The Bancorp, Inc. — Q3 2013 Form 10-Q
Business context and period. The Bancorp is a financial holding company whose bank provides regional commercial and retail banking and national prepaid-card, payment-processing, healthcare-account, institutional and private-label banking services. The report covers the quarter and nine months ended September 30, 2013; balance-sheet comparisons are with December 31, 2012. Dollar figures below are in millions unless stated otherwise.
Financial results and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net interest income | $24.1 | $21.6 | $70.4 | $63.4 |
| Provision for loan and lease losses | $8.0 | $5.5 | $23.0 | $15.0 |
| Non-interest income | $19.6 | $11.2 | $61.1 | $34.0 |
| Non-interest expense | $28.9 | $21.9 | $81.0 | $64.7 |
| Net income | $4.8 | $3.6 | $17.8 | $11.4 |
| Diluted earnings per share | $0.13 | $0.11 | $0.47 | $0.34 |
- Revenue and earnings: Q3 net income rose 34.5%; nine-month net income rose 56.2%. Prepaid-card fees were $10.2 million in Q3 and $33.7 million year to date. Loan-sale gains were $4.7 million in Q3 and $12.7 million year to date; the filing says there were no loan sales in the comparable 2012 periods.
- Margins: Net interest margin declined to 2.53% from 2.90% in Q3 and to 2.41% from 2.53% for the first nine months. Management attributed the declines mainly to lower loan and securities yields, partly offset by lower deposit costs. Q3 return on average assets/equity was 0.48%/5.52%; nine-month figures were 0.59%/6.91%.
- Balance sheet and liquidity: Total assets were $4.00 billion, up from $3.70 billion at year-end; loans, net of allowance, were $1.95 billion versus $1.87 billion. Deposits were $3.57 billion, up from $3.31 billion. Cash and cash equivalents were $730.5 million, down from $968.1 million, primarily as funds were directed to loans and securities. Nine-month operating cash flow was $80.2 million; investing cash outflow was $579.7 million, partly funded by $256.0 million of deposit growth. The Bank reported no outstanding borrowing-line balances and had $470.7 million of available credit lines.
- Debt and capital: Subordinated debentures were $13.4 million and repurchase-agreement funding was $22.1 million at September 30. Shareholders’ equity was $353.3 million. Bancorp regulatory capital ratios were 8.91% Tier 1 leverage, 14.54% Tier 1 risk-based and 15.79% total risk-based; Bank ratios were 6.86%, 11.23% and 12.48%, respectively. The filing states both were well capitalized under then-current rules.
Material changes and asset quality
- Non-interest income growth was driven by prepaid-card activity and loan-sale gains. Operating costs also increased: salaries and benefits rose 37.8% in Q3, reflecting staffing and business expansion, among other items.
- Credit costs and problem assets increased. The allowance for loan and lease losses was $39.2 million, or 1.97% of loans, versus $33.0 million, or 1.74%, at year-end. Nine-month net charge-offs were $16.9 million, compared with $11.5 million in the comparable 2012 period.
- Nonperforming loans were $49.0 million and other real estate owned (OREO) was $20.1 million, bringing nonperforming assets to $69.1 million, or 1.73% of assets. At year-end 2012, nonperforming assets were $33.9 million. Commercial non-accrual loans increased notably; OREO growth reflected $19.3 million of transfers from loans.
- Available-for-sale securities increased to $1.08 billion from $718.1 million at year-end; held-to-maturity securities increased to $97.5 million from $45.2 million. Nine-month other comprehensive loss was $6.8 million, largely reflecting a decline in unrealized securities gains. Management attributed most unrealized losses to interest-rate and market conditions and concluded they were temporary; it reported $20,000 of other-than-temporary impairment charges year to date.
Outlook, risks and unusual items
- The filing gives no specific earnings or balance-sheet guidance. Management said it expected to meet the revised capital requirements and expected to elect the option to exclude certain accumulated other comprehensive income items from regulatory capital under the new rules.
- Key risks include further deterioration in loan performance, additional provision needs, continued pressure on asset yields and net interest margin, and the sensitivity of earnings to interest rates and deposit behavior. Management cautioned that interim results may not indicate full-year results.
- New capital rules were scheduled to take effect beginning in 2015, with a capital-conservation buffer phased in through 2019. Management believed Bancorp and the Bank could meet targeted ratios upon implementation.
- Unusual items include loan-sale gains, a $300,000 one-time healthcare-program contract fee within year-to-date other income, and a $1.7 million year-to-date gain recorded for derivative fair-value changes. The company disclosed securities purchases from a broker-dealer in which its chairman had an interest: $62.1 million year to date, including $5.3 million of CRA investments in Q3. It reported no separate fee or commission paid.
- The Bank had $71.4 million of loans to related parties at quarter-end, up from $31.4 million at year-end; the filing states these loans were current and on terms comparable to other borrowers. Management reported effective disclosure controls and no material subsequent events requiring recognition or disclosure.
Important facts for investors to verify
- Whether commercial non-accrual loans and OREO stabilize, and whether the $39.2 million allowance remains adequate as charge-offs and nonperforming assets rise.
- How sustainable earnings are without the period’s loan-sale gains and with continued growth in prepaid-card fees; assess the related operating-cost increase.
- Whether deposit growth and funding remain stable, and whether declining asset yields continue to compress net interest margin.
- The valuation, credit exposure and interest-rate sensitivity of the expanded securities portfolio, including held-to-maturity positions and unrealized losses.
- Progress toward compliance with new capital rules, and the nature and governance of related-party lending and securities transactions.