TBBK

Business Context and Reporting Period

Company: The Bancorp, Inc. (a Delaware financial holding company with a wholly owned subsidiary, The Bancorp Bank).
Reporting Period: Quarterly period ended March 31, 2011 (Form 10-Q).
Business Model: Provides retail and commercial banking services regionally (Philadelphia-Wilmington area) and nationally via affinity group and private label banking (prepaid cards, health savings accounts, merchant processing). The primary delivery medium is the Internet.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability Improvement: Net income increased to $2.7 million from $2.2 million year-over-year. More significantly, net income available to common shareholders turned from a loss of $4.1 million in Q1 2010 to a profit of $2.7 million in Q1 2011. The prior year loss was heavily impacted by a $5.8 million charge for the accretion of TARP preferred stock dividends.
• Revenue Growth: Net interest income rose 11.8% to $18.2 million, driven by higher loan and investment balances and a lower cost of funds (0.41% vs 0.70%). Non-interest income increased 41% to $7.7 million, primarily due to a 69% surge in stored value (prepaid card) income and a $485,000 legal settlement.
• Expense Increases: Non-interest expenses rose 20.7% to $17.2 million. Key drivers included a 48% increase in data processing costs (due to transaction volume and platform upgrades), a 60% increase in FDIC insurance expense, and higher salaries/benefits.
• Balance Sheet Expansion: Total assets grew 18% to $2.84 billion, and deposits increased 25% to $2.53 billion. This growth was fueled by seasonal affinity group deposits and a public offering of common stock.
• Capital Raise: In March 2011, the company issued 7.015 million shares of common stock, raising approximately $54.5 million in net proceeds.

Outlook, Risks, and Contingencies

• Regulatory Contingency: The FDIC has notified the Bank that a formal action is anticipated regarding compliance management issues, including past overdraft charging practices and collections practices. The Bank expects an order requiring restitution and potential civil money penalties. The Bank's customer has contractually indemnified the Bank for portions of these liabilities.
• Asset Quality: Non-performing assets totaled $20.6 million (0.73% of total assets), a slight increase from $19.6 million at year-end. Non-accrual loans decreased to $14.2 million from $15.3 million. The allowance for loan and lease losses was $25.8 million, or 1.58% of total loans.
• Investment Portfolio: The company recorded a $75,000 other-than-temporary impairment (OTTI) charge on a pooled trust preferred security. Management believes remaining unrealized losses on held-to-maturity securities are temporary and driven by interest rate changes.
• Liquidity: The company maintains strong liquidity with $854 million in cash and cash equivalents. It eliminated all short-term borrowings and Federal Home Loan Bank advances by March 31, 2011, due to deposit growth.
• Capital Ratios: As of March 31, 2011, the Bank was "well capitalized" under FDIC regulations, with a Tier 1 leverage ratio of 6.00% and a total capital to risk-weighted assets ratio of 11.94%.

Investor Verification Checklist

• FDIC Action Status: Verify the final outcome and financial impact of the anticipated FDIC formal action regarding overdraft and collections practices.
• Deposit Seasonality: Assess the sustainability of the $507 million deposit increase, a significant portion of which is attributed to seasonal affinity group balances.
• Prepaid Card Revenue: Confirm the growth trajectory of stored value income, which drove the majority of non-interest income growth.
• Loan Portfolio Quality: Monitor the trend of non-accrual loans and the adequacy of the allowance for loan losses, particularly in the construction and commercial mortgage sectors.
• Investment Impairments: Track the performance of the held-to-maturity trust preferred securities to ensure unrealized losses remain temporary.