The Bancorp, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Comparisons of operating results are year over year; balance-sheet comparisons are with December 31, 2020. The company is a financial holding company whose principal subsidiary is The Bancorp Bank, with specialty lending and payments businesses.
Financial performance
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Net interest income | $53.8 million | $42.9 million; up 25.3% |
| Provision for credit losses | $0.8 million | $3.6 million |
| Non-interest income | $24.1 million | $16.6 million |
| Non-interest expense | $41.9 million | $38.4 million; up 9.0% |
| Income from continuing operations | $26.1 million | $13.2 million |
| Net income | $26.0 million | $12.6 million |
| Diluted earnings per share | $0.44 | $0.22 |
| Net interest margin | 3.34% | 3.34% |
Management attributed higher earnings chiefly to loan growth, lower funding costs, and improved fair-value results on commercial loans. The Q1 2020 comparison included pandemic-related pre-tax charges of approximately $6.8 million, including commercial-loan fair-value losses and higher credit provisions. Q1 2021 also included $1.4 million of interest on a short-term PPP-related line of credit, which management said was not expected to recur, and $2.4 million of PPP loan interest and fees.
Prepaid, debit-card and related fees, the largest driver of non-interest income, rose 3.6% to $19.2 million. Salary and benefits increased $2.9 million and legal expense increased $1.1 million year over year. The effective tax rate was 25.8%. Annualized return on assets was 1.56% and return on equity was 17.88%, versus 0.91% and 10.28%, respectively, a year earlier.
Financial position, cash flow and liquidity
- Total assets were $7.75 billion at March 31, up from $6.28 billion at year-end. Cash and cash equivalents were $1.75 billion, including $1.74 billion in interest-earning Federal Reserve deposits.
- Deposits were $6.92 billion, up $1.46 billion from year-end. Management attributed much of the increase to stimulus-related deposits and noted that a significant portion could be spent over time.
- Loans, net of the allowance, were $2.81 billion; commercial loans carried at fair value were $1.78 billion. The allowance for credit losses was $16.4 million, or 0.58% of loans.
- Shareholders’ equity was $596.8 million. The equity-to-assets ratio was 7.70%; management said the decline reflected stimulus-related deposit inflows. The company and bank remained “well capitalized.” The company’s Tier 1 leverage ratio was 8.62% and the bank’s was 8.69%.
- Quarterly operating cash flow was $50.3 million, versus cash used of $507.4 million in Q1 2020. Investing activities used $99.1 million; financing activities provided $1.45 billion, principally from deposit growth. Cash increased $1.40 billion during the quarter.
- No borrowings were outstanding on the Federal Reserve or FHLB lines at quarter-end. Management reported approximately $1.0 billion available on the FHLB line and a Federal Reserve line exceeding $1 billion. The company held approximately $98.7 million in cash at the holding-company level.
- Debt included $98.4 million of senior debt, $13.4 million of subordinated debentures and $40.1 million of other long-term borrowings. The senior notes carry a 4.75% fixed rate and mature in 2025; subordinated debentures mature in 2038 and carry a floating rate.
Material changes and outlook
- Average loans and leases rose 37.0% year over year to $4.48 billion, while average interest-earning assets rose 24.4% to $6.43 billion. Lower asset yields were substantially offset by reduced deposit and funding costs, leaving net interest margin unchanged.
- Average cost of deposits and interest-bearing liabilities fell to 0.21% from 0.70%. Average loan yield declined to 4.27% from 4.80%.
- Commercial real estate loans previously expected to be sold in 2020 were not purchased by the counterparty; the company said it planned to retain them. It also stated that no future securitizations were currently planned.
- The filing provides no specific earnings or financial guidance. Management said it continued monitoring pandemic and economic developments; future credit provisions and fair values could be affected by loan performance and economic conditions.
- At March 31, pandemic-related payment deferrals totaled $79.2 million, or 1.7% of the listed $4.69 billion loan balance; non-guaranteed deferrals were $47.4 million. Management noted potential elevated risk in hotel and other affected lending, while highlighting government guarantees, collateral and portfolio diversification as mitigants.
Risks, contingencies and unusual items
- Commercial real estate loans held at fair value, excluding SBA loans, totaled about $1.55 billion; approximately $1.41 billion was multifamily. The portfolio also included $71.4 million of hotel loans and $47.7 million of retail loans. Management cited potential pandemic-related credit and valuation risk.
- Non-performing loans were $13.7 million, up from $12.7 million at year-end; $1.8 million was at least 90 days past due and still accruing. Net charge-offs were $0.25 million for the quarter.
- The company faces a Delaware unclaimed-property lawsuit concerning certain prepaid cards; two non-public SEC fact-finding inquiries concerning debit-card activity and the CMBS business; a dispute with Cascade Funding over a $12.5 million deposit retained by the bank; and three former-employee lawsuits seeking aggregate damages of approximately $7.9 million. The company is defending these matters; it said it could not determine whether certain outcomes would materially affect it. The SEC had made no findings or allegations of wrongdoing as disclosed.
- The company repurchased 594,428 shares for $10.0 million during the quarter. It reported no material changes to previously disclosed risk factors and no material subsequent events requiring disclosure.
Important facts for investors to verify
- Whether stimulus-driven deposit balances persist or run off, and the resulting effect on liquidity, asset growth and capital ratios.
- Performance, valuation assumptions and concentration risk in multifamily, hotel, retail, SBA and other loan portfolios, including the effect of expiring payment relief.
- Whether credit losses or required provisions rise beyond the reported allowance, which depends on estimates and economic assumptions.
- Developments in the SEC inquiries and the disclosed lawsuits, including potential costs, outcomes and any changes in management’s ability to estimate exposure.
- Whether the reported net interest margin and fee income remain sustainable as rates, loan yields, PPP-related income and deposit balances change.