The Bancorp, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; this is an annual report, not a standalone fourth-quarter filing. The Bancorp is a financial holding company whose principal subsidiary, The Bancorp Bank, generates most revenue. Its strategy combines payments and deposit services with specialty lending.
Business context and financial performance
The business includes prepaid and debit cards, payment processing and affinity banking, alongside securities- and insurance-backed credit lines, SBA lending, vehicle leasing, investment-advisor financing and real-estate bridge lending. The company resumed originating apartment-focused real-estate bridge loans in Q3 2021, intending to hold them on balance sheet.
| Metric | FY2021 | FY2020 |
|---|---|---|
| Net interest income | $210.9 million | $194.9 million |
| Provision for credit losses | $3.1 million | $6.4 million |
| Non-interest income | $104.7 million | $84.6 million |
| Non-interest expense | $168.4 million | $164.8 million |
| Net income | $110.7 million | $80.1 million |
| Diluted earnings per share | $1.88 | $1.37 |
| Return on average assets / equity | 1.68% / 17.94% | 1.34% / 15.08% |
| Net interest margin | 3.35% | 3.45% |
Net income from continuing operations was $110.4 million, compared with $80.6 million in 2020. The filing attributes improved results principally to loan growth and higher income from repayments and payoffs of commercial real-estate loans carried at fair value. Lower credit-loss provision and interest expense also helped. Payments fees were nearly flat, as growth in other programs was offset by a client moving its operations to its own bank and lower margins on some transaction volume.
Balance sheet, cash flow and capital
- Assets and lending: Total assets were $6.84 billion, up from $6.28 billion. Total loans, including commercial loans at fair value, were $5.08 billion, up 13.7%. Average loans and leases rose 16.8% to $4.60 billion. Available-for-sale securities declined 20.9% to $953.7 million.
- Funding and liquidity: Deposits were $5.98 billion, up 9.4%; average deposits were $5.75 billion. Cash and cash equivalents were $601.8 million, including $596.4 million at the Federal Reserve. The Bank reported no year-end borrowings on its Federal Reserve or FHLB credit lines; available capacity was approximately $1.36 billion and $939.6 million, respectively.
- Cash flow: Operating activities provided $83.9 million; investing activities used $305.9 million, largely reflecting $1.10 billion of net loan growth; financing activities provided $478.3 million, including $514.9 million of deposit growth and $40.0 million of share repurchases.
- Debt and equity: Senior notes had $98.7 million outstanding at year-end, bear interest at 4.75% and mature in 2025. Subordinated debentures were $13.4 million, with a floating LIBOR-based rate and 2038 maturity. Shareholders’ equity was $652.5 million, compared with $581.2 million.
- Credit and capital: Allowance for credit losses was $17.8 million, or 0.48% of loans; non-performing loans were $3.6 million versus $12.7 million. Net charge-offs were $0.8 million. The Company and Bank were well capitalized; total risk-based capital ratios were 15.13% and 15.88%, respectively.
Material changes, outlook and risks
- Non-interest income rose $20.1 million, mainly reflecting a swing in fair-value commercial-loan results: a $14.9 million gain in 2021 versus a $3.9 million loss in 2020. The 2021 result primarily reflected loan prepayments and payoffs; 2020 included pandemic-related fair-value losses.
- The company originated $621.7 million of real-estate bridge loans by year-end. Management noted that scheduled maturities and potential prepayments could result in most of the remaining legacy fair-value CRE portfolio being repaid in 2022, but gave no assurance that new originations would replace those balances.
- No formal earnings guidance is provided. PPP lending is not expected to be replaced: $44.8 million remained outstanding at year-end, and the company did not expect new PPP-related revenue. A $4.6 million fee from a short-term line used to fund PPP loans is also not expected to recur.
- Management stated it believed liquidity and capital were sufficient for the next 12 months and foreseeable future. However, stimulus-related deposits had begun to recede, and approximately $2.04 billion of deposits were uninsured; the company said many uninsured balances were small or related to cards without identified depositors.
- Interest-rate sensitivity is notable: management estimated that a cumulative 150-basis-point rate increase might be needed before net interest income benefits from higher rates, in part because of loan-rate floors. Modeled net interest income fell 8.10% under a 100-basis-point decrease and 17.36% under a 200-basis-point decrease; the latter exceeded the stated policy threshold, and the filing cautions that negative-rate scenarios are less reliable.
- Key risks include concentration in payments fees and third-party-generated deposits, loss of affinity relationships, card fraud and cyber or vendor disruption, credit and real-estate valuation risk, regulatory and compliance costs, and the LIBOR transition. The top five prepaid/debit-related fee contributors represented approximately 55% of that income.
- Contingencies include two non-public SEC fact-finding inquiries, with no findings or allegations reported; a Delaware unclaimed-property lawsuit involving prepaid-card balances; and the Cascade dispute over a retained $12.5 million deposit. Cachet Financial Services seeks approximately $150 million in a bankruptcy-related proceeding. The company said it could not determine the potential material effect of these matters.
- The Board authorized 2022 repurchases of up to $60 million; $15 million was repurchased in January–February 2022. The Bank also notified the OCC of its intention to seek conversion to a national charter and relocation of its headquarters to Sioux Falls, subject to regulatory approval, projected for late Q3 2022.
The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting. Management and the auditor reported effective internal controls as of year-end.
Important facts for investors to verify
- Whether payments revenue, deposit balances and client relationships remain durable, especially following client departures and the concentration of fee income.
- Whether new bridge-loan originations can offset expected repayments, and whether fair-value assumptions and collateral valuations hold up.
- Deposit stability, uninsured deposit composition, brokered-deposit classifications and continued access to liquidity facilities.
- Credit performance in SBA, leasing and real-estate portfolios, including the adequacy of the allowance under CECL.
- Developments and possible costs or outcomes in the SEC inquiries and pending litigation, particularly Cachet and Cascade.
- Execution and regulatory approval of the planned bank charter conversion and headquarters relocation; the interest-rate and LIBOR-transition exposures.