The Bancorp, Inc. — Q1 2014 Form 10-Q
Business context and reporting period
The Bancorp, Inc. is a financial holding company whose primary subsidiary is The Bancorp Bank. Its business includes regional commercial and retail banking and national affinity banking, prepaid and debit cards, healthcare accounts, payment processing and related services, as well as prepaid-card operations in Europe. This unaudited report covers the three months ended March 31, 2014; comparisons are generally with Q1 2013 for results and December 31, 2013 for balance-sheet measures. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2014 / March 31, 2014 | Comparison |
|---|---|---|
| Total interest income | $29.5 | $25.4 in Q1 2013 |
| Net interest income | $26.6; net interest margin 2.30% | $22.7 and 2.25% in Q1 2013 |
| Provision for loan and lease losses | $17.3 | $5.5 in Q1 2013 |
| Non-interest income | $24.2 | $19.1 in Q1 2013 |
| Non-interest expense | $33.0 | $24.5 in Q1 2013 |
| Pre-tax income | $0.5 | $11.8 in Q1 2013 |
| Net income / diluted EPS | $0.3 / $0.01 | $7.4 / $0.20 in Q1 2013 |
| Return on average assets / equity | 0.02% / 0.33% | 0.72% / 8.83% in Q1 2013 |
| Total assets | $4,699.6 | $4,706.1 at December 31, 2013 |
| Loans, net of allowance | $1,997.6 | $1,920.3 at December 31, 2013 |
| Allowance for loan and lease losses | $46.4, or 2.27% of loans | $38.2, or 1.95%, at December 31, 2013 |
| Deposits | $4,247.2 | $4,273.0 at December 31, 2013 |
| Cash and cash equivalents | $836.6 | $1,237.9 at December 31, 2013 |
| Shareholders’ equity | $366.2 | $359.6 at December 31, 2013 |
Operating cash flow was negative $135.8 million, compared with positive $24.4 million in Q1 2013. Investing activities used $235.1 million; financing activities used $30.4 million. Cash and cash equivalents declined $401.3 million during the quarter. The filing attributes funding needs principally to investment-security purchases and loan growth, alongside deposit outflows.
Debt included $13.4 million of subordinated debentures and $16.5 million of repurchase-agreement borrowings at quarter-end. The company reported no outstanding advances on its $392 million Federal Home Loan Bank line or on $49 million of correspondent-bank lines. Regulatory capital ratios remained above the stated “well capitalized” thresholds: the Bank’s Tier 1 leverage, Tier 1 risk-based and total risk-based ratios were 6.19%, 10.87% and 12.12%, respectively.
Material changes versus comparable periods
- Net income fell to $0.3 million from $7.4 million. Management said higher net interest income and non-interest income were more than offset by higher credit-loss provision and operating expenses.
- Net interest income rose 17.1%, mainly on higher average loan and investment-security balances. Average loan yield declined to 3.96% from 4.19%; management reported the margin increased as funds shifted from Federal Reserve deposits into loans and securities.
- Non-interest income increased, with prepaid-card fees at $13.5 million versus $12.0 million and reported loan-sale gains at $5.5 million versus $2.2 million. Management noted loan-sale income was partly offset by approximately $3.1 million of related departmental origination expense.
- Non-interest expense rose 34.6%, including higher salaries, data processing, legal expense and FDIC insurance. Management cited staff additions, transaction volumes, compliance needs and higher deposit-related insurance costs.
- The provision for credit losses increased by $11.8 million, primarily associated with three large borrower relationships. Net charge-offs were $9.1 million, compared with $3.7 million in Q1 2013.
- Non-performing loans were $44.9 million and non-performing assets were $72.7 million, versus $40.7 million and $67.0 million, respectively, at year-end 2013. Other real estate owned was $27.8 million, up from $26.3 million.
- Available-for-sale securities increased to $1,411.7 million from $1,253.1 million at year-end. Other comprehensive income was $5.4 million, lifting accumulated other comprehensive income to $6.0 million from $0.6 million.
Outlook, commentary, risks and unusual items
The filing provides no specific earnings or financial guidance. Management stated that Q1 results may not indicate full-year results. It described deposits as the primary funding source, reported core-deposit growth in some categories and an exit from certain higher-cost relationships, and said it expects continued use of its borrowing facilities. The company had $590.7 million of commitments to fund loans, including unused lines of credit.
- Management identified the allowance for loan losses and fair-value estimates as significant judgment areas. It cautioned that deteriorating credits, economic conditions or changes in assumptions could require further provisions and reduce earnings.
- Management described the quarter’s elevated provision as driven by three large relationships: a $3.8 million reserve, a $4.6 million charge-off and a $2.9 million charge-off. The filing also reports $9.1 million of total net charge-offs for the quarter.
- Investment securities included held-to-maturity trust-preferred and other debt securities. The company reported $4.2 million of unrealized losses on held-to-maturity securities and concluded no other-than-temporary impairment existed at March 31, 2014; it reported no impairment charge in Q1 2014.
- The company recognized $1.8 million of income from fair-value changes on interest-rate swaps; four swaps had aggregate notional value of $28.6 million. These instruments were not accounted for as hedges.
- Non-interest expense included a $235,000 settlement related to a merchant-acquiring matter. The filing also discloses related-party deposits, lending relationships and office-sharing arrangements.
- Management reported disclosure controls and procedures were effective at the reasonable-assurance level, with no material change in internal control over financial reporting during the quarter. It reported no subsequent events requiring recognition or disclosure.
Important facts for investors to verify
- Review the three large credit relationships behind the quarter’s provision and charge-offs, subsequent collections, collateral values and any further reserve needs.
- Track non-accrual loans, construction and commercial credit exposures, other real estate owned, and the trend in non-performing assets and net charge-offs.
- Assess whether fee growth, including prepaid-card and loan-sale revenue, can offset higher operating costs and sustain earnings; note loan-sale gains are reported alongside direct production costs.
- Monitor liquidity and deposit composition after the $401.3 million decline in cash and cash equivalents, deposit outflows, security purchases and loan growth; assess the use and availability of committed funding lines.
- Review regulatory capital headroom, particularly the Bank’s 6.19% Tier 1 leverage ratio against the 5.00% well-capitalized threshold, and consider the impact of future asset growth or losses.
- Examine the valuation, credit performance and liquidity of securities with unrealized losses, including held-to-maturity trust-preferred securities, and the assumptions supporting management’s impairment conclusion.
- Verify related-party transactions and balances, the merchant-acquiring settlement, and the size and draw risk of the $590.7 million in loan commitments.