The Bancorp, Inc. (NASDAQ: TBBK) — 2020 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2020; it also provides unaudited quarterly results. Bancorp is a financial holding company whose primary subsidiary, The Bancorp Bank, generates most revenue. Its businesses include specialty lending and payment services, including prepaid and debit cards, ACH processing, and affinity banking. In the third quarter, the company decided to retain commercial real estate loans previously originated for sale or securitization; it currently plans no further securitizations.
Key financial results
Amounts below are in millions of dollars except per-share data and ratios.
| Metric | 2020 | 2019 |
|---|---|---|
| Interest income | $210.8 | $179.6 |
| Interest expense | $15.9 | $38.3 |
| Net interest income | $194.9 | $141.3 |
| Provision for credit losses | $6.4 | $4.4 |
| Non-interest income | $84.6 | $104.1 |
| Non-interest expense | $164.8 | $168.5 |
| Net income from continuing operations | $80.6 | $51.3 |
| Net income available to common shareholders | $80.1 | $51.6 |
| Diluted EPS | $1.37 | $0.90 |
| Net interest margin | 3.45% | 3.32% |
| Return on average assets / common equity | 1.34% / 15.08% | 1.09% / 11.57% |
- Fourth quarter: net income available to common shareholders was $24.2 million and diluted EPS was $0.41, versus $1.9 million and $0.03 in fourth quarter 2019.
- Balance sheet at year-end: total assets were $6.28 billion, deposits $5.46 billion, total loans and commercial loans at fair value $4.46 billion, available-for-sale securities $1.21 billion, and shareholders’ equity $581.2 million. Cash and cash equivalents were $345.5 million.
- Credit quality: allowance for credit losses was $16.1 million, or 0.61% of amortized-cost loans. Non-performing loans were $12.7 million, up from $9.1 million; net charge-offs were 0.07% of average loans, versus 0.12%.
- Debt and capital: the company issued $100 million of senior notes in August at 4.75%, due 2025; year-end senior debt was $98.3 million, subordinated debentures $13.4 million, and long-term borrowings $40.3 million. The company and Bank were well capitalized; their total risk-based capital ratios were 14.84% and 14.68%, respectively.
Cash flow and liquidity
Cash and cash equivalents decreased $599.0 million during 2020. Net cash used in operating activities was $512.2 million; net cash used in investing activities was $595.8 million; financing activities provided $509.0 million, including $410.0 million of net deposit growth and proceeds from the senior notes. Loan growth was a major use of funds. These cash-flow totals should be read in light of the company’s loan-origination and loan-sale accounting.
Management said it believed liquidity and capital resources were adequate for the next 12 months and foreseeable future. The company reported approximately $1.0 billion of availability on its FHLB line, with potential additional capacity if securities were pledged, and a Federal Reserve line exceeding $1 billion; neither line had a year-end balance outstanding. Commitments to extend credit were approximately $2.16 billion, predominantly securities-backed lines, which management said historically were largely undrawn.
Changes, outlook, risks, and unusual items
- Net interest income increased 37.9%, principally from higher average loan balances, including retained commercial loans, and lower funding costs after Federal Reserve rate cuts. Net interest margin rose 13 basis points.
- Non-interest income fell 18.7%: 2019 included $24.1 million of securitization gains, while 2020 had no securitizations and recognized a $3.9 million net loss on the related commercial-loan portfolio. Prepaid and debit card fees rose 14.3% to $74.5 million as transaction volumes grew.
- Non-interest expense declined 2.2%. This included $8.9 million of civil money penalties in 2019 that did not recur; 2020 expenses included higher salaries, compliance and technology costs, and higher FDIC insurance expense. The $7.5 million FDIC penalty and $1.4 million SEC penalty were recognized in 2019.
- COVID-19 uncertainty affected credit-loss estimates, loan fair values, business activity, and customer payment capacity. Year-end payment deferrals totaled $147.5 million, about 3% of the balances in the filing’s deferral table. The company reported $67.8 million of hotel loans in its commercial-loan fair-value portfolio; $50.2 million of commercial real estate loans were in payment deferral. Most of that portfolio was multifamily lending, whose valuation depends on estimates and market assumptions.
- The company originated about 1,250 PPP loans totaling more than $200 million and estimated approximately $5.5 million of fees and interest. It planned to participate in the expanded 2021 PPP. Management provided no broader quantified earnings or growth guidance.
- All outstanding FDIC consent orders were terminated in 2020. The company disclosed two ongoing SEC fact-finding inquiries, with no findings or allegations of wrongdoing reported, and legal matters involving prepaid-card unclaimed property and a disputed mortgage-loan sale deposit. Their ultimate financial effects were not determined. Three former-employee lawsuits were filed in January 2021; the company intended to defend them.
- The company adopted CECL in 2020, recording a $2.4 million after-tax reduction to retained earnings at adoption. The auditor gave unqualified opinions on the financial statements and internal controls, and identified credit-loss estimates and fair-value measurements as critical audit matters.
- No cash dividends were paid in 2020, and none were planned for 2021. A repurchase program authorized up to $10 million per quarter; no shares had been repurchased under it by year-end. Separately, the company repurchased 594,428 shares for $10.0 million in January and February 2021.
Important facts for investors to verify
- How the retained $1.57 billion commercial real estate portfolio performs, and whether actual loan recoveries and sale values support reported fair values.
- Whether COVID-related deferrals, particularly in hotels, retail, and non-guaranteed SBA lending, lead to higher delinquencies, provisions, or charge-offs after temporary relief measures expire.
- The sustainability of growth in payment fees and specialty lending, alongside funding concentration in third-party-generated deposits and the status of brokered-deposit reclassification.
- Progress and potential costs or outcomes of the SEC inquiries and disclosed litigation, including the disputed $12.5 million deposit.
- Future interest income and margins as rates, loan floors, deposit costs, and the LIBOR transition affect the balance sheet; the company’s own rate model projected an 18.54% net-interest-income decline under a 200-basis-point rate decrease, while cautioning that negative-rate assumptions make that scenario less reliable.
- Whether repurchases, capital needs, and regulatory limits affect liquidity at the holding company or the Bank’s ability to distribute dividends.