The Bancorp, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Unless stated otherwise, financial amounts below are in millions of dollars.
Business context and reporting period
The Bancorp is a financial holding company whose primary subsidiary is The Bancorp Bank. Continuing operations focus on specialty lending—including securities-backed lines of credit (SBLOC), leasing, SBA lending and commercial loans originated for sale—and payments, including prepaid cards and transaction processing. The company is winding down its legacy commercial lending business; its remaining portfolio is reported as discontinued operations and assets held for sale.
Financial performance and condition
| Metric | Q1 2016 / March 31, 2016 | Comparable / prior period |
|---|---|---|
| Net interest income | $20.6 | $16.5 in Q1 2015 |
| Net interest margin | 2.56% | 2.26% in Q1 2015 |
| Non-interest income | $18.7 | $20.8 in Q1 2015 |
| Non-interest expense | $55.1 | $40.9 in Q1 2015 |
| Provision for loan and lease losses | $0 | $0.7 in Q1 2015 |
| Net loss from continuing operations | $10.6; $0.28 diluted loss per share | $1.8 loss; $0.05 diluted loss per share |
| Net income (loss), including discontinued operations | $10.9 loss; $0.29 diluted loss per share | $0.2 income in Q1 2015 |
| Total assets | $4,379.7 | $4,765.8 at December 31, 2015 |
| Total deposits | $3,999.0 | $4,414.8 at December 31, 2015 |
| Shareholders’ equity | $315.6 | $320.0 at December 31, 2015 |
Interest income rose 20.0% to $23.7, mainly on higher loan balances and yields. Average loans and leases increased to $1.50 billion from $1.13 billion in Q1 2015; average loan yield rose to 4.22% from 3.78%. Prepaid card fees increased 3.4% to $13.6, while loan-sale income weakened: the company reported a $1.4 loss on loan sales versus a $1.7 gain a year earlier. A $2.0 gain on investment-security sales partly offset lower other income.
Higher expenses drove the larger loss. BSA lookback consulting expense was $14.3, up $8.6 year over year; salaries and benefits rose $4.1. Management attributed the increase in staffing costs to compliance, lending and business-development needs. The filing also reports a $3.8 loss on interest-rate swaps in Q1.
Operating cash flow was $201.7, investing cash flow was negative $164.3, and financing cash flow was negative $416.1. Cash and cash equivalents fell $378.6 to $776.5. The operating cash inflow included substantial loan-sale activity and a $34.4 increase in other liabilities; financing outflows principally reflected a $415.8 net deposit decrease.
Loans, net of the allowance, were $1,109.7, up from $1,073.7 at year-end. The allowance was $4.4, or 0.39% of loans. Non-performing loans were $2.7, including $0.8 past due at least 90 days and still accruing; non-accrual loans were $1.9. The company reported no other real estate owned.
Subordinated debentures were $13.4; no Federal Home Loan Bank advances or borrowings under the Bank’s credit lines were outstanding. The company reported $600.6 of FHLB and $132.6 of Federal Reserve borrowing capacity. At March 31, the company and Bank exceeded the regulatory thresholds shown for a “well capitalized” institution: total risk-based capital ratios were 14.56% and 13.96%, respectively. The company’s holding-company cash reserves were approximately $9.4.
Material changes versus comparable periods
- Net interest income improved, but the company moved from a $0.2 total net income in Q1 2015 to a $10.9 net loss in Q1 2016. The main drivers were higher BSA lookback and other expenses and weaker loan-sale results.
- Deposits declined $415.8, or 9.4%, from year-end, as management exited relationships it considered insufficiently profitable. Assets declined $386.1 from year-end; cash and cash equivalents fell while investment securities increased to $1,252.8 from $1,070.1.
- Assets held for sale from discontinued operations fell to $536.5 from $583.9, mainly due to loan paydowns. The associated discontinued operation recorded a $0.3 loss in Q1 2016, compared with $2.0 income in Q1 2015.
- Non-performing loans increased to $2.7 from $2.3 at year-end, driven by higher loans past due 90 days or more; non-accrual loans were broadly stable.
Outlook, risks and unusual items
- Management outlook: Management expected the BSA lookback to be substantially complete in Q2 2016 and said the related expenses should be substantially concluded then. It expects growth in continuing businesses to offset compliance costs over time, but gives no specific earnings or revenue guidance. Results for the quarter may not indicate full-year results.
- Regulatory restrictions: The Bank is subject to FDIC consent orders covering BSA compliance and consumer account practices. Certain prepaid-card and payment activities are restricted pending remediation and regulatory approval. The Bank cannot pay dividends without prior FDIC approval; the holding company also needs Federal Reserve approval for dividends and specified payments or transactions. The Federal Reserve approved the March 2016 trust-preferred interest payment; future payments require approval.
- Potential restitution and legal exposure: Under the 2015 FDIC consent order, the Bank may owe restitution to affected prepaid cardholders; the amount cannot be predicted. A securities class action alleges misleading disclosures concerning problem loans, loan-loss reserves and BSA compliance. The company says the case is preliminary, intends to defend it, and cannot estimate reasonably possible losses.
- Legacy portfolio and valuation: The company is still attempting to sell $523.6 of discontinued loans. It also holds a $177.2 investment in an unconsolidated entity related to previously sold loans. Significant assets, including held-for-sale loans and this investment, rely on Level 3 valuation inputs and management estimates.
- Other notable disclosures: The company previously restated financial statements for periods from 2010 through September 2014, principally for losses in the discontinued commercial loan portfolio. It reported no other-than-temporary impairment charges on investment securities in Q1 2016. Loan commitments, including unused lines, totaled $872.8 at March 31.
Investor verification points
- Track completion of the BSA lookback, remaining consulting costs, FDIC remediation milestones and any approval to resume Bank dividends.
- Verify whether prepaid-card restitution is required and monitor the amount, if determined, and the progress of the securities class action.
- Assess deposit trends, liquidity usage, the $872.8 of lending commitments and the effect of further planned deposit exits.
- Review loan-sale margins and credit spreads, as well as the timing and proceeds from dispositions of the remaining discontinued loan portfolio.
- Evaluate credit quality, allowance adequacy and the assumptions behind Level 3 valuations, especially for held-for-sale loans and the Walnut Street-related investment.