The Bancorp, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Unless noted, amounts are U.S. dollars; financial statement amounts are in millions. Bancorp is a financial holding company whose bank subsidiary focuses on specialty lending and payments, including prepaid cards, ACH and card processing. Results are unaudited.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net interest income | $34.5 | $29.5 | $68.5 | $59.6 |
| Provision for loan and lease losses | $0.6 | $0.9 | $2.3 | $1.6 |
| Non-interest income | $19.7 | $17.0 | $50.1 | $46.1 |
| Non-interest expense | $39.5 | $37.3 | $78.7 | $76.4 |
| Net income from continuing operations | $10.6 | $6.2 | $28.0 | $20.2 |
| Net income, including discontinued operations | $11.4 | $6.1 | $29.3 | $20.3 |
| Diluted EPS, including discontinued operations | $0.20 | $0.11 | $0.51 | $0.36 |
Q2 net interest margin was 3.41%, up from 3.11%; the six-month margin was 3.43%, also up from 3.11%. For Q2, average loan yield rose to 5.37% from 4.75%, while the cost of deposits and interest-bearing liabilities rose to 0.96% from 0.59%.
Financial position, liquidity and credit
- At June 30, total assets were $4.60 billion, total liabilities $4.15 billion and shareholders’ equity $458.1 million. Total assets were $4.44 billion and equity $406.8 million at December 31, 2018.
- Deposits were $3.99 billion, up $56.0 million from year-end. Loans, net of allowance, were $1.55 billion; commercial loans held for sale were $934.5 million, up $246.0 million from year-end, principally reflecting originations for a planned securitization.
- Cash and cash equivalents fell to $312.3 million from $554.3 million at year-end. Six-month operating cash flow was negative $248.7 million, principally reflecting loan originations for sale; investing cash flow was negative $94.4 million and financing cash flow positive $101.0 million. The filing reports a $242.0 million net decrease in cash.
- Borrowings included $45.0 million of short-term borrowings, $41.3 million of long-term borrowings and $13.4 million of subordinated debentures. The company reported $45.0 million outstanding on its FHLB line and none on its $1.15 billion Federal Reserve line. It reported more than $800 million of potential FHLB availability, subject to eligible collateral.
- Regulatory capital ratios remained above “well-capitalized” thresholds: Bancorp’s Tier 1 leverage ratio was 10.04% and the Bank’s was 9.76%; total risk-based capital ratios were 21.03% and 20.62%, respectively. Management reported a 10.0% company leverage ratio.
- The allowance for loan and lease losses was $10.0 million, or 0.64% of loans, versus $8.7 million, or 0.58%, at year-end. Non-performing loans were $8.8 million versus $5.5 million at year-end, including $6.5 million non-accrual and $2.4 million at least 90 days past due but still accruing. Six-month net charge-offs were $964,000.
Changes, outlook and notable matters
- Q2 earnings growth reflected higher loan balances and yields, increased payment fees and lower provision expense. Management cited strong growth in SBLOC/IBLOC, leasing and SBA balances, and attributed some yield improvement to prior Federal Reserve rate increases.
- Prepaid card and related fees were $15.8 million in Q2, up 12.6%; ACH, card and other payment processing fees were $2.5 million, up 17.7%. Deposit-account service fees fell sharply following the 2018 sale of the safe-harbor IRA portfolio.
- First-half non-interest income included $10.6 million of gains on commercial loans originated for sale. The first-quarter 2019 CRE5 securitization transferred $518.3 million of loans and produced a reported $10.8 million gain; Bancorp retained certificates initially valued at $41.6 million. Q2 itself recorded a $148,000 net loss on commercial loans originated for sale.
- Non-interest expense rose 5.9% in Q2. The quarter included $908,000 of lease-termination expense; management expects $2.2 million of future rent savings to more than offset it. Salaries and benefits increased, partly reflecting lending, securitization, technology and incentive costs.
- No specific full-year earnings or financial guidance is provided. Management cautions that interim results may not indicate full-year results. It planned to continue loan securitizations at roughly six-month intervals and expected a third-quarter 2019 securitization.
- The bank remains subject to FDIC consent-order requirements, including restrictions on certain new prepaid-card and merchant-related activities pending regulatory approval of a BSA corrective-action report. The Bank cannot pay dividends without prior FDIC approval; the holding company also requires Federal Reserve approval for dividends and certain other actions. These restrictions could constrain growth, funding and holding-company liquidity.
- Legal and regulatory exposures include an ongoing SEC investigation related to the historical financial-statement restatement, a Florida investor action alleging fraud involving a former borrower (claims totaling $12 million; motion to dismiss pending), and a Delaware qui tam suit alleging prepaid-card balances were not remitted as unclaimed property. The company says it cannot yet determine whether the Delaware matter will have a material adverse effect. It also expects SEC-investigation response costs to remain material at least until the investigation ends.
- The company was evaluating the expected-credit-loss standard (CECL), effective for it in 2020, and expected adoption to increase the allowance; the amount was not yet determined. Adoption of lease accounting in 2019 added an $18.1 million lease obligation and a $16.4 million right-of-use asset at January 1, without an effect on reported operating results.
Investor verification priorities
- Assess the sustainability and mix of earnings, especially securitization gains, loan growth, payment-fee growth and rising deposit funding costs.
- Track the increase in non-performing loans, SBA and lease credit quality, charge-offs, and adequacy of the allowance.
- Verify liquidity and funding sensitivity: cash declined materially, commitments to fund loans were $1.99 billion, and the majority of deposits are classified as brokered.
- Monitor regulatory-order compliance, restrictions on growth and dividends, and holding-company cash and ability to service trust preferred interest.
- Follow outcomes and potential costs of the SEC investigation and pending litigation, as well as the eventual CECL allowance impact.