The Bancorp, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022; interim financial statements are unaudited. The Bancorp is a financial holding company whose bank operates specialty lending and payments businesses, including prepaid and debit card, ACH, and other payment services.
Key financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net interest income | $64.7 million | $50.9 million | $172.1 million | $158.7 million |
| Net interest margin | 3.69% | 3.35% | 3.32% | 3.29% |
| Non-interest income | $23.4 million | $26.6 million | $79.9 million | $76.5 million |
| Non-interest expense | $44.8 million | $39.4 million | $126.0 million | $125.2 million |
| Net income | $30.6 million | $28.3 million | $90.0 million | $83.7 million |
| Diluted earnings per share | $0.54 | $0.48 | $1.56 | $1.42 |
Q3 pretax income from continuing operations was $42.4 million, compared with $36.5 million. Q3 return on assets and return on equity were 1.69% and 18.39%, respectively, on an annualized basis. Management attributed improved earnings chiefly to loan growth and higher loan yields as variable-rate assets repriced. Higher funding costs partly offset those benefits.
Financial position, cash flow, and capital
- Balance sheet: Total assets were $7.78 billion at September 30, up from $6.84 billion at December 31, 2021. Loans, net of allowance, were $5.25 billion, and commercial loans carried at fair value were $818.0 million.
- Loan growth and concentrations: Loans at amortized cost rose to $5.27 billion before allowance, from $3.75 billion at year-end. Real estate bridge loans grew to $1.49 billion from $621.7 million; SBLOC/IBLOC balances rose to $2.37 billion from $1.93 billion. The company reported $2.15 billion of non-SBA commercial real estate exposure, largely apartment properties.
- Deposits and liquidity: Deposits increased to $6.91 billion from $5.98 billion. Cash and cash equivalents were $722.7 million. Available-for-sale securities were $790.6 million, down from $953.7 million at year-end. The company reported no period-end borrowings on its Federal Reserve or FHLB lines; it described substantial secured borrowing availability.
- Cash flow, first nine months: Operating activities provided $68.3 million, investing activities used $836.9 million, and financing activities provided $889.6 million. The investing outflow primarily reflected loan growth; financing inflows primarily reflected a $934.4 million increase in deposits. Cash increased $120.9 million from year-end.
- Credit and asset quality: The allowance for credit losses was $19.7 million, or 0.37% of loans, versus $17.8 million, or 0.48%, at year-end. Nonperforming loans were $8.3 million, versus $3.6 million; nonperforming assets were $27.1 million, versus $22.5 million. Nine-month net charge-offs were $1.0 million.
- Securities and equity: Available-for-sale securities had $45.7 million of gross unrealized losses at quarter-end; management attributed the losses primarily to market interest-rate changes and reported no credit-loss allowance. Accumulated other comprehensive loss was $33.1 million, compared with income of $6.3 million at year-end.
- Debt and capital: Senior debt was $99.0 million, subordinated debentures $13.4 million, and other long-term borrowings $38.9 million. The Bank’s Tier 1 leverage ratio was 10.79%, Tier 1 risk-based capital ratio 14.73%, and total risk-based capital ratio 15.15%; it met the regulatory “well capitalized” thresholds.
Changes, outlook, and significant matters
- Interest-rate outlook: Management expected loan repricing to continue benefiting net interest income and margin in Q4 2022, while cautioning that timing and magnitude were uncertain. The majority of earning assets are variable rate and generally reprice more fully, but with a lag, than deposits. The filing’s rate-shock model estimated a 16.31% increase in net interest income under a +200 basis-point scenario and a 15.75% decrease under a −200 basis-point scenario; actual results may differ.
- Costs and unusual items: Q3 expenses included a $1.75 million non-deductible SEC civil money penalty. The company settled an SEC investigation concerning CMBS-related books-and-records matters without admitting or denying the allegations; the order became effective August 24, 2022. Nine-month expenses also included a $1.15 million legal settlement. Management said certain costs related to the SEC investigation would cease following the settlement.
- Loan valuation event: A $9.5 million loan secured by a movie theater missed an August payment after the theater ceased operations and its parent company filed for bankruptcy. The company recorded a $4.0 million Q3 fair-value loss based on a September appraisal less estimated disposition costs. This was described as its only movie-theater loan.
- Regulatory and operational change: The Bank completed conversion from a state to a national charter in September 2022. Management anticipated relocating its headquarters to Sioux Falls on or after January 1, 2023, subject to applicable regulatory conditions.
- Legal and regulatory exposure: The Bank is defending a Cachet bankruptcy-related lawsuit seeking approximately $150 million; the company said the outcome could not yet be determined. Other disclosed matters include a Delaware prepaid-card unclaimed-property lawsuit and former-employee claims seeking $2.3 million in total, for which summary judgment motions were pending. A separate SEC inquiry had not resulted in findings or allegations, according to the filing.
- Funding and economic risks: Approximately $2.09 billion of deposits were uninsured. Management cited inflation, recession risk, rising rates, deposit pricing and potential stress on floating-rate real estate borrowers and vehicle lease residual values. The company noted interest-rate caps on many real estate bridge loans and multifamily rent growth as mitigants.
- Repurchases and expenses outlook: The company repurchased $45.0 million of shares in the first nine months of 2022. On October 26, the Board authorized a 2023 repurchase program of up to $25.0 million per quarter, or $100.0 million for the year. Management estimated the FDIC’s proposed 2023 assessment increase could add approximately $1.5 million to full-year 2023 expense.
Important facts for investors to verify
- Whether asset repricing continues to outpace deposit and other funding-cost increases, and how this affects net interest margin.
- Credit performance and collateral values in the rapidly growing real estate bridge, SBLOC/IBLOC, and advisor-financing portfolios; also monitor the theater loan and other criticized or delinquent credits.
- Whether deposit growth remains adequate to fund loan expansion, including the impact of $401.3 million of time deposits scheduled to mature in Q4 2022 and the level of uninsured deposits.
- How securities’ unrealized losses, market-rate movements, and capital levels evolve.
- Developments in the Cachet litigation, other legal proceedings, and regulatory matters, including any additional costs or liabilities.
- Actual 2023 FDIC assessment expense and the execution and capital implications of the increased share-repurchase authorization.