The Bancorp, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013; unaudited consolidated results. Balance-sheet comparisons are with December 31, 2012 unless stated otherwise. The company provides regional and online banking, prepaid and debit-card services, healthcare accounts, merchant processing, and related services.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net interest income | $23.6m | $20.9m | $46.3m | $41.8m |
| Provision for loan and lease losses | $9.5m | $4.3m | $15.0m | $9.5m |
| Non-interest income | $22.4m | $10.4m | $41.5m | $22.7m |
| Non-interest expense | $27.6m | $21.0m | $52.1m | $42.8m |
| Net income | $5.6m | $3.9m | $13.0m | $7.8m |
| Diluted earnings per share | $0.15 | $0.12 | $0.34 | $0.24 |
| Net interest margin | 2.46% | 2.59% | 2.35% | 2.37% |
Q2 net income rose 45% year over year; first-half net income rose 66%. First-half return on average assets was 0.64% and return on average equity was 7.62%, versus 0.42% and 5.72%, respectively, in 2012. Q2 figures were 0.56% and 6.45%, versus 0.46% and 5.54%.
Growth in net interest income reflected higher loan and investment-security balances, while lower asset yields reduced the net interest margin. Management attributed higher non-interest income chiefly to increased prepaid-card transaction volume and commercial loan-sale activity. Q2 loan-sale gain was $5.7m; first-half gain was $7.9m. First-half results also included a $1.5m fair-value gain on loans held for sale and $0.7m in investment-security sale gains. Expense growth included staffing and operating costs for prepaid operations, compliance, loan sales and SBA lending.
Financial position, cash flow and asset quality
- Scale and funding: Assets were $3.876bn, up from $3.700bn. Loans, net of deferred fees and costs, were $1.967bn, versus $1.903bn. Deposits were $3.451bn, versus $3.313bn.
- Liquidity: Cash and cash equivalents were $684.8m, down from $968.1m, primarily as funds were deployed into loans and securities. First-half operating cash flow was $18.6m; investing cash use was $441.8m; financing cash flow was $139.9m. Cash declined $283.3m during the period.
- Debt and capital: Subordinated debt was $13.4m and repurchase-agreement liabilities were $19.1m. No FHLB advances or amounts on correspondent-bank credit lines were outstanding at June 30. Shareholders’ equity was $344.2m, versus $336.7m. Reported Tier 1 leverage, Tier 1 risk-based and total risk-based capital ratios were 8.81%, 14.45% and 15.71% for Bancorp, and 6.82%, 11.20% and 12.46% for the Bank. The company reported the Bank as well-capitalized under then-applicable rules.
- Credit: The allowance for loan and lease losses was $40.3m, or 2.05% of loans, compared with $33.0m, or 1.74%, at year-end. Non-performing loans were $42.5m, versus $29.6m; non-performing assets were $48.8m, versus $33.9m. Non-accrual loans increased to $41.7m from $25.2m. The allowance equaled 94.77% of non-performing loans.
- Other comprehensive income: First-half other comprehensive loss was $9.0m, largely reflecting unrealized losses on available-for-sale securities; accumulated other comprehensive income fell to $1.3m from $10.2m.
Changes, outlook and risks
- Compared with the prior-year quarter, higher loan and security balances lifted net interest income, but the net interest margin fell 13 basis points. Prepaid-card fees increased to $11.5m from $7.1m, and loan-sale gains were recorded where there were none in Q2 2012.
- The provision for credit losses increased substantially. Management linked the increase primarily to two borrower relationships—one commercial relationship involving multiple loans and one residential-construction relationship. First-half net charge-offs were $7.8m; management cited commercial and construction credits as the main sources.
- Management stated that it believed the allowance was adequate, while acknowledging that economic conditions, credit deterioration and changes in loss estimates could require additional provisions. The filing also identifies interest-rate exposure, deposit seasonality, and estimation uncertainty in fair values and credit reserves as relevant risks.
- Outstanding loan commitments, including unused lines of credit, were $518.0m, up from $463.4m at year-end. Management reported $392.0m of FHLB borrowing capacity and $49.0m of additional correspondent lines.
- New U.S. capital rules were expected to take effect beginning in 2015, with phased implementation and a fully phased-in capital conservation buffer by 2019. Management said it expected both Bancorp and the Bank to meet targeted capital ratios; the filing provides no specific earnings or revenue guidance.
- The filing reports $71.5m in loans to directors, executives, principal stockholders and affiliates, up from $31.4m at year-end; it also describes securities purchases through a broker-dealer in which the company’s chairman held a minority interest. Management stated the related-party loans were current and on comparable terms to other borrowers.
- Management cautioned that first-half results may not indicate full-year results. It reported no subsequent events requiring recognition or disclosure and concluded disclosure controls were effective at a reasonable-assurance level.
Investor verification priorities
- Review the drivers, collateral and subsequent performance of the credits behind the higher provision and the increase in non-accrual loans and non-performing assets.
- Assess how much earnings growth depends on loan-sale gains, fair-value changes and other potentially variable fee income, versus recurring prepaid and banking fees.
- Examine securities-portfolio valuation and interest-rate sensitivity, including the first-half unrealized losses and the company’s stated ability and intention to hold impaired securities.
- Evaluate the liquidity implications of the $518.0m loan commitments and the decline in cash balances, alongside deposit stability and available borrowing lines.
- Verify the terms, oversight and credit exposure associated with related-party loans, affiliate deposits and broker-dealer securities transactions.
- Track credit-capital headroom and the effect of the new capital rules, including the sensitivity of regulatory capital to the investment portfolio and other deductions.