The Bancorp, Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This annual filing was signed September 25, 2015 and includes restated financial statements for 2010 through 2014. It is not a standalone fourth-quarter report; quarterly data is included in the filing.
Business context
The Bancorp is a financial holding company whose principal subsidiary is The Bancorp Bank. Continuing operations centered on specialty lending (securities-backed lines of credit, equipment leasing, SBA loans and commercial mortgage loans originated for sale) and affinity-group banking services, especially prepaid cards, payment processing and healthcare accounts. In the third quarter of 2014, the company discontinued its Philadelphia commercial lending operations and began selling that portfolio.
Key financial metrics
| Metric | 2014 | 2013, restated |
|---|---|---|
| Interest income | $70.7 million | $51.2 million |
| Net interest income | $59.4 million | $40.4 million |
| Net interest margin | 2.60% | 2.44% |
| Provision for loan and lease losses | $1.2 million | $0.4 million |
| Noninterest income | $85.0 million | $82.1 million |
| Noninterest expense | $136.0 million | $101.8 million |
| Continuing-operations pretax income | $7.3 million | $20.3 million |
| Continuing-operations net income | $21.8 million | $13.5 million |
| Net income (loss) from discontinued operations | $35.3 million | ($27.9 million) |
| Net income (loss) available to common shareholders | $57.1 million | ($14.4 million) |
| Diluted earnings (loss) per share | $1.49 | ($0.40) |
The 2014 continuing-operations tax benefit was $14.5 million, primarily from reversing valuation allowances. Total 2014 net income also included the discontinued commercial lending business; it should not be read as a measure of recurring earnings.
- Balance sheet at year-end: Assets $4.99 billion; deposits $4.62 billion; cash and cash equivalents $1.11 billion; available-for-sale securities $1.49 billion; shareholders’ equity $319.0 million.
- Lending and credit: Continuing loans, net of deferred fees and costs, were $874.6 million, up from $636.0 million. The allowance for loan and lease losses was $3.6 million, or 0.42% of loans, versus 0.61% in 2013. Nonperforming loans were $2.1 million; net charge-offs were $1.4 million.
- Cash flow: Operating activities used $50.0 million; investing activities used $418.8 million; financing activities provided $347.1 million. Cash and cash equivalents declined $121.7 million during the year.
- Debt and liquidity: Year-end repurchase-agreement liabilities were $19.4 million and subordinated debentures were $13.4 million; no FHLB advances or short-term borrowings were outstanding. The Bank had a $355.8 million FHLB line and additional correspondent-bank lines, with no outstanding balances at year-end. Loan commitments were $709.1 million and standby letters of credit $22.1 million.
- Regulatory capital: Bancorp’s total risk-based capital and leverage ratios were 11.67% and 7.07%; the Bank’s were 10.59% and 6.46%. Both were reported as well capitalized at December 31, 2014.
Material changes versus the prior comparable period
- Net interest income rose 47.2%, mainly from higher average loan and securities balances; net interest margin improved 16 basis points. Average total deposits increased 11.3%, while year-end deposits rose 8.2%.
- Prepaid card fees increased 13.1% to $51.3 million, supported by account and transaction growth. Gain on loan sales declined to $12.5 million from $17.2 million as spreads narrowed.
- Noninterest expense increased 33.6%. The filing cites $8.8 million of 2014 BSA and lookback consulting expenses, higher staffing, data-processing and software costs, and a $3.1 million rise in FDIC insurance expense.
- The commercial loan portfolio was classified as discontinued operations and held for sale. At year-end, assets held for sale totaled $887.9 million, including $867.4 million of loans. In the fourth quarter, loans with approximately $267.6 million face value were transferred to a private securitization entity; the Bank reported a $17.0 million gain after $74.9 million of loan charges reflected in the face-to-book-value difference.
Outlook, risks and unusual items
- Management planned to continue growing specialty lending and the investment portfolio, using proceeds from commercial loan sales to acquire securities and support lending growth. The filing gives no specific earnings, revenue or margin guidance; reinvestment returns depend on market rates and conditions.
- The filing restates prior-period loan-loss recognition. It identifies approximately $28.5 million of previously unreported losses and $12.7 million of losses on loans resolved after year-end but recorded in 2014. The restatements principally involved discontinued commercial lending. The 2012 and 2013 annual statements and quarterly statements through September 2014 were identified as not reliable.
- The Bank was subject to 2012 and 2014 FDIC consent orders, including BSA/AML remediation requirements and restrictions on certain new payment-processing and prepaid-card activities. An August 2015 amendment required prior FDIC approval for Bank dividends. A May 2015 Federal Reserve supervisory letter restricted holding-company dividends, debt incurrence, stock redemptions and certain payments without prior approval. These post-year-end actions are included as subsequent developments.
- Management reported material weaknesses in credit-file maintenance and loan evaluation, and in identifying discontinued operations. Management concluded disclosure controls were ineffective; the independent auditor issued an adverse opinion on internal control over financial reporting, while expressing an unqualified opinion on the financial statements.
- A securities class action was pending, alleging misleading statements about problem loans, reserves and BSA compliance. The company said the case was preliminary and that reasonably possible losses could not be estimated. The FDIC was also reviewing certain third-party card-program practices that could raise consumer-protection concerns.
- Other material exposures include reliance on prepaid-card and affinity-group deposits and fee income, concentration among major affinity relationships, loan-sale valuation and execution risk, interest-rate sensitivity, fraud and cybersecurity, third-party service-provider risk, and regulatory compliance costs. The company had no cash-dividend history and did not plan common dividends for the foreseeable future.
Important facts for investors to verify
- Review the restatement notes and revised annual and quarterly statements, including the timing and attribution of loan losses, the $12.7 million subsequent-resolution charge and the 2014 discontinued-operations result.
- Assess progress in remediating the credit-file and discontinued-operations control weaknesses, and whether the auditor or regulators identify further deficiencies.
- Confirm the status and scope of the consent orders, BSA lookback costs, business restrictions, and required regulatory approvals for dividends and debt payments.
- Reconcile commercial-loan sale proceeds, remaining held-for-sale assets, the securitization structure and the valuation of the Bank’s $193.6 million investment in the unconsolidated entity.
- Evaluate recurring profitability apart from discontinued operations and the tax benefit, and monitor the expense base, prepaid-card concentration, deposit stability, capital and liquidity.