The Bancorp, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; filed March 16, 2018. This is an annual report, not a standalone fourth-quarter filing. The Bancorp is a financial holding company whose primary subsidiary, The Bancorp Bank, generates most of its revenue and income. Its continuing businesses include specialty lending, payments and prepaid-card services, and affinity banking.
Financial performance and position
| Metric | 2017 | 2016 |
|---|---|---|
| Net interest income | $106.7 million | $90.0 million |
| Net interest margin | 3.04% | 2.74% |
| Non-interest income | $91.5 million | $42.5 million |
| Non-interest expense | $154.9 million | $198.6 million |
| Continuing-operations net income (loss) | $17.3 million | ($56.8 million) |
| Net income (loss) available to common shareholders | $21.7 million; $0.39 diluted EPS | ($96.5 million); ($2.17) diluted EPS |
Amounts are for the year ended December 31 and are in U.S. dollars. The 2017 quarterly table reports a fourth-quarter continuing-operations loss of $13.3 million and total net loss of $12.4 million; a $23.5 million income-tax expense contributed to the quarterly loss.
- Income drivers: Loan growth and higher interest rates lifted net interest income. Prepaid-card fees were $53.4 million, up 4%. Loan-sale gains were $17.9 million, up $15.0 million year over year, primarily from securitizations.
- Expense and tax: Expense fell $43.7 million, mainly because BSA/lookback consulting ended in 2016 and staffing and operating costs declined. The 2017 tax expense was $23.1 million, including a $17.3 million impact from remeasuring deferred taxes after the federal rate reduction. Management estimated a combined federal and state rate of about 27% for 2018.
- Assets, loans and deposits: Total assets were $4.71 billion, down from $4.86 billion. Total deposits were $4.26 billion, up 0.5%. Loans, net of deferred fees and costs, were $1.39 billion, up from $1.22 billion; commercial loans held for sale were $503.3 million. Available-for-sale securities were $1.29 billion.
- Credit quality: The allowance for loan and lease losses was $7.1 million, or 0.51% of loans, versus 0.52% in 2016. Non-performing assets were $4.7 million, up from $3.7 million; net charge-offs were $2.2 million, or 0.12% of average loans.
- Cash flow and funding: Cash and cash equivalents were $908.9 million, versus $999.1 million. Net cash used in operating activities was $34.1 million; investing activities used $78.3 million, including net loan growth and securities activity. Financing activities provided $22.3 million. The filing describes deposits as the primary funding source.
- Debt, liquidity and capital: Year-end liabilities included $13.4 million of subordinated debentures and $42.3 million of long-term borrowings; no amounts were outstanding on the Bank’s $294.4 million FHLB and $327.6 million Federal Reserve credit lines. Company and Bank total risk-based capital ratios were 17.09% and 16.59%; leverage ratios were 7.90% and 7.61%. Both were classified as well capitalized.
Material changes and outlook
- Continuing-operations results improved from a large 2016 loss. That comparison is affected by 2016’s $37.5 million reduction in the fair value of the Walnut Street investment and substantial BSA/lookback and other expenses.
- Management said further rate increases were expected to support higher 2018 net interest income, partly offset by smaller increases in funding costs. This is directional commentary, not quantified earnings guidance.
- The discontinued Philadelphia commercial lending portfolio continued to run down. Discontinued assets were $304.3 million at year-end, including $270.0 million of net loans. Proceeds from repayments or sales were intended for reinvestment in continuing lending businesses. A mall property acquired through the portfolio was expected to be sold in 2018.
- Most deposits were classified as brokered because they were obtained with third-party assistance. Management described them as stable and low-cost, but loss of well-capitalized status could restrict the Bank’s ability to accept or renew brokered deposits.
Risks, contingencies and unusual items
- Regulatory orders: FDIC consent orders and a Federal Reserve supervisory letter impose compliance obligations and require regulatory approval for Bank dividends to the holding company and holding-company dividends, debt, and share redemptions. Restrictions also limit certain new prepaid-card and merchant-payment relationships pending regulatory review of BSA remediation.
- Penalty and restitution: A $2.0 million FDIC civil money penalty, paid and recorded as expense in 2017, relates to processor fee errors affecting signature-based point-of-sale transactions from 2010–2014. The processor reimbursed affected consumers; the Bank was completing related plan, documentation, and audit requirements. A separate corrective action plan under an earlier order could require restitution; the amount was not clear in the filing.
- Legal and examination matters: The SEC investigation into historical financial-statement restatements remained open, with legal costs expected to continue. An IRS audit of 2011–2014 returns was also in process. Earlier restatements involved recognition of losses on discontinued commercial loans; management said the related control weaknesses had been remediated.
- Legacy credit exposure: The Walnut Street investment was valued at $74.5 million and depends on estimated cash flows and loan recoveries. The filing also describes a $36.9 million discontinued-operation construction loan that became delinquent and entered borrower bankruptcy in early 2018; management believed no principal loss would result, but collection remained in progress.
- Other risks: Prepaid-card fees and deposits are significant to the business; regulation, compliance costs, fraud, third-party service providers, competition, interest-rate movements, credit losses, and the valuation or sale of held-for-sale loans could affect results. The filing expected the new CECL credit-loss standard, effective in 2020, to increase the allowance, with the amount undetermined.
Most important facts for investors to verify
- Whether BSA remediation is accepted by the FDIC and Delaware regulator, and whether restrictions on new business and dividend transfers are lifted.
- The sustainability of earnings excluding tax remeasurement, loan-sale gains, asset-sale results, and other nonrecurring items; also verify the fourth-quarter tax impact.
- Credit performance and valuation of the discontinued portfolio, Walnut Street exposure, and the delinquent construction loan, including actual proceeds from sales and repayments.
- Deposit stability and funding costs, particularly the consequences of brokered-deposit classification and any change in the Bank’s capital status.
- The extent of future compliance, legal, restitution, and CECL-related costs. The filing’s audited financial statements received an unqualified opinion, and the auditor also reported effective internal control over financial reporting as of year-end.