Bancorp, Inc. quarterly report, Q3 FY2019

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The Bancorp, Inc. — Q3 2019 Form 10-Q

Reporting period: Three and nine months ended September 30, 2019. Amounts below are in millions unless stated otherwise. The Bancorp is a financial holding company whose primary subsidiary, The Bancorp Bank, operates specialty lending and payments businesses. Results are unaudited.

Financial performance

  • Q3 profit: Net income was $20.4 million, or $0.36 per diluted share, versus $61.3 million, or $1.07 per diluted share, in Q3 2018. Continuing-operations net income was also $20.4 million.
  • Nine-month profit: Net income was $49.7 million, or $0.87 per diluted share, versus $81.6 million, or $1.45 per diluted share. Continuing-operations net income was $48.4 million.
  • Net interest income and margin: Q3 net interest income increased 22.6% to $37.6 million; net interest margin rose to 3.35% from 3.22%. For the first nine months, net interest income increased 17.6% to $106.1 million and margin rose to 3.40% from 3.15%.
  • Non-interest income: Q3 was $33.5 million, compared with $91.0 million in the prior-year quarter; nine-month income was $83.6 million versus $137.1 million. The comparisons are heavily affected by the $65.0 million gain from the 2018 sale of the safe-harbor IRA portfolio. Q3 prepaid/debit card and payment-processing fees together increased 20.9% to $18.7 million.
  • Expenses and credit provision: Q3 non-interest expense increased 12.7% to $42.1 million, including a $1.4 million SEC settlement charge; excluding that charge, the company reported a 9.0% increase. Nine-month expense rose 6.3% to $120.8 million. Loan-loss provision was $0.7 million in Q3 and $3.0 million year to date.
  • Cash flow: For the first nine months, operating cash flow was $163.3 million, investing cash flow was $(171.1) million, and financing cash flow was $410.0 million. Cash and cash equivalents increased $402.2 million to $956.5 million.

Financial position, liquidity and asset quality

  • Balance sheet: Total assets were $4.94 billion at September 30, up from $4.44 billion at year-end 2018. Loans, net of allowance, were $1.67 billion; available-for-sale securities were $1.38 billion.
  • Funding and liquidity: Deposits totaled $4.35 billion, up 10.4% from December 31, 2018. The increase included $475 million of short-term time deposits raised to fund commercial loan originations; those deposits matured in October 2019. Period-end cash included $932.4 million in interest-earning deposits, primarily at the Federal Reserve. The company reported no period-end balance on its FHLB or Federal Reserve credit lines, with more than $800 million of FHLB availability and a $1.17 billion Federal Reserve line.
  • Debt and capital: Long-term borrowings were $41.2 million and subordinated debentures were $13.4 million. The company and Bank were reported as well capitalized. At September 30, the company’s Tier 1 leverage ratio was 9.53%; the Bank’s was 9.40%. The company’s total risk-based capital ratio was 25.64%.
  • Credit quality: The allowance for loan and lease losses was $10.4 million, or 0.62% of loans, versus $8.7 million, or 0.58%, at year-end. Nonperforming loans were $9.2 million, up from $5.5 million; nonaccrual loans were $6.4 million. The allowance covered 112.51% of nonperforming loans. Nine-month net charge-offs were $1.2 million.
  • Loan growth: Total loans before allowance grew from $1.50 billion at year-end to $1.68 billion. SBLOC/IBLOC balances were $920.5 million, and direct lease financing was $412.8 million.

Material changes and unusual items

  • Profit declined sharply year over year primarily because Q3 and nine-month 2018 included the $65.0 million IRA-portfolio sale gain. Excluding that specific comparison item, growth in net interest income and payments fees supported 2019 results.
  • The company sponsored a $778.2 million commercial mortgage securitization in Q3 2019 and recorded a $13.7 million gain. It also completed a $518.3 million securitization in Q1, recording a $10.8 million gain. Securitization gains depend on market conditions.
  • Average Q3 loans and leases increased 31.1% year over year to $2.62 billion; average commercial mortgages originated for securitization increased 147% to $770.5 million. Q3 loan growth included 9.9% sequential growth in SBLOC/IBLOC and 8.3% in SBA loans.
  • Adoption of the new lease accounting standard resulted in an $16.4 million operating lease right-of-use asset and an $18.1 million lease obligation at January 1, 2019, with no reported effect on operating results.
  • The company continues to dispose of its discontinued commercial lending portfolio. Assets held for sale from discontinued operations were $162.1 million, including $136.1 million of net loans and $26.0 million of other real estate owned.

Outlook, risks and contingencies

  • Guidance: The filing provides no specific earnings or financial forecast. Management describes growth in specialty lending and payments as part of its strategy, but notes that securitizations depend on market conditions and that interim results may not indicate full-year results.
  • Regulatory constraints: The Bank remains subject to FDIC consent-order requirements, including restrictions on certain new payment-processing and prepaid-card activities until specified BSA remediation is demonstrated and approved. The Bank cannot pay dividends without prior FDIC approval; the company also requires Federal Reserve approval for dividends and certain other actions. These restrictions may limit growth or holding-company funding.
  • Legal matters: The SEC investigation settlement became effective September 20, 2019; the company agreed to pay $1.4 million without admitting or denying allegations. A Delaware qui tam case alleges unclaimed-property violations relating to certain prepaid cards; the company said it could not determine whether the outcome would materially affect its financial condition or operations. Claims related to a Florida hotel project were dismissed without prejudice in October 2019.
  • Other risks: Management identifies credit-loss estimates, fair values—particularly Level 3 valuations—and economic conditions as significant sources of uncertainty. Nonperforming loans increased, and the company expects the 2020 CECL accounting standard to increase its allowance, although the amount was not clear in the filing.
  • Management concluded disclosure controls and procedures were effective at a reasonable-assurance level and reported no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

  • How much recurring earnings growth remains after separating out prior-year IRA-sale gains and current securitization gains.
  • Whether October maturities of the $475 million short-term time deposits were replaced, and how liquidity and funding costs evolved after quarter-end.
  • Whether loan delinquencies and nonperforming loans continue to rise, and whether the allowance adequately reflects growth in SBA and lease exposures.
  • Progress and regulatory approval of BSA remediation, restrictions on business activity, and the potential effect on deposits and payments revenue.
  • Resolution or further developments in the Delaware prepaid-card litigation and the remaining discontinued-operations assets, including the Florida mall and Walnut Street investment.