The Bancorp, Inc. — Q2 2018 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2018; interim financial statements are unaudited. Bancorp is a financial holding company whose primary subsidiary is The Bancorp Bank. Continuing businesses include specialty lending and payment services. The company is winding down a commercial loan portfolio classified as discontinued operations.
Financial performance and condition
- Q2 results: Net interest income was $29.5 million, up 8.5% year over year; provision for loan losses was $0.9 million. Non-interest income was $17.0 million and non-interest expense was $37.3 million. Pretax continuing income rose to $8.4 million from $7.7 million, but continuing net income fell to $6.2 million from $17.6 million. Net income including discontinued operations was $6.1 million versus $18.9 million; diluted EPS was $0.11 versus $0.34.
- Six-month results: Net interest income increased 14.4% to $59.6 million; non-interest income was $46.1 million and expenses were $76.4 million. Pretax continuing income increased to $27.8 million from $18.0 million, while continuing net income declined to $20.2 million from $23.9 million. Total net income was $20.3 million versus $26.8 million; diluted EPS was $0.36 versus $0.48.
- Revenue and margins: Net interest income plus non-interest income totaled $46.6 million in Q2, compared with $45.4 million a year earlier, and $105.7 million for the first six months, compared with $94.5 million. Net interest margin was 3.11% in Q2 versus 3.10%, and 3.11% for the first six months versus 2.90%.
- Drivers and costs: Management attributed stronger pretax results to loan growth, higher yields and a $11.3 million first-half gain on loans sold into securitizations. Prepaid card fees rose 5.9% in the first half to $28.4 million. First-half salaries and benefits increased $3.9 million; lower data-processing expense partly offset the increase. The 2017 comparison benefited from roughly $12 million of deferred tax valuation allowance reversals, explaining much of the year-over-year decline in after-tax income.
- Balance sheet and liquidity: At June 30, total assets were $4.22 billion, deposits $3.80 billion, loans net of allowance $1.50 billion, and shareholders’ equity $332.5 million. Versus December 31, 2017, assets fell $486.3 million and deposits fell $461.6 million, largely reflecting seasonal year-end gift-card balances. Cash and cash equivalents were $441.1 million, down from $908.9 million.
- Cash flow: First-half operating cash flow was $67.1 million, compared with cash used of $117.0 million in 2017. Investing used $73.5 million; financing used $461.5 million, primarily reflecting a $461.6 million net decrease in deposits. Cash declined $467.9 million to $441.1 million.
- Debt and capital: Long-term borrowings were $42.0 million; subordinated debentures were $13.4 million. The company and bank reported regulatory capital ratios above the stated “well capitalized” thresholds. At June 30, the company’s Tier 1 leverage ratio was 8.06% and the Bank’s was 7.69%. Bancorp reported a holding-company leverage ratio of 8.06%, versus 7.77% a year earlier.
- Asset quality: The allowance for loan and lease losses was $8.0 million, or 0.53% of loans, versus $7.1 million, or 0.51%, at year-end. Non-performing loans increased to $6.4 million from $4.2 million; non-performing assets rose to $6.8 million from $4.7 million. First-half net charge-offs were $0.7 million.
Material changes, outlook and risks
- After quarter-end, the Bank agreed to transfer fiduciary rights and obligations for its approximately $400 million Safe Harbor IRA portfolio for $65 million, with $5 million held in escrow through October 10, 2019. Management expected to recognize the gain in Q3 2018. The Bank remains the depository institution for now. Management expected near-term deposit interest expense to rise and interest income on Federal Reserve balances to fall; most associated deposit service fees are expected to end.
- The Bank had $1.03 billion of Federal Reserve borrowing capacity and more than $800 million of potential FHLB availability, with no amounts outstanding on those lines at June 30. Loan commitments, including unused lines, totaled $1.59 billion, predominantly SBLOC commitments; management said historical utilization was a fraction of committed amounts.
- Most deposits are generated through third parties and classified as brokered. Loss of “well capitalized” status could restrict the Bank’s ability to accept or renew brokered deposits. The filing also describes regulatory restrictions on dividends and certain business growth, including limitations tied to outstanding FDIC consent orders and BSA remediation.
- The Bank paid a $2 million civil money penalty under a 2018 FDIC order; affected consumers had been reimbursed by a third-party processor, while the Bank continued documentation and audit work. The company is cooperating with an SEC investigation concerning its historical financial-statement restatement and expects related costs to remain material.
- A lawsuit filed July 16, 2018 alleges fraud-related claims concerning a former borrower’s hotel project. The related loan had been sold; the Bank disputes the claims, and potential liability could not yet be estimated. Management reported no formal earnings guidance in the provided filing text.
- Market and credit risks include interest-rate sensitivity, potentially higher funding costs, valuation uncertainty in Level 3 assets, and possible additional loan-loss provisions. Management said adoption of the expected-credit-loss standard in 2020 is expected to increase the allowance, but the amount was not clear.
Important facts for investors to verify
- Whether the $65 million SHIRA transaction gain was recognized as expected, and the effects of transferred deposits on funding costs, interest income and fee revenue.
- Progress and remaining restrictions under the FDIC and Federal Reserve regulatory actions, including dividend and business-growth limitations.
- Trends in non-performing loans, past-due loans, charge-offs and allowance coverage, particularly in SBA and leasing portfolios.
- Deposit stability and the actual utilization of the $1.59 billion in commitments, as well as available borrowing capacity and liquidity needs.
- Developments in the SEC investigation and Seabreeze litigation, including costs, outcomes and any resulting financial exposure.