process.
- Credit and valuation exposure: The $126.9 million Walnut Street retained interest was measured using significant unobservable inputs and was subject to further credit and market assumptions. Discontinued commercial loans remained exposed to uncertain sale prices and collateral values. The allowance for loan and lease losses was $6.3 million, or 0.52% of total loans; nonperforming loans were $3.6 million, up from $2.3 million.
- Other legal matter: A securities class action was settled for $17.5 million, with payments fully funded by insurance; court approval occurred in December 2016. A shareholder records-inspection lawsuit filed in January 2017 remained pending, and reasonably possible losses could not be estimated.
- Historical reporting and audit: Prior-period statements for 2010 through September 2014 were restated for loan-loss timing and other loan losses. Management said past material weaknesses had been remediated; management and the independent auditor reported effective internal control over financial reporting at December 31, 2016. The auditor gave an unmodified opinion on the 2016 financial statements.
- Other notable items: The company issued 17.5 million common shares in a 2016 private offering for net proceeds of approximately $74.8 million. A definitive agreement to sell its minimal European prepaid operations was signed in March 2017, with closing expected in the second quarter; otherwise, the company planned to wind them down.
Important facts for investors to verify
- Progress on FDIC consent-order remediation, submission and approval of the BSA report, and any resulting changes to operating restrictions or restitution exposure.
- Whether the planned 2017 expense reductions and return to profitability were achieved, and whether prepaid-card fees and specialty-loan growth remained durable.
- Subsequent performance, sale proceeds, and updated valuations for the Walnut Street interest, discontinued loans, and Florida mall collateral.
- Deposit stability and concentration: deposits associated with the top 20 affinity groups totaled $2.70 billion at year-end, while total deposits declined year over year.
- Regulatory approval constraints on dividends and holding-company liquidity, and the 2017 accounting treatment of the $263.1 million securitization-related borrowing.
- Developments in the SEC investigation, IRS audit, shareholder records litigation, and the implementation of the prepaid-account rule.