The Bancorp, Inc. — Q3 2021 Form 10-Q
Business context and reporting period. Unaudited results cover the quarter and nine months ended September 30, 2021, compared with the same 2020 periods. Bancorp is a financial holding company whose principal subsidiary, The Bancorp Bank, operates specialty lending and payments businesses. Specialty lending includes securities- and insurance-backed lines of credit, leasing, SBA lending, advisor financing and commercial real estate lending. The company continued to wind down a discontinued commercial loan portfolio.
Financial performance and condition
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income | $50.9 million | $50.0 million | $158.7 million | $143.2 million |
| Non-interest income | $26.6 million | $24.4 million | $76.5 million | $61.3 million |
| Provision for credit losses | $1.6 million | $1.3 million | $1.5 million | $5.8 million |
| Non-interest expense | $39.4 million | $42.0 million | $125.2 million | $123.1 million |
| Net income from continuing operations | $28.2 million | $23.1 million | $83.4 million | $56.6 million |
| Total net income | $28.3 million | $23.3 million | $83.7 million | $55.9 million |
| Diluted EPS, total | $0.48 | $0.40 | $1.42 | $0.96 |
| Net interest margin | 3.35% | 3.37% | 3.29% | 3.41% |
Balance sheet and liquidity at September 30, 2021: Total assets were $6.27 billion, essentially unchanged from $6.28 billion at December 31, 2020. Cash and cash equivalents were $317.3 million; available-for-sale securities were $1.05 billion. Loans, net of deferred fees and allowance, were $3.12 billion, versus $2.64 billion at year-end; commercial loans carried at fair value were $1.55 billion, versus $1.81 billion. Deposits were $5.11 billion, down from $5.46 billion. Equity was $638.0 million, compared with $581.2 million.
Cash flow and funding: For the first nine months, operating cash flow was $71.4 million, investing cash outflow was $23.4 million, and financing cash outflow was $76.2 million; cash declined $28.2 million to $317.3 million. The company had $300 million outstanding on its Federal Reserve line at quarter-end and none on its FHLB line. Management reported approximately $900 million of FHLB borrowing availability and a Federal Reserve line exceeding $1 billion, subject to collateral. Approximately $1.77 billion of deposits were uninsured. Loan commitments, including unused lines, were $2.13 billion.
Debt and capital: Period-end liabilities included $300 million of short-term borrowings, $98.6 million of senior debt, $13.4 million of subordinated debentures and $39.7 million of other long-term borrowings. The $100 million senior notes bear a fixed 4.75% rate and mature in August 2025; subordinated debentures mature in 2038 and bear a floating LIBOR-based rate. Bancorp’s total risk-based capital ratio was 16.10%, and the Bank’s was 16.69%; both were above the stated 10.00% well-capitalized threshold.
Credit quality: The allowance for credit losses was $16.2 million, or 0.52% of loans, versus $16.1 million, or 0.61%, at year-end. Non-performing loans were $7.7 million and non-performing assets $9.8 million, down from $12.7 million at year-end. Management said substantially all prior COVID-related deferrals had resumed payments, with $1.3 million of non-government-guaranteed balances still in deferral.
Material changes and management commentary
- Quarterly earnings rose year over year, reflecting higher net interest and non-interest income and lower expenses. For the nine-month period, higher net interest income and non-interest income, alongside a lower credit-loss provision, drove the improvement.
- Loan growth, especially in SBLOC/IBLOC, advisor financing and leasing, supported interest income. The nine-month net interest margin fell 12 basis points year over year, reflecting lower asset yields and larger low-yield balances held at the Federal Reserve after stimulus-related deposit inflows.
- Non-interest income benefited from gains and fees on commercial loans at fair value. The nine-month year-over-year improvement in this item also reflects COVID-related fair-value losses in 2020; management noted that some prepayment-related fees and a $4.6 million short-term PPP-funding line of credit were not expected to recur.
- In Q3, Bancorp resumed originating non-SBA CRE real estate bridge loans, primarily backed by multifamily properties, after suspending those originations for most of 2020 and the first half of 2021. The new originations are intended to offset payoffs and are held for investment.
- The company dissolved its Walnut Street investment entity in Q3, transferring approximately $22.9 million of loans to commercial loans at fair value and $2.1 million to other real estate owned.
- The Board approved a 2022 repurchase plan authorizing intended repurchases of up to $15 million per quarter, or $60 million for the year. Bancorp repurchased $30 million of stock during the first nine months of 2021.
Outlook, risks and unusual items
The filing provides no formal earnings or revenue guidance. Management stated that 2021 results had not included significant pandemic-related charges, described the reduction in deferrals, and expected the outstanding $71.3 million of PPP loans to be repaid without replacement by new PPP lending. The filing cautions that interim results may not indicate full-year results.
- Legal and regulatory matters: Bancorp is responding to two non-public SEC fact-finding inquiries concerning debit-card activity and its CMBS business; the SEC had made no findings or allegations of wrongdoing. A Delaware unclaimed-property lawsuit remains in discovery. In the Cascade dispute, the plaintiff seeks return of a deposit of approximately $12.5 million plus interest and fees; its summary-judgment motion was pending. Cachet Financial Services, in bankruptcy, seeks approximately $150 million in damages and disallowance of the Bank’s claim; the Bank had not been served when reported. Three former employees seek damages totaling approximately $7.9 million. Management said outcomes could not yet be determined for these matters.
- Credit, market and liquidity exposures: Portfolio performance remains sensitive to borrower repayment, collateral values, prepayments, deposit withdrawals and economic conditions. Management’s fair-value measurements include significant Level 3 estimates, including commercial loans. The filing says interest-rate floors may mean increases of up to 200 basis points are required before higher rates increase net interest income. Deposit balances also declined with the exit of an affinity-group relationship and stimulus-related outflows.
- Other notable items: Q3 effective tax rate was 22.7%, with a discrete tax benefit from stock-based compensation. FDIC insurance expense fell substantially after a lower assessment rate, but management cautioned that the rate could change. LIBOR transition remains under assessment for certain instruments. Management judged the allowance adequate, while noting that future provisions may be needed if estimates or conditions change.
Important facts for investors to verify
- Whether loan growth and fee income can offset prepayments, PPP runoff and the lower net interest margin, particularly after nonrecurring items.
- Trends in deposits, affinity-group relationships, uninsured balances, contingent borrowing capacity and the $300 million Federal Reserve advance.
- Credit performance, collateral values, allowance adequacy and concentrations in multifamily CRE, SBA lending and securities-/insurance-backed credit.
- Developments and potential costs or liabilities in the SEC inquiries, Cachet, Cascade, Delaware unclaimed-property and former-employee matters.
- Execution and funding of the 2022 stock repurchase authorization, alongside regulatory capital and liquidity needs.