The Bancorp, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023; filed November 9, 2023. The Bancorp is a financial holding company whose bank subsidiary operates specialty finance and payments businesses. Specialty lending includes securities- and insurance-backed credit lines, SBA lending, vehicle leasing, investment-advisor financing and commercial real estate bridge loans. Payments includes prepaid and debit cards, ACH and related services. Amounts below are in U.S. dollars; financial statement amounts are unaudited.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net interest income | $88.9 million | $64.7 million | $261.9 million | $172.1 million |
| Provision for credit losses | $1.8 million | $0.8 million | $4.0 million | $4.3 million |
| Non-interest income | $26.8 million | $23.4 million | $85.1 million | $79.9 million |
| Non-interest expense | $47.5 million | $44.8 million | $145.4 million | $126.0 million |
| Net income | $50.1 million | $30.6 million | $148.3 million | $90.0 million |
| Diluted earnings per share | $0.92 | $0.54 | $2.68 | $1.56 |
| Net interest margin | 5.07% | 3.69% | 4.86% | 3.32% |
Q3 net income increased 64% year over year, principally on higher loan and securities yields following Federal Reserve rate increases. Q3 interest income rose 53.7% to $129.0 million, while interest expense rose to $40.1 million from $19.3 million. The average cost of deposits and interest-bearing liabilities was 2.50%, compared with 1.19% a year earlier. Average loans and leases fell 5.1% year over year to $5.61 billion, as SBLOC and IBLOC paydowns partly offset growth in other lending categories.
For the first nine months, net interest income increased 52.2%. Payment-related fees supported non-interest income growth: prepaid, debit card and related fees rose 15.8% to $67.0 million. Expense growth was led by salaries and benefits, up 20.0% for the nine-month period, reflecting staffing in financial crimes, compliance and IT, as well as higher incentive and stock compensation expense. Nine-month results also included a $1.4 million client termination fee and approximately $0.6 million of payment-related income attributed to Q4 2022.
Financial position, funding and capital
- At September 30, total assets were $7.47 billion, down from $7.90 billion at December 31, 2022. Loans, net, were $5.17 billion, compared with $5.46 billion; commercial loans carried at fair value were $379.6 million, down from $589.1 million as that portfolio ran off.
- Deposits were $6.50 billion, down $525.6 million, or 7.5%, from year-end. The decrease included $330 million of time deposits that matured in Q1 2023. Cash and cash equivalents were $903.4 million; available-for-sale securities were $756.6 million.
- Shareholders’ equity was $773.7 million, compared with $694.0 million at year-end; accumulated other comprehensive loss was $32.1 million. The equity-to-assets ratio was 10.36% at September 30.
- Debt included $95.8 million of senior debt, $13.4 million of subordinated debentures and $9.9 million of other long-term borrowings. The $100 million senior notes mature in August 2025 and carry a 4.75% coupon; subordinated debentures mature in 2038 and bear interest at SOFR plus 3.51%.
- Nine-month cash flows were $125.4 million provided by operating activities, $493.7 million provided by investing activities and $603.8 million used in financing activities. Cash and cash equivalents increased $15.2 million. Financing uses included a $525.6 million net deposit decline and $75.0 million of stock repurchases.
- The Company and Bank exceeded regulatory “well capitalized” thresholds at September 30. The Bank reported a 12.13% Tier 1 leverage ratio, 17.26% Tier 1 capital to risk-weighted assets and 17.77% total capital to risk-weighted assets. No advances were outstanding on the Federal Reserve or FHLB credit lines; reported availability was approximately $1.94 billion and $731.5 million, respectively.
Credit quality and material changes
- The allowance for credit losses was $24.1 million, or 0.46% of total loans, versus $22.4 million, or 0.41%, at year-end. Nine-month net charge-offs were $2.6 million, mainly from leasing and non-guaranteed SBA loans. Management said the allowance was adequate, while noting that future additions may be needed as conditions or credit performance change.
- Non-accrual loans increased to $15.1 million from $10.4 million at year-end. Non-performing loans, including loans at least 90 days past due and still accruing, were $15.8 million, versus $18.1 million; non-performing assets were $34.5 million, versus $39.3 million. The reduction in 90-day-past-due accruing loans more than offset the rise in non-accrual loans.
- Management raised leasing-related economic and collateral risk assessments amid higher rates and weaker vehicle auction prices, retaining elevated risk levels in Q3 despite indications of price stabilization. The Q3 credit-loss provision was $1.8 million and included the impact of $0.9 million in net charge-offs.
- SBLOC and IBLOC balances were $1.01 billion and $712.6 million, respectively, at September 30, down from $1.27 billion and $1.10 billion at September 30, 2022. Real estate bridge loans held at amortized cost increased to $1.85 billion from $1.67 billion at year-end.
- Available-for-sale securities had $43.5 million of gross unrealized losses at September 30, primarily attributed by the Company to market interest rates. A single $10 million trust preferred security, with a $6.3 million fair value, was placed on non-accrual after its issuer deferred interest payments. The Company stated that a loss of up to the full $10 million principal could be recognized in Q4, depending on information from the issuer.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management said it believed liquidity and capital resources were sufficient for the next 12 months and foreseeable future. Its interest-rate model estimated net interest income would change by +6.30% under a 100-basis-point rate increase and −6.44% under a 100-basis-point decrease; the filing cautions that model assumptions and actual results may differ. Management noted that further SBLOC and IBLOC paydowns or Federal Reserve rate cuts could reduce net interest income.
The Company authorized up to $200 million of share repurchases for 2024, following a $100 million authorization for 2023. Repurchases may be modified or stopped to conserve capital. The filing also identifies potential risks from deposit withdrawals, uninsured deposits, banking-sector volatility, increased FDIC assessments, interest-rate changes, real estate collateral values, credit losses, regulation, cybersecurity and litigation.
- A CFPB investigation, initiated by a Civil Investigative Demand concerning escheatment practices, remained ongoing. The Company could not predict the outcome and said future costs may be material.
- Cachet Financial Services seeks approximately $150 million from the Bank in litigation related to a former payroll-processing relationship. The Bank is defending the claims; the Company could not determine whether the outcome would materially affect it.
- A Delaware unclaimed-property qui tam suit and a newly filed New York force-placed-insurance case remained unresolved; the Company could not determine whether either outcome would be materially adverse. Former-employee lawsuits were resolved in September 2023.
- One modified loan of $156,000 was reported under the new loan-modification disclosure rules. Three loans restructured within the prior 12 months subsequently defaulted, with a combined pre-modification balance of $3.7 million.
Important facts for investors to verify
- Whether the trust preferred issuer supplies updated financial information and whether a loss is recorded in Q4, potentially up to $10 million.
- Subsequent trends in deposit balances, deposit pricing and client concentration, including the behavior of uninsured and third-party-generated deposits.
- Whether SBLOC and IBLOC runoff continues, and whether growth in other loan categories offsets its effect on interest income.
- Developments in non-accrual loans, vehicle-lease charge-offs, real estate bridge-loan performance and the allowance for credit losses.
- Updates on the CFPB inquiry, Cachet litigation and Del Mar lawsuit, including any changes in estimated exposure or costs.
- Execution of the 2024 buyback authorization and its effect on capital, liquidity and outstanding shares.