The Bancorp may have turned an important corner, but it will take more time before the Wilmington, Del., company returns to a state of normalcy.
The $4.7 billion-asset company put an end to its recent accounting woes last week by filing a batch of long-overdue financial reports. The filings had been delayed by a credit review, stemming from the discovery earlier this year of $28 million in unreported loan losses.
The filings, while certainly welcome news to investors, revealed a number of significant challenges for management.
The company's planned sale of its $1.1 billion commercial loan book is months behind schedule. Consulting expenses are running higher than expected, as the company works to address a June 2014 consent order. Profit is razor slim, decreasing to just $174,000 in the second quarter, compared to $10.3 million a year earlier.
Working through such a quagmire of regulatory and financial issues will take time, industry observers said. The ongoing issues, however, are certain to test the patience of investors.
"It's just more brain drain," said William Wallace, an analyst at Raymond James, referring to opportunities lost at the company continues to patch itself up. Management's "time and energy would be better focused on building the niche businesses."
The Bancorp, formed 15 years ago as a typical commercial bank, wasn't always in such rough shape. In recent years, it shifted its focus to selling back-end financial services such as payment processing and prepaid cards. The company touts big-name clients in financial technology, including Google, PayPal and T-Mobile.
"You can't really compare us" to similar-sized institutions, Frank Mastrangelo, the company's chief executive, told investors during a conference call last week. "When we look for peers … we have to look to the largest banks in the country and their card-issuing portfolios."
Fee-based revenue surged as the company's prepaid business expanded. Noninterest income has increased nearly fivefold, to almost $46 million during the first half of this year, compared to what the company earned over the same period in 2010, according to regulatory filings.
But the solid run recently took a nasty turn. The Federal Deposit Insurance Corp. hit the company with an enforcement action last year that curbed the growth of its prepaid business. The order also required management to beef up the company's money-laundering controls.
A flurry of unwelcome — and seemingly unrelated — news followed. The FDIC assessed the company a surcharge tied to the agency's treatment of prepaid cards. The company then discovered several million dollars in unreported loan losses after it shut down its commercial bank.
"It's been a difficult, long journey," Mastrangelo said during the recent conference call.
Investors will be looking for a path forward when the company reports its third-quarter earnings, industry observers said. Shareholders should keep an eye on the company's progress liquidating its remaining commercial loan book.
The company, as of June 30, had only liquidated about a third of its $1.1 billion commercial loan book, according to its recent filings. The sale of that portfolio was originally expected to conclude earlier this year.
"They've got to move these loans," Wallace said. "They've got to get the sale done."
The Bancorp will also be pressed to provide details about prepaid card revenue, said Frank Schiraldi, an analyst at Sandler O'Neill.
During the recent investor call, Mastrangelo said he expected the prepaid business to post an "organic double-digit growth rate."
That took analysts by surprise, given the restrictive terms of the company's consent order.
"Generally, I was surprised by the expectation of continued double-digit growth," Schiraldi said. He wrote in a separate note to clients that such growth, though "hard to believe," would likely come from providing services to larger prepaid clients.
Despite recent woes, The Bancorp remains well-positioned for long-term growth as the prepaid and payments industries continue to mature, industry observers said.
"I think prepaid is a business that will be viable, and will be real and lasting for The Bancorp — and for anyone else in the business," Wallace said.