The Bancorp, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet comparisons are against December 31, 2022. The Bancorp is a financial holding company whose bank subsidiary operates specialty finance and payments businesses, including specialty lending, prepaid and debit accounts, and payment processing.
Financial performance and condition
| Metric | Q1 2023 / Mar. 31, 2023 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $85.8 million | $52.9 million in Q1 2022; up 62.4% |
| Net interest margin | 4.67% | 3.12% in Q1 2022 |
| Net income | $49.1 million; diluted EPS $0.88 | $29.0 million; diluted EPS $0.50 in Q1 2022 |
| Non-interest income / expense | $29.0 million / $48.0 million | $25.1 million / $38.4 million in Q1 2022 |
| Provision for credit losses | $1.9 million | $1.5 million in Q1 2022 |
| Total assets / shareholders’ equity | $7.61 billion / $725.1 million | $7.90 billion / $694.0 million at Dec. 31, 2022 |
| Loans, net / deposits | $5.33 billion / $6.70 billion | $5.46 billion / $7.03 billion at Dec. 31, 2022 |
| Cash and cash equivalents | $787.2 million | $888.2 million at Dec. 31, 2022 |
| Debt | $99.1 million senior debt; $13.4 million subordinated debentures; $10.0 million other long-term borrowings | No material change in these balances from year-end |
Cash flow: Operating activities provided $43.1 million and investing activities provided $206.3 million; financing activities used $350.5 million. Cash and cash equivalents fell by $101.0 million during the quarter. The investing inflow primarily reflected loan repayments exceeding originations; financing outflow primarily reflected deposit decreases and $25.1 million of share repurchases, including excise tax.
Credit and capital: The allowance for credit losses on loans was $23.8 million, or 0.44% of loans, versus $22.4 million, or 0.41%, at year-end. Non-performing loans were $13.8 million, compared with $18.1 million at year-end; non-performing assets were $34.9 million. The company and bank reported regulatory capital ratios above the stated “well capitalized” thresholds. Company common equity to assets was 9.53% at March 31.
Material changes and management commentary
- Net income increased primarily due to higher interest income as variable-rate loans and securities repriced after Federal Reserve rate increases, with additional contribution from loan growth. Average loans and leases rose 16.5% year over year to $5.99 billion.
- Funding costs rose materially: the reported cost of deposits and interest-bearing liabilities increased to 2.15% from 0.19% in Q1 2022. Management noted deposit pricing adjusts promptly while many earning assets reprice with a lag.
- Payments fees increased, supported by transaction volume, new and existing clients, and a $1.4 million client termination fee. Q1 2023 non-interest income also included approximately $0.6 million related to Q4 2022.
- Non-interest expense rose 25.2%, including a $5.9 million increase in salaries and benefits, higher compliance and technology costs, and a $1.0 million writedown on a movie-theater property in other real estate owned (OREO).
- Deposits declined $325.5 million from year-end, principally because $330 million of short-term time deposits matured. Management reported no borrowings outstanding on its Federal Reserve or FHLB lines at March 31 and approximately $1.1 billion available on its FHLB line.
- The company repurchased 778,442 shares for $25.0 million during the quarter, at an average price of $32.12 per share. Its 2023 program authorizes up to $100 million of repurchases for the year, subject to suspension or termination.
Outlook, risks, contingencies, and unusual items
- No formal earnings or financial guidance is provided. Management says higher rates have benefited net interest income, but future Federal Reserve rate reductions could lower it. Further IBLOC paydowns could also reduce interest income if not offset by growth elsewhere.
- Interest-rate sensitivity modeling projected net interest income up 14.05% under an immediate +200-basis-point shock and down 14.18% under a −200-basis-point shock. The latter slightly exceeded the company’s 15% policy limit? The filing states policy limits a decline of 15%; the modeled decline was 14.18%, within that limit. Management cautions actual results may differ from models.
- Credit risks include economic deterioration, inflation, recession risk, collateral values and vehicle lease residual values. Management retained elevated economic qualitative credit-risk factors for small-business lending and leasing. The loan portfolio includes substantial multifamily real estate bridge lending; the filing cites collateral and interest-rate cap protections but notes valuations and future repayment are uncertain.
- Available-for-sale securities had $36.0 million of gross unrealized losses at March 31, primarily attributed to market interest rates; management recorded no credit-loss allowance on these securities. Accumulated other comprehensive loss was $26.4 million.
- Approximately $643.9 million of deposits were estimated to be uninsured. Management says many uninsured balances are small or anonymous prepaid-card balances, but acknowledges uninsured deposits may pose greater liquidity risk if large depositors withdraw funds.
- The Bank received a CFPB Civil Investigative Demand in March concerning escheatment practices for certain partner accounts; it is cooperating, and response costs may be material. A Delaware unclaimed-property lawsuit and former-employee bonus claims remain pending. Cachet Financial Services seeks approximately $150 million in its bankruptcy-related case; the Bank is defending the claims. The company says it cannot determine whether these matters will materially affect its financial condition or operations.
- After quarter-end, SEC staff notified the company on May 9, 2023 that it did not intend to recommend enforcement action concerning its prior inquiry; the company considers the matter closed.
- The company continues evaluating LIBOR transition exposure, including certain securities and subordinated debentures for which the filing says fallback arrangements are less clear. The Bank relocated its main office from Wilmington, Delaware, to Sioux Falls, South Dakota, on February 1, 2023.
Most important facts for investors to verify
- Whether higher deposit costs, deposit movements, and any changing funding mix sustain or compress net interest margin.
- Trends in uninsured deposits, available borrowing capacity, and liquidity as deposits and loans change.
- Credit quality and allowance adequacy, particularly for multifamily real estate bridge loans, leasing, and non-accrual credits.
- Whether payments-fee growth persists after excluding the one-time termination fee and prior-quarter-related income.
- Potential financial exposure and developments in the CFPB inquiry, Cachet litigation, and other pending legal matters.
- Actual share repurchases under the 2023 authorization and their effect on capital and per-share results.