The Bancorp, Inc. — Q1 2019 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2019; year-over-year comparisons are with Q1 2018. The company operates through The Bancorp Bank, with continuing businesses in specialty finance and payments, alongside a legacy commercial loan portfolio reported as discontinued operations. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial and operating performance
| Metric | Q1 2019 / March 31, 2019 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $43.6 | $35.3 in Q1 2018 |
| Net interest income | $34.0 | $30.1 in Q1 2018 |
| Net interest margin | 3.41% | 3.12% in Q1 2018 |
| Non-interest income | $30.4 | $29.1 in Q1 2018 |
| Non-interest expense | $39.2 | $39.0 in Q1 2018 |
| Provision for loan and lease losses | $1.7 | $0.7 in Q1 2018 |
| Continuing operations income before tax | $23.4 | $19.4 in Q1 2018 |
| Net income from continuing operations | $17.4 | $14.0 in Q1 2018 |
| Net income, including discontinued operations | $17.9; diluted EPS $0.32 | $14.1; diluted EPS $0.25 in Q1 2018 |
| Operating cash flow | $99.0 | $143.3 in Q1 2018 |
| Cash and cash equivalents | $726.2 | $554.3 at December 31, 2018 |
| Total assets | $4,627.0 | $4,437.9 at December 31, 2018 |
| Total deposits | $4,025.3 | $3,935.7 at December 31, 2018 |
| Loans, net of allowance | $1,500.4 | $1,493.3 at December 31, 2018 |
| Allowance for loan and lease losses | $10.0, or 0.66% of loans | $8.7, or 0.58%, at December 31, 2018 |
Reported long-term borrowings were $41.5 million and subordinated debentures were $13.4 million. The company reported no amounts outstanding on its Federal Home Loan Bank or Federal Reserve borrowing lines. Its March 31 regulatory capital ratios exceeded “well capitalized” thresholds: the Bank’s Tier 1 leverage ratio was 9.63%, Tier 1 risk-based capital ratio 23.17%, total risk-based capital ratio 23.71%, and common equity Tier 1 ratio 23.17%.
Material changes versus comparable periods
- Net income rose 26.8% year over year. Net interest income increased 13.1%, reflecting loan growth and higher yields; average loans and leases rose 16.1% to $2.27 billion.
- Funding costs rose: interest expense increased to $9.6 million from $5.2 million, and the cost of total deposits and interest-bearing liabilities increased to 0.98% from 0.52%. Management attributed the net interest margin improvement to asset yields rising faster overall than funding costs.
- Payments-related fees increased, including prepaid card fees of $16.2 million, up 13.2%, and ACH, card and other processing fees of $2.3 million, up 36.1%. Deposit service fees declined sharply following the 2018 sale of the safe-harbor IRA portfolio.
- Non-interest expense was nearly flat, up 0.5%; salaries and benefits increased $2.8 million, partly offset by lower legal, data processing and other costs.
- At March 31, 2019, non-performing loans were $8.3 million versus $5.5 million at December 31, 2018. Non-accrual loans rose to $5.9 million from $4.5 million; loans 90 days past due and still accruing increased to $2.5 million from $1.0 million. Net charge-offs for Q1 were $0.4 million, down from $0.5 million in Q1 2018.
- Available-for-sale securities increased to $1.37 billion from $1.24 billion at year-end. Net unrealized losses on that portfolio were $10.2 million at quarter-end, compared with $20.8 million at December 31, 2018; Q1 other comprehensive income, net of tax, was $8.7 million.
Outlook, commentary, risks and unusual items
- The company sponsored a Q1 2019 commercial mortgage securitization of approximately $518.3 million of loans and recorded a $10.8 million gain. Management said the gain was lower than the Q1 2018 gain despite the larger securitization, due to lower credit spreads. Management planned its next securitization for September 2019; no specific earnings or financial guidance was provided.
- The company continues to wind down its discontinued commercial lending portfolio. Assets held for sale were $188.0 million at March 31, including $159.0 million of net loans and $29.0 million of other real estate owned. Management is pursuing sales and dispositions.
- Regulatory orders restrict the Bank’s ability to pay dividends without prior FDIC approval; the Federal Reserve also requires prior approval for holding-company dividends and certain other actions. BSA-related restrictions limit certain new payment and prepaid-card business activities until required remediation is accepted. Management noted these restrictions could constrain growth and that future regulatory approvals are not assured.
- The Bank was subject to a continuing SEC investigation concerning its historical financial statement restatement; management expected related costs to remain material at least until the investigation concludes. The Bank also faced a Florida investor lawsuit alleging misrepresentation and related claims, with approximately $12 million at issue; it had moved to dismiss and stated it would defend the case.
- CECL credit-loss accounting was expected to take effect in Q1 2020. The company was evaluating the impact and expected an increase in credit-loss allowances, with the amount dependent on portfolio conditions and economic forecasts at adoption.
- The company adopted the lease accounting standard on January 1, 2019, recognizing an $16.4 million operating lease right-of-use asset and an $18.1 million lease obligation; management said adoption did not affect operating results.
Most important facts for investors to verify
- Whether growth in specialty lending, securitization gains and payments fees is sustainable, particularly given spread sensitivity and reliance on periodic securitizations.
- Credit quality trends, including rising non-performing loans, the higher SBA-related provision, and the adequacy of the allowance.
- Deposit stability and funding costs, including the effects of brokered-deposit classification, seasonal balances and rate repricing.
- Progress on regulatory remediation, restrictions on business growth and dividend approvals, and the resulting effect on liquidity and capital flexibility.
- Resolution and potential costs of the SEC investigation, the investor litigation, and the remaining discontinued loan and real-estate dispositions.
- Actual CECL adoption impact and whether reported cash generation remains consistent with earnings; Q1 operating cash flow was lower than in the prior-year quarter.