KBRA Affirms Ratings for The Bancorp, Inc.

KBRA affirms the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, and the short-term debt rating of K3 for Wilmington, Delaware based The Bancorp, Inc. (NASDAQ: TBBK) (“the company”). Additionally, KBRA affirms the deposit and senior unsecured debt ratings of BBB+, the subordinated debt rating of BBB, and the short-term deposit and debt ratings of K2 for the lead subsidiary, The Bancorp Bank, National Association. The Outlook for all long-term ratings is Positive.

Key Credit Considerations

The ratings are supported by TBBK’s strong earnings, outperforming rated peers over a multi-year period (including a reported ROAA of 2.86% through 1H24), benefiting from the company’s position as a leader in the BaaS space. Through its BaaS product lines, more specifically, its prepaid and debit card business where TBBK is the largest issuer by transaction volume, the company generates meaningful fee revenues, reporting over $60 million in total noninterest income in 1H24, representing 1.6% of average assets (~25% of total revenues). Additionally, with the bulk of its deposits sourced through its BaaS business lines, TBBK maintains an enviable funding position with a highly granular and durable deposit base, with rather stable costs (TBBK’s total cost of deposits has tracked near 2.4% over multiple quarters) and limited funding pressures, in part, due to the assumed asset cap ($10 billion) for the company related to the effects of the Durbin amendment on the bank.

Further underpinning ratings is TBBK’s rather robust capital levels, with the company consistently running with capital ratios above rated peer averages, particularly risk-based measures, which included a CET1 ratio of over 14% at 2Q24. We note the sequential decrease in capital ratios in 2Q24 was, in part, driven by the company’s purchase of $900 million in AFS securities, using cash assets, which, coupled with 3% sequential loan growth, materially increased the risk-weighted assets of the company. Furthermore, the company repurchased approximately $100 million in common stock during 2Q24. Despite these actions, TBBK's capital ratios remained comfortably above the rated peer average, with management indicating it will likely continue to manage to above average capital levels.

Somewhat counterbalancing ratings strengths is a loan portfolio heavily concentrated in bridge lending for multi-family properties that has experienced some deterioration in recent quarters, with total criticized/classified loans reaching 4% of total loans at 1Q24. However, loss rates have continued to track near historical lows (below 0.1% through 1H24), in part, due to the company's sound underwriting and loan review practices. In addition, KBRA recognizes the potential increase in risk profile associated with the company's recent entrance into sponsored lending, though TBBK's well built-out risk infrastructure and vetting process for its fintech partners provides a certain level of risk mitigation.

Rating Sensitivities

The Positive Outlook indicates KBRA’s view that a rating upgrade over the near-to-medium term is likely should TBBK continue to outperform rated peers, while maintaining above-average capital levels along with more stabilized credit metrics and the successful rollout of its new sponsored lending program. Should TBBK experience continued deterioration of credit metrics, including the onset of materially elevated credit losses, or should the company demonstrate a change in management of capital, negative ratings momentum could ensue including the removal of the Positive Outlook.

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