The Bancorp, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Dollar amounts below are in millions unless otherwise noted. The interim statements are unaudited.
Business context
Bancorp is a financial holding company whose principal subsidiary is The Bancorp Bank. Continuing operations focus on specialty lending—including securities-backed lines of credit, leasing, SBA lending and loans originated for sale—and payments services such as prepaid cards, merchant processing and private-label banking. The company is continuing to dispose of its discontinued commercial lending portfolio.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net interest income | $27.2 | $20.9 | $52.1 | $41.4 |
| Provision for loan and lease losses | $0.35 | $1.06 | $1.35 | $1.06 |
| Non-interest income | $18.2 | $9.5 | $42.4 | $28.2 |
| Non-interest expense | $37.4 | $57.1 | $75.1 | $112.3 |
| Income from continuing operations | $17.6 | $(17.8) | $23.9 | $(28.4) |
| Net income (loss), including discontinued operations | $18.9 | $(31.4) | $26.8 | $(42.3) |
| Diluted EPS | $0.34 | $(0.83) | $0.48 | $(1.12) |
Net interest margin rose to 3.10% in Q2 from 2.73% a year earlier, and to 2.90% for the first half from 2.56%. Management attributed the improvement principally to loan growth and higher asset yields following Federal Reserve rate increases; deposit costs rose less. Prepaid card fees, the largest non-interest income component, were $13.2 million in Q2 and $26.8 million for the first half.
Profitability included approximately $12 million of tax benefits in Q2, primarily from reversals of deferred-tax valuation allowances. Non-interest income also included a $2.5 million gain on the sale of health savings accounts and a $3.4 million loss on the sale of European prepaid operations. First-half loan-sale gains included approximately $5.0 million from a securitization. Comparisons with 2016 were affected by a $13.9 million Q2 and $13.1 million first-half decline in the value of the investment in an unconsolidated entity in 2016, and by substantial BSA lookback consulting costs in 2016.
Financial position, liquidity and capital
- At June 30, total assets were $4.30 billion, down from $4.86 billion at year-end 2016. Total deposits were $3.88 billion, down 8.5% from $4.24 billion; management said the decline reflected planned exits from less profitable deposit relationships.
- Loans, net, increased to $1.363 billion from $1.217 billion. Commercial loans held for sale declined to $542.8 million from $663.1 million. Assets held for sale from discontinued operations were $336.2 million, down from $360.7 million.
- Cash and cash equivalents were $546.9 million, compared with $999.1 million at year-end. For the first half, operating cash flow was negative $112.2 million, investing cash flow was positive $22.5 million and financing cash flow was negative $362.4 million; cash fell by $452.1 million.
- Total shareholders’ equity was $331.0 million. Subordinated debentures were $13.4 million; long-term borrowings were $42.7 million versus $263.1 million at year-end. The filing attributes the prior balance primarily to a securitization recorded as a secured borrowing until true-sale documentation was completed in Q1 2017.
- Management reported no outstanding borrowings on its secured credit lines at June 30, with approximately $366.7 million available from the FHLB and $179.8 million from the Federal Reserve. It reported $14.0 million of holding-company cash reserves and approximately $150,000 in quarterly trust-preferred interest payments.
- The company and Bank were reported as well capitalized. At June 30, the Bank’s Tier 1 leverage ratio was 7.62%, Tier 1 risk-based capital ratio 15.04%, total risk-based capital ratio 15.38%, and common equity Tier 1 ratio 15.04%.
Material changes, outlook and risks
- Management said first-half results returned to profitability in line with its business plan and budget. Leasing balances grew 18% year over year, and management reported yields above 6% on that portfolio. Further expense reductions were in progress and could affect the remainder of 2017, but timing was difficult to project. No quantified full-year earnings or revenue guidance was provided.
- Credit indicators warrant attention: non-performing loans rose to $5.6 million from $3.6 million at year-end, including non-accrual loans of $5.1 million versus $3.0 million. Two recently restructured SBA loans totaling $750,000 had subsequently defaulted. The allowance was $7.4 million, or 0.54% of loans; management considered it adequate but noted future provisions could be required.
- The Bank remains subject to FDIC consent-order requirements, including restrictions on certain new prepaid programs and payment activities pending regulatory approval of corrective actions. The Bank may not pay dividends without FDIC approval, and the holding company requires Federal Reserve approval for dividends and certain other payments or actions. These restrictions could limit growth and access to subsidiary funding.
- The CFPB’s prepaid-card rule, with a general effective date delayed to April 1, 2018, could materially change regulation of a business that is a major source of deposits and fees. The company said it was assessing implementation and could not quantify the financial impact. It was also evaluating the CFPB arbitration rule, effective March 19, 2018.
- The SEC investigation concerning the company’s historical financial-statement restatement remained ongoing; the company was cooperating and expected related costs to remain material. An IRS audit of 2012–2014 returns was in process. A shareholder books-and-records demand was denied by the Delaware Court of Chancery on July 27, 2017, subject to appeal; reasonably possible losses were not estimable. The securities class action settlement was approved in 2016, with the $17.5 million payment fully funded by insurers.
- The company’s prior restatement covered 2010 through September 2014 and included $28.5 million of previously unreported discontinued-operation losses. Management cautioned that interim results may not indicate full-year results and that forward-looking statements are subject to risks.
Important facts for investors to verify
- How much of reported earnings is sustainable after the approximately $12 million deferred-tax benefit and the other unusual gains and losses.
- Whether loan growth, asset yields and net interest margin can persist as funding costs and market rates change.
- Whether asset quality deterioration—including rising non-accrual loans and defaults on restructured SBA loans—requires higher reserves.
- Whether deposit outflows, large loan commitments ($1.22 billion, primarily SBLOC-related) and negative first-half operating cash flow affect liquidity; confirm the availability and terms of backup funding.
- Progress toward satisfying FDIC and Federal Reserve requirements, lifting operating and dividend restrictions, and containing ongoing investigation-related costs.
- The final operational and financial effects of the prepaid-card and arbitration rules, and the resolution of the SEC investigation and IRS audit.