The Bancorp, Inc. — Q3 2018 Form 10-Q
Business context and period. The Bancorp is a financial holding company whose bank operates specialty lending and payments businesses, including securities-backed lending, leasing, SBA lending, prepaid cards, and payment processing. This unaudited filing covers the quarter and nine months ended September 30, 2018; balance-sheet comparisons are with December 31, 2017.
Key financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net interest income | $30.6 million | $27.9 million | $90.2 million | $80.0 million |
| Non-interest income | $91.0 million | $29.0 million | $137.1 million | $71.4 million |
| Provision for loan and lease losses | $1.1 million | $0.8 million | $2.7 million | $2.2 million |
| Non-interest expense | $37.3 million | $43.9 million | $113.7 million | $119.0 million |
| Income from continuing operations, net | $61.3 million | $6.8 million | $81.5 million | $30.7 million |
| Net income available to common shareholders | $61.3 million | $7.3 million | $81.6 million | $34.1 million |
| Diluted EPS | $1.07 | $0.13 | $1.43 | $0.61 |
| Net interest margin | 3.22% | 3.26% | 3.15% | 3.02% |
Balance sheet and liquidity at September 30, 2018: Total assets were $4.36 billion, down from $4.71 billion at year-end 2017. Loans, net, were $1.49 billion, up from $1.39 billion; deposits were $3.86 billion, down from $4.26 billion. Cash and cash equivalents were $777.6 million, including $710.8 million in interest-earning Federal Reserve deposits. Shareholders’ equity was $391.9 million, compared with $324.1 million at year-end.
Debt and capital: Long-term borrowings were $41.8 million, subordinated debentures $13.4 million, and repurchase-agreement balances $0.2 million. The company and bank were reported as well capitalized. The holding company’s Tier 1 leverage ratio was 9.61% and the bank’s was 9.19%; the respective total risk-based capital ratios were 24.41% and 24.28%.
Cash flow, nine months: Operating activities provided $171.9 million and investing activities provided $39.4 million; financing activities used $342.7 million. Cash and cash equivalents declined $131.4 million to $777.6 million. Financing included a $402.8 million net deposit decrease and $60.0 million proceeds from the IRA portfolio sale.
Material changes and drivers
- Reported earnings were substantially boosted by the $65.0 million third-quarter gain on sale of the Safe Harbor IRA portfolio. The sale covered fiduciary rights and obligations for a portfolio of approximately $400 million; $5.0 million of the consideration remained in escrow through October 10, 2019.
- Excluding the sale’s exceptional effect, operating trends included higher net interest income, payment-related fees, and gains on loan securitizations, alongside lower expenses. The filing does not provide a complete adjusted earnings figure excluding the IRA gain.
- Net interest income rose 9.8% year over year in Q3 and 12.8% for the first nine months, supported by loan growth and higher yields. Deposit and other funding costs also rose; Q3 net interest margin edged down from 3.26% to 3.22%, while the nine-month margin improved from 3.02% to 3.15%.
- Non-interest income growth primarily reflected the IRA gain. Prepaid-card fees increased 5.8% year to date and ACH/card processing fees increased 36.5%. The company said the IRA sale would eliminate most related deposit service fees and could increase deposit funding costs while reducing interest income on Federal Reserve balances.
- Loans held for sale declined to $308.5 million from $503.3 million at year-end, following loan sales including a $341.0 million third-quarter commercial mortgage securitization, which generated a $9.0 million gain. Continuing loans grew about 7.5% from year-end; securities-backed lines of credit were the largest loan category at $778.6 million.
- The allowance for loan and lease losses increased to $8.1 million, or 0.54% of loans, from $7.1 million, or 0.51%, at year-end. Non-performing loans rose to $5.2 million from $4.2 million; non-performing assets were $5.7 million. Net charge-offs increased year over year, primarily in non-guaranteed SBA start-up loans and leasing.
- Accumulated other comprehensive loss widened to $21.5 million from $4.6 million, largely reflecting unrealized losses on available-for-sale securities. Management said it considered the securities’ impairments temporary and reported no other-than-temporary impairment charges.
Outlook, risks, contingencies, and unusual items
- No numerical earnings or revenue guidance is provided. Management cautioned that nine-month results may not indicate full-year results and said reinvestment yields and future deposit costs depend on market conditions. It expected near-term interest expense to rise and Federal Reserve deposit interest income to decline following the IRA-related transfers.
- Regulatory constraints remain significant. The bank’s FDIC consent-order framework restricts certain new payment and prepaid-card activities until required BSA corrective actions are documented and approved. The bank cannot pay dividends without FDIC approval, and the holding company requires Federal Reserve approval for dividends and certain other actions. These restrictions may constrain growth, funding, or holding-company liquidity.
- The company continues to cooperate with an SEC investigation related to its historical financial-statement restatement and expects related costs to remain material at least until the investigation concludes. The filing describes prior restatement adjustments and ongoing regulatory compliance expenses.
- A $2 million civil money penalty under a 2018 FDIC order had been paid; it was recognized as expense in 2017. The order also addressed consumer reimbursements relating to a third-party processor’s historical fee error; the processor had reimbursed affected consumers, with documentation and audit requirements still being addressed.
- A lawsuit related to a former borrower’s hotel project was dismissed on November 1, 2018, for lack of jurisdiction, without prejudice to filing in another forum. The underlying loan had been sold in Q2 2018. Management said routine legal proceedings were not expected to have a material adverse effect.
- Approximately $226.0 million of assets from discontinued commercial lending operations remained held for sale. A delinquent loan in that portfolio was written down by $1.7 million after appraisal; the borrower had filed for bankruptcy and the bank was pursuing collection.
- Management identified credit-loss estimates, fair-value measurements, securities impairment assessments, and income taxes as significant judgment areas. It expected the 2020 adoption of the current expected credit loss standard to increase the allowance, but the amount was not yet clear.
Most important facts for investors to verify
- How sustainable earnings are after the $65.0 million IRA-sale gain, including lost IRA fees and post-sale deposit pricing and balances.
- Whether loan growth, securitization gains, and payment-fee trends persist, and whether funding-cost increases pressure net interest margin.
- Credit performance in non-guaranteed SBA start-up loans and leasing, including charge-offs, delinquencies, troubled restructurings, and allowance adequacy.
- Progress toward satisfying FDIC BSA and other consent-order requirements, and the resulting restrictions on business growth, dividend payments, and holding-company liquidity.
- Developments in the SEC investigation, related legal costs, and the potential for further regulatory or legal consequences.
- The filing’s liquidity discussion gives different descriptions of IRA-related funds moved after quarter-end (approximately $200 million in one passage and approximately $262 million not yet transferred at September 30 in another); verify the final amount and its balance-sheet and funding impact.