The Bancorp, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context
The Bancorp is a financial holding company whose bank subsidiary provides payments and deposit services and specialty lending, including securities- and insurance-backed credit lines, SBA lending, vehicle leasing, and commercial real estate loans originated for sale or securitization. The company also continues to wind down a discontinued commercial lending portfolio.
Financial performance and position
- Q2 earnings: Net income from continuing operations was $20.3 million, versus $10.6 million in Q2 2019; diluted continuing-operations EPS was $0.35 versus $0.19. Including discontinued operations, net income was $20.1 million versus $11.4 million.
- First-half earnings: Continuing-operations net income was $33.4 million, versus $28.0 million; diluted continuing-operations EPS was $0.58 versus $0.49. Total net income was $32.7 million versus $29.3 million.
- Net interest income and margin: Q2 net interest income rose 45.5% to $50.2 million; net interest margin was 3.53%, up from 3.41%. First-half net interest income rose 35.9% to $93.2 million, while margin was unchanged at 3.43%.
- Non-interest income and expense: Q2 non-interest income was $20.4 million versus $19.7 million, including $18.7 million of prepaid, debit card and related fees. First-half non-interest income fell to $37.0 million from $50.1 million, mainly reflecting a $6.1 million fair-value loss on commercial loans originated for sale versus a $10.6 million gain in 2019. Non-interest expense increased 7.8% to $42.6 million in Q2 and 2.9% to $81.0 million for the first half.
- Assets and lending: Total assets were $6.21 billion, up from $5.66 billion at year-end 2019. Loans, net, were $2.31 billion, versus $1.81 billion; commercial loans held for sale were $1.81 billion, versus $1.18 billion. Deposits were $5.55 billion, up from $5.05 billion.
- Credit quality: The allowance for credit losses was $14.6 million, or 0.63% of loans, versus $10.2 million, or 0.56%, at year-end. Nonperforming loans were $10.3 million versus $9.1 million. First-half net charge-offs were $2.5 million versus $1.0 million, primarily reflecting direct lease financing.
- Cash flow and liquidity: Cash and cash equivalents were $480.7 million, down from $944.5 million. For the first half, operating cash flow was negative $554.4 million, investing cash flow negative $403.1 million, and financing cash flow positive $493.7 million; net cash decreased $463.8 million. The filing attributes substantial cash use to loan originations and growth. No Federal Reserve or FHLB borrowings were outstanding at quarter-end; available capacity was reported as more than $1 billion at the Federal Reserve and approximately $750 million through eligible securities at the FHLB.
- Debt and capital: Long-term borrowings were $40.6 million and subordinated debentures $13.4 million; period-end short-term borrowings were zero. The company reported an 8.48% Tier 1 leverage ratio and said it and the Bank were well capitalized under regulatory standards.
Material changes, outlook and risks
- The company reported approximately $6.1 million of first-half pre-tax fair-value losses on commercial loans originated for sale attributed to COVID-19, an approximately $849,000 increase in credit-loss provision related to economic factors, and $819,000 of fair-value charges in discontinued operations. Most of these income reductions occurred in Q1.
- A planned purchaser did not complete an April 2020 purchase of approximately $825 million of commercial real estate loans. The loans remained on the balance sheet as held-for-sale; if not sold, the company expects to retain them as earning assets. Future securitizations and sale timing depend on market conditions.
- Management identified $60.4 million of hotel loans in the commercial held-for-sale portfolio as potentially higher risk. It also noted $318.5 million of loan payment deferrals at June 30, 2020, equal to 8% of the listed loan principal, with higher concentrations in small-business lending and leasing. The company cautioned that the pandemic’s duration and ultimate credit effects were uncertain and could raise provisions or reduce fair values and income.
- The company originated about 1,250 PPP loans totaling more than $200 million and expected approximately $5.5 million of fees and interest, with recognition estimated over about eleven months beginning April 2020. It warned that SBA guarantee protection could be affected by deficiencies in loan origination, funding, or servicing.
- A single vehicle-leasing borrower entered bankruptcy. The outstanding loan balance was $13.3 million at June 30, and recovery depends on vehicle sales and used-vehicle market conditions; full recovery is not assured.
- Legal and regulatory matters include a Delaware False Claims Act suit concerning prepaid-card balances, two non-public SEC fact-finding inquiries, and a dispute over a terminated loan-sale agreement. The Bank retained a $12.5 million deposit from the counterparty, which is seeking its return; the Bank is defending the claim. The company said it could not yet determine whether these matters would have a material adverse effect. The SEC had made no findings or allegations of wrongdoing as disclosed in the filing.
- The FDIC terminated the Bank’s 2014 consent order in May 2020, lifting its business-related restrictions. The separate 2015 consent order obligations included completion of the corrective action plan in January 2020.
- The filing provides no specific full-year earnings or margin guidance. Management emphasized uncertainty around COVID-19, loan performance, interest rates, securities and loan valuations, funding, and the timing of loan sales. It noted that the first-half results may not indicate full-year results.
Important facts for investors to verify
- Whether and when the approximately $825 million planned loan sale or other commercial real estate securitizations are completed, and the resulting valuation and earnings effects.
- Subsequent trends in payment deferrals, delinquencies, nonaccruals, charge-offs, and the allowance for credit losses, particularly in hospitality, small-business, and vehicle-leasing exposures.
- Whether the vehicle collateral sale recovers the $13.3 million borrower balance and how the Cascade dispute over the retained $12.5 million deposit is resolved.
- Developments in the SEC inquiries and prepaid-card lawsuit, including any changes in estimated costs, contingencies, or potential exposure.
- Deposit stability and concentration, use of contingent borrowing facilities, and capital ratios as lending and held-for-sale balances evolve.