Business context and reporting period
The Bancorp, Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2017. The company operates through The Bancorp Bank, with continuing businesses focused on specialty finance (including securities-backed lines of credit, leasing, SBA lending and loans originated for sale) and payments, including prepaid cards and payment processing. Its legacy commercial lending portfolio is reported as discontinued operations and remains in the process of disposition. Financial amounts below are in U.S. dollars; unless otherwise noted, figures are in millions.
Financial results and condition
| Metric | Q1 2017 / March 31, 2017 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $24.9 million | $20.6 million in Q1 2016 |
| Provision for loan and lease losses | $1.0 million | None in Q1 2016 |
| Non-interest income | $24.2 million | $18.7 million in Q1 2016 |
| Non-interest expense | $37.8 million | $55.1 million in Q1 2016 |
| Continuing-operations net income (loss) | $6.3 million; $0.11 diluted EPS | Loss of $10.6 million; loss of $0.28 diluted EPS in Q1 2016 |
| Discontinued-operations net income (loss) | $1.7 million | Loss of $0.3 million in Q1 2016 |
| Total net income (loss) | $8.0 million; $0.14 diluted EPS | Loss of $10.9 million; loss of $0.29 diluted EPS in Q1 2016 |
| Net interest margin | 2.70% | 2.56% in Q1 2016 |
| Total assets | $4,404.6 million | $4,858.1 million at December 31, 2016 |
| Total loans, net of deferred fees and costs | $1,264.1 million | $1,222.9 million at December 31, 2016 |
| Total deposits | $4,035.8 million | $4,238.3 million at December 31, 2016 |
| Cash and cash equivalents | $739.0 million | $999.1 million at December 31, 2016 |
| Shareholders’ equity | $309.8 million | $299.0 million at December 31, 2016 |
Cash flows in Q1 2017 included $66.2 million used in operating activities, $8.8 million provided by investing activities and $202.7 million used in financing activities. Cash and cash equivalents declined by $260.1 million during the quarter. Deposit outflows and loan funding were significant drivers; the company said it was reducing excess Federal Reserve balances and exiting certain deposit relationships.
Long-term borrowings were zero at March 31, 2017, versus $263.1 million at year-end. The company completed documentation in Q1 to account for a prior loan securitization as a true sale rather than a secured borrowing. Subordinated debentures were $13.4 million. The Bank reported no outstanding borrowings on its $359.6 million FHLB line or $181.0 million Federal Reserve line. The holding company reported approximately $13.8 million of cash reserves.
The Bank was classified as well capitalized. At March 31, 2017, its Tier 1 leverage ratio was 6.74%, Tier 1 risk-based capital ratio 14.28%, total risk-based capital ratio 14.63% and common equity Tier 1 ratio 14.28%. These exceeded the stated well-capitalized thresholds of 5.00%, 8.00%, 10.00% and 6.50%, respectively.
Material changes versus prior comparable period
- The company returned to profitability, with total net income of $8.0 million versus a $10.9 million loss in Q1 2016. Continuing-operations results improved by $16.9 million.
- Net interest income rose 21.0%, attributed primarily to higher loan balances and yields. Average loans and leases increased, including growth in leasing, SBA and SBLOC lending; leasing balances grew 51% year over year.
- Non-interest expense fell 31.5%. A major factor was the absence of $14.3 million of BSA lookback consulting costs incurred in Q1 2016. Salary and employee-benefit expense also fell 8.1%, following staff reductions in 2016.
- Non-interest income benefited from a $5.4 million gain on loan sales, including an approximately $5.0 million gain from a securitization. Prepaid card fees were broadly flat year over year at $13.5 million.
- Non-performing assets increased to $7.0 million from $3.7 million at year-end 2016. Non-performing loans were $6.9 million, up from $3.6 million; non-accrual loans rose to $5.4 million from $3.0 million.
- Deposits declined 4.8% from year-end, while net loans increased. Commercial loans held for sale declined to $480.9 million from $663.1 million, primarily reflecting loan sales.
Outlook, management commentary, risks and unusual items
- Management said Q1 performance was consistent with its business plan and budget. Further expense reductions were in progress, but their timing was difficult to project. The company anticipated at least one additional securitization in 2017; no quantified earnings or revenue guidance was provided.
- Management said it believed the allowance for loan and lease losses was adequate, while noting that future provisions may be needed if economic conditions, delinquencies, recoveries, credit quality or assumptions change. The allowance was $7.3 million, or 0.58% of total loans, at quarter-end.
- The Bank remains subject to FDIC consent orders and restrictions, including limits on certain prepaid-card and payment activities pending regulatory approval of corrective actions. The Bank may not pay dividends without prior FDIC approval; the holding company is also subject to Federal Reserve restrictions on dividends, certain distributions, debt and share redemptions without prior approval.
- The CFPB’s Final Prepaid Card Rule was scheduled to take effect beginning October 1, 2017, with some requirements delayed until October 1, 2018. Management described it as a material regulatory change but said the financial impact could not yet be quantified. Prepaid cards are a major source of deposits and non-interest income.
- The company is cooperating with an SEC investigation concerning its prior financial-statement restatement and said related response costs have been material and are expected to remain material at least through the investigation. An IRS audit of 2012–2014 tax returns was in process. A shareholder books-and-records complaint was pending; counsel said reasonably possible losses could not be estimated.
- A securities class-action settlement for $17.5 million was court-approved in December 2016, with amounts paid fully funded by insurance carriers. The filing also describes historical restatements and prior BSA-related regulatory actions.
- Subsequent to quarter-end, the sale of the company’s minimal European prepaid operations closed on April 3, 2017. Management estimated that the sale would eliminate more than $0.4 million of non-interest expense per quarter. Sales of remaining health savings account operations, representing approximately $100 million, had regulatory approval and were scheduled to close in Q2 2017; the filing cites an approximately $3 million sales price.
- Unrealized losses existed in investment securities, including a $2.9 million unrealized loss on one held-to-maturity single-issuer security. The company concluded that no other-than-temporary impairment existed and said it intended and was able to hold the securities to recover their cost basis.
Most important facts for investors to verify
- Whether higher earnings are sustainable without the unusual Q1 loan-securitization gain and the prior-year BSA lookback expense comparison.
- Credit quality trends, particularly the increase in non-performing loans and the allowance’s coverage of non-performing loans.
- Progress and costs related to FDIC consent-order remediation, the SEC investigation and other regulatory requirements, including the prepaid-card rule.
- Deposit stability and liquidity as the company continues to exit relationships; note the decline in cash and deposits and the $1.22 billion of outstanding loan commitments, primarily SBLOC-related.
- Completion and financial effects of planned asset sales, including remaining discontinued commercial loans and the Q2 2017 HSA transactions.
- Whether the Bank and holding company maintain capital and liquidity while dividend, debt and distribution restrictions remain in effect.