The Bancorp, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Figures are unaudited and in U.S. dollars; financial statement amounts are in thousands unless noted.
Business context and reporting period
The Bancorp is a financial holding company whose bank provides regional commercial and retail banking and nationwide affinity banking services, including prepaid and debit cards, health savings accounts, merchant processing and private-label banking. The filing compares Q3 and the first nine months of 2012 with the corresponding 2011 periods; balance-sheet comparisons are principally with December 31, 2011.
Financial performance and position
- Q3 earnings: Net income was $3.6 million, up 56.0% from $2.3 million; diluted EPS was $0.11 versus $0.07. Net interest income was $21.6 million, up 10.0%; noninterest income was $11.2 million, versus $6.7 million. Provision for loan losses was $5.5 million, and noninterest expense was $21.9 million, up 23.3%.
- Nine-month earnings: Net income was $11.4 million, up 102.2% from $5.6 million; diluted EPS was $0.34 versus $0.18. Net interest income was $63.4 million, up 13.0%; noninterest income was $34.0 million, versus $22.1 million. Provision was $15.0 million, down from $16.7 million; noninterest expense was $64.7 million, up 22.2%.
- Margins and returns: Net interest margin fell to 2.90% from 3.15% in Q3 and to 2.53% from 3.00% for the nine months. Q3 return on average assets/equity was 0.46%/4.97%, versus 0.33%/3.43%; nine-month figures were 0.43%/5.44%, versus 0.27%/3.06%.
- Balance sheet at September 30: Assets were $3.11 billion, up from $3.01 billion at year-end 2011. Loans, net of deferred costs, were $1.86 billion, up from $1.74 billion; deposits were $2.78 billion, up 3.7% from $2.68 billion. Cash and cash equivalents were $544.7 million, down from $749.2 million.
- Funding, debt and capital: Liabilities included $13.4 million of subordinated debentures and $18.8 million of repurchase agreements. The company reported no outstanding FHLB advances or balances on its credit lines; available lines totaled $478 million. The Bank’s Tier 1 leverage, Tier 1 risk-based and total risk-based capital ratios were 7.58%, 11.98% and 13.24%, respectively, above the stated “well-capitalized” thresholds.
- Cash flow, first nine months: Operating activities provided $21.8 million; investing activities used $310.6 million, mainly reflecting securities purchases and loan growth; financing activities provided $84.3 million, principally from deposit growth. Cash and cash equivalents decreased $204.5 million.
Material changes versus comparable periods
- Growth in prepaid card activity was the principal driver of noninterest income: Q3 prepaid fees rose to $7.5 million from $4.0 million; nine-month fees rose to $23.6 million from $13.2 million. Management also cited higher account and transaction volumes and new clients/processors.
- Loan and securities balances increased interest income, but lower asset yields and excess deposits held at the Federal Reserve earning approximately 0.25% pressured margins. Lower deposit costs partly offset this pressure.
- Expense growth reflected added staff and business capabilities, higher data-processing costs, and other operating costs. Legal expense included $310,000 related to European prepaid card contracts and processing infrastructure. Nine-month OREO sale/write-down losses rose to $2.4 million from $555,000.
- Credit quality weakened on several measures: impaired loans increased to $29.2 million from $17.6 million at year-end 2011; nonperforming loans rose to $30.3 million from $21.7 million; nonperforming assets reached $33.4 million from $29.1 million. OREO declined to $3.1 million from $7.4 million.
Outlook, risks and unusual items
- The filing provides no specific earnings or financial guidance. Management cautions that nine-month results may not indicate full-year results and that forward-looking statements are subject to risks and uncertainty.
- Management considered the $33.1 million allowance for loan and lease losses, equal to 1.78% of loans, adequate, but said future provisions may be needed if economic conditions, borrower performance or loss assumptions deteriorate. Nonperforming loans included $3.9 million past due 90 days or more and still accruing; troubled debt restructurings totaled $8.3 million.
- Q3 provision increased year over year in light of higher impaired loans. For the nine months, net charge-offs were $11.5 million; management attributed the lower provision versus 2011 to reduced net charge-offs and other factors.
- Liquidity included $540.0 million of interest-earning deposits, primarily at the Federal Reserve. Management described deposit seasonality and noted that excess liquidity earns low returns. Outstanding commitments to fund loans, including unused lines, were $476.6 million.
- Interest-rate risk remains relevant: management’s repricing analysis showed a negative cumulative gap through one year and a positive gap thereafter, while warning that assumptions and actual deposit and loan behavior can differ from estimates.
- The company recorded $126,000 of credit-related other-than-temporary impairment on a held-to-maturity security for the nine months. It reported unrealized losses of $4.4 million on held-to-maturity trust-preferred securities and concluded those losses were temporary, citing its intent and ability to hold the securities to recovery.
- Other items include a $173,000 civil money penalty related to a terminated customer relationship, and $35.8 million of commercial mortgage-backed securities purchased through a brokerage firm in which the company’s Chairman was a principal. The company said purchases were at market, independently price-checked, and incurred no separate commission.
- Management reported disclosure controls effective at the reasonable-assurance level and no material change in internal control over financial reporting during the quarter. No subsequent event requiring recognition or disclosure was identified.
Important facts for investors to verify
- Whether growth in prepaid and affinity-related income is durable and sufficient to offset rising operating expenses and continued margin compression.
- Subsequent trends in impaired, nonperforming and restructured loans, especially construction and commercial exposures, and the adequacy of the allowance relative to realized losses.
- The performance, valuation assumptions and credit exposure of held-to-maturity trust-preferred securities and other securities with unrealized losses.
- The stability and seasonality of affinity-related deposits, use of excess Federal Reserve balances, and the company’s ability to fund its $476.6 million of loan commitments.
- Costs and outcomes associated with European prepaid card contracts, the civil penalty, and the disclosed related-party transactions, including securities purchases through the Chairman-affiliated broker.