The Bancorp, Inc. — Q2 2023 Form 10-Q
Business context and reporting period. The Bancorp is a financial holding company whose bank operates specialty finance and payments businesses. Specialty lending includes securities- and insurance-backed credit lines, SBA lending, vehicle leasing, advisor financing and commercial real estate bridge loans. Payments services include prepaid and debit cards, ACH processing and related deposit accounts. This unaudited report covers the quarter and six months ended June 30, 2023; balance-sheet comparisons are to December 31, 2022.
Financial performance and condition
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net interest income | $87.2 million | $54.6 million | $173.0 million | $107.4 million |
| Non-interest income | $29.3 million | $28.0 million | $58.3 million | $56.5 million |
| Non-interest expense | $49.9 million | $42.8 million | $98.0 million | $81.2 million |
| Provision for credit losses | $0.4 million | $(1.5) million reversal | $2.3 million | $3.5 million |
| Net income | $49.0 million | $30.4 million | $98.1 million | $59.4 million |
| Diluted EPS | $0.89 | $0.53 | $1.76 | $1.03 |
| Net interest margin | 4.83% | 3.17% | 4.75% | 3.14% |
Q2 net income rose 61% year over year, mainly as higher rates lifted loan and securities yields. Q2 net interest income increased 59.8%; average loans and leases grew 4.8% to $5.73 billion. The average yield on loans rose to 7.49% from 4.03%, while deposit and other funding costs increased to 2.37% from 0.44%. Management said asset repricing generally lags deposit repricing.
Non-interest expense increased 16.6% in Q2, led by salaries and benefits, up $7.2 million (27.6%), reflecting additional financial-crime, compliance and IT staffing, higher incentive and stock compensation, and lower deferral of loan-origination costs. Prepaid, debit-card and related fees rose 10.7% in Q2 to $22.2 million, supported by transaction growth and new clients.
- Assets and funding: Total assets were $7.54 billion, down from $7.90 billion. Cash and cash equivalents were $880.5 million; loans at amortized cost, net of allowance, were $5.24 billion; and commercial loans at fair value were $396.6 million. Deposits were $6.62 billion, down $407.1 million (5.8%), largely reflecting maturity of $330 million in short-term time deposits. The allowance for credit losses was $23.3 million, or 0.44% of total loans.
- Debt and liquidity: Senior debt was $95.7 million, subordinated debentures $13.4 million and other long-term borrowings $9.9 million. No balances were outstanding on the Federal Reserve or FHLB credit lines at quarter-end; reported available capacity was $2.06 billion at the Fed and approximately $752.4 million at the FHLB. Available-for-sale securities were $776.4 million. The company reported $604 million of deposits not covered by FDIC insurance, while noting that many are small-balance accounts.
- Cash flow: For the first six months, operating activities provided $72.5 million and investing activities provided $380.1 million, while financing activities used $460.2 million. Cash and cash equivalents decreased $7.6 million to $880.5 million.
- Capital: At June 30, the Bank’s Tier 1 leverage ratio was 11.59%, Tier 1 capital to risk-weighted assets 16.67%, total capital to risk-weighted assets 17.16%, and common equity Tier 1 ratio 16.67%. The company and Bank exceeded the stated “well capitalized” thresholds.
Material changes and credit quality
- Loans at amortized cost declined to $5.27 billion from $5.49 billion at year-end; commercial loans at fair value fell to $396.6 million from $589.1 million as the legacy portfolio continued to run off. Real estate bridge loans at amortized cost increased to $1.83 billion from $1.67 billion.
- SBLOC and IBLOC balances declined from year-end, including IBLOC from $1.12 billion to $806.1 million. Management cautioned that further paydowns could reduce interest income if not offset by other lending growth.
- Non-accrual loans increased to $14.0 million from $10.4 million, while loans 90 days past due and still accruing declined to $0.6 million from $7.8 million. Total non-performing assets were $35.5 million, down from $39.3 million.
- Six-month net charge-offs were $1.7 million, primarily from leasing and small-business loans. Management cited higher leasing-related economic and collateral risk assumptions, including lower vehicle auction prices and uncertainty in the higher-rate environment, as factors in the allowance assessment.
- Available-for-sale securities had $39.3 million of gross unrealized losses at June 30, primarily attributed to market interest-rate changes; the company recorded no credit-loss allowance on these securities.
Outlook, risks and unusual items
The filing provides no formal earnings or revenue guidance. Management said higher rates had benefited net interest income, but future Federal Reserve rate reductions could lower it. Its interest-rate model estimated net interest income would rise 6.21% under an immediate +100 basis-point shock and fall 6.28% under a -100 basis-point shock; management cautioned actual results may differ because of assumptions about repricing, deposit behavior and prepayments.
- Unusual items: First-half payment-fee income included approximately $0.6 million related to the fourth quarter of 2022 and a $1.4 million client termination fee. First-half expense included $1.2 million of OREO write-downs and losses. A $1.152 million legal-settlement expense recorded in the prior-year quarter did not recur.
- Contingencies: The Bank is defending a Delaware unclaimed-property lawsuit concerning prepaid cards; the company cannot assess whether its outcome could materially affect results. Former-employee cases seek $2.3 million in remaining bonus-related claims, with summary-judgment motions pending. In Cachet’s bankruptcy-related proceeding, the Bank faces claims seeking approximately $150 million; the Bank is defending the matter. The CFPB issued a Civil Investigative Demand concerning escheatment practices; the company cannot predict the investigation’s timing or outcome and says future costs may be material.
- Other risks: Management highlighted interest-rate and economic uncertainty, commercial real estate collateral values, credit-loss adequacy, deposit concentration and uninsured-deposit outflows, banking-sector volatility and potential higher FDIC assessments, regulatory matters, and cybersecurity risks.
- Capital returns: The company repurchased $50 million of shares in the first half under its 2023 program. It subsequently repurchased 284,227 shares for $10.3 million between July 1 and August 1, 2023.
Most important facts for investors to verify
- Whether rising deposit costs or falling rates materially erode net interest income and margins.
- Whether the decline in SBLOC/IBLOC balances is offset by sustainable growth in other loan categories and payment deposits.
- Trends in non-accrual loans, leasing charge-offs, real estate collateral values and the adequacy of the $23.3 million allowance.
- Deposit retention, the level and behavior of uninsured balances, and continued availability of contingent borrowing capacity.
- Developments and potential financial exposure from the Cachet litigation, CFPB investigation and other pending legal matters.
- Whether expense growth, especially compensation and compliance/technology costs, remains proportionate to revenue growth.