The Bancorp, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. The Bancorp is a financial holding company whose banking subsidiary focuses on specialty lending and payments. Results are unaudited; amounts below are in millions unless noted.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $54.1 | $50.2 | $107.8 | $93.2 |
| Non-interest income | $25.9 | $20.4 | $49.9 | $37.0 |
| Non-interest expense | $43.9 | $42.6 | $85.8 | $81.0 |
| Net income from continuing operations | $29.2 | $20.3 | $55.2 | $33.4 |
| Net income, including discontinued operations | $29.4 | $20.1 | $55.4 | $32.7 |
| Diluted EPS | $0.50 | $0.35 | $0.94 | $0.57 |
| Net interest margin | 3.19% | 3.53% | 3.26% | 3.43% |
- Q2 annualized return on assets was 1.67% and return on equity was 19.42%, versus 1.33% and 15.61% a year earlier. Six-month ROA and ROE were 1.62% and 18.62%, versus 1.13% and 12.87%.
- At June 30, total assets were $6.55 billion, up from $6.28 billion at year-end 2020. Loans, net, were $2.90 billion, compared with $2.64 billion; commercial loans carried at fair value were $1.69 billion, compared with $1.81 billion.
- Deposits totaled $5.68 billion, up from $5.46 billion at December 31, 2020. Cash and cash equivalents were $589.0 million, including $583.5 million in interest-earning Federal Reserve deposits. Available-for-sale securities were $1.11 billion.
- Allowance for credit losses was $15.3 million, or 0.52% of loans, versus $16.1 million, or 0.61%, at year-end. Six-month net charge-offs were $0.53 million. Non-performing loans were $8.9 million, down from $12.7 million at year-end.
- Six-month cash flows: $156.9 million provided by operating activities, $117.3 million used in investing, and $203.9 million provided by financing. Cash and cash equivalents increased $243.5 million to $589.0 million.
- Total liabilities were $5.93 billion, including $98.5 million of senior debt, $13.4 million of subordinated debentures, and $39.9 million of other long-term borrowings. The company reported no balances outstanding on its Federal Reserve or FHLB credit lines at quarter-end; management cited approximately $1.0 billion of available FHLB capacity.
- At June 30, the company’s total capital to risk-weighted assets ratio was 15.78%, and the Bank’s was 16.14%, above the 10% well-capitalized threshold. The company’s leverage ratio was 8.52%; the filing’s well-capitalized benchmark for that ratio is 5%.
Material changes and management commentary
- Year-over-year earnings growth reflected higher loan balances and fee income, improved fair-value results on commercial real estate loans, and a credit to the provision for credit losses in Q2 2021 versus a provision in Q2 2020. Non-interest expense also increased.
- Q2 net interest margin declined 34 basis points year over year. Management attributed pressure to elevated, low-yield Federal Reserve balances from stimulus-related deposits and lower securities yields. The $3.0 million of fees from a short-term line of credit used to fund PPP loans supported loan income and is not expected to recur.
- Commercial-loan fair-value gains included exit and prepayment fees on loan payoffs; management said it began originating new non-SBA CRE loans in Q3 2021, primarily secured by multifamily properties. The company retained CRE loans on its balance sheet and said no future securitizations were currently planned.
- Management reported that approximately 98% of COVID-related payment deferrals had expired by July 5, 2021, and substantially all affected borrowers had made their scheduled payments. Only $968,000 of non-government-guaranteed principal remained in deferral at that date. Management cited increased vaccinations and economic reopening in explaining reversals of some pandemic-related credit reserves.
- Deposits had declined from the Q2 average of $6.26 billion to $5.68 billion by June 30, partly as stimulus-related balances flowed out. Management described some deposit growth as temporary and said liquidity is actively monitored.
- The company repurchased 1.04 million shares for $20.0 million during the first half of 2021, including 449,315 shares in Q2. No formal earnings guidance is provided in the supplied filing text; management cautioned that first-half results may not indicate full-year results.
Risks, contingencies, and unusual items
- The company disclosed a Delaware False Claims Act lawsuit concerning unclaimed balances on prepaid cards; a dispute with Cascade Funding over a failed loan-asset purchase and a retained $12.5 million deposit; and three former-employee lawsuits seeking stated damages totaling approximately $7.9 million. The company is defending these matters and said outcomes could not yet be determined.
- Two non-public SEC fact-finding inquiries concern debit-card issuance and gross dollar-volume data, and the CMBS business. The company said the SEC had made no findings or allegations of wrongdoing; response costs may remain material.
- Fair values for commercial loans and other assets rely significantly on discounted-cash-flow models and unobservable inputs. Management cautioned that valuation assumptions and credit estimates involve judgment and may change.
- Interest-rate risk remains relevant: management noted that, despite a positive repricing gap, rate increases of up to 200 basis points might be required to increase net interest income because of loan-rate floors. LIBOR-based instruments also face the planned benchmark transition.
- COVID-related risks include the remaining non-guaranteed SBA exposure and the possible effects of economic conditions on borrowers. Management stated that future credit-loss provisions may be necessary if conditions, delinquencies, or loss experience change.
Key facts for investors to verify
- Whether loan growth, payment-processing fees, and core earnings persist after the nonrecurring PPP-related fees and CRE payoff gains.
- Subsequent trends in net interest margin, Federal Reserve cash balances, deposit levels, and funding costs as temporary stimulus-related balances normalize.
- Credit performance and reserve adequacy in SBA, CRE, leasing, SBLOC/IBLOC, and advisor-financing portfolios, including the status of deferred loans and non-performing assets.
- Developments and potential costs or exposure related to the SEC inquiries and pending litigation.
- Execution and credit performance of new CRE originations, liquidity capacity, and capital levels as the balance sheet and lending mix evolve.