The Bancorp, Inc. — Q3 2020 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2020; financial statements are unaudited. The Bancorp is a financial holding company whose principal subsidiary is The Bancorp Bank. Continuing operations focus on specialty lending, payments and affinity banking; a legacy commercial lending portfolio remains classified as discontinued operations.
In Q3, the company decided to retain commercial real estate loans previously originated for sale or securitization and reported that no future securitizations were currently planned. These loans are primarily multifamily properties.
Financial performance and position
| Metric | Q3 2020 / September 30, 2020 | Comparable period |
|---|---|---|
| Net interest income | $50.0 million; up 33.1% | $37.6 million in Q3 2019 |
| Net interest margin | 3.37% | 3.35% in Q3 2019 |
| Continuing-operations net income | $23.1 million; diluted EPS $0.40 | $20.4 million; diluted EPS $0.36 in Q3 2019 |
| Total net income | $23.3 million | $20.4 million in Q3 2019 |
| Non-interest income | $24.4 million | $33.5 million in Q3 2019 |
| Non-interest expense | $42.0 million | $42.1 million in Q3 2019 |
| Total assets | $6.17 billion | $5.66 billion at December 31, 2019 |
| Deposits | $5.39 billion | $5.05 billion at December 31, 2019 |
| Cash and cash equivalents | $301.0 million | $944.5 million at December 31, 2019 |
For the first nine months, net interest income was $143.2 million, versus $106.1 million in 2019; net income was $55.9 million, versus $49.7 million, including continuing-operations income of $56.6 million versus $48.4 million. Diluted EPS was $0.96 for total operations and $0.97 for continuing operations, compared with $0.87 and $0.85, respectively, in 2019.
At September 30, loans at amortized cost, net of allowance, were $2.47 billion; commercial loans carried at fair value were $1.85 billion. The allowance for credit losses was $15.7 million, or 0.63% of loans at amortized cost. Non-performing loans were $12.3 million, compared with $9.1 million at year-end 2019. Nine-month net charge-offs were $2.9 million.
Nine-month operating cash flow was negative $583.3 million, compared with positive $163.3 million in 2019, reflecting lending and loan-origination activity. Investing cash flow was negative $495.7 million; financing cash flow was positive $435.5 million, including deposit growth and senior-debt proceeds.
The company issued $100 million of unsecured senior notes in August at 4.75%, due August 2025; their carrying amount was $98.2 million at quarter-end. Other long-term borrowings were $40.5 million and subordinated debentures were $13.4 million. The company reported approximately $1.0 billion of available FHLB borrowing capacity and a Federal Reserve credit line exceeding $1 billion; neither line had a balance outstanding at quarter-end. The holding company had approximately $111.3 million in cash reserves. The company and Bank met regulatory “well capitalized” thresholds; holding-company leverage was 8.62% and the Bank’s was 8.50%.
Material changes versus prior periods
- Q3 net interest income increased primarily on higher loan balances and lower funding costs. Average loans and leases rose 60.5% year over year; the cost of deposits and interest-bearing liabilities fell to 0.18% from 0.98%.
- Q3 non-interest income fell 27.3%, mainly because Q3 2019 included securitization gains. Prepaid and debit-card fees increased 20.5% to $19.4 million, partially offsetting the decline.
- For the first nine months, non-interest income declined to $61.3 million from $83.6 million, chiefly reflecting a $5.4 million fair-value loss on commercial loans in 2020 versus $24.3 million of gains in 2019. Nine-month provision for credit losses rose to $5.8 million from $3.0 million.
- Commercial loans at fair value increased by approximately $669 million from year-end, partly because a planned purchaser did not complete an approximately $825 million CRE loan purchase. Cash and Federal Reserve deposits declined as funds were deployed into loan growth.
- CECL adoption on January 1, 2020 increased the loan allowance by $2.6 million and established a $569,000 reserve for unfunded commitments; the after-tax cumulative adjustment reduced retained earnings by $2.4 million.
Outlook, risks, contingencies and unusual items
No formal earnings or financial guidance is provided. Management cited uncertainty from COVID-19, including potential deterioration in borrowers’ ability to pay, collateral values and fair values, and possible increases in provisions. At September 30, loan payment deferrals totaled $53.5 million, or 1.2% of the listed loan principal. Government-funded payments on SBA 7(a) loans were expected to largely end in Q4 2020; the company may grant further deferrals, and continuation of government support was not assured.
Management identified $63.3 million of hotel loans within its $1.60 billion CRE fair-value portfolio as potentially higher risk. It cited an external analysis estimating 1.2% cumulative COVID-related losses on its predominantly multifamily portfolio and said loans were generally recorded at a discount. These estimates are subject to uncertainty. PPP loans were fully government-guaranteed, but the company warned that SBA findings of origination, funding or servicing deficiencies could reduce or jeopardize that guarantee.
Legal matters include a Delaware unclaimed-property suit involving prepaid-card balances, two non-public SEC fact-finding inquiries (one concerning debit-card activity and another CMBS offerings and holdings), and a New York suit by a prospective loan purchaser seeking return of a $12.5 million deposit. The company said it could not determine whether the first and third matters would have a material adverse effect; it is cooperating with the SEC, which had made no findings or allegations. Costs of responding to the SEC inquiries could remain material. The Bank’s corrective action plan under its 2015 FDIC consent order was completed in January 2020; management believes it has substantially complied.
Other notable items: a $2.2 million nine-month loss on interest-rate derivatives; a $1.4 million Q3 2019 SEC settlement expense absent in Q3 2020; and a November 5, 2020 announcement of a stock-repurchase program that may spend up to $10 million per quarter, subject to conditions and possible modification or termination.
Most important facts for investors to verify
- Credit performance and fair-value assumptions for the retained CRE portfolio, especially hotels, and the sensitivity of reported values to COVID-related losses and market conditions.
- Whether deferrals increase after SBA support ends, and the quality and performance of PPP and other SBA exposures.
- Deposit stability and concentration: the filing says most deposits are obtained through third parties and classified as brokered, creating potential funding constraints if the Bank ceases to be “well capitalized.”
- Progress, costs and potential outcomes of the SEC inquiries, prepaid-card litigation and Cascade deposit dispute.
- Liquidity and capital trends following rapid loan growth, the new senior debt issuance and the planned share repurchases.
- Whether management’s plan to retain CRE loans rather than securitize them changes future funding needs, earnings volatility or interest-rate sensitivity.