The Bancorp, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing was signed March 15, 2016. The company is a financial holding company whose primary subsidiary is The Bancorp Bank.
Business context and reporting period
The company focuses on specialty lending and affinity-group banking, including prepaid cards, payment processing and private-label banking. Continuing lending includes securities-backed lines of credit (SBLOC), equipment and fleet leasing, SBA loans, and loans originated for sale into capital markets. Commercial lending operations were discontinued in 2014; the remaining portfolio is reported as discontinued operations and held for sale.
Financial performance and condition
| Metric | 2015 | 2014 |
|---|---|---|
| Interest income | $83.5 million | $70.7 million |
| Net interest income | $69.9 million | $59.4 million |
| Net interest margin | 2.37% | 2.60% |
| Noninterest income | $133.1 million | $85.0 million |
| Noninterest expense | $194.1 million | $136.0 million |
| Continuing-operations net income | $5.4 million | $21.8 million |
| Discontinued-operations net income | $8.1 million | $35.3 million |
| Net income available to common shareholders | $13.4 million | $57.1 million |
| Diluted earnings per share | $0.35 | $1.49 |
- 2015 noninterest income included a $33.5 million gain on the sale of most of the health savings business and a $14.4 million gain on municipal securities sales. Prepaid card fees were $47.5 million, down from $51.3 million.
- Net interest income rose 17.7%, mainly on loan growth. Average loans and leases increased 37.9%; the net interest margin fell 23 basis points, reflecting lower loan yields, reduced discontinued-asset balances and substantial balances at the Federal Reserve.
- Noninterest expense rose 42.7%, including $41.4 million of BSA and transaction-lookback consulting expense, up from $8.8 million in 2014. The 2015 total also included a $3.0 million regulatory civil money penalty.
- At year-end, total assets were $4.77 billion, deposits $4.41 billion, shareholders’ equity $320.0 million, and cash and cash equivalents $1.16 billion. Deposits declined $207.0 million, or 4.5%, from year-end 2014.
- Continuing loans, net of deferred fees and costs, were $1.08 billion; commercial loans held for sale were $489.9 million. The discontinued commercial loan portfolio was $568.7 million net. Available-for-sale securities were $1.07 billion, down from $1.49 billion.
- The allowance for loan and lease losses was $4.4 million, or 0.41% of continuing loans. Nonperforming loans were $2.3 million; net charge-offs were $1.3 million.
- Operating cash flow was negative $234.9 million; investing cash flow was positive $501.3 million and financing cash flow was negative $225.5 million. Cash and cash equivalents increased $40.9 million during the year.
- The company and Bank were reported as well capitalized. The company’s total risk-based, Tier 1 risk-based and leverage ratios were 14.88%, 14.67% and 7.17%; the Bank’s were 14.18%, 13.98% and 6.90%.
- The Bank had no outstanding borrowings on its secured credit lines at year-end. The company reported $13.4 million of subordinated debentures. The filing does not identify material conventional funded debt beyond these debentures and routine short-term items.
Material changes versus the prior comparable period
- Total net income declined to $13.4 million from $57.1 million. Continuing-operations net income fell to $5.4 million from $21.8 million; discontinued-operations income fell to $8.1 million from $35.3 million.
- The 2014 comparison included a $14.5 million income tax benefit from reversal of valuation allowances. In 2015, continuing-operations income tax expense was $1.5 million.
- Loan growth increased interest income, while the sale of the health savings business and municipal securities materially boosted 2015 noninterest income. Compliance and lookback costs, other expense increases and the decline in prepaid card fees offset much of these gains.
- Investment securities declined as the company redeployed funds toward loans. The discontinued loan portfolio also declined, from $867.4 million to $568.7 million.
- The filing restated financial statements for periods from 2010 through September 2014, principally for earlier recognition of losses in discontinued commercial lending. It included $28.5 million of previously unreported discontinued-operations losses and moved $12.7 million of 2015 losses for resolved loans into 2014.
Outlook, risks, contingencies and unusual items
- Management expected the BSA transaction lookback to conclude by the second quarter of 2016, while acknowledging that remaining costs could not yet be estimated. It expected savings from the health savings business sale to benefit earnings in the latter part of 2016 and anticipated prepaid fee growth from existing and new clients.
- The company planned to continue growing specialty lending, exit selected nonstrategic deposit relationships and invest proceeds from discontinued loan sales into continuing lending and securities. These are management expectations, not formal earnings guidance.
- FDIC consent orders restrict certain new payment-processing and prepaid-card activities pending regulatory review of corrective actions. The FDIC also requires prior approval for Bank dividends; a Federal Reserve supervisory letter requires prior approval for parent-company dividends, debt incurrence, share repurchases, certain distributions and trust-preferred interest payments.
- A 2015 FDIC consent order imposed a $3 million penalty and requires consumer complaint and electronic-funds-transfer error-claim remediation. Potential restitution is unquantified; the company believes third-party agreements may provide reimbursement.
- The Bank received a “needs to improve” CRA rating, triggering restrictions on certain branches, mergers, changes in control and new financial activities. The company also cited a class-action securities lawsuit; counsel said reasonably possible losses could not be estimated.
- The filing disclosed prior material weaknesses in financial reporting controls related to loan-loss timing and recognition. Management said they had been remediated; management and the independent auditor reported effective internal control over financial reporting at December 31, 2015, and the financial-statement audit opinion was unmodified.
- Key risks include dependence on affinity-group and prepaid-card deposits and fees, regulatory restrictions and compliance costs, credit quality and loan-sale valuations, interest-rate sensitivity, third-party and cyber risks, and the ability to sell or reinvest proceeds from discontinued loans. The company paid no common dividends and did not plan to do so for the foreseeable future.
Most important facts for investors to verify
- Whether the BSA lookback and consent-order corrective actions were completed on schedule, and whether the regulators lifted business and dividend restrictions.
- Actual 2016 compliance, lookback and potential cardholder restitution costs, including whether third-party reimbursement is realized.
- Collection, valuation and sale outcomes for the remaining $568.7 million discontinued loan portfolio and the $178.5 million investment in the related unconsolidated entity.
- How much recurring earnings remain after excluding the health savings and securities gains, and whether prepaid-card revenue and margins recover.
- Loan growth, credit performance, allowance adequacy, deposit stability and liquidity deployment, especially given the 0.41% allowance-to-loans ratio and large affinity-group deposit exposures.
- Developments in the securities lawsuit, CRA restrictions and the company’s continuing internal-control remediation.