The Bancorp, Inc. — Q3 2017 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and nine months ended September 30, 2017. Bancorp operates through The Bancorp Bank, with specialty lending and payments as its continuing businesses; it is also winding down its discontinued commercial lending portfolio.
Financial performance and condition
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net interest income | $27.9m | $23.5m | $80.0m | $65.0m |
| Non-interest income | $29.0m | $19.9m | $71.4m | $48.1m |
| Net income (loss), including discontinued operations | $7.3m | ($25.6m) | $34.1m | ($67.7m) |
| Continuing-operations net income (loss) | $6.8m | ($1.5m) | $30.7m | ($29.8m) |
| Net interest margin, taxable-equivalent basis | 3.26% | 2.69% | 3.02% | 2.57% |
| Non-interest expense | $43.9m | $44.2m | $119.0m | $156.4m |
- Q3 diluted earnings per share were $0.13, versus a loss of $0.54 a year earlier. Nine-month diluted earnings per share were $0.61, versus a loss of $1.65.
- Q3 loan-sale gains were $11.4m versus $0.9m; nine-month gains were $17.5m versus $0.8m, reflecting loan securitizations. Prepaid card fees were broadly flat year to date at $39.3m.
- At September 30, total assets were $3.99bn, down from $4.86bn at year-end 2016; deposits were $3.57bn, down $672.9m. Management attributed the deposit reduction primarily to exiting less profitable relationships.
- Loans, net of deferred fees and before the allowance, were $1.374bn, up from $1.223bn at year-end. SBLOC balances were $720.3m, up from $630.4m.
- Cash and cash equivalents were $398.9m, compared with $999.1m at year-end. Nine-month operating cash flow was $74.7m; financing cash outflow was $673.2m, primarily reflecting a $672.9m net decrease in deposits.
- Long-term borrowings were $42.5m versus $263.1m at year-end, primarily reflecting completion of true-sale accounting for a securitization. Subordinated debentures remained $13.4m. Shareholders’ equity was $339.5m.
- Regulatory capital ratios exceeded “well capitalized” thresholds: Bank Tier 1 leverage was 8.05%, Tier 1 risk-based capital 15.95%, total risk-based capital 16.31%, and CET1 15.95%.
- The allowance for loan and lease losses was $7.3m, or 0.53% of loans. Nonperforming loans were $5.3m, up from $3.6m at year-end; net charge-offs for the first nine months were $1.2m.
Changes, outlook and risks
- Management attributed the return to profitability to loan growth and higher yields, expense reductions, the end of 2016 BSA lookback costs, and lower discontinued-operation credit charges. Q3 net interest income rose 18.5% year over year; nine-month net interest income rose 23.1%.
- Nine-month non-interest expense fell $37.4m, mainly because $29.1m of BSA lookback consulting expense did not recur, alongside staffing and operating cost reductions. Q3 expense included a $2.5m civil money penalty accrual and a $1.1m data-processing contract exit fee; management expects future savings from the contract change to exceed the exit fee.
- No specific earnings or financial guidance is provided. Management said further expense reductions are being pursued, but their timing is difficult to project. It cautioned that interim results may not indicate full-year results.
- The FDIC notified the Bank on October 17, 2017 that it intended to pursue restitution and a civil money penalty of up to $2.576m over a third-party processor’s historic fee error. The company accrued $2.5m in Q3 for the penalty. Processor-funded consumer reimbursements are indemnified; the penalty is not.
- The Bank remains subject to regulatory orders and restrictions, including limits on certain new prepaid and payment activities pending FDIC approval of corrective actions. The Bank and company cannot pay dividends without regulatory approval; trust-preferred interest payments also require Federal Reserve approval. The company reports that the September 2017 interest payment was approved.
- The CFPB prepaid-card rule was delayed to April 1, 2018. Management described it as a material regulatory change, was still evaluating its impact, and said the financial effect could not yet be quantified.
- An ongoing SEC investigation concerns the company’s prior financial-statement restatement; associated costs have been material and are expected to continue. The IRS is auditing 2012–2014 returns. A separate dispute over Walnut Street payment priorities could, if resolved adversely, result in an estimated $8m loss; management believes that outcome is unlikely.
- Legacy discontinued-operation assets held for sale were $315.0m, and the Walnut Street investment was $107.7m; both rely on significant unobservable fair-value inputs. Management continues efforts to sell the remaining portfolio.
- Management reported disclosure controls effective at the reasonable-assurance level and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether loan-sale gains and other fair-value-related income are repeatable, and how much ongoing earnings depend on securitizations.
- The pace and profitability of core loan growth, particularly SBLOC, SBA, and leasing, alongside trends in delinquencies, nonperforming loans, charge-offs, and allowance adequacy.
- Deposit stability and funding needs after the planned relationship exits, including reliance on prepaid and other third-party-generated deposits and availability of secured borrowing lines.
- Final FDIC penalty and restitution outcomes, progress in satisfying regulatory orders, and any changes to restrictions or required approvals.
- The resolution and valuation implications of the Walnut Street dispute, as well as developments in the SEC investigation and IRS audit.
- The operational and financial effects of the CFPB prepaid-card rule and whether cost savings from expense and data-processing initiatives materialize.