The Bancorp, Inc. — FY 2012 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2012, not just the fourth quarter. The Bancorp is a financial holding company whose revenue and income are generated through The Bancorp Bank. Its business combines commercial and consumer lending, primarily in the Philadelphia-Wilmington region, with national affinity-group banking services, including prepaid cards, healthcare accounts, merchant processing and wealth management.
Financial performance and position
- Profitability: Net income was $16.6 million, or $0.50 per diluted share, versus $8.9 million, or $0.28 per diluted share, in 2011. Return on average assets was 0.48% (0.31% in 2011) and return on average common equity was 5.86% (3.54%).
- Interest and fee income: Net interest income increased to $85.4 million from $76.4 million. Noninterest income was $49.6 million versus $30.5 million, led by prepaid card fees of $33.3 million, up $14.6 million year over year. Interest income was $96.9 million; interest expense was $11.4 million.
- Margins and costs: Net interest margin fell to 2.58% from 2.96%, as growth in low-yield Federal Reserve deposits and lower loan and investment yields outweighed lower deposit costs. Noninterest expense rose 22.1% to $88.2 million, including higher staffing, data processing, legal expense and losses/write-downs on other real estate owned.
- Credit costs and asset quality: The provision for loan and lease losses increased to $22.4 million from $21.5 million. Net charge-offs were $19.0 million, compared with $16.0 million, and the allowance was $33.0 million, or 1.74% of loans (1.69% in 2011). Nonperforming loans rose to $29.6 million from $21.7 million; nonperforming assets were $33.9 million, or 0.92% of assets. The allowance covered 111.53% of nonperforming loans, down from 136.33%.
- Balance sheet and funding: Total assets increased 22.9% to $3.70 billion. Loans before allowance were $1.90 billion; deposits grew 23.5% to $3.31 billion. Cash and cash equivalents were $968.1 million, including $948.1 million in interest-earning Federal Reserve deposits. Investment securities totaled $763.2 million, up 63.7%.
- Liquidity, debt and cash flow: Operating cash flow was $33.0 million; investing cash flow was negative $472.4 million and financing cash flow was positive $658.2 million. The company reported $13.4 million of subordinated debentures and $18.5 million of repurchase-agreement funding at year-end, no FHLB advances and no outstanding balances on its borrowing lines. It reported $380 million of FHLB capacity and $49 million of correspondent-bank lines.
- Capital: At year-end, the Bank’s Tier 1 leverage, Tier 1 risk-based and total risk-based capital ratios were 7.25%, 11.91% and 13.16%, respectively; both the Bank and holding company were classified as well capitalized. Shareholders’ equity was $336.7 million.
Material changes and notable items
- Net income increased by $7.7 million year over year, reflecting higher prepaid card and other fee income, higher net interest income and lower deposit costs; expense growth and credit provisions partly offset these gains.
- Prepaid card transaction growth drove the largest fee-income increase. Average deposits rose to $3.15 billion from $2.56 billion, while average interest-earning assets rose 28.5% to $3.38 billion. Deposit growth outpaced deployment into loans and investments, contributing to elevated low-yield cash balances.
- In December, the company issued 4.0 million common shares at $11 per share, generating approximately $41.7 million of net proceeds. It issued another 175,790 shares under the offering’s over-allotment option in January 2013. No shares were repurchased in 2012.
- The company acquired European prepaid-processing software, contracts and personnel for approximately $1.8 million in November 2012; the activities were described as not material to 2012 operations. Purchase-price allocation was preliminary.
- The Bank paid a $172,000 civil money penalty in 2012 under an administrative agreement that also requires additional quarterly reporting to the FDIC.
Outlook, risks and contingencies
- Management’s stated strategy is to grow commercial lending and affinity-group relationships, fund growth with lower-cost deposits, and expand fee income, especially from prepaid cards. The filing provides no specific numerical earnings or growth guidance.
- Key risks include the concentration of commercial, construction and commercial mortgage loans (about 71% of the portfolio), geographic concentration in the Philadelphia-Wilmington area, rising nonperforming loans and charge-offs, and uncertainty in loan-loss estimates.
- Affinity-group dependence is material: deposits from the top 20 affinity groups totaled $1.7 billion. Termination of a significant relationship could raise funding costs or require asset sales. The filing also flags compliance oversight of third-party relationships as a risk.
- Other risks include interest-rate and margin pressure, competition, deposit seasonality, operational and cybersecurity dependence on internet systems and service providers, and potential regulatory costs. The company said the Bank was generally asset-sensitive, but modeled effects depend on assumptions and actual results may differ.
- Off-balance-sheet commitments included $463.4 million of loan commitments and $13.4 million of standby letters of credit; many may not be drawn. Routine legal proceedings were not expected by management to have a material adverse effect.
- The company had not paid common dividends and said it did not plan to do so for the foreseeable future. Bank dividends to the holding company are subject to regulatory and statutory limits.
Most important facts for investors to verify
- Whether prepaid-card fee growth and affinity-group deposit growth continue, and how concentrated those deposits remain.
- Trends in nonaccrual loans, charge-offs, troubled debt restructurings and construction/commercial credit quality; assess whether the allowance remains adequate.
- Whether excess Federal Reserve balances can be redeployed profitably without weakening liquidity, and whether net interest margin stabilizes or continues to decline.
- Progress on the FDIC administrative agreement and any further regulatory findings, compliance costs or restrictions.
- Completion and financial effect of the European prepaid-business acquisition, including the final purchase-price allocation.
- Confirm reported quarterly trends: fourth-quarter 2012 net income available to common shareholders was $5.2 million, versus $3.3 million in fourth-quarter 2011; fourth-quarter provision was $7.4 million.