The Bancorp, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; balance-sheet comparisons are with December 31, 2023 unless noted. Amounts are in U.S. dollars. The interim financial statements are unaudited.
Business context
The Bancorp is a financial holding company whose bank operates specialty lending and payments businesses. Specialty finance includes securities- and insurance-backed credit, investment-advisor financing, leasing, SBA lending and real-estate bridge loans. Payments provides prepaid and debit card, deposit and transaction-processing services. Payments-related deposits fund much of the loan and securities portfolio.
Financial performance and condition
| Metric | Q1 2024 / March 31, 2024 | Comparable period / prior date |
|---|---|---|
| Net interest income | $94.4 million | $85.8 million in Q1 2023; up 10.0% |
| Net interest margin | 5.15% | 4.67% in Q1 2023 |
| Non-interest income | $29.4 million | $29.0 million in Q1 2023 |
| Provision for credit losses on loans | $2.2 million | $1.9 million in Q1 2023 |
| Non-interest expense | $46.7 million | $48.0 million in Q1 2023 |
| Income before taxes | $74.9 million | $64.9 million in Q1 2023 |
| Net income / diluted EPS | $56.4 million / $1.06 | $49.1 million / $0.88 in Q1 2023 |
| Operating cash flow | $75.2 million | $43.1 million in Q1 2023 |
| Cash and cash equivalents | $1.25 billion | $1.04 billion |
| Total assets / total loans | $7.92 billion / $5.46 billion | $7.71 billion / $5.36 billion |
| Total deposits | $6.89 billion | $6.68 billion |
| Shareholders’ equity | $816.8 million | $807.3 million |
| Allowance for credit losses | $28.7 million; 0.53% of loans | $27.4 million; 0.51% at year-end |
Average loan and lease balances fell 4.5% year over year to $5.72 billion, principally reflecting paydowns in securities-backed and insurance-backed lending. Higher asset yields more than offset lower average loan balances and higher funding costs. The cost of funds rose to 2.49% from 2.15%; management reported that loan yields increased 89 basis points year over year. Non-interest income growth was led by payment fees. The lower year-over-year expense partly reflected a $1.0 million OREO write-down in Q1 2023.
Net cash increased $212.4 million during the quarter. Operating activities provided $75.2 million, investing activities used $22.3 million, and financing activities provided $159.4 million, including deposit growth partly offset by $50.4 million of share repurchases and excise tax.
Debt and capital: Senior debt was $95.9 million, subordinated debentures $13.4 million and other long-term borrowings $38.4 million. The company and bank reported regulatory capital ratios above the disclosed “well-capitalized” thresholds. At March 31, the bank’s total risk-based capital ratio was 18.02%, versus a 10.00% threshold; the company’s was 16.35%.
Material changes, outlook and risks
- Credit quality worsened: Non-performing loans rose to $57.1 million from $13.3 million at year-end, and non-performing assets to $76.7 million from $30.2 million. A $39.4 million apartment rehabilitation bridge loan moved to nonaccrual during Q1 and was transferred to OREO on April 2. Management plans to oversee improvements and leasing and explore a possible sale. The loan’s September 2023 “as is” appraisal was $47.8 million.
- Loans past due 90 days or more and still accruing increased to $4.1 million from $1.7 million; the filing attributes most of the increase to administrative payment delays on government and municipal vehicle leases. OREO increased to $19.6 million, including a $2.6 million hotel securing an SBA loan; management cites a 75% SBA guarantee if a loss occurs on that property.
- Net charge-offs were $1.0 million, primarily from leasing and non-real-estate SBA lending. Management says the allowance is appropriate but notes future provisions may be needed if economic conditions, delinquencies or credit performance deteriorate. It cited approximately $39 million of exposure to long-haul and local trucking, transportation and related activities.
- Interest-rate exposure: Management says higher rates have supported earnings, while Federal Reserve rate reductions could lower net interest income. Its March 31 model estimated net interest income changes of +5.30% under a +100-basis-point shock and -5.46% under a -100-basis-point shock; management cautions that modeled results depend on assumptions. In April, the company purchased approximately $900 million of fixed-rate agency mortgage securities, with estimated weighted-average yield of 5.11% and life of eight years, to reduce sensitivity to rate changes. It temporarily increased FHLB borrowing to help fund the purchases.
- Liquidity and funding: Management states it believes liquidity and capital resources are sufficient for the next 12 months and foreseeable future. At quarter-end, it reported $1.95 billion of available Federal Reserve line capacity and approximately $731.5 million available from the FHLB line, with no amounts drawn. Deposits included $551.0 million classified as brokered and an estimated $573.5 million uninsured. The company notes that large uninsured deposit withdrawals could pose liquidity risk, although it considers much of its uninsured balance to consist of small anonymous card balances.
- Capital return: The company repurchased 1.26 million shares for $50.4 million in Q1. After quarter-end, it increased its planned Q2 repurchase authorization from $50 million to $100 million, raising the 2024 program maximum to $250 million. Repurchases may be modified or stopped.
- Legal and regulatory matters: The filing describes a Cachet bankruptcy-related claim seeking approximately $150 million, a CFPB investigation concerning escheatment practices, a Delaware unclaimed-property suit involving prepaid cards, a New York force-placed-insurance dispute, and a California prepaid-card complaint. The company cannot determine whether several matters will have a material adverse effect; it says future CFPB-related costs may be material. These matters are not quantified as recorded losses in the supplied filing text.
- No specific earnings guidance: The filing provides no clear numerical earnings or revenue guidance. Management’s outlook emphasizes rate sensitivity, loan growth and portfolio credit performance; it cautions that Q1 results may not indicate full-year results.
Important facts for investors to verify
- Whether the $39.4 million bridge loan transferred to OREO is successfully rehabilitated, leased or sold, and whether further credit deterioration or reserve additions occur.
- Subsequent changes in non-performing loans, past-due leases, OREO and charge-offs, including the adequacy of the $28.7 million loan-loss allowance.
- The cost, funding and interest-rate impact of the approximately $900 million April securities purchase, including any additional FHLB advances.
- Deposit concentration, uninsured-deposit balances and available contingent borrowing capacity as funding conditions change.
- Developments in the Cachet claim, CFPB investigation and other legal matters, including potential costs or outcomes not quantifiable in this filing.
- Actual share repurchases versus the expanded authorization and the effect on capital ratios and liquidity.