The Bancorp, Inc. — Q2 2022 Form 10-Q
Business context and reporting period. Unaudited results cover the three and six months ended June 30, 2022; balance-sheet comparisons are with December 31, 2021. The Bancorp operates specialty lending and payments businesses through The Bancorp Bank. Its lending includes securities- and insurance-backed credit, advisor financing, leases, SBA loans, and commercial real estate bridge loans. Payments services include prepaid and debit cards, ACH, and related deposit services.
Financial performance and condition
- Q2 earnings: Net income was $30.4 million, up from $29.4 million a year earlier. Diluted EPS was $0.53 versus $0.50. Pretax continuing income was $41.1 million versus $37.0 million.
- First-half earnings: Net income was $59.4 million versus $55.4 million; diluted EPS was $1.03 versus $0.94.
- Income and margins: Q2 net interest income was $54.6 million, up 0.9%; non-interest income was $28.0 million, up 8.1%; and non-interest expense was $42.8 million, down 2.4%. Net interest margin was 3.17%, compared with 3.19%. For the first half, net interest income was $107.4 million, non-interest income $56.5 million, and non-interest expense $81.2 million; margin was 3.14% versus 3.26%.
- Drivers: Loan growth and higher commercial real estate repayment fees supported results. Deposit costs rose faster than loan yields as rates increased. Lower salaries and FDIC insurance costs reduced expenses, partly offset by a $1.2 million legal settlement.
- Credit: Q2 included a $1.5 million provision credit, compared with a $951,000 credit in Q2 2021. First-half provision was $3.5 million, versus a $129,000 credit, largely reflecting reclassification of former discontinued loans and related reserves; management said the associated $3.5 million gain and provision had no net income impact. The allowance was $19.1 million, or 0.40% of loans, at June 30. First-half net charge-offs were $917,000.
- Balance sheet and lending: Assets were $7.12 billion, up from $6.84 billion at year-end. Loans at amortized cost, net of allowance, were $4.74 billion versus $3.73 billion; commercial loans at fair value were $995.5 million versus $1.39 billion. Total deposits declined to $5.88 billion from $5.98 billion. Shareholders’ equity was $656.5 million; the equity-to-assets ratio was 9.22%.
- Cash flow: First-half operating cash flow was $39.9 million versus $33.8 million. Investing activities used $557.8 million, principally reflecting a $946.2 million net increase in loans; financing provided $259.0 million, including $385.0 million of short-term borrowing. Cash and cash equivalents fell to $342.9 million from $601.8 million.
- Debt and liquidity: At June 30, short-term borrowings were $385.0 million, drawn against the Federal Reserve line; no FHLB advances were outstanding. Senior debt was $98.9 million and subordinated debentures $13.4 million. Management reported approximately $1.2 billion of available FHLB capacity and a $1.4 billion Federal Reserve line. Uninsured deposits were approximately $2.17 billion. Loan commitments, including unused lines, were $2.00 billion.
- Capital: Bancorp’s Tier 1 leverage, Tier 1 risk-based, total risk-based, and common equity Tier 1 ratios were 9.51%, 13.46%, 13.84%, and 13.46%, respectively. The Bank’s corresponding ratios were 10.45%, 14.84%, 15.22%, and 14.84%; both were above the stated well-capitalized thresholds.
- Other notable balance-sheet item: Available-for-sale securities were $826.6 million, with $31.4 million of gross unrealized losses at June 30, primarily attributed by the company to market interest-rate changes; management reported no required credit-loss allowance.
Changes versus comparable periods
- Average loans and leases rose 19.5% year over year in Q2 and 17.1% in the first half, while average securities balances declined. Growth included SBLOC, IBLOC, advisor financing, leasing, and real estate bridge lending; PPP-related balances and fees declined.
- Higher interest expense offset much of the increase in loan interest income; Q2 net interest margin edged down two basis points, and first-half margin fell 12 basis points.
- Non-interest income increased, driven especially by fees on repayments of fair-value commercial real estate loans. Prepaid and debit card fees were broadly flat for the first half; ACH and payment-processing fees increased.
- Non-interest expense declined 5.3% in the first half, with lower salaries, FDIC insurance, and legal expense partly offset by higher software, insurance, travel, and the Cascade settlement.
- Unrealized losses on securities moved accumulated other comprehensive income from positive $6.3 million at year-end to a loss of $22.6 million at June 30.
Outlook, commentary, risks, and unusual items
- Outlook: No formal earnings guidance is provided. Management expected lagged repricing of variable-rate loans to begin benefiting net interest income and margin in Q3 2022, while noting that the timing and extent were uncertain. Its rate-shock model projected higher net interest income under +100 and +200 basis-point scenarios; actual results may differ.
- Economic and credit risks: Management cited heightened inflation and recession risk. Higher rates may increase bridge-loan borrowers’ financing costs; fuel-price inflation could affect demand and residual values for less fuel-efficient leased vehicles. Management noted potential offsets from rising multifamily rents and vehicle shortages, respectively.
- Regulatory and legal matters: On July 6, 2022, the company received an SEC Wells Notice concerning a preliminary staff recommendation for an enforcement action alleging Exchange Act recordkeeping, reporting, and internal-control violations relating to the CMBS business. A Wells Notice is not a formal charge or final finding; the company said it was in discussions with the SEC. A separate SEC inquiry concerning debit-card activity remained ongoing, with no findings or allegations reported. Cachet’s August 3 amended complaint sought approximately $150 million from the Bank; the company said it could not determine the outcome’s potential material effect. In the Cascade case, the Bank settled after an adverse summary judgment, returning a $12.5 million deposit and paying approximately $1.2 million, recorded as Q2 expense.
- Business change: The OCC approved the Bank’s conversion to a national charter and relocation plan, subject to a condition on significant business-plan changes. The Bank expected to complete conversion around September 1, 2022 and move its headquarters to Sioux Falls around January 1, 2023.
- Other items: The Bank reclassified former discontinued-operation loans and real estate to continuing operations as disposition efforts concluded. The company repurchased $30 million of shares in the first half under its 2022 plan. Subsequent to quarter-end, it repurchased 360,403 shares for $7.6 million through August 3. The report disclosed no material change in previously reported risk factors and concluded disclosure controls were effective at a reasonable-assurance level.
Key facts investors should verify
- Whether loan repricing subsequently improved net interest income and margin, and how deposit costs responded to rate increases.
- Loan growth, credit quality, delinquencies, non-performing assets, charge-offs, and adequacy of the allowance as economic conditions evolve.
- Liquidity and deposit stability, including the $385 million Federal Reserve borrowing, uninsured deposit balances, and availability of contingent funding.
- Developments in the SEC matters and Cachet litigation, including potential costs, outcomes, and any impact on controls or operations.
- Performance and valuation of commercial real estate exposures and the remaining CMBS-related security, including collateral recoveries and subordinate credit protection.
- Completion of the Bank’s charter conversion and headquarters relocation, and any resulting operational or regulatory effects.