The Bancorp, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. The Bancorp is a financial holding company whose bank provides regional commercial and retail banking and national prepaid-card, health-savings-account, wealth-management and private-label banking services. Amounts below are in millions unless noted.
Financial performance and condition
| Metric | Q3 2011 | Comparable period / balance date |
|---|---|---|
| Net interest income | $19.6 | $17.1 in Q3 2010 |
| Provision for loan and lease losses | $5.0 | $5.1 in Q3 2010 |
| Non-interest income | $6.7 | $4.8 in Q3 2010 |
| Non-interest expense | $17.8 | $16.0 in Q3 2010 |
| Net income | $2.3; $0.07 diluted EPS | $0.6; $0.02 diluted EPS in Q3 2010 |
| Net interest margin | 3.14% | 3.26% in Q3 2010 |
For the first nine months, net income was $5.6 million ($0.18 diluted EPS), versus $3.2 million net income but a $3.1 million loss available to common shareholders (loss per share $0.12) in 2010. The 2010 common-share loss included $5.8 million of TARP preferred-stock accretion. Nine-month net interest income was $56.1 million versus $50.0 million; provision was $16.7 million versus $15.1 million; and net interest margin was 2.99% versus 3.25%.
At September 30, total assets were $3.39 billion, loans net of allowance were $1.69 billion, deposits were $3.07 billion and shareholders’ equity was $268.7 million. From December 31, 2010, deposits rose $1.05 billion and assets rose about $997 million, largely reflecting deposit inflows, some seasonal. The allowance for loan and lease losses was $27.7 million, or 1.61% of loans, versus $24.1 million, or 1.49%, at year-end.
Nine-month operating cash flow was $30.4 million; investing cash use was $290.1 million, including net loan growth and securities purchases; financing cash inflow was $978.6 million, chiefly from deposit growth. Cash and cash equivalents ended at $1.19 billion, up from $472.3 million at year-end. The Bank had no FHLB advances or short-term borrowings outstanding at quarter-end; subordinated debentures were $13.4 million and repurchase-agreement balances were $25.1 million. The Bank was reported as well capitalized: Tier 1 leverage 6.76%, Tier 1 risk-based 10.52%, and total risk-based capital 11.77% (regulatory minimums cited for well-capitalized status: 5%, 6% and 10%).
Material changes and management commentary
- Quarterly earnings improved with higher net interest income and fee income, partly offset by higher operating expenses. Prepaid-card income rose to $4.0 million from $2.8 million in Q3 2010; management attributed growth to account volumes and transaction fees. Lower deposit costs and higher average loan and securities balances also supported net interest income.
- Deposit and asset growth included substantial seasonal balances. Average Q3 demand deposits were $1.32 billion versus $992.5 million a year earlier; management said roughly half of the increase came from its largest affinity group. Seasonal deposits were placed largely at the Federal Reserve earning about 0.25%, contributing to margin compression. Management said it monitors liquidity daily and had resources it considered sufficient for operations.
- Credit quality weakened on several measures versus December 31, 2010: nonperforming loans rose to $22.8 million from $17.5 million; nonperforming assets to $29.2 million from $19.6 million; loans 90 days or more past due to $5.6 million from $2.2 million; and other real estate owned to $6.4 million from $2.1 million. Nine-month net charge-offs were $13.0 million, with only $19,000 of recoveries reported. Management noted that future allowance additions may be needed if conditions or loss experience deteriorate.
- Non-interest expense increased 11.2% year over year in Q3 and 16.7% for the nine-month period. Drivers included staffing and compliance costs, data processing, and expenses associated with other real estate owned. Nine-month securities gains were $0.6 million; a $0.7 million legal settlement also contributed to other income. A $75,000 credit-related impairment was recorded on a pooled trust-preferred security during the nine months.
Outlook, risks and contingencies
- The filing provides no quantified earnings or revenue guidance. Management cautions that interim results may not indicate full-year results. Forward-looking statements are subject to risks described in the company’s prior filings.
- The FDIC notified the Bank that formal action should be anticipated concerning compliance-management issues, including past overdraft practices, collections and transaction-error resolution. The company believes an order requiring restitution may result and civil money penalties may be assessed. A customer contractually indemnified the Bank for portions of potential liabilities; the Bank believes the indemnity is collectible, but the filing does not quantify exposure.
- The company gave notice on August 8, 2011, to terminate services for the third-party affinity customer associated with the compliance matters. The 270-day notice period means disengagement is due no later than May 4, 2012. The customer’s account balances are significant; management said liquidity resources were sufficient to replace related deposits.
- At quarter-end, commitments to fund loans, including unused credit lines, were $358.5 million. Management identifies the allowance for loan losses as a significant judgment area and notes that actual credit outcomes may differ from estimates.
- Related-party activity included $103.0 million of deposits from affiliated companies and $39.1 million of loans to related parties at September 30, 2011, up from $15.0 million and $7.5 million, respectively, at year-end. The Bank also held a $21.7 million participation in a loan originated by RAIT and purchased $30.9 million of securities from a brokerage firm in which the Board Chairman was a principal; the filing says the purchases were at market, with pricing confirmed by an independent adviser.
Important facts for investors to verify
- Whether the anticipated FDIC action results in restitution, penalties or other material costs, and whether contractual indemnification is collectible.
- How quickly the affinity-customer relationship and associated deposits run off by May 4, 2012, and the effect on liquidity, funding costs and net interest margin.
- Subsequent trends in delinquency, nonperforming assets, charge-offs, other real estate owned and the adequacy of the loan-loss allowance.
- The concentration, duration and credit performance of seasonal deposits, as well as the company’s ability to maintain reported capital ratios as assets grow.
- The nature and terms of material related-party deposits, loans and securities transactions, and any changes after quarter-end.