UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2024
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
For the transition period from: _____ to _____
Commission file number: 000-51018
(Exact name of registrant as specified in its charter)
Delaware
23-3016517
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)
409 Silverside Road, Wilmington, DE 19809
(302) 385-5000
(Address of principal executive offices and zip code)
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of each Exchange on Which Registered
Common Stock, par value $1.00 per share
TBBK
Nasdaq Global Select
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of October 28, 2024, there were 47,932,103 outstanding shares of common stock, $1.00 par value.
THE BANCORP, INC
Form 10-Q Index
Page
Part I Financial Information
Item 1.
Financial Statements:
3
Consolidated Balance Sheets – September 30, 2024 (unaudited) and December 31, 2023
Unaudited Consolidated Statements of Operations – Three and nine months ended September 30, 2024 and 2023
4
Unaudited Consolidated Statements of Comprehensive Income – Three and nine months ended September 30, 2024 and 2023
5
Unaudited Consolidated Statements of Changes in Shareholders’ Equity – Three and nine months ended September 30, 2024 and 2023
6
Unaudited Consolidated Statements of Cash Flows – Nine months ended September 30, 2024 and 2023
8
Notes to Unaudited Consolidated Financial Statements
9
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
40
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
76
Item 4.
Controls and Procedures
Part II Other Information
Legal Proceedings
77
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Item 5.
Other Information
Item 6.
Exhibits
78
Signatures
79
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
THE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30,
December 31,
2024
2023
(Dollars in thousands, except share data)
(unaudited)
ASSETS
Cash and cash equivalents
Cash and due from banks
$
8,660
4,820
Interest-earning deposits at Federal Reserve Bank
47,105
1,033,270
Total cash and cash equivalents
55,765
1,038,090
Investment securities, available-for-sale, at fair value, net of $10.0 million allowance for credit loss effective December 31, 2023
1,588,289
747,534
Commercial loans, at fair value
252,004
332,766
Loans, net of deferred loan fees and costs
5,906,616
5,361,139
Allowance for credit losses
(31,004)
(27,378)
Loans, net
5,875,612
5,333,761
Stock in Federal Reserve, Federal Home Loan and Atlantic Central Bankers Banks
21,717
15,591
Premises and equipment, net
28,091
27,474
Accrued interest receivable
42,915
37,534
Intangible assets, net
1,353
1,651
Other real estate owned
61,739
16,949
Deferred tax asset, net
9,604
21,219
Other assets
157,501
133,126
Total assets
8,094,590
7,705,695
LIABILITIES
Deposits
Demand and interest checking
6,844,128
6,630,251
Savings and money market
81,624
50,659
Total deposits
6,925,752
6,680,910
Securities sold under agreements to repurchase
—
42
Short-term borrowings
135,000
Senior debt
96,125
95,859
Subordinated debentures
13,401
Other long-term borrowings
38,157
38,561
Other liabilities
70,829
69,641
Total liabilities
7,279,264
6,898,414
SHAREHOLDERS' EQUITY
Common stock - authorized, 75,000,000 shares of $1.00 par value; 48,230,334 and 53,202,630
shares issued and outstanding at September 30, 2024 and December 31, 2023, respectively
48,231
53,203
Additional paid-in capital
26,573
212,431
Retained earnings
723,247
561,615
Accumulated other comprehensive income (loss)
17,275
(19,968)
Total shareholders' equity
815,326
807,281
Total liabilities and shareholders' equity
The accompanying notes are an integral part of these consolidated statements.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended September 30,
For the nine months ended September 30,
(Dollars in thousands, except per share data)
Interest income
Loans, including fees
116,483
110,592
345,797
324,229
Investment securities:
Taxable interest
19,767
9,647
46,921
28,820
Tax-exempt interest
43
122
114
Interest-earning deposits
3,387
8,689
19,948
24,271
139,680
128,968
412,788
377,434
Interest expense
42,698
38,431
121,858
110,307
1,030
2,344
234
Long-term borrowings
689
128
2,060
382
1,234
3,701
3,793
297
293
880
825
45,948
40,086
130,843
115,541
Net interest income
93,732
88,882
281,945
261,893
Provision for credit losses on loans
3,476
1,783
7,316
4,409
Provision (reversal) for unfunded commitments
(31)
(340)
(393)
Net interest income after provision for credit losses and provision reversal for unfunded commitments
90,177
87,130
274,969
257,877
Non-interest income
Fintech fees
ACH, card and other payment processing fees
3,892
2,553
9,856
7,153
Prepaid, debit card and related fees
23,907
21,513
72,948
67,013
Consumer credit fintech fees
1,600
1,740
Total fintech fees
29,399
24,066
84,544
74,166
Net realized and unrealized gains
on commercial loans, at fair value
606
525
2,205
4,171
Leasing related income
1,072
1,767
2,889
4,768
Other
1,031
422
2,574
2,000
Total non-interest income
32,108
26,780
92,212
85,105
Non-interest expense
Salaries and employee benefits
33,821
30,475
97,964
93,427
Depreciation
1,047
644
3,023
2,046
Rent and related occupancy cost
1,734
1,510
5,060
4,265
Data processing expense
1,408
1,404
4,252
4,123
Audit expense
403
446
1,081
1,255
Legal expense
1,055
1,203
2,509
3,110
FDIC insurance
904
806
2,618
2,233
Software
4,561
4,427
13,687
12,981
Insurance
1,246
1,321
3,866
3,935
Telecom and IT network communications
283
305
908
1,044
Consulting
418
448
1,558
1,412
Write-downs and other losses on other real estate owned
131
1,315
6,375
4,339
14,887
14,286
Total non-interest expense
53,255
47,459
151,413
145,432
Income before income taxes
69,030
66,451
215,768
197,550
Income tax expense
17,513
16,314
54,136
49,282
Net income
51,517
50,137
161,632
148,268
Net income per share - basic
1.06
0.93
3.18
2.70
Net income per share - diluted
1.04
0.92
3.15
2.68
Weighted average shares - basic
48,759,369
54,175,184
50,807,021
54,828,547
Weighted average shares - diluted
49,478,236
54,738,610
51,361,104
55,336,354
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
Other comprehensive income, net of reclassifications into net income:
Other comprehensive income (loss)
Securities available-for-sale:
Change in net unrealized gains (losses)
44,404
(4,310)
49,428
(2,510)
Reclassification adjustments for losses included in income
2
49,430
(2,506)
Income tax expense (benefit) related to items of other comprehensive income
10,951
(1,164)
12,187
(678)
1
(677)
Other comprehensive income (loss), net of tax and reclassifications into net income
33,453
(3,146)
37,243
(1,829)
Comprehensive income
84,970
46,991
198,875
146,439
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the three and nine months ended September 30, 2024
Accumulated
Common
Additional
other
stock
paid-in
Retained
comprehensive
shares
capital
earnings
(loss) income
Total
Balance at January 1, 2024
53,202,630
56,429
Common stock issued from restricted units,
net of tax benefits
312,619
312
(312)
Stock-based compensation
3,317
Common stock repurchases and excise tax
(1,262,212)
(1,262)
(49,101)
(50,363)
Other comprehensive income net of
reclassification adjustments and tax
101
Balance at March 31, 2024
52,253,037
52,253
166,335
618,044
(19,867)
816,765
53,686
32,771
33
(33)
3,841
(3,018,405)
(3,018)
(97,972)
(100,990)
3,689
Balance at June 30, 2024
49,267,403
49,268
72,171
671,730
(16,178)
776,991
3,864
(1,037,069)
(1,037)
(49,462)
(50,499)
Balance at September 30, 2024
48,230,334
For the three and nine months ended September 30, 2023
Balance at January 1, 2023
55,689,627
55,690
299,279
369,319
(30,257)
694,031
49,122
Common stock issued from option exercises,
13,158
13
92
105
405,286
405
(405)
3,169
(778,442)
(778)
(24,321)
(25,099)
3,820
Balance at March 31, 2023
55,329,629
55,330
277,814
418,441
(26,437)
725,148
49,009
41,382
41
(41)
2,750
(828,727)
(829)
(24,408)
(25,237)
Other comprehensive loss net of
(2,503)
Balance at June 30, 2023
54,542,284
54,542
256,115
467,450
(28,940)
749,167
10,323
10
(10)
2,775
(685,478)
(685)
(24,560)
(25,245)
Balance at September 30, 2023
53,867,129
53,867
234,320
517,587
(32,086)
773,688
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months
ended September 30,
Operating activities
Adjustments to reconcile net income to net cash provided by operating activities
Provision reversal for unfunded commitments
Net amortization of investment securities discounts/premiums
(1,505)
703
Stock-based compensation expense
11,022
8,694
Realized gains on commercial loans, at fair value
(2,489)
(5,852)
Gain on sale of fixed assets
(53)
Write-down of other real estate owned
1,147
Change in fair value of commercial loans, at fair value
1,700
Change in fair value of derivatives
284
(19)
Loss on sales/calls of investment securities
Increase in accrued interest receivable
(5,381)
(2,154)
Increase in other assets
(31,120)
(44,804)
Increase in other liabilities
956
12,009
Net cash provided by operating activities
143,347
125,758
Investing activities
Purchase of investment securities available-for-sale
(969,436)
(48,989)
Proceeds from redemptions and prepayments of securities available-for-sale
179,880
55,151
Proceeds from sale of other real estate owned
2,044
Capitalized investment in other real estate owned
(926)
Sale of repossessed assets
8,924
6,671
Net (increase) decrease in loans
(599,161)
277,980
Proceeds from sale of fixed assets
133
Commercial loans, at fair value drawn during the period
(105,192)
Payments on commercial loans, at fair value
81,333
317,980
Purchases of premises and equipment
(4,367)
(12,369)
Net cash (used in) provided by investing activities
(1,303,620)
493,276
Financing activities
Net increase (decrease) in deposits
244,842
(525,642)
Net decrease in securities sold under agreements to repurchase
(42)
Proceeds from short-term borrowings
Redemption of senior debt
(3,273)
Proceeds from the issuance of common stock
Repurchases of common stock and excise tax
(201,852)
(74,999)
Net cash provided by (used in) financing activities
177,948
(603,809)
Net (decrease) increase in cash and cash equivalents
(982,325)
15,225
Cash and cash equivalents, beginning of period
888,189
Cash and cash equivalents, end of period
903,414
Supplemental disclosure:
Interest paid
131,336
117,473
Taxes paid
62,158
67,985
Non-cash investing and financing activities
Transfers to other real estate owned from commercial loans, at fair value, and loans, net
43,864
737
Leased vehicles transferred to repossessed assets
8,291
7,009
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization and Nature of Operations
The Bancorp, Inc. (the “Company”) is a Delaware corporation and a registered financial holding company. Its primary, wholly-owned subsidiary is The Bancorp Bank, National Association (the “Bank”). The Bank is a nationally chartered commercial bank located in Sioux Falls, South Dakota and is a Federal Deposit Insurance Corporation (“FDIC”) insured institution. As a nationally chartered bank, its primary regulator is the Office of the Comptroller of the Currency (“OCC”). The Bank has two primary lines of business consisting of its national specialty finance segment and its payments segment.
In the national specialty finance segment, the Bank makes the following types of loans: securities-backed lines of credit (“SBLOCs”), cash value of insurance-backed lines of credit (“IBLOCs”) and investment advisor financing; leases (direct lease financing); small business loans (“SBLs”), consisting primarily of Small Business Administration (“SBA”) loans; and non-SBA commercial real estate bridge loans (“REBLs”). Consumer fintech lending is reflected in the payments segment.
While the national specialty finance segment generates the majority of the Company’s revenues, the payments segment also contributes significant revenues. In its payments segment, the Company provides payment and deposit services nationally, which include prepaid and debit card accounts, affinity group banking, deposit accounts to investment advisors’ customers, card payments and other payment processing services. Payments segment deposits fund the majority of the Company’s loans and securities and may produce lower costs than other funding sources. Most of the payments segment’s revenues and deposits, and SBLOC and IBLOC loans, result from relationships with third parties which market such products. Concentrations of loans and deposits are based upon the cumulative account balances generated by those third parties. Similar concentrations result in revenues in prepaid, debit card and related fees. These concentrations may also be reflected in a lower cost of funds compared to other funding sources. The Company sweeps certain deposits off its balance sheet to other institutions through intermediaries. Such sweeps are utilized to optimize diversity within its funding structure by managing the percentage of individual client deposits to total deposits.
The Company and the Bank are subject to regulation by certain state and federal agencies and, accordingly, they are examined periodically by those regulatory authorities. As a consequence of the extensive regulation of commercial banking activities, the Company’s and the Bank’s businesses are affected by state and federal legislation and regulations.
Note 2. Significant Accounting Policies
Basis of Presentation
The financial statements of the Company, as of September 30, 2024 and for the three and nine month periods ended September 30, 2024 and 2023, are unaudited. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted in this Quarterly Report on Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). However, in the opinion of management, these interim financial statements include all necessary adjustments to fairly present the results of the interim periods presented. The unaudited interim consolidated financial statements should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 Form 10-K”). The results of operations for the nine-month period ended September 30, 2024 may not necessarily be indicative of the results of operations for the full year ending December 31, 2024.
There have been no significant changes as of September 30, 2024 from the Company’s significant accounting policies as described in the 2023 Form 10-K.
The Company recognizes compensation expense for stock options and restricted stock units (“RSUs”) in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification 718 Stock Compensation (“ASC 718”). The fair value of the option or RSU is generally measured at fair value at the grant date with compensation expense recognized over the service period, which is typically the stated vesting period. For option grants subject to a service condition, the Company utilizes the Black-Scholes option-pricing model to estimate the fair value of such options on the date of grant. The Black-Scholes model takes into consideration the exercise price and expected life of the options, the current price of the underlying stock and its expected volatility, the expected dividends on the stock and the current risk-free interest rate for the expected life of the option. The Company’s estimate of the fair value of a stock option is based on expectations derived from historical experience and may not necessarily equate to its market value when fully vested. In accordance with ASC 718, the Company estimates the number of options for which the requisite service is expected to be rendered. At September 30, 2024, the Company had three active stock-based compensation plans.
During the nine months ended September 30, 2024, the Company granted 45,616 stock options with a vesting period of four years and a weighted average grant-date fair value of $21.92. During the nine months ended September 30, 2023, the Company granted 57,573 stock options with a vesting period of four years and a weighted average grant-date fair value of $17.37. There were no common stock options exercised in the nine-month period ended September 30, 2024. There were 13,158 stock options exercised in the nine-month period ended September 30, 2023.
A summary of the Company’s stock options is presented below.
Weighted average
remaining
contractual
Aggregate
Options
exercise price
term (years)
intrinsic value
Outstanding at January 1, 2024
622,677
15.35
6.90
14,453,641
Granted
45,616
43.89
9.37
Exercised
Expired
Forfeited
Outstanding at September 30, 2024
668,293
17.30
6.37
24,194,806
Exercisable at September 30, 2024
504,497
12.00
5.83
20,938,696
The Company granted 390,305 RSUs in the first nine months of 2024, of which 355,965 have a vesting period of three years and 34,340 have a vesting period of one year. At issuance, the 390,305 RSUs granted in the first nine months of 2024 had a weighted average fair value of $42.87 per unit. The Company granted 547,556 RSUs in the first nine months of 2023, of which 514,785 had a vesting period of three years and 32,771 had a vesting period of one year. At issuance, the 547,556 RSUs granted in the first nine months of 2023 had a weighted average fair value of $35.00 per unit.
A summary of the Company’s RSUs is presented below.
Average remaining
grant date
RSUs
fair value
752,255
32.53
1.66
390,305
42.87
2.21
Vested
(345,390)
30.39
797,170
38.27
1.68
As of September 30, 2024, there was a total of $23.2 million of unrecognized compensation cost related to unvested awards under stock-based compensation plans. This cost is expected to be recognized over a weighted average period of approximately 1.5 years. Related compensation expense for the three months ended September 30, 2024 and 2023 was $3.9 million and $2.8 million, respectively. Related compensation expense for the nine months ended September 30, 2024 and 2023 was $11.0 million and $8.7 million, respectively. The total issuance date fair value of RSUs vested and options exercised during the nine months ended September 30, 2024 and 2023, was $10.5 million and $6.4 million, respectively. The total intrinsic value of the options exercised and RSUs vested in those respective periods was $14.8 million and $16.8 million, respectively.
For the nine-month periods ended September 30, 2024 and 2023, the Company estimated the fair value of each stock option grant on the date of grant using the Black-Scholes options pricing model with the following weighted average assumptions:
Risk-free interest rate
4.17%
3.67%
Expected dividend yield
Expected volatility
44.76%
45.21%
Expected lives (years)
6.3
Expected volatility is based on the historical volatility of the Company’s stock and peer group comparisons over the expected life of the option. The risk-free rate for periods within the expected life of the option is based on the U.S. Treasury Separate Trading of Registered Interest and Principal of Securities (“STRIPS”) rate in effect at the time of the grant. The life of the option is based on historical factors which include the contractual term, vesting period, exercise behavior and employee terminations. In accordance with ASC 718, stock- based compensation expense for the period ended September 30, 2024 is based on awards that are ultimately expected to vest and has been reduced for estimated forfeitures. The Company estimates forfeitures using historical data or acceptable expedients.
The Company calculates earnings per share in accordance with ASC 260, Earnings Per Share. Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities, including stock options and RSUs or other contracts to issue common stock were exercised and converted into common stock. Stock options are dilutive if their exercise prices are less than the current stock price. RSUs are dilutive because they represent grants over vesting periods which do not require employees to pay exercise prices. The dilution shown in the tables below includes the potential dilution from both stock options and RSUs.
The following tables show the Company’s earnings per share for the periods presented:
For the three months ended
September 30, 2024
Income
Shares
Per share
(numerator)
(denominator)
amount
(Dollars in thousands except share and per share data)
Basic earnings per share
Net earnings available to common shareholders
Effect of dilutive securities
Common stock options and RSUs
718,867
(0.02)
Diluted earnings per share
Stock options for 622,677 shares, exercisable at prices between $6.87 and $35.17 per share, were outstanding at September 30, 2024, and included in the diluted earnings per share computation because their exercise price per share was less than the average market price for the three month period ended September 30, 2024. Stock options for 45,616 shares were anti-dilutive and not included in the earnings per share calculation.
For the nine months ended
554,083
(0.03)
Stock options for 565,104 shares, exercisable at prices between $6.87 and $30.32 per share, were outstanding at September 30, 2024, and included in the diluted earnings per share computation because their exercise price per share was less than the average market price for the nine-month period ended September 30, 2024. Stock options for 103,189 shares were anti-dilutive and not included in the earnings per share calculation.
September 30, 2023
563,426
(0.01)
Stock options for 465,104 shares, exercisable at prices between $6.87 and $18.81 per share, were outstanding at September 30, 2023, and included in the diluted earnings per share computation because their exercise price per share was less than the average market price for the three month period ended September 30, 2023. Stock options for 157,573 shares were anti-dilutive and not included in the earnings per share calculation.
507,807
Stock options for 465,104 shares, exercisable at prices between $6.87 and $18.81 per share, were outstanding at September 30, 2023, and included in the diluted earnings per share computation because their exercise price per share was less than the average market price for the nine-month period ended September 30, 2023. Stock options for 157,573 shares were anti-dilutive and not included in the earnings per share calculation.
Note 5. Investment Securities
Fair values of available-for-sale securities are based on the fair market values supplied by a third-party market data provider, or where such third-party market data is not available, fair values are based on discounted cash flows. The third-party market data provider uses a pricing matrix which it creates daily, taking into consideration actual trade data, projected prepayments, and when relevant, projected credit defaults and losses.
The amortized cost, gross unrealized gains and losses, and fair values of the Company’s investment securities classified as available-for-sale at September 30, 2024 and December 31, 2023 are summarized as follows (dollars in thousands):
Available-for-sale
Gross
Allowance
Amortized
unrealized
for
Fair
cost
gains
losses
Credit Losses
value
U.S. Government agency securities
31,622
(718)
31,018
Asset-backed securities(1)
236,794
157
(27)
236,924
Tax-exempt obligations of states and political subdivisions
7,860
97
(26)
7,931
Taxable obligations of states and political subdivisions
35,366
12
(371)
35,007
Residential mortgage-backed securities
448,761
18,536
(3,689)
463,608
Collateralized mortgage obligation securities
29,433
(940)
28,493
Commercial mortgage-backed securities
775,393
21,544
(11,629)
785,308
Corporate debt securities
10,000
(10,000)
1,575,229
40,460
(17,400)
(1)Asset-backed securities as shown above
Federally insured student loan securities
2,754
(6)
2,748
Collateralized loan obligation securities
234,040
(21)
234,176
December 31, 2023
35,346
(1,466)
33,886
327,159
(1,815)
325,353
4,860
39
(48)
4,851
43,323
15
(952)
42,386
169,882
108
(9,223)
160,767
35,575
(1,537)
34,038
157,759
(11,506)
146,253
783,904
177
(26,547)
6,032
(49)
5,983
321,127
(1,766)
319,370
Investments in Federal Home Loan Bank (“FHLB”) stock, Atlantic Central Bankers Bank (“ACBB”) stock, and Federal Reserve Bank stock are recorded at cost and amounted to $21.7 million at September 30, 2024, and $15.6 million at December 31, 2023. At each of those dates, ACBB stock amounted to $40,000. The amount of FHLB stock required to be held is based on the amount of borrowings, and after repayment thereof, the stock may be redeemed.
The amortized cost and fair value of the Company’s investment securities at September 30, 2024, by contractual maturity, are shown below (dollars in thousands). Expected maturities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
Due before one year
61,915
61,234
Due after one year through five years
131,811
130,897
Due after five years through ten years
724,661
740,659
Due after ten years
656,842
655,499
The Company pledges loans to collateralize its line of credit with the FHLB, as described in “Note 6. Loans.” The Company had no securities pledged at September 30, 2024, and December 31, 2023. There were no gross realized gains on sales of securities for the three and nine months ended September 30, 2024 and September 30, 2023. There were no realized losses on securities sales for the three months ended September 30, 2024 and September 30, 2023. Realized losses on securities sales/calls were $2,000 and $4,000, respectively, for the nine months ended September 30, 2024 and September 30, 2023.
The table below indicates the length of time individual securities had been in a continuous unrealized loss position at September 30, 2024 (dollars in thousands):
Less than 12 months
12 months or longer
Number of securities
Fair Value
Unrealized losses
Description of Securities
17
15,171
15,188
Asset-backed securities
16
43,265
(8)
34,734
77,999
Tax-exempt obligations of states and
political subdivisions
1,134
Taxable obligations of states and
19
29,331
100
536
(1)
40,110
(3,688)
40,646
54
35,020
(152)
189,928
(11,477)
224,948
Total unrealized loss position
investment securities
222
78,838
(161)
338,901
(17,239)
417,739
The table below indicates the length of time individual securities had been in a continuous unrealized loss position at December 31, 2023 (dollars in thousands):
14,945
(302)
17,697
32,642
53
314,749
997
(3)
1,850
(45)
2,847
25
39,621
132
20,884
(491)
126,645
(8,732)
147,529
20
288
36,826
(796)
680,853
(25,751)
717,679
The Company owns one trust preferred security, issued by an insurance company, which was purchased in 2006, and owns no other such security or similar security. At September 30, 2024, this security had a cost basis of $10.0 million, and comprises the balance of the corporate debt securities classification in the tables above. The Bank provided for a potential loss for the full amount of the $10.0 million par value of the trust preferred security through a provision for credit loss of $10.0 million in the fourth quarter of 2023. Interest payments on the trust preferred security have been deferred, as permitted by its terms for periods up to five years. While the trust preferred security has previously been subject to interest deferral which was repaid, there can be no assurance that repayment will occur for the current deferral. The Company has evaluated the securities in the above tables as of September 30, 2024 and has concluded that, except for the trust preferred security discussed above, none of these securities required an allowance for credit loss (“ACL”).
The Company evaluates whether an ACL is required by considering primarily the following factors: (a) the extent to which the fair value is less than the amortized cost of the security, (b) changes in the financial condition, credit rating and near-term prospects of the issuer, (c) whether the issuer is current on contractually obligated interest and principal payments, (d) changes in the financial condition of the security’s underlying collateral and (e) the payment structure of the security. The Company’s determination of the best estimate of expected future cash flows, which is used to determine the credit loss amount, is a quantitative and qualitative process that incorporates information received from third-party sources along with internal assumptions and judgments regarding the future performance of the security. With the exception of the trust preferred security discussed above and the CRE-2 security discussed in “Note 6. Loans,” the Company concluded that the securities that are in an unrealized loss position are in a loss position because of changes in market interest rates after the securities were purchased. The severity of the impact of fair value in relation to the carrying amounts of the individual investments is consistent with market developments. The Company’s analysis of each investment is performed at the security level. The Company intends to hold its investment securities to maturity, and it is likely that it will not be required to sell the securities prior to their anticipated recovery.
Note 6. Loans
The Company has several lending lines of business including: SBLs, comprised primarily of SBA loans; direct lease financing primarily for commercial vehicles and to a lesser extent equipment; SBLOC collateralized by marketable securities; IBLOC collateralized by the cash value of eligible life insurance policies; and investment advisor financing for purposes of debt refinance, acquisition of another firm or internal succession. In 2024, the Company began making consumer fintech loans which consist of short-term extensions of credit including secured credit card loans made in conjunction with marketers and servicers. Prior to 2020, the Company also originated non-SBA commercial real estate bridge loans, primarily collateralized by multifamily properties (apartment buildings), and to a lesser extent, by hotel and retail properties, for sale into securitizations. At origination, the Company elected fair value treatment for these loans as they were originally held-for-sale, to better reflect the economics of the transactions. In 2020, the Company decided to retain these loans on its balance sheet as interest-earning assets and currently intends to continue doing so. Therefore, these loans are no longer accounted for as held-for-sale, but the Company continues to present them at fair value. At September 30, 2024, such loans comprised $158.1 million of the $252.0 million of commercial loans, at fair value, with the balance comprised of the guaranteed portion of certain SBA loans also previously held for sale. The amortized cost of the $252.0 million commercial loans at fair value was $255.7 million. Included in net realized and unrealized gains (losses) on commercial loans, at fair value in the consolidated statements of operations are changes in the estimated fair value of such loans. For the nine months ended September 30, 2024, there were no related net unrealized losses or gains recognized for changes in fair value. For the nine months ended September 30, 2023, related net unrealized losses recognized for changes in fair value were $1.7 million, $365,000 of which reflected losses attributable to credit weaknesses. In the third quarter of 2021, the Company resumed the origination of non-SBA commercial real estate bridge loans which it also intends to hold for investment
and which are accounted for at amortized cost. They are captioned as REBLs as they are transitional commercial mortgage loans which are made to improve and rehabilitate existing properties which already have cash flow.
The Bank has pledged the majority of its loans held for investment at amortized cost and commercial loans at fair value to either the FHLB or the Federal Reserve Bank for lines of credit with those institutions. The FHLB and FRB lines are periodically utilized to manage liquidity. The amount of loans pledged varies and the collateral may be unpledged at any time to the extent the collateral exceeds advances. The lines maintained are consistent with the Bank’s liquidity policy which maximizes potential liquidity. At September 30, 2024, $2.46 billion of loans were pledged to the Federal Reserve Bank and $2.21 billion of loans were pledged to the FHLB against lines of credit which provide a source of liquidity to the Bank. There was $135.0 million drawn against the FHLB line at September 30, 2024.
Prior to 2020, the Company sponsored the structuring of commercial mortgage loan securitizations, and in 2020, the Company decided not to pursue additional securitizations. The loans previously sold to the commercial mortgage-backed securitizations were transitional commercial mortgage loans made to improve and rehabilitate existing properties which already had cash flow. Servicing rights were not retained. Each of the securitizations is considered a variable interest entity of which the Company is not the primary beneficiary. Further, true sale accounting has been applicable to each of the securitizations, as supported by a review performed by an independent third-party consultant. In each of the securitizations, the Company obtained a tranche of certificates which are accounted for as available-for-sale debt securities. The securities were recorded at fair value at acquisition, which was determined by an independent third-party based on the discounted cash flow method using unobservable (level 3) inputs.
Of the six securities purchased by the Bank from our securitizations, all have been repaid except one issued by CRE-2, which is included in the commercial mortgage-backed securities classification in investment securities. As of September 30, 2024, the principal balance of the Bank’s CRE-2-issued security was $12.6 million. As a result of the reduced excess of appraised value over the Bank’s principal and accruing interest based on new appraisals, the $12.6 million principal was placed in nonaccrual status and $1.3 million was reversed from securities interest in the second quarter of 2024. While the appraised values allocable to the Bank’s security exceed the principal and unpaid interest, there can be no assurance as to the amounts received upon the servicer’s disposition of these properties, which will reflect additional servicing fees, actual disposition prices and other disposition costs.
The Company analyzes credit risk prior to making loans on an individual loan basis. The Company considers relevant aspects of the borrowers’ financial position and cash flow, past borrower performance, management’s knowledge of market conditions, collateral and the ratio of loan amounts to estimated collateral value in making its credit determinations. For SBLOC, the Company relies on the market value of the underlying securities collateral as adjusted by margin requirements, generally 50% for equities and 80% for investment grade securities. For IBLOC, the Company relies on the cash value of insurance policy collateral. Of the total $280.1 million of consumer fintech loans at September 30, 2024, $111.0 million consisted of secured credit card loans, with the balance consisting of other short-term extensions of credit. Consumers do not pay interest on the majority of consumer fintech loan balances, including secured credit card loans. The majority of the income on those loans is reflected in non-interest income under “Consumer credit fintech fees” and originate with the marketers and servicers for those loans. The secured credit card balances were collateralized with deposits at the Bank, with related income statement impact reflected both in a lower cost of funds and fee income. The lower cost of funds results from balances required to be maintained to collateralize related card use. Related fee income is reflected in the “Consumer credit fintech fees” line of the income statement.
Major classifications of loans, excluding commercial loans at fair value, are as follows (dollars in thousands):
SBL non-real estate
179,915
137,752
SBL commercial mortgage
665,608
606,986
SBL construction
30,158
22,627
SBLs
875,681
767,365
Direct lease financing
711,836
685,657
SBLOC / IBLOC(1)
1,543,215
1,627,285
Advisor financing(2)
248,422
221,612
Real estate bridge loans
2,189,761
1,999,782
Consumer fintech(3)
280,092
Other loans(4)
46,586
50,638
5,895,593
5,352,339
Unamortized loan fees and costs
11,023
8,800
Total loans, including unamortized loan fees and costs
SBLs, including costs net of deferred fees of $9,582 and $9,502
for September 30, 2024 and December 31, 2023, respectively
885,263
776,867
SBLs included in commercial loans, at fair value
93,888
119,287
Total SBLs(5)
979,151
896,154
(1) SBLOC are collateralized by marketable securities, while IBLOC are collateralized by the cash surrender value of insurance policies. At September 30, 2024 and December 31, 2023, IBLOC loans amounted to $554.0 million and $646.9 million, respectively.
(2) In 2020, the Bank began originating loans to investment advisors for purposes of debt refinancing, acquisition of another firm or internal succession. Maximum loan amounts are subject to loan-to-value ratios of 70% of the business enterprise value based on a third-party valuation but may be increased depending upon the debt service coverage ratio. Personal guarantees and blanket business liens are obtained as appropriate.
(3) Consumer fintech loans included $111.0 million of secured credit card loans, with the balance consisting of other short-term extensions of credit.
(4) Includes demand deposit overdrafts reclassified as loan balances totaling $960,000 and $1.7 million at September 30, 2024 and December 31, 2023, respectively. Estimated overdraft charge-offs and recoveries are reflected in the ACL and are immaterial.
(5) The SBLs held at fair value are comprised of the government guaranteed portion of 7(a) Program (as defined below) loans at the dates indicated.
The loan review department recommends non-accrual status for loans to the surveillance committee, in those situations where interest income appears to be uncollectible or a protracted delay in collection becomes evident. The surveillance committee further vets and approves the non-accrual status.
The following table summarizes non-accrual loans with and without an ACL as of the periods indicated (dollars in thousands):
Non-accrual loans with a related ACL
Related ACL
Non-accrual loans without a related ACL
Total non-accrual loans
2,236
524
811
3,047
1,842
1,814
931
3,084
4,898
2,381
1,585
118
3,385
Direct leasing
3,211
1,867
708
3,919
3,785
12,300
Other loans
8,846
3,440
16,903
25,749
11,525
The Company had $61.7 million of other real estate owned (“OREO”) at September 30, 2024, and $16.9 million of OREO at December 31, 2023. The following table summarizes the Company’s non-accrual loans, loans past due 90 days or more, and OREO at September 30, 2024 and December 31, 2023, respectively:
Non-accrual loans
Loans past due 90 days or more and still accruing(1)
4,737
1,744
Total non-performing loans
30,486
13,269
OREO(2)
Total non-performing assets
92,225
30,218
(1) The majority of the increase in Loans past due 90 days or more and still accruing resulted from vehicle leases to governmental entities and municipalities, the payments for which are sometimes subject to administrative delays.
(2) In the first quarter of 2024, a $39.4 million apartment building rehabilitation bridge loan was transferred to nonaccrual status. On April 2, 2024, the same loan was transferred from nonaccrual status to OREO, and comprised the majority of our OREO at September 30, 2024, with a balance at that date of $40.3 million. We intend to continue to manage the capital improvements on the underlying apartment complex. As the units become available for lease, the property manager will be tasked with leasing these units at market rents. The $40.3 million balance compares to a September 2023 third party “as is” appraisal of $47.8 million, or an 84% “as is” loan to value (“LTV”), with additional potential collateral value as construction progresses, and units are re-leased at stabilized rental rates. The Company entered into a purchase and sale agreement for that apartment property acquired by the Bank through foreclosure. The purchaser has made earnest money deposits of $375,000, with additional required deposits projected to total $500,000 prior to the December 31, 2024 closing deadline. The sales price is expected to cover the Company’s current OREO balance plus the forecasted cost of improvements to the property. There can be no assurance that the purchaser will consummate the sale of the property, but if not consummated, earnest money deposits are expected to accrue to the Company. The nonaccrual balances in this table as of September 30, 2024, are also reflected in the substandard loan totals.
Interest which would have been earned on loans classified as non-accrual for the nine months ended September 30, 2024 and 2023, was $886,000 and $621,000, respectively. No income on non-accrual loans was recognized during the nine months ended September 30, 2024. During the nine months ended September 30, 2024, $1.0 million of REBL, $69,000 of direct leasing, $130,000 of SBL commercial real estate, and $33,000 of SBL non-real estate were reversed from interest income, which represented interest accrued on loans placed into non-accrual status during the period. During the nine months ended September 30, 2023, $89,000 of legacy commercial real estate,
$89,000 of SBL commercial real estate, $10,000 of SBL non-real estate, $13,000 of IBLOC, and $71,000 of direct leasing were reversed from interest income, which represented interest accrued on loans placed into non-accrual status during the period. Material amounts of prior year non-accrual interest reversals are charged to the ACL, but such amounts were not material during either the nine months ended September 30, 2024 or 2023. In the third quarter of 2024 $815,000 of interest was reversed from interest income as a result of REBL loan modifications.
Loans which are experiencing financial stress are reviewed by the loan review department, which is independent of the lending lines. The review includes an analysis for a potential specific reserve allocation in the ACL. For REBLs, updated appraisals are generally obtained in conjunction with modifications.
During the three month and year-to-date periods ended September 30, 2024 and September 30, 2023, loans modified and related information are as follows (dollars in thousands):
Three months ended September 30, 2024
Three months ended September 30, 2023
Payment delay as a result of a payment deferral
Interest rate reduction and payment deferral
Term extension
Percent of total loan category
819
0.46%
55,336
2.53%
56,155
0.95%
Nine months ended September 30, 2024
Nine months ended September 30, 2023
2,484
1.38%
156
0.12%
3,271
0.49%
2,521
0.35%
Real estate bridge loans(1)
87,836
4.01%
5,755
96,112
1.63%
(1) For the nine months ended September 30, 2024, the “as is” weighted average LTV of the real estate bridge lending balances was approximately 73%, and the “as stabilized” LTV was approximately 66% based upon appraisals performed within the past twelve months. “As stabilized” LTVs reflect the third-party appraiser’s estimated value after the rehabilitation is complete and units are released at stabilized rates. Apartment improvements and renovations continue, sometimes utilizing additional borrower capital. The balances for both periods were also classified as either special mention or substandard as of September 30, 2024.
The following table shows an analysis of loans that were modified during the three month and year-to-date periods ended September 30, 2024 and September 30, 2023 presented by loan classification (dollars in thousands):
Payment Status (Amortized Cost Basis)
30-59 days
60-89 days
90+ days
past due
still accruing
Non-accrual
delinquent
Current
321
498
55,834
Real estate bridge lending
1,046
1,438
3,567
92,545
The following table describes the financial effect of the modifications made during the three month and year-to-date periods ended September 30, 2024 and September 30, 2023 (dollars in thousands):
Combined Rate and Maturity
Weighted average interest reduction
Weighted average term extension (in months)
More-than-insignificant-payment delay(2)
1.27%
12.0
1.42%
1.23%
(2) Percentage represents the principal of loans deferred divided by the principal of the total loan portfolio.
While borrowers for a $12.3 million apartment property loan which had a six month payment deferral granted in the fourth quarter of 2023 have not resumed payments, the related “as is” and “as stabilized” LTV based on a May 2024 appraisal were 72% and 56%, respectively. That balance comprises the balance of REBL nonaccrual loans as of September 30, 2024. The “as stabilized” LTV measures the apartment property’s value after renovations have been completed and units have generally been re-leased.
There were no loans that received a term extension modification which had a payment default during the period and were modified in the twelve months before default.
The Company had no commitments to extend additional credit to loans classified as modified for the periods ended September 30, 2024 or December 31, 2023.
Of the $84.4 million special mention and $155.4 million substandard REBL loans at September 30, 2024, $55.3 million were modified in the third quarter of 2024 and received reductions in interest rates and payment deferrals. Included in the $155.4 million was $26.9 million which had been modified in first quarter 2024 with a six month payment deferral. The third quarter additional modification was for an additional three month payment deferral and a partial nine month payment deferral.
Not included in the $55.3 million of REBL loans were (i) $19.3 million which was recapitalized with a new borrower, who negotiated a partial interest deferral and rate reduction, and (ii) $37.3 million which is accounted for at fair value, and as such, not reflected in modification totals. While payment deferrals have generally been for three to twelve months, that loan was granted a 15 month payment deferral, followed by a nine month partial payment deferral, in addition to an interest rate reduction. Going forward, the Company will not be accruing interest on this loan. The weighted average “as is” and “as stabilized” LTVs for the $19.3 million balance were 72% and 68%, respectively, while those LTVs for the $37.3 million were 73% and 65%, respectively.
There were $56.2 million and $96.1 million of total loans classified as modified for the three month and year-to-date periods ended September 30, 2024, respectively, with specific reserves of zero and $5,000, for the three month and year-to-date periods ended September 30, 2024, respectively. There were zero and $156,000 of loans classified as modified for the three month and year-to-date periods ended September 30, 2023. Substantially all of the reserves at September 30, 2024 related to the non-guaranteed portion of SBA loans.
Management estimates the ACL quarterly and for most loan categories uses relevant available internal and external historical loan performance information to determine the quantitative component of the reserve and current economic conditions, and reasonable and supportable forecasts and other factors to determine the qualitative component of the reserve. Reserves on specific credit-deteriorated loans comprise the third and final component of the reserve. Historical credit loss experience provides the quantitative basis for the estimation of expected credit losses over the estimated remaining life of the loans. The qualitative component of the ACL is designed to be responsive to changes in portfolio credit quality and the impact of current and future economic conditions on loan performance, and is subjective. The review of the appropriateness of the ACL is performed by the Chief Credit Officer and presented to the Audit Committee of the Company’s Board of Directors for review. With the exception of SBLOC and IBLOC, which utilize probability of default/loss given default, and the other loan category, which uses discounted cash flow to determine a reserve, the quantitative components for remaining categories are determined by establishing reserves on loan pools with similar risk characteristics based on a lifetime loss-rate model, or vintage analysis, as described in the following paragraph. Loans that do not share risk characteristics are evaluated on an individual basis. If foreclosure is believed to be probable or repayment is expected from the sale of collateral, a reserve for deficiency is established within the ACL. Those reserves are estimated based on the difference between loan principal and the estimated fair value of the collateral, adjusted for estimated disposition costs.
Below are the portfolio segments used to pool loans with similar risk characteristics and align with the Company’s methodology for measuring expected credit losses. These pools have similar risk and collateral characteristics, and certain of these pools are broken down further in determining and applying the vintage loss estimates previously discussed. For instance, within the direct lease financing pool, government and public institution leases are considered separately. Additionally, the Company evaluates its loans under an internal loan risk rating system as a means of identifying problem loans. The special mention classification indicates weaknesses that may, if not cured, threaten the borrower’s future repayment ability. A substandard classification reflects an existing weakness indicating the possible inadequacy of net worth and other repayment sources. These classifications are used both by regulators and peers, as they have been correlated with an increased probability of credit losses. A summary of the Company’s primary portfolio pools and loans accordingly classified, by year of origination, at September 30, 2024 and December 31, 2023 are as follows (dollars in thousands):
As of September 30, 2024
2022
2021
2020
Prior
Revolving loans at amortized cost
SBL non real estate
Pass
28,815
78,143
29,382
19,517
5,969
5,880
167,706
Special mention
667
215
149
Substandard
443
964
1,995
451
1,141
6,432
Total SBL non-real estate
29,258
79,107
31,377
21,622
6,635
7,170
175,169
100,153
96,812
133,887
78,897
64,899
151,737
626,385
534
1,108
2,413
4,055
13,285
1,380
12,233
254
3,606
30,758
Total SBL commercial mortgage
110,097
135,801
92,238
65,153
157,756
661,198
8,829
12,363
2,394
3,625
927
28,138
1,310
710
2,020
Total SBL construction
4,935
Non-rated
3,413
226,080
218,088
151,653
53,905
20,283
7,295
677,304
2,079
2,403
2,837
1,922
136
113
9,490
3,987
7,144
7,593
2,633
172
21,629
Total direct lease financing
235,559
227,635
162,083
58,460
20,591
7,508
SBLOC
3,991
985,272
Total SBLOC
989,263
IBLOC
52
553,351
46
503
Total IBLOC
553,952
Advisor financing
54,214
86,674
55,480
23,241
18,511
238,120
8,431
840
10,302
Total advisor financing
56,511
31,672
19,351
353,084
421,321
807,514
368,011
1,949,930
Special mention(1)
16,913
36,318
31,153
84,384
Substandard(1)
27,644
103,875
23,928
155,447
Total real estate bridge loans
397,641
947,707
423,092
281,052
10,320
291,372
727
163
257
353
2,607
38,612
1,445
44,164
298
Total other loans(2)
281,779
49,230
335,834
1,107,433
937,360
1,336,130
632,372
115,264
222,374
1,544,660
(1) For the special mention and substandard real estate bridge loans, recent appraisals reflect a respective weighted average “as is” LTV of 77% and a further estimated 68% “as stabilized” LTV. The “as stabilized” LTV reflects the third-party appraiser’s estimate of value after rehabilitation is complete. The special mention and substandard real estate bridge loans shown in 2024 reflected loans to new borrowers with greater financial capacity, with their original financing in the 2021 and 2022 vintages.
(2) Included in Other loans are $9.2 million of SBA loans purchased for Community Reinvestment Act (“CRA”) purposes as of September 30, 2024. These loans are classified as SBL in the Company’s loan table, which classifies loans by type, as opposed to risk characteristics.
As of December 31, 2023
2019
507
47,066
32,512
26,919
9,662
4,334
5,357
125,850
460
258
1,101
119
337
2,275
495
632
564
250
562
2,503
48,033
33,007
27,809
11,327
4,703
6,256
131,135
128,375
138,281
93,399
67,635
58,550
98,704
584,944
375
10,764
595
1,363
13,097
452
1,853
1,928
4,233
128,750
104,163
68,087
60,998
101,995
602,274
2,848
5,966
1,877
4,534
16,152
3,090
2,675
7,642
.
1,273
302,362
221,768
92,945
37,664
17,469
4,349
676,557
666
202
125
146
1,139
135
3,898
1,998
372
184
6,688
303,770
226,332
95,145
38,161
17,799
4,450
3,261
977,158
980,419
646,230
636
646,866
92,273
63,083
40,994
24,321
220,671
941
25,262
397,073
1,013,199
461,474
1,871,746
59,423
76,336
51,700
1,072,622
530,087
2,555
11,513
14,068
165
260
363
2,609
2,314
40,101
1,593
47,405
362
Total other loans(1)
2,720
52,108
61,967
975,467
1,539,551
806,203
146,373
90,348
165,519
1,628,878
(1) Included in Other loans are $11.3 million of SBA loans purchased for CRA purposes as of December 31, 2023. These loans are classified as SBL in the Company’s loan table, which classifies loans by type, as opposed to risk characteristics.
SBL. Substantially all SBLs consist of SBA loans. The Bank participates in loan programs established by the SBA, including the 7(a) Loan Guarantee Program (the “7(a) Program”), the 504 Fixed Asset Financing Program (the “504 Program”), and the discontinued PPP. The 7(a) Program is designed to help small business borrowers start or expand their businesses by providing partial guarantees of loans made by banks and non-bank lending institutions for specific business purposes, including long or short-term working capital; funds for the purchase of equipment, machinery, supplies and materials; funds for the purchase, construction or renovation of real estate; and
funds to acquire, operate or expand an existing business or refinance existing debt, all under conditions established by the SBA. The 504 Program includes the financing of real estate and commercial mortgages. In 2020 and 2021, the Company also participated in the PPP, which provided short-term loans to small businesses. PPP loans are fully guaranteed by the U.S. government. This program was a specific response to the COVID-19 pandemic, and the vast majority of these loans have been reimbursed by the U.S. government, with $1.6 million remaining to be reimbursed as of September 30, 2024. The Company segments the SBL portfolio into four pools: non-real estate, commercial mortgage and construction to capture the risk characteristics of each pool, and the PPP loans discussed above. PPP loans are not included in the risk pools because they have inherently different risk characteristics due to the U.S. government guarantee. In the table above, the PPP loans are included in non-rated SBL non-real estate. The qualitative factors for SBL loans focus on pool loan performance, underlying collateral for collateral dependent loans and changes in economic conditions. Additionally, the construction segment adds a qualitative factor for general construction risk, such as construction delays resulting from labor shortages or availability/pricing of construction materials.
Direct lease financing. The Company provides lease financing for commercial and government vehicle fleets and, to a lesser extent, provides lease financing for other equipment. Leases are either open-end or closed-end. An open-end lease is one in which, at the end of the lease term, the lessee must pay the difference between the amount at which the Company sells the leased asset and the stated termination value. Termination value is a contractual value agreed to by the parties at the inception of a lease as to the value of the leased asset at the end of the lease term. A closed-end lease is one for which no such payment is due on lease termination. In a closed-end lease, the risk that the amount received on a sale of the leased asset will be less than the residual value is assumed by the Bank, as lessor. The qualitative factors for direct lease financing focus on underlying collateral for collateral dependent loans, portfolio loan performance, loan concentrations and changes in economic conditions.
SBLOC. SBLOC loans are made to individuals, trusts and entities and are secured by a pledge of marketable securities maintained in one or more accounts for which the Company obtains a securities account control agreement. The securities pledged may be either debt or equity securities or a combination thereof, but all such securities must be listed for trading on a national securities exchange or automated inter-dealer quotation system. SBLOCs are typically payable on demand. Maximum SBLOC line amounts are calculated by applying a standard “advance rate” calculation against the eligible security type depending on asset class: typically, up to 50% for equity securities and mutual fund securities and 80% for investment grade (Standard & Poor’s rating of BBB- or higher, or Moody’s rating of Baa3 or higher) municipal or corporate debt securities. Substantially all SBLOCs have full recourse to the borrower. The underlying securities collateral for SBLOC loans is monitored on a daily basis to confirm the composition of the client portfolio and its daily market value. The primary qualitative factor in the SBLOC analysis is the ratio of loans outstanding to market value. This factor has been maintained at low levels, which has remained appropriate as losses have not materialized despite the historic declines in the equity markets during 2020, during which there were no losses. Significant losses have not been incurred since inception of this line of business. Additionally, the advance rates noted above were established to provide the Company with protection from declines in market conditions from the origination date of the lines of credit.
IBLOC. IBLOC loans are collateralized by the cash surrender value of eligible insurance policies. Should a loan default, the primary risks for IBLOCs are if the insurance company issuing the policy were to become insolvent, or if that company would fail to recognize the Bank’s assignment of policy proceeds. To mitigate these risks, insurance company ratings are periodically evaluated for compliance with Bank standards. Additionally, the Bank utilizes assignments of cash surrender value, which legal counsel has concluded are enforceable. Significant losses have not been incurred since inception of this line of business. The qualitative factors for IBLOC primarily focus on the concentration risk with insurance companies.
Investment advisor financing. In 2020, the Bank began originating loans to investment advisors for purposes of debt refinancing, acquisition of another firm or internal succession. Maximum loan amounts are subject to loan-to-value ratios of 70%, based on third-party business appraisals, but may be increased depending upon the debt service coverage ratio. Personal guarantees and blanket business liens are obtained as appropriate. Loan repayment is highly dependent on fee streams from advisor clientele. Accordingly, loss of fee-based investment advisory clients or negative market performance may reduce fees and pose a risk to these credits. As credit losses have not been experienced, the ACL is determined by qualitative factors. The qualitative factors for investment advisor financing focus on historical industry losses, changes in lending policies and procedures, portfolio performance and economic conditions.
Real estate bridge loans. Real estate bridge loans are transitional commercial mortgage loans which are made to improve and rehabilitate existing properties which already have cash flow, and which are securitized by those properties. Prior to 2020, such loans were originated for securitization and loans which had been originated but not securitized continue to be accounted for at fair value in “Commercial loans, at fair value”, on the balance sheet. In 2021, originations resumed and are being held for investment in “Loans, net of deferred fees and costs”, on the balance sheet. The Bancorp has minimal exposure to non-multifamily commercial real estate such as office buildings, and instead has a portfolio largely comprised of rehabilitation bridge loans for apartment buildings. These loans generally have three-year terms with two one-year extensions to allow for the rehabilitation work to be completed and rentals stabilized for an extended period, before being refinanced at lower rates through U.S. Government Sponsored Entities or other lenders. The rehabilitation real estate lending portfolio consists primarily of workforce housing, which the Company considers to be working class apartments at
more affordable rental rates. As charge-offs have generally not been experienced for multifamily (apartment building loans) which comprise the REBL portfolio, the ACL is determined by qualitative factors. Qualitative factors focus on historical industry losses, changes in classified loan balances, changes in economic conditions and underlying collateral and portfolio performance. In the third quarter of 2024, as a result of increased levels of loans classified as special mention or substandard, a new qualitative factor related to the level of such classified loans was added.
Consumer fintech loans. Consumer fintech loans consist of short-term extensions of credit including secured credit card loans made in conjunction with marketers and servicers. The majority of secured credit card balances are collateralized with deposits at the Bank, with related income statement impact reflected both in a lower cost of funds and fee income. The lower cost of funds results from balances required to be maintained to collateralize related card use. Fee income for consumer fintech loans is reflected in the “Consumer credit fintech fees” line of the income statement.
Other loans. Other loans include commercial and home equity lines of credit which the Company generally no longer offers. Qualitative factors focus on changes in the underlying collateral for collateral dependent loans, portfolio loan performance, loan concentrations and changes in economic conditions.
Expected credit losses are estimated over the estimated remaining lives of loans. The estimate excludes possible extensions, renewals and modifications unless either of the following applies: management has a reasonable expectation that a loan will be restructured, or the extension or renewal options are included in the borrower contract and are not unconditionally cancellable by us.
The Company does not measure an ACL on accrued interest receivable balances, because these balances are written off in a timely manner as a reduction to interest income when loans are placed on non-accrual status.
ACL on off-balance sheet credit exposures. The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The ACL on such off-balance sheet credit exposures, also referred to as loan commitments, is adjusted through the provision for credit losses. The estimate considers the likelihood that funding will occur over the estimated life of the commitment. The amount of the ACL on such exposures as of September 30, 2024 and as of December 31, 2023 was $2.3 million and $2.6 million, respectively.
A detail of the changes in the ACL by loan category and summary of loans evaluated individually and collectively for credit deterioration is as follows (in thousands):
SBLOC / IBLOC
Consumer fintech
Deferred fees and costs
Beginning 1/1/2024
6,059
2,820
285
10,454
813
1,662
4,740
545
27,378
Charge-offs
(431)
(3,625)
(16)
(4,072)
Recoveries
102
279
Provision (credit)
(757)
252
26
5,404
201
2,387
(156)
Ending balance
4,973
3,072
311
12,512
772
1,863
7,127
374
31,004
Ending balance: Individually evaluated for expected credit loss
585
117
3,500
Ending balance: Collectively evaluated for expected credit loss
4,388
2,141
194
10,645
27,504
Loans:
3,113
26,037
176,802
660,710
28,573
707,917
2,177,461
46,364
5,880,579
Beginning 1/1/2023
5,028
2,585
565
7,972
1,167
1,293
3,121
643
22,374
(871)
(76)
(3,666)
(24)
(4,640)
475
75
330
299
1,179
1,427
236
(280)
5,818
(330)
369
1,619
(394)
8,465
670
343
44
1,827
2,888
5,389
2,477
241
8,627
541
24,490
1,919
11,832
135,833
604,605
19,242
681,872
50,276
5,349,307
(2,804)
(3,678)
220
1,040
1,250
(323)
3,583
(291)
203
335
(367)
5,853
2,679
242
8,971
876
1,496
3,456
572
24,145
566
419
774
11
1,831
5,287
2,260
198
8,197
859
561
22,314
130,579
547,107
19,204
670,208
1,720,513
199,442
1,848,224
55,800
7,895
5,198,972
1,337
2,945
3,351
15,412
129,242
544,162
15,819
666,857
1,720,038
51,881
5,183,560
A summary of the Company’s net charge-offs accordingly classified, by year of origination, at September 30, 2024 and December 31, 2023 are as follows (dollars in thousands):
Current period charge-offs
(14)
(101)
(192)
(71)
Current period recoveries
7
95
Current period SBL non-real estate net charge-offs
(46)
24
(329)
Current period SBL commercial mortgage net charge-offs
Current period SBL construction net charge-offs
(478)
(2,274)
(810)
155
67
Current period direct lease financing net charge-offs
(439)
(2,119)
(743)
(38)
(4)
(3,346)
Current period SBLOC net charge-offs
Current period IBLOC net charge-offs
Current period advisor financing net charge-offs
Current period real estate bridge loans net charge-offs
Current period other loans net recoveries
(9)
(15)
(17)
(537)
(911)
(238)
(95)
106
Current period net charge-offs
(844)
(230)
(3,690)
(396)
(138)
(2,138)
(1,117)
(234)
(39)
48
168
96
18
(2,090)
(949)
(3,336)
(12)
Current period other loans net charge-offs
296
(2,150)
(1,129)
(950)
867
(2,102)
(961)
(83)
(3,461)
The Company did not have loans acquired with deteriorated credit quality at either September 30, 2024 or December 31, 2023. In the first nine months of 2024, the Company purchased $35.9 million of SBLs, none of which were credit deteriorated. Additionally, in the first nine months of 2024, the Company participated in SBLs with other institutions in the amount of $7.5 million.
The non-accrual loans in the following table are treated as collateral dependent to the extent they have resulted from borrower financial difficulty (and not from administrative delays or other mitigating factors), and are not brought current. For non-accrual loans, the Company establishes a reserve in the allowance for credit losses for deficiencies between estimated collateral and loan carrying values. During the nine months ended September 30, 2024, the Company did not have any significant changes to the extent to which collateral secures its collateral dependent loans due to general collateral deterioration or from other factors. SBL non-real estate are collateralized by business assets, which may include certain real estate. SBL commercial mortgage and construction are collateralized by real estate for small businesses, while real estate bridge lending is primarily collateralized by apartment buildings, or other commercial real estate. SBLOC is collateralized by marketable investment securities while IBLOC is collateralized by the cash value of life insurance. Advisor financing is collateralized by investment advisors’ business franchises. Direct lease financing is collateralized primarily by vehicles or equipment.
A detail of the Company’s delinquent loans by loan category is as follows (dollars in thousands):
Total past due
and non-accrual
loans
72
322
758
4,199
175,716
336
5,234
660,374
5,791
12,883
1,260
23,853
687,983
10,251
2,014
2,383
14,648
1,528,567
4,021
4,025
276,067
20,135
15,223
65,844
5,840,772
84
333
2,595
135,157
2,183
4,564
602,422
5,163
1,209
485
10,642
675,015
21,934
3,607
745
26,286
1,600,999
853
178
1,239
49,399
30,217
5,225
48,711
5,312,428
(1) The $12.3 million shown in the non-accrual column for real estate bridge loans is collateralized by apartment building property with respective 72% and 56% “as is” and “as stabilized” LTVs, respectively, based upon a May 2024 appraisal. “As stabilized” LTVs represent additional potential collateral value as rehabilitation progresses, and units are re-leased at stabilized rental rates. The table above does not include an $11.2 million loan accounted for at fair value, and, as such, not reflected in delinquency tables. In third quarter 2024, the borrower notified the Company that he would no longer be making payments on the loan, which is collateralized by a vacant retail property. Based upon a July 2024 appraisal, the “as is” LTV is 84% and the “as stabilized” LTV is 62%. Since 2021, real estate bridge lending originations have consisted of apartment buildings, while this loan was originated previously.
The scheduled maturities of the direct financing leases reconciled to the total lease receivables in the consolidated balance sheet, are as follows (dollars in thousands):
Remaining 2024
64,912
2025
195,067
2026
169,273
2027
96,674
2028
49,469
2029 and thereafter
15,845
Total undiscounted cash flows
591,240
Residual value(1)
224,392
Difference between undiscounted cash flows and discounted cash flows
(103,796)
Present value of lease payments recorded as lease receivables
(1) Of the $224,392,000, $49,856,000 is not guaranteed by the lessee or other guarantors.
Note 7. Transactions with Affiliates
The Bank did not maintain any deposits for various affiliated companies as of September 30, 2024 and December 31, 2023, respectively.
The Bank has entered into lending transactions in the ordinary course of business with directors, executive officers, principal stockholders and affiliates of such persons. All loans were made on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable loans with persons not related to the lender. At September 30, 2024, these loans were current as to principal and interest payments and did not involve more than normal risk of collectability. Loans to these related parties amounted to $5.2 million at September 30, 2024 and $5.7 million at December 31, 2023.
Mr. Hersh Kozlov, a director of the Company, is a partner at Duane Morris LLP, an international law firm. The Company paid Duane Morris LLP $4,800 and $164,000 for legal services for the nine months ended September 30, 2024 and 2023, respectively.
Note 8. Fair Value Measurements
ASC 825, Financial Instruments, requires disclosure of the estimated fair value of an entity’s assets and liabilities considered to be financial instruments. For the Company, as for most financial institutions, the majority of its assets and liabilities are considered to be financial instruments. However, many such instruments lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. Accordingly, estimated fair values are determined by the Company using the best available data and an estimation methodology it believes to be suitable for each category of financial instruments. Also, it is the Company’s general practice and intent to hold its financial instruments to maturity whether or not categorized as available-for-sale and not to engage in trading or sales activities although it has sold loans and securities in the past and may do so in the future. For fair value disclosure purposes, the Company utilized certain value measurement criteria required in accordance with ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), as discussed below. In addition, ASC 820 establishes a common definition for fair value to be applied to assets and liabilities. It clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It also establishes a framework for measuring fair value and expands disclosures concerning fair value measurements. ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Level 1 valuation is based on quoted market prices for identical assets or liabilities to which the Company has access at the measurement date. Level 2 valuation is based on other observable inputs for the asset or liability, either directly or indirectly. This includes quoted prices for similar assets in active or inactive markets, inputs other than quoted prices that are observable for the asset or liability such as yield curves, volatilities, prepayment speeds, credit risks, default rates, or inputs that are derived principally from, or corroborated through, observable market data by market-corroborated reports. Level 3 valuation is based on “unobservable inputs” which the Company believes is the best information available in the circumstances. A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
Changes in the assumptions or methodologies used to estimate fair values may materially affect the estimated amounts. Also, there may not be reasonable comparability between institutions due to the wide range of permitted assumptions and methodologies in the absence of active markets. This lack of uniformity gives rise to a high degree of subjectivity in estimating financial instrument fair values.
Cash and cash equivalents, which are comprised of cash and due from banks and the Company’s balance at the Federal Reserve Bank, had recorded values of $55.8 million and $1.04 billion as of September 30, 2024 and December 31, 2023, respectively, which approximated fair values.
The estimated Level 2 fair values of investment securities are based on quoted market prices, if available, or estimated independently by a third-party pricing service based upon their matrix pricing technique. Level 3 investment security fair values are based on the present valuing of cash flows, which discounts expected cash flows from principal and interest using yield to maturity, or yield to call as appropriate, at the measurement date. In the third quarter of 2024 and 2023, there were no transfers between the three levels.
Federal Reserve, FHLB, and ACBB stock, are held as required by those respective institutions and are carried at cost. Each of these institutions require their members to hold stock as a condition of membership. While a fixed stock amount is required by each of these institutions, the FHLB stock requirement periodically increases or decreases with varying levels of borrowing activity.
Commercial loans held at fair value are comprised primarily of commercial real estate bridge loans and SBA loans which had been originated for sale or securitization in the secondary market, and which are now being held on the balance sheet. Commercial real estate bridge loans and SBA loans are valued using a discounted cash flow analysis based upon pricing for similar loans where market indications of the sales price of such loans are not available. SBA loans are valued on a pooled basis and commercial real estate bridge loans are valued individually.
Loans, net have an estimated fair value using the present value of future cash flows. The discount rate used in these calculations is the estimated current market rate adjusted for credit risk. Accrued interest receivable has a carrying value that approximates fair value.
Loan fair values are based on “unobservable inputs” that are based on available information. Level 3 fair values are based on the present value of cash flows by unit of measurement.
For OREO, market value is based upon appraisals of the underlying collateral by third-party appraisers, reduced by 7% to 10% for estimated selling costs.
The estimated fair values of demand deposits (comprised of interest and non-interest-bearing checking accounts, savings accounts, and certain types of money market accounts) are equal to the amount payable on demand at the reporting date (generally, their carrying
amounts). The fair values of securities sold under agreements to repurchase and short-term borrowings, when outstanding, are equal to their carrying amounts as they are short-term borrowings.
Time deposits, when outstanding, senior debt and subordinated debentures have a fair value estimated using a discounted cash flow calculation that applies current interest rates to discount expected cash flows. The carrying amount of accrued interest payable approximates its fair value. Long term borrowings resulting from sold loans which did not qualify for true sale accounting are presented in the amount of the principal of such loans.
The fair values of interest rate swaps, recorded in other assets or other liabilities, are determined using models that use readily observable market inputs and a market standard methodology applied to the contractual terms of the derivatives, including the period to maturity and interest rate indices.
The fair value of commitments to extend credit is estimated based on the amount of unamortized deferred loan commitment fees. The fair value of letters of credit is based on the amount of unearned fees plus the estimated cost to terminate the letters of credit. Fair values of unrecognized financial instruments, including commitments to extend credit, and the fair value of letters of credit are considered immaterial.
The following tables provide information regarding carrying amounts and estimated fair values (dollars in thousands) as of the dates indicated:
Quoted prices in
Significant other
Significant
active markets for
observable
unobservable
Carrying
Estimated
identical assets
inputs
(Level 1)
(Level 2)
(Level 3)
Investment securities, available-for-sale
1,576,972
11,317
Federal Reserve, FHLB and ACBB stock
5,807,267
93,726
10,991
735,463
12,071
5,329,436
Interest rate swaps, asset
96,539
11,470
Other assets and liabilities measured at fair value on a recurring basis, segregated by fair value hierarchy, are summarized below (dollars in thousands) as of the dates indicated:
Fair Value Measurements at Reporting Date Using
Fair value
Obligations of states and political subdivisions
42,938
773,991
Total investment securities, available-for-sale
1,840,293
263,321
47,237
134,182
1,080,585
735,748
344,837
The Company’s year-to-date Level 3 asset activity for the categories shown are summarized below (dollars in thousands):
Fair Value Measurements Using
Significant Unobservable Inputs
Commercial loans,
securities
at fair value
Beginning balance
20,023
589,143
Transfers to OREO
(1,744)
(2,686)
Total net (losses) or gains (realized/unrealized)
Included in earnings
2,489
3,869
Included in earnings (included in credit loss)
Included in other comprehensive income (loss)
(754)
2,048
Purchases, advances, sales and settlements
Advances
134,256
Settlements
(81,507)
(391,816)
Total losses year-to-date included
in earnings attributable to the change in
unrealized gains or losses relating to assets still
held at the reporting date as shown above.
(3,085)
The Company’s year-to-date OREO activity is summarized below (dollars in thousands) as of the dates indicated:
21,210
Transfer from loans, net
42,120
Transfer from commercial loans, at fair value
2,686
926
Write-downs
(1,147)
Sales
(5,800)
Information related to fair values of Level 3 balance sheet categories is as follows (dollars in thousands):
Level 3 instruments only
Weighted
Fair value at
Range at
average at
Valuation techniques
Unobservable inputs
Commercial mortgage-backed investment
security(1)
Discounted cash flow
Discount rate
15.00%
Commercial - SBA(2)
7.10%
Non-SBA commercial real estate - fixed(3)
146,701
7.00%-10.80%
8.82%
Non-SBA commercial real estate - floating(4)
11,415
9.20%-16.20%
12.02%
OREO(5)
Appraised value
N/A
security
14.00%
Commercial - SBA
7.46%
Non-SBA commercial real estate - fixed
162,674
Discounted cash flow and appraisal
8.00%-12.30%
8.76%
Non-SBA commercial real estate - floating
50,805
9.30%-16.50%
14.19%
OREO
The valuations for each of the instruments above, as of the balance sheet date, are subject to judgments, assumptions and uncertainties, changes in which could have a significant impact on such valuations. Weighted averages were calculated by using the discount rate for each individual security or loan weighted by its market value, except for SBA loans. For SBA loans, the yield derived from market pricing indications for comparable pools determined by date of loan origination. For commercial loans recorded at fair value, changes in fair value are reflected in the income statement. Changes in the fair value of securities which are unrelated to credit are recorded through equity. Changes in the fair value of loans recorded at amortized cost which are unrelated to credit are a disclosure item, without impact on the financial statements. The notes below refer to the September 30, 2024 table.
(1) Commercial mortgage-backed investment security, consisting of a single bank-issued CRE security, is valued using discounted cash flow analysis. The discount rate and prepayment rate applied are based upon market observations and actual experience for comparable securities and implicitly assume market averages for defaults and loss severities. The CRE-2 security has significant credit enhancement, or protection from other subordinated tranches in the issue, which limits the valuation exposure to credit losses. Nonetheless, increases in expected default rates or loss severities on the loans underlying the issue could reduce its value. In market environments in which investors demand greater yield compensation for credit risk, the discount rate applied would ordinarily be higher and the valuation lower. Changes in loss experience could also change the interest earned on this holding in future periods and impact its fair value. As a single security, the weighted average rate shown is the actual rate applied to the CRE-2 security. For additional information related to this security, which was transferred to nonaccrual status in the third quarter of 2024, see “Note 6. Loans.”
(2) Commercial – SBA Loans are comprised of the government guaranteed portion of SBA-insured loans. Their valuation is based upon the yield derived from dealer pricing indications for guaranteed pools, adjusted for seasoning and prepayments. A limited number of broker-dealers originate the pooled securities for which the loans are purchased and as a result, prices can fluctuate based on such limited market demand, although the government guarantee has resulted in consistent historical demand. Valuations are impacted by prepayment assumptions resulting from both voluntary payoffs and defaults. Such assumptions for these seasoned loans are based on a seasoning vector for constant prepayment rates from 3% to 30% over life.
(3) Non-SBA commercial real estate – fixed are fixed rate non-SBA commercial real estate mortgages. These loans are fair valued by a third-party, based upon discounting at market rates for similar loans. Discount rates used in applying discounted cash flow analysis utilize input based upon loan terms, the general level of interest rates and the quality of the credit. Deterioration in loan performance or other credit weaknesses could result in fair value ranges which would be dependent upon potential buyers’ tolerance for such weaknesses and are difficult to estimate.
(4) Non-SBA commercial real estate – floating are floating rate non-SBA loans, the majority of which are secured by multifamily properties (apartments). These are bridge loans designed to provide owners time and funding for property improvements and are generally valued using discounted cash flow analysis. The discount rate for the vast majority of these loans was based upon current origination rates for similar loans. Deterioration in loan performance or other credit weaknesses could result in fair value ranges which would be dependent upon potential buyers’ tolerance for such weaknesses and are difficult to estimate. At September 30, 2024, these loans were fair valued by a third-party, based upon discounting at market rates for similar loans.
(5) For OREO, fair value is based upon appraisals of the underlying collateral by third-party appraisers, reduced by 7% to 10% for estimated selling costs. Such appraisals reflect estimates of amounts realizable upon property sales based on the sale of comparable properties and other factors. Actual sales prices may vary based upon the identification of potential purchasers, changing conditions in local real estate markets and the level of interest rates required to finance purchases.
Assets measured at fair value on a nonrecurring basis, segregated by fair value hierarchy, during the periods shown are summarized below (dollars in thousands). The non-accrual loans in the following table are treated as collateral dependent to the extent they have resulted from borrower financial difficulty (and not from administrative delays or other mitigating factors), and are not brought current. For non-accrual loans, the Company establishes a reserve in the allowance for credit losses for deficiencies between estimated collateral and loan carrying values.
Quoted prices in active
markets for identical
assets
inputs(1)
Description
Collateral dependent loans with specific reserves(1)
5,410
67,149
8,944
25,893
(1) The method of valuation approach for the loans evaluated for an allowance for credit losses on an individual loan basis and also for OREO was the market approach based upon appraisals of the underlying collateral by external appraisers, reduced by 7% to 10% for estimated selling costs.
At September 30, 2024, principal on collateral dependent loans, which is accounted for on the basis of the value of underlying collateral, is shown at an estimated fair value of $5.4 million. To arrive at that fair value, related loan principal of $8.9 million was reduced by specific reserves of $3.5 million within the ACL as of that date, representing the deficiency between principal and estimated collateral values, which were reduced by estimated costs to sell. When the deficiency is deemed uncollectible, it is charged off by reducing the specific reserve and decreasing principal. Valuation techniques consistent with the market and/or cost approach were used to measure fair value and primarily included observable inputs for the individual loans being evaluated such as recent sales of similar collateral or observable market data for operational or carrying costs. In cases where such inputs were unobservable, the loan balance is reflected within the Level 3 hierarchy.
Note 9. Other Identifiable Intangible Assets
In May 2016, the Company purchased approximately $60.0 million of lease receivables which resulted in a customer list intangible of $3.4 million that is being amortized over a ten-year period. Amortization expense is $340,000 per year ($539,000 over the next three years). The gross carrying amount of the customer list intangible is $3.4 million, and as of September 30, 2024, and December 31, 2023, respectively, the accumulated amortization expense was $2.9 million and $2.6 million.
In January 2020, the Company purchased McMahon Leasing and subsidiaries for approximately $8.7 million which resulted in $1.1 million of intangibles. The gross carrying value of $1.1 million of intangibles was comprised of a customer list intangible of $689,000, goodwill of $263,000 and a trade name valuation of $135,000. The customer list intangible is being amortized over a twelve year period and accumulated amortization expense was $273,000 at September 30, 2024 and $230,000 at December 31, 2023. Amortization expense is $57,000 per year ($287,000 over the next five years). The gross carrying value and accumulated amortization related to the Company’s intangibles at September 30, 2024 and December 31, 2023 are presented below:
Amount
Amortization
Customer list intangibles
4,093
3,138
2,840
Goodwill
263
Trade Name
4,491
Note 10. Recent Accounting Pronouncements
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280), Improvements to Reportable Segment Disclosures.
ASU 2023-07 enhances segment level disclosures, for both annual and quarterly reporting periods and is effective with the December 31, 2024 financial statements. As a result of the enhancements, segment disclosures will include greater detail surrounding the nature of expenses now reported as a single line item in the segment income statements. In addition to disclosing the chief operational decision maker by title and position, an explanation of how the segment information is used by that decision maker will be summarized.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740), Improvements to Income Tax Disclosures. ASU 2023-09, effective January 1, 2025, adds annual disclosures for the amount of income taxes paid, net of refunds, shown separately for federal, state and foreign taxes. Total tax paid, net of refunds, for any jurisdictions which exceed 5% of total net taxes paid, will also be shown separately. The Company is currently evaluating these disclosures.
Note 11. Shareholders’ Equity
On October 20, 2021, the Board of Directors (the “Board”) approved a common stock repurchase program for the 2022 fiscal year (the “2022 Repurchase Program”). Under the 2022 Repurchase Program, the Company repurchased $15.0 million in value of the Company’s common stock in each quarter of 2022.
On October 26, 2022, the Board approved a common stock repurchase program for the 2023 fiscal year (the “2023 Repurchase Program”). Under the 2023 Repurchase Program, the Company repurchased $25.0 million in value of the Company’s common stock in each quarter of 2023.
On October 26, 2023, the Board approved a common stock repurchase program for the 2024 fiscal year (the “2024 Repurchase Program”), which authorizes the Company to repurchase $50.0 million in value of the Company’s common stock per fiscal quarter in 2024, for a maximum amount of $200.0 million. The Company increased its share repurchase authorization for the second quarter of 2024 from $50.0 million to $100.0 million, which increased the maximum amount under the 2024 Repurchase Program to $250.0 million. Under the 2024 Repurchase Program, the Company intends to repurchase shares through open market purchases, privately negotiated transactions, block purchases or otherwise in accordance with applicable federal securities laws, including Rule 10b-18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The 2024 Repurchase Program may be modified or terminated at any time. During the three and nine months ended September 30, 2024, the Company repurchased 1,037,069 shares and 5,317,686 shares of its common stock in the open market under the 2024 Repurchase Program at an average price of $48.22 per share and $37.61 per share, respectively.
As a means of returning capital to shareholders, the Company implemented stock repurchase programs which totaled $40.0 million, $60.0 million and $100.0 million, in equal quarterly amounts, respectively, in 2021, 2022 and 2023, with $200 million originally planned for 2024. Subsequently the second quarter 2024 planned repurchase was increased from $50 million to $100 million, with $50 million
in repurchases planned for each remaining quarter of 2024. The planned amounts of such repurchases are generally determined in the fourth quarter of the preceding year by assessing the impact of budgetary earnings projections on regulatory capital requirements. The excess of projected earnings over amounts required to maintain capital requirements is the maximum available for capital return to shareholders, barring any need to retain capital for other purposes. A significant portion of such excess earnings has been utilized for stock repurchases in the amounts noted above, while cash dividends have not been paid. In determining whether capital is returned through stock repurchases or cash dividends, the Company calculates a maximum share repurchase price, based upon comparisons with what it concludes to be other exemplar peer share price valuations, with further consideration of internal growth projections. As these share prices, which are updated at least annually, have not been reached, capital return has consisted solely of stock repurchases. Exemplar share price comparisons are based upon multiples of earnings per share over time, with further consideration of returns on equity and assets. While repurchase amounts are planned in the fourth quarter of the preceding year, repurchases may be modified or terminated at any time, should capital need to be conserved.
Note 12. Regulatory Matters
Various federal and state statutory provisions limit the amount of dividends that subsidiary banks can pay to their holding companies without regulatory approval. Without the prior approval of the OCC, a dividend may not be paid if the total of all dividends declared by a bank in any calendar year is in excess of the current year’s net income combined with the retained net income of the two preceding years. Additionally, a dividend may not be paid in excess of a bank’s retained earnings. Moreover, an insured depository institution may not pay a dividend if the payment would cause it to be less than “adequately capitalized” under the prompt corrective action framework as defined in the Federal Deposit Insurance Act or if the institution is in default in the payment of an assessment due to the FDIC. Similarly, a banking organization that fails to satisfy regulatory minimum capital conservation buffer requirements will be subject to certain limitations, which include restrictions on capital distributions.
In addition to these explicit limitations, federal and state regulatory agencies are authorized to prohibit a banking subsidiary or financial holding company from engaging in an unsafe or unsound practice. Depending upon the circumstances, the agencies could take the position that paying a dividend would constitute an unsafe or unsound banking practice.
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification of the Company and the Bank are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Moreover, capital requirements may be modified based upon regulatory rules or by regulatory discretion at any time reflecting a variety of factors including deterioration in asset quality.
The following table sets forth our regulatory capital amounts and ratios for the periods indicated:
Tier 1 capital
Total capital
Common equity
to average
to risk-weighted
tier 1 to risk
assets ratio
weighted assets
The Bancorp, Inc.
9.86%
13.62%
The Bancorp Bank, National Association
10.94%
15.11%
15.67%
"Well capitalized" institution (under federal regulations-Basel III)
5.00%
8.00%
10.00%
6.50%
11.19%
15.66%
16.23%
12.37%
17.35%
17.92%
Note 13. Legal
On June 12, 2019, the Bank was served with a qui tam lawsuit filed in the Superior Court of the State of Delaware, New Castle County. The Delaware Department of Justice intervened in the litigation. The case is titled The State of Delaware, Plaintiff, Ex rel. Russell S. Rogers, Plaintiff-Relator v. The Bancorp Bank, Interactive Communications International, Inc., and InComm Financial Services, Inc., Defendants. The lawsuit alleges that the defendants violated the Delaware False Claims Act by not paying balances on certain open-
loop “Vanilla” prepaid cards to the State of Delaware as unclaimed property. The complaint seeks actual and treble damages, statutory penalties, and attorneys’ fees. The Bank has filed an answer denying the allegations and continues to vigorously defend against the claims. The Bank and other defendants previously filed a motion to dismiss the action, but the motion was denied and the case is in preliminary stages of discovery. The Company is unable to determine whether the ultimate resolution of the matter will have a material adverse effect on the Company’s financial condition or operations.
On September 14, 2021, Cachet Financial Services (“Cachet”) filed an adversary proceeding against the Bank in the U.S. Bankruptcy Court for the Central District of California, titled Cachet Financial Services, Plaintiff v. The Bancorp Bank, et al., Defendants. The case was filed within the context of Cachet’s pending Chapter 11 bankruptcy case. The Bank previously served as the Originating Depository Financial Institution (“ODFI”) for automated clearing house (“ACH”) transactions in connection with Cachet’s payroll services business. The matter arises from the Bank’s termination of its Payroll Processing ODFI Agreement with Cachet on October 23, 2019, for safety and soundness reasons. The initial complaint alleges eight causes of action: (i) breach of contract; (ii) negligence; (iii) intentional interference with contract; (iv) conversion; (v) express indemnity; (vi) implied indemnity; (vii) accounting; and (viii) objection to the Bank’s proof of claim in the bankruptcy case. On November 4, 2021, the Bank filed a motion in the U.S. District Court for the Central District of California to withdraw the reference of the adversary proceeding to the bankruptcy court, which was denied in February 2023. On August 3, 2022, Cachet served the Bank with a First Amended Complaint wherein Cachet, among other things, withdraws its implied indemnity claim against the Bank and adds several defendants unaffiliated with the Bank and causes of action related to those parties. As to the Bank, Cachet seeks approximately $150 million in damages, an accounting and disallowance of the Bank’s proof of claim. The Bank is vigorously defending against these claims. On September 28, 2022, the Bank filed a partial motion to dismiss, seeking to dispose of the majority of Cachet’s claims against the Bank. On September 12, 2024, the Bank’s partial motion to dismiss, seeking to dispose of the majority of Cachet’s claims was denied on procedural grounds and without reaching the issues the Bank raised in its partial motion to dismiss. On October 31, 2024, Cachet filed its Second Amended Complaint, which as related to the Bank, is substantially similar to the First Amended Complaint; however, the Second Amended Complaint seeks only “damages in amount to be proven at trial” whereas the First Amended Complaint sought “damages in amount to be proven but in no event less than $150 million.” The Bank will defend against the Second Amended Complaint and respond to the Second Amended Complaint in compliance with applicable deadlines, as may be amended. The Company is not yet able to determine whether the ultimate resolution of this matter will have a material adverse effect on the Company’s financial conditions or operations.
On March 27, 2023, the Bank received a Civil Investigative Demand (“CID”) from the Consumer Financial Protection Bureau (“CFPB”) seeking documents and information related to the Bank’s escheatment practices in connection with certain accounts offered through one of the Bank’s program partners. The Bank continues to cooperate with the CFPB, including by responding to the CID. While the Company remains confident in the Bank’s escheatment practices, it cannot predict the timing or final outcome of the investigation. Future costs related to this matter may be material and could continue to be material at least through the completion of the investigation.
On November 21, 2023, TBBK Card Services, Inc. (“TBBK Card”), a wholly-owned subsidiary of the Bank, was served with a complaint filed in the Superior Court of the State of California, captioned People of the State of California, acting by and through San Francisco City Attorney David Chiu, Plaintiff v. InComm Financial Services, Inc., TBBK Card Services, Inc., Sutton Bank, Pathward, N.A., and Does 1-10, Defendants. The complaint principally alleges that the defendants engaged in unlawful, unfair or fraudulent business acts and practices related to the packaging of “Vanilla” prepaid cards and the refund process for unauthorized transactions that occurred due to card draining practices. On December 14, 2023, the case was removed to the U.S. District Court for the Northern District of California. On March 26, 2024, the case was remanded to the Superior Court of the State of California. TBBK Card is vigorously defending against the claims. On May 6, 2024, TBBK Card filed a motion to quash service of summons as to TBBK Card for lack of personal jurisdiction, which is still pending. The Company is not yet able to determine whether the ultimate resolution of this matter will have a material adverse effect on the Company’s financial conditions or operations.
In addition, we are a party to various routine legal proceedings arising out of the ordinary course of our business. Management believes that none of these actions, individually or in the aggregate, will have a material adverse effect on our financial condition or operations.
Note 14. Segment Financials
The Company’s operations can be classified under three segments: payments, specialty finance and corporate. The chief operating decision maker for these segments is the Chief Executive Officer. The payments segment includes the deposit balances and non-interest income generated by prepaid, debit and other card accessed accounts, ACH proccessing and other payments related processing. It also includes loan balances and interest and non-interest income from credit products generated through payment relationships. Specialty finance includes: (i) REBL (real estate bridge lending) comprised primarily of apartment building rehabilitation loans (ii) institutional banking comprised primarily of security-backed lines of credit, cash value insurance policy-backed lines of credit and advisor financing and (iii) commercial loans comprised primarily of SBA loans and direct lease financing. It also includes deposits generated by those business lines. Corporate includes the Company’s investment securities, corporate overhead and expenses which have not been allocated to segments. Expenses not allocated include certain management, board oversight, administrative, legal, IT and technology infrastructure, human resouces, audit, regulatory and CRA, finance and accounting, marketing and other corporate expenses.
In the segment reporting below, a non-GAAP subtotal is shown, captioned “Income before non-interest expense allocation”. That subtotal presents an income subotal before consideration of allocated corporate expenses which might be fixed, semi-fixed or otherwise resist changes without regard to a particular line of business. It also reflects a market-based allocation of interest expense to financing segments which utilize funding from deposits generated by the payments segment, which earns offsetting interest income. That allocation is shown in the “Interest allocation” line item. The rate utilized for the allocation corresponds to an estimated average of the three year FHLB rate. The payments segment interest expense line item consists of interest expense actually incurred to generate its deposits, which is the Company’s actual cost of funds. That actual cost is allocated to the corporate segment which requires funding for the Company’s investment securities portfolio.
The more significant non-interest expense categories correspond to the Company’s consolidated statements of operations and include salaries and employee benefits, data processing and software expenses that are incurred directly by those segments. Expenses incurred by departments which provide support services to the segments also include those categories of expense and others which are allocated to segments based on estimated usage. Those support department allocations are reflected in the “Risk, financial crimes and compliance” and “Information technology and operations” line items. Other expenses not shown separately are monitored for purposes of expense management, but, unless atypically high, are ordinarily of lesser significance than the categories noted above.
For the payments segment, deposit growth and the cost thereof and non-interest income growth, are factors in the decision making process and are respectively reported in the consolidated statemens of operations. For specialty finance, loan growth and related yields are factors in decision making. Comparative loan balance information measuring loan growth is presented in Note-E Loans. In addition to consideration of the above profitability and growth aspects of its operations, decision making is focused on the management of current and future potential risks. Such risks include, but are not limited to, credit, interest rate, liquidity, regulatory, and reputation. The loan committee provides support and oversight for credit risk, while the asset liability committee provides support and oversight over pricing, duration and liquidity. The risk committee provides further oversight over those areas in addition to regulatory, reputation and other risks.
The following tables provide segment information for the periods indicated (dollars in thousands):
For the three months ended September 30, 2024
Payments
REBL
Institutional Banking
Commercial
Corporate
32
51,994
30,765
32,278
24,611
Interest allocation
61,532
(23,193)
(16,223)
(16,521)
(5,595)
40,932
906
14
4,096
20,632
28,801
13,636
15,743
14,920
Provision for credit losses
2,245
93
1,218
3,555
29,431
782
214
1,656
Direct non-interest expense
3,803
921
2,195
4,819
22,083
388
576
399
741
435
3,237
2,318
1,062
538
1,905
13,465
Income before non-interest expense allocations
43,432
25,286
9,707
9,020
(18,415)
Non-interest expense allocations
Risk, financial crimes, and compliance
6,719
748
1,215
(9,218)
Information technology and operations
3,420
191
1,498
1,876
(6,985)
Other allocated expenses
4,000
752
1,793
(8,201)
Total non-interest expense allocations
14,139
1,479
3,902
4,884
(24,404)
Income before taxes
29,293
23,807
5,805
4,136
5,989
7,432
6,040
1,473
1,049
1,519
21,861
17,767
4,332
3,087
4,470
For the three months ended September 30, 2023
49,945
33,543
26,240
19,186
72,304
(26,664)
(22,363)
(19,077)
(4,200)
37,186
127
990
35,172
23,154
10,190
7,163
13,203
1,874
(262)
1,752
24,101
(359)
3,332
924
2,230
4,038
19,951
328
609
424
143
706
331
3,222
2,512
734
540
2,173
5,194
11,153
52,958
22,461
5,973
744
(15,685)
6,567
318
471
660
(8,016)
3,248
1,701
1,643
(6,806)
2,903
573
1,489
(6,523)
12,718
1,105
3,661
3,861
(21,345)
40,240
21,356
2,312
(3,117)
5,660
Income tax expense (benefit)
9,879
5,243
568
(765)
1,389
Net income (loss)
30,361
16,113
(2,352)
4,271
For the nine months ended September 30, 2024
157,010
91,987
92,316
71,442
196,251
(73,570)
(53,111)
(52,499)
(17,071)
117,884
10,327
78,400
83,440
36,269
39,792
44,044
166
(172)
6,976
84,639
2,646
4,251
462
11,433
2,917
6,784
13,653
63,177
1,155
1,771
1,196
364
2,253
1,343
9,649
6,728
2,601
1,663
5,836
18,682
35,510
143,359
77,810
23,846
18,779
(48,026)
20,150
1,621
2,248
3,665
(27,684)
10,151
539
4,449
5,533
(20,672)
11,830
2,244
4,904
5,266
(24,244)
42,131
4,404
11,601
14,464
(72,600)
101,228
73,406
12,245
4,315
24,574
25,398
18,418
1,083
6,165
75,830
54,988
9,173
3,232
18,409
For the nine months ended September 30, 2023
94
142,846
104,203
74,659
55,632
202,076
(74,141)
(66,700)
(51,813)
(9,422)
102,353
3,520
9,286
99,817
68,323
33,983
22,846
36,924
216
(146)
4,313
4,016
74,269
5,824
521
5,178
(687)
10,077
2,796
7,764
12,570
60,220
987
1,242
74
2,057
1,028
9,400
7,218
2,875
1,396
5,949
17,463
34,901
155,382
68,064
21,666
4,159
(51,721)
19,520
910
1,292
1,832
(23,554)
9,575
610
5,238
4,735
(20,158)
8,540
1,728
4,425
4,356
(19,049)
37,635
10,955
10,923
(62,761)
Income (loss) before taxes
117,747
64,816
10,711
(6,764)
11,040
29,374
16,169
2,672
(1,687)
88,373
48,647
8,039
(5,077)
8,286
327,349
2,340,542
1,815,344
1,659,299
1,952,056
6,370,558
2,476
197,605
12,782
695,843
42,769
2,208,030
1,867,702
1,468,654
2,118,540
6,412,911
3,258
186,503
9,718
286,024
Note 15. Subsequent Events
The Company evaluated its September 30, 2024 consolidated financial statements for subsequent events through the date the consolidated financial statements were issued. The Company is not aware of any subsequent events which would require recognition or disclosure in the financial statements.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) provides information about the Company’s results of operations, financial condition, liquidity and asset quality. This information is intended to facilitate your understanding and assessment of significant changes and trends related to our financial condition and results of operations. This MD&A should be read in conjunction with our financial information in our Form 10-K for the fiscal year ended 2023 (the “2023 Form 10-K”) and the unaudited interim consolidated financial statements and notes thereto contained in this Quarterly Report on Form 10-Q.
Important Note Regarding Forward-Looking Statements
When used in this Quarterly Report on Form 10-Q, statements regarding The Bancorp’s business, that are not historical facts, are “forward-looking statements.” These statements may be identified by the use of forward-looking terminology, including, but not limited to the words “intend,” “may,” “believe,” “will,” “expect,” “look,” “anticipate,” “plan,” “estimate,” “continue,” or similar words. Forward-looking statements include but are not limited to, statements regarding our annual fiscal 2024 results, profitability, and increased volumes, and relate to our current assumptions, projections, and expectations about our business and future events, including current expectations about important economic, political, and technological factors, among other factors, and are subject to risks and uncertainties, which could cause the actual results, events, or achievements to differ materially from those set forth in or implied by the forward-looking statements and related assumptions. Factors that could cause results to differ from those expressed in the forward-looking statements also include, but are not limited to, the risks and uncertainties referenced or described in The Bancorp’s filings with the Securities and Exchange Commission, including the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023 and other documents that the Company files from time to time with the Securities and Exchange Commission as well as the following:
continued movement in interest rates and the resulting impact on net interest income;
changes in the monetary and fiscal policies of the federal government and its agencies;
the impacts of recent volatility in the banking sector and actual or perceived concerns regarding the liquidity and soundness of other financial institutions;
adverse changes in general economic and business conditions, including the impact of such conditions on the market value of real estate securing certain of our loans;
levels of net charge-offs and the adequacy of the ACL in covering expected losses;
any significant increase in the level of the Bank’s deposits that are uninsured by the FDIC, or are otherwise regulated, including as a result of the implementation or adoption of pending regulatory change;
any failure to maintain or enhance our competitive position with respect to new products, services and technology and achieve our strategic priorities, such as growing payments-related deposit accounts;
our entry into consumer fintech lending and its future potential impact on our operations and financial condition;
the impact on our stock price as a result of speculative or short trading strategies;
weather events, natural disasters, geopolitical events, public health crises and other catastrophic events beyond our control;
the outcome of regulatory matters or investigations, litigation, and other legal actions; and
our ability to identify and prevent cyber-security incidents, such as data security breaches, ransomware, malware intrusion, or other attacks.
We caution readers not to place undue reliance on forward-looking statements, which speak only as of the date hereof and are based on information presently available to the management of the Company. We undertake no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q except as required by applicable law.
Recent Developments
As previously disclosed in our Form 10-Q for the quarter ended June 30, 2024, the Company entered into a purchase and sale agreement for an apartment property acquired by our wholly-owned subsidiary, The Bancorp Bank, National Association, through foreclosure in connection with a real estate bridge lending (“REBL”) loan. At September 30, 2024, the related $40.3 million balance, comprised the majority of our OREO. Subsequent to the previously reported $125,000 earnest money deposit in July 2024, the purchaser has made additional earnest money deposits of $250,000 bringing the total of such deposits to $375,000 in 2024. Additional required deposits are projected to total $500,000 prior to the December 31, 2024 closing deadline. The sales price is expected to cover the Company’s current OREO balance plus the forecasted cost of improvements to the property. There can be no assurance that the purchaser will consummate the sale of the property, but if not consummated, earnest money deposits would accrue to the Company.
While real estate bridge loans classified as either special mention or substandard increased during the quarter, we believe that such classifications are at or near their peak. That conclusion is based, at least in part, on an independent review of a significant portion of the REBL portfolio performed during the third quarter by a firm specializing in such analysis. Additionally, the 50 basis point Federal Reserve rate reduction may provide immediate cash flow benefits to borrowers, while the further declining forward yield curve should support further liquidity benefits, as fixed rates decline. Moreover, respective weighted average “as is” and “as stabilized” LTVs of 77% and 68%, respectively, based upon appraisals in the past twelve months, continue to provide significant protection against loss. Underlying property values as supported by such independent LTVs, continue to facilitate the recapitalization of certain loans from borrowers experiencing cash flow issues, to borrowers with greater financial capacity. At September 30, 2024, real estate bridge loans classified as special mention and substandard respectively amounted to $84.4 million and $155.4 million compared to $96.0 million and $80.4 million at June 30, 2024. Each classified loan was evaluated for a potential increase in the allowance for credit losses (“ACL”) on the basis of a third-party appraisals of apartment building collateral. On the basis of “as is” and “as stabilized” LTVs, increases to the allowance were not required. The current allowance for credit losses for REBL, is primarily based upon historical industry losses for multi-family loans, in the absence of significant charge-offs within the Company’s REBL portfolio. As a result of increasing amounts of loans classified as special mention and substandard, the Company evaluated potential related sensitivity for REBL in the third quarter. Such evaluation is inherently subjective as it requires material estimates that may be susceptible to change as more information becomes available. As a result, the Company added a new qualitative factor to its ACL with a cumulative after-tax impact of approximately $1.5 million ($2.0 million pre-tax), as described in “Note 6. Loans.”
Overview
The Bancorp’s balance sheet has a risk profile enhanced by the special nature of the collateral supporting its loan niches, and related underwriting. Those loan niches have contributed to increased earnings levels, even during periods in which markets have experienced various economic stresses. Real estate bridge lending is comprised of workforce housing which we consider to be working class apartments at more affordable rental rates, in selected states. We believe that underwriting requirements provide significant protection against loss, as supported by LTV ratios based on third-party appraisals. SBLOC and IBLOC loans are collateralized by marketable securities and the cash value of life insurance, respectively, while SBA loans are either SBA 7(a) loans that come with significant government-related guarantees, or SBA 504 loans that are made at 50-60% LTVs. Additional detail with respect to these loan portfolios is included in the related tables in “Financial Condition.” Also enhancing the Company’s risk profile is the substantial earnings impact of its payment businesses.
Nature of Operations
We are a Delaware financial holding company and our primary, wholly-owned subsidiary is The Bancorp Bank, National Association. The vast majority of our revenue and income is currently generated through the Bank. In our continuing operations, we have four primary lines of specialty lending in our national specialty finance segment:
SBLOC, IBLOC, and investment advisor financing;
leasing (direct lease financing);
SBLs, consisting primarily of SBA loans;
non-SBA commercial real estate bridge loans; and
beginning in 2024, consumer fintech lending.
SBLOCs and IBLOCs are loans that are generated through affinity groups and are respectively collateralized by marketable securities and the cash value of insurance policies. SBLOCs are typically offered in conjunction with brokerage accounts and are offered nationally. IBLOC loans are typically viewed as an alternative to standard policy loans from insurance companies and are utilized by our existing advisor base as well as insurance agents throughout the country. Investment advisor financing are loans made to investment advisors for purposes of debt refinance, acquisition of another investment firm or internal succession. Vehicle fleet and, to a lesser extent, other equipment leases are generated in a number of Atlantic Coast and other states and are collateralized primarily by vehicles. SBA loans are generated nationally and are collateralized by commercial properties and other types of collateral. Our non-SBA commercial real estate bridge loans, at fair value, are primarily collateralized by multifamily properties (apartment buildings), and to a lesser extent, by hotel and retail properties. These loans were originally generated for sale through securitizations. In 2020, we decided to retain these loans on our balance sheet as interest-earning assets and resumed originating such loans in the third quarter of 2021. These new originations are identified as real estate bridge loans, consist of apartment building loans, and are held for investment in the loan portfolio. Prior originations originally intended for securitizations continue to be accounted for at fair value, and are included on the balance sheet in “Commercial loans, at fair value.”
In the second quarter of 2024, we initiated our measured entry into consumer fintech lending, by which we make consumer loans with the marketing and servicing assistance of existing and planned new fintech relationships. While the $280.1 million of such loans at September 30, 2024 did not significantly impact income during the quarter, such lending is expected to meaningfully impact both the balance sheet and income in the future. We expect that impact will be reflected in a lower cost of funds for related deposits and increased transaction fees.
The majority of our deposits and non-interest income are generated in our payments segment, or Fintech Solutions Group, which consists of consumer transaction accounts accessed by Bank-issued prepaid or debit cards and payment companies that process their clients’ corporate and consumer payments, automated clearing house (“ACH”) accounts, the collection of card payments on behalf of merchants and other payments through our Bank. The card-accessed deposit accounts are comprised of debit and prepaid card accounts that are generated by companies that market directly to end users. Our card-accessed deposit account types are diverse and include: consumer and business debit, general purpose reloadable prepaid, pre-tax medical spending benefit, payroll, gift, government, corporate incentive, reward, business payment accounts and others. Our ACH accounts facilitate bill payments and our acquiring accounts provide clearing and settlement services for payments made to merchants which must be settled through associations such as Visa or Mastercard. Consumer transaction account banking services are provided to organizations with a pre-existing customer base tailored to support or complement the services provided by these organizations to their customers, which we refer to as “affinity or private label banking.” These services include loan and deposit accounts for investment advisory companies through our Institutional Banking department. We typically provide these services under the name and through the facilities of each organization with whom we develop a relationship.
Performance Summary
Our net income increased to $51.5 million for the third quarter of 2024, from $50.1 million for the third quarter of 2023. Our cost of funds rose slightly to 2.54% in the third quarter of 2024 from 2.50% in the third quarter of 2023. See “Asset and Liability Management” in this MD&A for further discussion of how our funding sources and loans adjust to Federal Reserve rate changes.
Prepaid, debit card and other payment fees, including ACH, are the largest drivers of non-interest income. Such fees for the third quarter of 2024 increased $3.7 million over the comparable 2023 period.
There was a $3.5 million provision for credit losses in the third quarter of 2024, compared to a provision for credit losses of $1.8 million in the third quarter of 2023.
Key Performance Indicators
We use a number of key performance indicators (“KPIs”) to measure our overall financial performance and believe they are useful to investors because they provide additional information about our underlying operational performance and trends. We describe how we calculate and use a number of these KPIs and analyze their results below.
Return on assets and return on equity. Two KPIs commonly used within the banking industry to measure overall financial performance are return on assets and return on equity. Return on assets measures the amount of earnings compared to the level of assets utilized to generate those earnings and is derived by dividing net income by average assets. Return on equity measures the amount of earnings compared to the equity utilized to generate those earnings and is derived by dividing net income by average shareholders’ equity.
Ratio of equity to assets. Ratio of equity to assets is another KPI frequently utilized within the banking industry and is derived by dividing period-end shareholders’ equity by period-end total assets.
Net interest margin and credit losses. Net interest margin is a KPI associated with net interest income, which is the largest component of our earnings and is the difference between the interest earned on our interest-earning assets consisting of loans and investments, less the interest on our funding, consisting primarily of deposits. Net interest margin is derived by dividing net interest income by average interest-earning assets. Higher levels of earnings and net interest income on lower levels of assets, equity and interest-earning assets are generally desirable. However, these indicators must be considered in light of regulatory capital requirements, which impact equity, and credit risk inherent in loans. Accordingly, the magnitude of credit losses is an additional KPI.
Other KPIs. Other KPIs we use from time to time include growth in average loans and leases, non-interest income growth, the level of non-interest expense and various capital measures including equity to assets.
Results of KPIs
In the third quarter of 2024, return on assets and return on equity amounted to 2.55% and 25.74% (annualized), respectively, compared to 2.71% and 26.12% (annualized) in the third quarter of 2023. For the nine-month period ended September 30, 2024, return on assets, and return on equity amounted to 2.76% and 26.61% (annualized), respectively, compared to 2.66% and 27.01% (annualized) for the nine-month period ended September 30, 2023.
At September 30, 2024, the ratio of equity to assets was 10.07%, compared to 10.36% at September 30, 2023, reflecting an increase in equity capital from retained earnings and an increase in unrealized income on securities partially offset by share repurchases. The ratio fell slightly as a result of the increase in period end assets.
Net interest margin was 4.78% in the third quarter of 2024, versus 5.07% in the third quarter of 2023. Net interest margin for third quarter 2024 was reduced by the reversal of $1.6 million ($1.2 million, net of tax) of prior period interest related to both real estate bridge loans transferred to non-accrual status during the quarter and loan modifications with retroactive rate reductions.
Average loans and leases increased to $6.02 billion in the third quarter of 2024 compared to $5.61 billion in the third quarter of 2023. The provision for credit losses was $3.5 million in the third quarter of 2024 compared to a provision for credit losses of $1.8 million in the third quarter of 2023.
Critical Accounting Estimates
Our accounting and reporting policies conform with GAAP and general practices within the financial services industry. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates. We view critical accounting estimates as those estimates made in accordance with GAAP that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations. Our critical accounting policies and estimates as of September 30, 2024, remain unchanged from those presented in the 2023 Form 10-K under Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Results of Operations
Comparison of third quarter 2024 to third quarter 2023
Net Income
Net income for the third quarter of 2024 was $51.5 million, or $1.04 per diluted share, compared to $50.1 million, or $0.92 per diluted share, for the third quarter of 2023. Income before income taxes was $69.0 million in the third quarter of 2024 compared to $66.5 million in the third quarter of 2023. Income increased between those respective periods primarily as a result of higher net interest income, which resulted primarily from higher loan and investment securities balances and higher fintech related payment and credit fees.
Net Interest Income
Our net interest income for the third quarter of 2024 increased $4.9 million, or 5.5%, to $93.7 million from $88.9 million in the third quarter of 2023. Our interest income for the third quarter of 2024 increased to $139.7 million, an increase of $10.7 million, or 8.3%, from $129.0 million for the third quarter of 2023. The increase in interest income resulted primarily from higher investment securities and loan balances as our average loans and leases increased to $6.02 billion for the third quarter of 2024 from $5.61 billion for the third quarter of 2023, an increase of $415.0 million, or 7.4%. Related interest income increased $5.9 million on a tax equivalent basis. SBLOC and IBLOC balances at September 30, 2024 were approximately 1% lower than those at June 30, 2024, after having shown larger decreases in prior periods. At September 30, 2024, the respective balances of SBLOC and IBLOC loans were $989.3 million and $554.0 million, respectively, compared to $1.01 billion and $712.6 million at September 30, 2023. Loans in other categories with higher yields more than offset the impact of the SBLOC and IBLOC decreases, which also contributed to the higher net interest income. Of the total $5.9 million increase in loan interest income on a tax equivalent basis, the largest increases were $2.2 million for all real estate bridge loans, $3.3 million for small business lending, $2.8 million for leasing and $1.3 million for investment advisor financing, while total SBLOC and IBLOC decreased $4.1 million.
Our average investment securities of $1.58 billion for the third quarter of 2024 increased $806.6 million from $771.4 million for the third quarter of 2023. Related tax equivalent interest income increased $10.1 million, primarily reflecting an increase in balances.
Our net interest margin (calculated by dividing net interest income by average interest-earning assets) for the third quarter of 2024 was 4.78% compared to 5.07% for the third quarter of 2023, a decrease of 29 basis points. While the yield on interest-earning assets decreased 23 basis points, the cost of deposits and interest-bearing liabilities increased 4 basis points, or a net change of 27 basis points. Average interest-earning deposits at the Federal Reserve Bank decreased $392.6 million, or 61.3%, to $247.3 million in the third quarter of 2024 from $639.9 million in the third quarter of 2023, reflecting the impact of the purchase of approximately $900 million of securities in April 2024. In the third quarter of 2024, the average yield on our loans decreased to 7.73% from 7.89% for the third quarter of 2023, a decrease of 16 basis points. Yields on taxable investment securities in the third quarter of 2024 was 5.02% compared to 5.02% for the third quarter of 2023.
Average Daily Balances
The following table presents the average daily balances of assets, liabilities and shareholders’ equity and the respective interest earned or paid on interest-earning assets and interest-bearing liabilities, as well as average annualized rates, for the periods indicated:
Three months ended September 30,
2024 vs 2023
Average
Balance
Interest
Rate
Due to Volume
Due to Rate
Assets:
Interest-earning assets:
Loans, net of deferred loan fees and costs(1)
6,017,911
116,367
7.73%
5,603,514
110,506
7.89%
7,956
(2,095)
5,861
Leases-bank qualified(2)
5,151
11.34%
4,585
110
9.60%
21
36
Investment securities-taxable
1,575,091
5.02%
768,364
10,124
10,120
Investment securities-nontaxable(2)
2,927
55
7.52%
3,005
50
6.66%
247,344
5.48%
639,946
5.43%
(5,377)
(5,302)
Net interest-earning assets
7,848,424
139,722
7.12%
7,019,414
129,002
7.35%
(28,254)
(23,147)
222,646
338,085
8,042,816
7,334,352
12,717
(1,997)
10,720
Liabilities and shareholders' equity:
Deposits:
6,942,029
42,149
2.43%
6,229,668
37,913
4,325
(89)
4,236
65,079
549
3.37%
56,538
518
3.66%
65
(34)
31
7,007,108
2.44%
6,286,206
2.45%
73,480
5.61%
Repurchase agreements
38,235
7.21%
9,889
5.18%
493
68
Subordinated debt
8.87%
8.75%
96,071
5.14%
95,714
5.16%
Total deposits and liabilities
7,228,295
2.54%
6,405,251
2.50%
18,362
167,673
7,246,657
6,572,924
5,913
(51)
5,862
Shareholders' equity
796,159
761,428
Net interest income on tax equivalent basis(2)
93,774
88,916
6,804
(1,946)
4,858
Tax equivalent adjustment
34
Net interest margin(2)
4.78%
5.07%
(1) Includes commercial loans, at fair value. All periods include non-accrual loans.
(2) Full taxable equivalent basis, using 21% respective statutory federal tax rates in 2024 and 2023.
For the third quarter of 2024, average interest-earning assets increased to $7.85 billion, an increase of $829.0 million, or 11.8%, from $7.02 billion in the third quarter of 2023. The increase reflected decreased average interest-earning deposits at the Federal Reserve Bank of $392.6 million, the impact of which was more than offset by increased average balances of loans and leases of $415.0 million, or 7.4%, and increased average investment securities of $806.6 million, or 104.6%. The increase reflected the purchase of approximately $900 million of fixed rate securities to reduce exposure to possible future Federal Reserve rate decreases. For those respective periods, average demand and interest checking deposits increased $712.4 million, or 11.4%. The interest expense shown for demand and interest checking is primarily comprised of interest paid to our affinity groups.
Provision for Credit Losses
Our provision for credit losses was $3.5 million for the third quarter of 2024 compared to a provision of $1.8 million for the third quarter of 2023. The ACL was $31.0 million, or 0.52% of total loans, at September 30, 2024, compared to $27.4 million, or 0.51% of total loans, at December 31, 2023. As a result of a new qualitative factor for classified REBL loans, the provision for credit losses was increased by $2.0 million in the third quarter of 2024. The provision also reflected the impact of continuing higher leasing net charge-offs, especially in long haul and local trucking, transportation and related activities for which total exposure was approximately $34 million at September 30, 2024. We believe that our ACL is appropriate and supportable. For more information about our provision and ACL and our loss experience, see “Item 2 – Allowance for Credit Losses,” “Item 2 – Net Charge-offs,” and “Item 2 – Non-accrual Loans, Loans 90 days Delinquent and Still Accruing, OREO and Modified Loans,” below and “Note 6. Loans” to the unaudited consolidated financial statements herein.
Non-Interest Income
Non-interest income was $32.1 million in the third quarter of 2024 compared to $26.8 million in the third quarter of 2023. The $5.3 million, or 19.9%, increase between those respective periods reflected an increase in prepaid, debit card and related fees. The increase also reflected increased ACH, card and other payment processing fees. Prepaid, debit card and related fees increased $2.4 million, or 11.1%, to $23.9 million for the third quarter of 2024, compared to $21.5 million in the third quarter of 2023. The increase reflected higher transaction volume from new clients and organic growth from existing clients. ACH, card and other payment processing fees increased $1.3 million, or 52.4%, to $3.9 million for the third quarter of 2024, compared to $2.6 million in the third quarter of 2023, reflecting an increase in rapid funds transfer volume.
Consumer credit fintech fees amounted to $1.6 million for the third quarter of 2024, as we began our entry into consumer fintech lending in the second quarter of 2024. Such lending may also be reflected in a lower cost of deposits, as a result of associated deposits.
Net realized and unrealized gains on commercial loans, at fair value, increased $81,000, or 15.4%, to $606,000 for the third quarter of 2024 from $525,000 for the third quarter of 2023.
Leasing related income decreased $695,000, or 39.3%, to $1.1 million for the third quarter of 2024 from $1.8 million for the third quarter of 2023.
Other non-interest income increased $609,000, or 144.3%, to $1.0 million for the third quarter of 2024 from $422,000 in the third quarter of 2023 which reflected increased payoff fees on advisor financing loans.
Non-Interest Expense
Total non-interest expense was $53.3 million for the third quarter of 2024, an increase of $5.8 million, or 12.2%, compared to $47.5 million for the third quarter of 2023. An 11.0%, increase in salaries and employee benefits expense reflected increases in payments related financial crimes and IT salary expense and an increase in incentive compensation expenses.
The following table presents the principal categories of non-interest expense for the periods indicated:
Increase (Decrease)
Percent Change
3,346
11.0%
62.6%
224
14.8%
0.3%
(43)
(9.6%)
(148)
(12.3%)
98
12.2%
134
3.0%
(75)
(5.7%)
(22)
(7.2%)
(30)
(6.7%)
(131)
(100.0%)
2,036
46.9%
5,796
Changes in non-interest expense were as follows:
Salaries and employee benefits expense increased to $33.8 million for the third quarter of 2024, an increase of $3.3 million, or 11.0%, from $30.5 million for the third quarter of 2023.
Depreciation expense increased $403,000, or 62.6%, to $1.0 million in the third quarter of 2024 from $644,000 in the third quarter of 2023, reflecting the impact of the Sioux Falls, South Dakota relocation to new and expanded offices and a new expanded data center.
Rent and related occupancy cost increased $224,000, or 14.8%, to $1.7 million in the third quarter of 2024 from $1.5 million in the third quarter of 2023, reflecting the impact of the Sioux Falls, South Dakota relocation to new and expanded offices and a new expanded data center.
Data processing expense increased $4,000, or 0.3%, to $1.4 million in the third quarter of 2024 from $1.4 million in the third quarter of 2023, reflecting higher transaction volume.
Audit expense decreased $43,000, or 9.6%, to $403,000 in the third quarter of 2024 from $446,000 in the third quarter of 2023.
Legal expense decreased $148,000, or 12.3%, to $1.1 million in the third quarter of 2024 from $1.2 million in the third quarter of 2023.
FDIC insurance expense increased $98,000, or 12.2%, to $904,000 for the third quarter of 2024 from $806,000 in the third quarter of 2023, reflecting increases in liabilities against which insurance rates are applied.
Software expense increased $134,000, or 3.0%, to $4.6 million in the third quarter of 2024 from $4.4 million in the third quarter of 2023. The increase reflected higher expenditures for information technology infrastructure including leasing, institutional banking, cybersecurity, and enterprise risk, which more than offset decreased expenses related to financial crimes management.
Insurance expense decreased $75,000, or 5.7%, to $1.2 million in the third quarter of 2024 compared to $1.3 million in the third quarter of 2023.
Telecom and IT network communications expense decreased $22,000, or 7.2%, to $283,000 in the third quarter of 2024 from $305,000 in the third quarter of 2023.
Consulting expense decreased $30,000, or 6.7%, to $418,000 in the third quarter of 2024 from $448,000 in the third quarter of 2023.
Other non-interest expense increased $2.0 million, or 46.9%, to $6.4 million in the third quarter of 2024 from $4.3 million in the third quarter of 2023 reflecting a $1.2 million loss from a transaction processing delay and a $652,000 increase in OREO expense. The $652,000 increase in OREO expense, reflected expenses on the $39.4 million apartment property transferred to OREO in the second quarter of 2024, as described in “Note 6. Loans.” The OREO balance of that property as of September 30, 2024 was $40.3 million.
Income Taxes
Income tax expense was $17.5 million for the third quarter of 2024 compared to $16.3 million in the third quarter of 2023. The increase resulted primarily from an increase in income, substantially all of which is subject to income tax. A 25.4% effective tax rate in 2024 and a 24.6% effective tax rate in 2023 primarily reflected a 21% federal tax rate and the impact of various state income taxes.
Comparison of first nine months 2024 to first nine months 2023
Net income for the first nine months of 2024 was $161.6 million, or $3.15 per diluted share, compared to $148.3 million, or $2.68 per diluted share, for the first nine months of 2023. Income before income taxes was $215.8 million in the first nine months of 2024 compared to $197.6 million in the first nine months of 2023. Income increased between those respective periods primarily as a result of higher net interest income, which reflected the cumulative impact of Federal Reserve rate increases in 2023 on the loan and securities portfolios, prior to Federal Reserve rate decreases in September 2024. Additionally, growth in higher yielding loan categories offset reductions in lower yielding SBLOC and IBLOC balances.
Our net interest income for the first nine months of 2024 increased $20.1 million, or 7.7%, to $281.9 million from $261.9 million in the first nine months of 2023. Our interest income for the first nine months of 2024 increased to $412.8 million, an increase of $35.4 million, or 9.4%, from $377.4 million for the first nine months of 2023. The increase in interest income reflected an increase in loan yields resulting from the aforementioned Federal Reserve rate increases, as our average loans and leases increased to $5.83 billion for the first nine months of 2024 from $5.78 billion for the first nine months of 2023, an increase of $57.6 million, or 1.0%. Related interest income increased $21.6 million on a tax equivalent basis. At September 30, 2024, the respective balances of SBLOC and IBLOC loans were $989.3 million and $554.0 million, respectively, compared to $1.01 billion and $712.6 million at September 30, 2023. Loans in other categories with higher yields partially offset the year over year SBLOC and IBLOC decreases, which also contributed to the higher net
interest income. Of the total $21.6 million increase in loan interest income on a tax equivalent basis, the largest increases were $14.6 million for all real estate bridge loans, $9.6 million for small business lending, $8.0 million for leasing and $4.0 million for investment advisor financing, while total SBLOC and IBLOC decreased $16.2 million.
Our average investment securities of $1.26 billion for the first nine months of 2024 increased $481.8 million from $776.7 million for the first nine months of 2023. Related tax equivalent interest income increased $18.1 million, primarily reflecting an increase in balances.
Higher yields on loans reflected the continuing impact of Federal Reserve rate increases as variable rate loans repriced to higher rates, prior to the Federal Reserve’s September 2024 rate reduction. Federal Reserve rate changes had an immediate impact on cost of funds, while their impact on variable rate loans lags. Generally, interest expense is contractually adjusted daily. The majority of our loans and securities are variable rate and generally reprice monthly or quarterly, although some reprice over several years.
Our net interest margin (calculated by dividing net interest income by average interest-earning assets) for the first nine months of 2024 was 4.96% compared to 4.86% for the first nine months of 2023, an increase of 10 basis points. While the yield on interest-earning assets increased 26 basis points, the cost of deposits and interest-bearing liabilities increased 17 basis points, or a net change of 9 basis points. Investment securities yields reflected the $1.3 million second quarter 2024 impact of placing a security in nonaccrual status as described in “Note 6. Loans” to the unaudited consolidated financial statements herein. Average interest-earning deposits at the Federal Reserve Bank decreased $153.7 million, or 24.0%, to $486.9 million in the first nine months of 2024 from $640.6 million in the first nine months of 2023. In the first nine months of 2024, the average yield on our loans increased to 7.90% from 7.48% for the first nine months of 2023, an increase of 42 basis points. Yields on taxable investment securities in the first nine months of 2024 increased to 4.98% compared to 4.97% for the first nine months of 2023, an increase of 1 basis point.
Nine months ended September 30,
5,828,938
345,497
7.90%
5,772,266
324,009
7.48%
3,208
18,280
21,488
4,840
379
10.44%
3,920
9.49%
70
30
1,255,532
4.98%
773,485
4.97%
18,015
86
18,101
2,905
7.11%
3,193
144
6.01%
(11)
22
486,883
5.46%
640,554
5.05%
(6,539)
2,216
(4,323)
7,579,098
412,900
7.26%
7,193,418
377,523
7.00%
(27,993)
(23,192)
280,733
269,072
7,831,838
7,439,298
14,743
20,634
35,377
6,684,671
120,405
2.40%
6,343,711
106,984
2.25%
5,923
7,498
13,421
58,777
1,453
3.30%
88,738
2,465
3.70%
(763)
(249)
(1,012)
Time
27,802
858
4.11%
(858)
6,743,448
2.41%
6,460,251
2.28%
55,820
5.60%
6,758
4.62%
2,050
60
2,110
38,371
7.16%
9,945
5.12%
205
1,678
8.21%
95,983
97,220
5.20%
(44)
(92)
6,947,027
2.51%
6,587,616
2.34%
73,507
117,822
7,020,534
6,705,438
7,777
7,525
15,302
811,304
733,860
282,057
261,982
6,966
13,109
20,075
112
89
4.96%
4.86%
For the first nine months of 2024, average interest-earning assets increased to $7.58 billion, an increase of $385.7 million, or 5.4%, from $7.19 billion in the first nine months of 2023. The increase reflected decreased average interest-earning deposits at the Federal Reserve Bank of $153.7 million, the impact of which was more than offset by increased average balances of loans and leases of $57.6 million, or 1.0%, and increased average investment securities of $481.8 million, or 62.0%. For those respective periods, average demand and
interest checking deposits increased $341.0 million, or 5.4%. The interest expense shown for demand and interest checking is primarily comprised of interest paid to our affinity groups.
Our provision for credit losses was $7.3 million for the first nine months of 2024 compared to a provision of $4.4 million for the first nine months of 2023. The ACL was $31.0 million, or 0.52% of total loans, at September 30, 2024, compared to $27.4 million, or 0.51% of total loans, at December 31, 2023. As a result of a new qualitative factor for classified REBL loans, the provision for credit losses was increased by $2.0 million in the third quarter of 2024. The provision also reflected the impact of continuing higher leasing net charge-offs, especially in long haul and local trucking, transportation and related activities for which total exposure was approximately $34 million at September 30, 2024. We believe that our ACL is appropriate and supportable. For more information about our provision and ACL and our loss experience, see “Item 2 – Allowance for Credit Losses,” “Item 2 – Net Charge-offs,” and “Item 2 – Non-accrual Loans, Loans 90 days Delinquent and Still Accruing, OREO and Modified Loans,” below and “Note 6. Loans” to the unaudited consolidated financial statements herein.
Non-interest income was $92.2 million in the first nine months of 2024 compared to $85.1 million in the first nine months of 2023. The $7.1 million, or 8.4%, increase between those respective periods reflected an increase in prepaid, debit card and related fees. The increase also reflected increased ACH, card and other payment processing fees. Prepaid, debit card and related fees increased $5.9 million, or 8.9%, to $72.9 million for the first nine months of 2024, compared to $67.0 million in the first nine months of 2023. The first quarter of 2023 included approximately $600,000 of non-interest income related to the fourth quarter of 2022, and a $1.4 million termination fee from a client which formed its own bank. The increase reflected higher transaction volume from new clients and organic growth from existing clients. ACH, card and other payment processing fees increased $2.7 million, or 37.8%, to $9.9 million for the first nine months of 2024, compared to $7.2 million in the first nine months of 2023, reflecting an increase in rapid funds transfer volume.
Consumer credit fintech fees amounted to $1.7 million for 2024, as we began our entry into consumer fintech lending. Such lending may also be reflected in a lower cost of deposits, as a result of associated deposits.
Net realized and unrealized gains on commercial loans, at fair value, decreased $2.0 million, or 47.1%, to $2.2 million for the first nine months of 2024 from $4.2 million for the first nine months of 2023. The decrease reflected the runoff of the commercial loans, at fair value portfolio, which has continued to reduce the volume of loan payoffs and the income recognized at the time of payoff.
Leasing related income decreased $1.9 million, or 39.4%, to $2.9 million for the first nine months of 2024 from $4.8 million for the first nine months of 2023, reflecting $1.1 million of losses related to an auto auction company which ceased operations.
Other non-interest income increased $574,000, or 28.7%, to $2.6 million for the first nine months of 2024 from $2.0 million in the first nine months of 2023 reflecting increased payoff fees on advisor financing loans.
Total non-interest expense was $151.4 million for the first nine months of 2024, an increase of $6.0 million, or 4.1%, compared to $145.4 million for the first nine months of 2023. While salaries and employee benefits increased 4.9%, increases in the payments business and related financial crimes and in IT salary expense, were offset by decreases in incentive compensation.
4,537
4.9%
977
47.8%
795
18.6%
129
3.1%
(174)
(13.9%)
(601)
(19.3%)
385
17.2%
5.4%
(69)
(1.8%)
(136)
(13.0%)
10.3%
Write-downs and other losses on OREO
(1,315)
601
4.2%
5,981
4.1%
Salaries and employee benefits expense increased to $98.0 million for the first nine months of 2024, an increase of $4.5 million, or 4.9%, from $93.4 million for the first nine months of 2023.
Depreciation expense increased $977,000, or 47.8%, to $3.0 million in the first nine months of 2024 from $2.0 million in the first nine months of 2023, reflecting the impact of the Sioux Falls, South Dakota relocation to new and expanded offices and a new expanded data center.
Rent and related occupancy cost increased $795,000, or 18.6%, to $5.1 million in the first nine months of 2024 from $4.3 million in the first nine months of 2023, reflecting the impact of the Sioux Falls, South Dakota relocation to new and expanded offices and a new expanded data center.
Data processing expense increased $129,000, or 3.1%, to $4.3 million in the first nine months of 2024 from $4.1 million in the first nine months of 2023, reflecting higher transaction volume.
Audit expense decreased $174,000, or 13.9%, to $1.1 million in the first nine months of 2024 from $1.3 million in the first nine months of 2023.
Legal expense decreased $601,000, or 19.3%, to $2.5 million in the first nine months of 2024 from $3.1 million in the first nine months of 2023, reflecting a reimbursement of legal fees related to the Del Mar complaint described in “Note O. Commitments and Contingencies” to the audited consolidated financial statements in the 2023 Form 10-K.
FDIC insurance expense increased $385,000, or 17.2%, to $2.6 million for the first nine months of 2024 from $2.2 million in the first nine months of 2023, reflecting increases in liabilities against which insurance rates are applied.
Software expense increased $706,000, or 5.4%, to $13.7 million in the first nine months of 2024 from $13.0 million in the first nine months of 2023. The increase reflected higher expenditures for information technology infrastructure including leasing, institutional banking, cybersecurity, cloud computing and enterprise risk, which more than offset decreasing expenses related to financial crimes management.
Insurance expense decreased $69,000, or 1.8%, to $3.9 million in the first nine months of 2024 compared to $3.9 million in the first nine months of 2023.
Telecom and IT network communications expense decreased $136,000, or 13.0%, to $908,000 in the first nine months of 2024 from $1.0 million in the first nine months of 2023.
Consulting expense increased $146,000, or 10.3%, to $1.6 million in the first nine months of 2024 from $1.4 million in the first nine months of 2023. The increase reflected expenses related to the Company’s ongoing efforts of documenting and optimizing operational controls.
Other non-interest expense increased $601,000, or 4.2%, to $14.9 million in the first nine months of 2024 from $14.3 million in the first nine months of 2023. The $601,000 increase reflected a $1.2 million loss from a transaction processing delay and a $989,000 increase in OREO expense offset by the following decreases: (i) regulatory examination fees of $272,000 and (ii) other operating taxes of $359,000. The $989,000 increase in OREO expense, reflected expenses on the $39.4 million apartment property transferred to OREO in the second quarter of 2024, as described in “Note 6. Loans.” The balance as of September 30, 2024 was $40.3 million.
Income tax expense was $54.1 million for the first nine months of 2024 compared to $49.3 million in the first nine months of 2023. The increase resulted primarily from an increase in income, substantially all of which is subject to income tax. A 25.1% effective tax rate in 2024 and a 24.9% effective tax rate in 2023 primarily reflected a 21% federal tax rate and the impact of various state income taxes.
Liquidity
Liquidity defines our ability to generate funds at a reasonable cost to support asset growth, meet deposit withdrawals, satisfy borrowing needs and otherwise operate on an ongoing basis. Maintaining an adequate level of liquidity depends on the institution’s ability to efficiently meet both expected and unexpected cash flows without adversely affecting daily operations or financial condition. The Company’s liquidity management policy requirements include sustaining defined liquidity minimums, concentration monitoring and management, stress testing, contingency planning and related oversight. Based on our sources of funding and liquidity discussed below, we believe we have sufficient liquidity and capital resources available for our needs in the next 12 months and for the foreseeable future. We invest the funds we do not need for daily operations primarily in overnight federal funds or in our interest-bearing account at the Federal Reserve. We actively monitor our positions and contingent funding sources daily.
Our primary source of funding has been deposits. Average total deposits increased by $720.9 million, or 11.5%, to $7.01 billion for the third quarter of 2024 compared to the third quarter of 2023. The increase reflected the planned exit of higher cost deposits. Federal Reserve average balances decreased to $247.3 million in the third quarter of 2024 from $639.9 million in the third quarter of 2023. The decrease reflected approximately $900 million of securities purchases in April 2024 as discussed under “Asset and Liability Management” in this MD&A. Additionally, as a result of those purchases, we have increased the use of FHLB advances to partially fund such purchases, at least temporarily, and those advances averaged approximately $73.5 million for third quarter 2024.
One source of contingent liquidity is available-for-sale securities, which amounted to $1.59 billion at September 30, 2024, compared to $747.5 million at December 31, 2023, reflecting $900 million of securities purchases in April, 2024. In excess of $1.0 billion of these securities, including those $900 million of April 2024 purchases, can be pledged to facilitate extensions of credit in addition to loans already pledged against lines of credit, as discussed later in this section. At September 30, 2024, outstanding loans amounted to $5.91 billion, compared to $5.36 billion at the prior year end, an increase of $545.5 million representing a use of funds. Commercial loans, at fair value, decreased to $252.0 million from $332.8 million between those respective dates, a decrease of $80.8 million, which provided funding. In 2019 and previous years, these loans were generally originated for securitization and sale, but in 2020 we decided to retain such loans on the balance sheet. While we suspended originating such loans after the first quarter of 2020, we resumed originations, which consist primarily of non-SBA commercial real estate bridge loans, in the third quarter of 2021. Such originations are held for investment and are included in “Loans, net of deferred loan fees and costs” on the balance sheet. Accordingly, commercial loans, at fair value will continue to run off. Our liquidity planning has not previously placed undue reliance on securitizations, and while our future planning excludes the impact of securitizations, other liquidity sources, primarily deposits, are determined to be adequate.
While we do not have a traditional branch system, we believe that our core deposits, which include our demand, interest checking, savings and money market accounts, have similar characteristics to those of a bank with a branch system. The majority of our deposit accounts are obtained with the assistance of third-parties and as a result have historically been classified as brokered by the FDIC. Prior to December 2020, FDIC guidance for classification of deposit accounts as brokered was relatively broad, and generally included accounts which were referred to or “placed” with the institution by other companies. If the Bank ceases to be categorized as “well capitalized” under banking regulations, it will be prohibited from accepting, renewing or rolling over any of its deposits classified as brokered without the consent of the FDIC. In such a case, the FDIC’s refusal to grant consent to our accepting, renewing or rolling over brokered deposits could effectively restrict or eliminate the ability of the Bank to operate its business lines as presently conducted. In December 2020, the FDIC issued a new regulation which, in the third quarter of 2021, resulted in the majority of our deposits being reclassified from brokered to non-brokered. On July 30, 2024, the FDIC proposed a regulation eliminating certain automatic exceptions which resulted in the reclassification of significant amounts of our deposits from brokered to non-brokered as a result of the December 2020 rules changes, while retaining the ability of financial institutions to reapply. If the proposed regulation is adopted, significant amounts of our deposits could be reclassified as brokered, which could also result in an increase in our federal deposit insurance rate and expense. Of our total deposits of $6.93 billion as of September 30, 2024, $586.8 million were classified as brokered and an estimated $485.3 million were not insured by FDIC insurance, which requires identification of the depositor and is limited to $250,000 per identified depositor. Uninsured accounts may represent a greater liquidity risk than FDIC-insured accounts should large depositors withdraw funds as a result of negative financial developments either at the Bank or in the economy. Significant amounts of our uninsured deposits are comprised of small balances, such as anonymous gift cards and corporate incentive cards for which there is no identified depositor. We do not believe that such uninsured accounts present a significant liquidity risk.
Certain components of our deposits experience seasonality, creating greater excess liquidity at certain times. The largest deposit inflows occur in the first quarter of the year when certain of our accounts are credited with tax refund payments from the U.S. Treasury.
While consumer deposit accounts, including prepaid and debit card accounts, comprise the vast majority of our funding needs, we maintain secured borrowing lines with the FHLB and the Federal Reserve. Our collateralized line of credit with the Federal Reserve Bank had available accessible capacity of $1.97 billion as of September 30, 2024, and was collateralized by loans. We have also pledged in excess of $2.21 billion of multifamily loans to the FHLB. As a result, we have approximately $1.11 billion of availability on that line of credit which we can also access at any time. There was $135.0 million drawn against the FHLB line at September 30, 2024. We expect to continue to maintain our facilities with the FHLB and Federal Reserve.
As a holding company conducting substantially all our business through our subsidiaries, the Company’s near-term need for liquidity consists principally of cash for required interest payments on our subordinated debentures, consisting of 2038 Debentures, and senior debt, consisting of $100.0 million senior notes with an interest rate of 4.75% and maturing in August 2025 (the “2025 Senior Notes”). Semi-annual interest payments on the 2025 Senior Notes are approximately $2.4 million, and quarterly interest payments on the 2038 Debentures are approximately $300,000. As of September 30, 2024, we had cash reserves of approximately $8.9 million at the holding company. Stock repurchases are funded by dividends from the Bank, as are interest payments on the above debt instruments. Stock repurchases may be terminated at any time. The holding company’s sources of liquidity are primarily comprised of dividends paid by the Bank to the Company, and the issuance of debt.
Included in our cash and cash-equivalents at September 30, 2024 were $47.1 million of interest-earning deposits which primarily consisted of deposits with the Federal Reserve.
In 2024, $179.9 million of redemptions were exceeded by purchases of $969.4 million of securities. We had outstanding commitments to fund loans, including unused lines of credit, of $1.77 billion and $1.79 billion as of September 30, 2024, and December 31, 2023, respectively. The majority of our commitments are variable rate and originate with SBLOC. The recorded amount of such commitments has, for many accounts, been based on the full amount of collateral in a customer’s investment account. The funding requirements for such commitments occur on a measured basis over time and would be funded by normal deposit growth. Additionally, these loans are “demand” loans and as such, represent a contingent source of funding.
Capital Resources and Requirements
We must comply with capital adequacy guidelines issued by our regulators. A bank must, in general, have a Tier 1 leverage ratio of 5.00%, a ratio of Tier I capital to risk-weighted assets of 8.0%, a ratio of total capital to risk-weighted assets of 10.0% and a ratio of common equity tier 1 to risk weighted assets of 6.5% to be considered “well capitalized.” The Tier I leverage ratio is the ratio of Tier 1 capital to average assets for the quarter. “Tier I capital” includes common shareholders’ equity, certain qualifying perpetual preferred stock and minority interests in equity accounts of consolidated subsidiaries, less intangibles. At September 30, 2024, the Bank was “well capitalized” under banking regulations.
Asset and Liability Management
The management of rate sensitive assets and liabilities is essential to controlling interest rate risk and optimizing interest margins. An interest rate sensitive asset or liability is one that, within a defined time period, either matures or experiences an interest rate change in line with general market rates. Interest rate sensitivity measures the relative volatility of an institution’s interest margin resulting from changes in market interest rates. While it is difficult to predict the impact of inflation and responsive Federal Reserve rate changes on our net interest income, the Federal Reserve has historically utilized increases in the overnight federal funds rate as one tool in fighting inflation. As a result of high rates of inflation, the Federal Reserve raised rates in each quarter of 2022 and in the first three quarters of 2023. In the third quarter of 2024 the Federal Reserve began lowering rates. Our largest funding source, prepaid and debit card deposit accounts, contractually adjusts to only a portion of increases or decreases in rates which are largely determined by such Federal Reserve actions. That pricing has generally supported the maintenance of a balance sheet for which net interest income tends to increase with increases in rates. While deposits reprice to only a portion of Federal Reserve rate changes, such changes are immediate. Interest-earning
assets, comprised primarily of loans and securities, tend to adjust more fully to rate increases at lagged contractual pricing intervals. The majority of our loans and securities are variable rate and generally reprice monthly or quarterly, although some reprice over several years. Additionally, the impact of loan interest rate floors which must be exceeded before rates on certain loans increase, may result in decreases in net interest income with lesser increases in rates. Cumulative 2022 Federal Reserve interest rate increases resulted in contractual rates on loans generally exceeding rate floors beginning in the second quarter of 2022.
We have adopted policies designed to manage net interest income and preserve capital over a broad range of interest rate movements. To effectively administer the policies and to monitor our exposure to fluctuations in interest rates, we maintain an asset/liability committee, consisting of the Bank’s Chief Executive Officer, Chief Accounting Officer, Chief Financial Officer, Chief Credit Officer and others. This committee meets quarterly to review our financial results, develop strategies to optimize margins and to respond to market conditions. The primary goal of our policies is to optimize margins and manage interest rate risk, subject to overall policy constraints for prudent management of interest rate risk.
We monitor, manage and control interest rate risk through a variety of techniques, including the use of traditional interest rate sensitivity analysis (also known as “gap analysis”) and an interest rate risk management model. With the interest rate risk management model, we project future net interest income and then estimate the effect of various changes in interest rates on that projected net interest income. We also use the interest rate risk management model to calculate the change in net portfolio value over a range of interest rate change scenarios. Traditional gap analysis involves arranging our interest-earning assets and interest-bearing liabilities by repricing periods and then computing the difference (or “interest rate sensitivity gap”) between the assets and liabilities that we estimate will reprice during each time period and cumulatively through the end of each time period.
Both interest rate sensitivity modeling and gap analysis are done at a specific point in time and involve a variety of significant estimates and assumptions. Interest rate sensitivity modeling requires, among other things, estimates of how much and when yields and costs on individual categories of interest-earning assets and interest-bearing liabilities will respond to general changes in market rates, future cash flows and discount rates. Gap analysis requires estimates as to when individual categories of interest-sensitive assets and liabilities will re-price, and assumes that assets and liabilities assigned to the same repricing period will reprice at the same time and in the same amount. Gap analysis does not account for the fact that repricing of assets and liabilities is discretionary and subject to competitive and other pressures. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds interest rate sensitive assets. During a period of falling interest rates, a positive gap would tend to adversely affect net interest income, while a negative gap would tend to result in an increase in net interest income. During a period of rising interest rates, a positive gap would tend to result in an increase in net interest income while a negative gap would tend to affect net interest income adversely.
The following table sets forth the estimated maturity or repricing structure of our interest-earning assets and interest-bearing liabilities at September 30, 2024. Except as stated below, the amounts of assets or liabilities shown which reprice or mature during a particular period were determined in accordance with the contractual terms of each asset or liability. The majority of transaction and savings balances are assumed to be “core” deposits, or deposits that will generally remain with us regardless of market interest rates. We estimate the repricing characteristics of these deposits based on historical performance, past experience, judgmental predictions and other deposit behavior assumptions. However, we may choose not to reprice liabilities proportionally to changes in market interest rates for competitive or other reasons. Additionally, although non-interest-bearing transaction accounts are not paid interest, we estimate certain of the balances will reprice as a result of the contractual fees that are paid to the affinity groups which are based upon a rate index, and therefore are included in interest expense. We have adjusted the transaction account balances in the table downward, to better reflect the impact of their partial adjustment to changes in rates. Loans and security balances, which adjust more fully to market rate changes, are based upon actual balances. The table does not assume any prepayment of fixed-rate loans and mortgage-backed securities are scheduled based on their anticipated cash flow, including prepayments based on historical data and current market trends. The table does not necessarily indicate the impact of general interest rate movements on our net interest income because the repricing and related behavior of certain categories of assets and liabilities (for example, prepayments of loans and withdrawal of deposits) is beyond our control. As a result, certain assets and liabilities indicated as repricing within a stated period may in fact reprice at different times and at different rate levels. For instance, the majority of REBL loans are variable rate with floors, but prepayments may offset the benefit of such floors in decreasing rate environments.
1-90
91-364
1-3
3-5
Over 5
Days
Years
97,651
70,063
36,693
45,639
1,958
3,272,423
361,862
1,412,639
661,164
198,528
Investment securities
287,224
90,039
113,612
222,872
874,542
Total interest-earning assets
3,704,403
521,964
1,562,944
929,675
1,075,028
Interest-bearing liabilities:
Transaction accounts as adjusted(1)
3,422,064
Senior debt and subordinated debentures
Total interest-bearing liabilities
3,652,089
Gap
52,314
425,839
Cumulative gap
478,153
2,041,097
2,970,772
4,045,800
Gap to assets ratio
1%
5%
19%
12%
13%
Cumulative gap to assets ratio
6%
25%
37%
50%
(1) Transaction accounts are comprised primarily of demand deposits. While demand deposits are non-interest-bearing, related fees paid to affinity groups may reprice according to specified indices.
The methods used to analyze interest rate sensitivity in this table have a number of limitations. Certain assets and liabilities may react differently to changes in interest rates even though they reprice or mature in the same or similar time periods. The interest rates on certain assets and liabilities may change at different times than market interest rates, with some changing in advance of changes in market rates and some lagging behind changes in market rates. Additionally, the actual prepayments and withdrawals we experience when interest rates change may deviate significantly from those assumed in calculating the data shown in the table. Accordingly, actual results can and often do differ from projections.
We believe that the assumptions utilized in evaluating our estimated net interest income are reasonable; however, the interest rate sensitivity of our assets, liabilities and off-balance sheet financial instruments, as well as the estimated effect of changes in interest rates on estimated net interest income, could vary substantially if different assumptions are used or actual experience differs from presumed behavior of various deposit and loan categories. The following table shows the effects of interest rate shocks on our net portfolio value described as Market Value of Portfolio Equity (“MVPE”) and net interest income. Rate shocks assume that current interest rates change immediately and sustain parallel shifts. For interest rate increases or decreases of 100 and 200 basis points, our policy includes a guideline that our MVPE ratio should not decrease more than 10% and 15%, respectively, and that net interest income should not decrease more than 10% and 15%, respectively. As illustrated in the following table, we complied with our asset/liability policy guidelines at September 30, 2024. While our modeling suggests that rate increases of 100 and 200 basis points will have a positive impact on net interest income (as shown in the table below), the actual amount of such increase cannot be determined, and there can be no assurance any increase will be realized. Because the Company has emphasized variable rate instruments in its loan and investment portfolios, it tends to benefit from higher interest rate environments. As a result of the Federal Reserve rate increases in 2022 and 2023, net interest income has increased and exceeded prior period levels. Future Federal Reserve rate reductions may result in a return to lower net interest income levels. In April 2024, the Company purchased approximately $900 million of fixed rate commercial and residential mortgage securities of varying maturities to reduce its exposure to lower levels of net interest income, in anticipation of Federal Reserve rate reductions. In September 2024, the Federal Reserve began to lower rates. Such purchases would also reduce the additional net interest income which would result should the Federal Reserve increase rates. Those purchases had respective estimated weighted average yields and lives of approximately 5.11% and eight years.
Net portfolio value at
Percentage
Rate scenario
change
+200 basis points
1,290,352
(0.18%)
398,838
3.24%
+100 basis points
1,291,651
(0.08%)
392,592
1.62%
Flat rate
1,292,728
386,330
-100 basis points
1,281,804
(0.85%)
379,965
(1.65%)
-200 basis points
1,262,175
(2.36%)
374,342
(3.10%)
Financial Condition
General. Our total assets at September 30, 2024 were $8.09 billion, of which our total loans were $5.91 billion, and our commercial loans, at fair value, were $252.0 million. At December 31, 2023, our total assets were $7.71 billion, of which our total loans were $5.36 billion, and our commercial loans, at fair value were $332.8 million. The increase in assets reflected an increase in available-for-sale securities, which resulted from the previously discussed $900 million of April 2024 securities purchases. The increase also reflected loan growth in various loan categories, which offset decreases both in SBLOC and IBLOC loan balances and in commercial loans, at fair value as that portfolio continues to run off.
Interest-earning Deposits
At September 30, 2024, we had a total of $47.1 million of interest-earning deposits compared to $1.03 billion at December 31, 2023, a decrease of $986.2 million. These deposits were comprised primarily of balances at the Federal Reserve. The decrease reflected the utilization of these overnight balances for the aforementioned securities purchases in the second quarter of 2024.
Investment Portfolio
For detailed information on the composition and maturity distribution of our investment portfolio, see “Note 5. Investment Securities” to the unaudited consolidated financial statements herein. Total investment securities increased to $1.59 billion at September 30, 2024, an increase of $840.8 million, or 112.5%, from December 31, 2023, as a result of the aforementioned $900 million of securities purchases in April 2024.
Under the accounting guidance related to CECL, changes in fair value of securities unrelated to credit losses continue to be recognized through equity. However, credit-related losses are recognized through an allowance, rather than through a reduction in the amortized cost of the security. CECL accounting guidance also permits the reversal of allowances for credit deterioration in future periods based on improvements in credit, which was not included in previous guidance. Generally, a security’s credit-related loss is the difference between its amortized cost basis and the best estimate of its expected future cash flows discounted at the security’s effective yield. That difference is recognized through the income statement, as with prior guidance, but is renamed a provision for credit loss. For the nine months ended September 30, 2024 and 2023, we recognized no credit-related losses on our portfolio.
Investments in FHLB, ACBB and Federal Reserve Bank stock are recorded at cost and amounted to $21.7 million at September 30, 2024 and $15.6 million at December 31, 2023. Each of these institutions require their correspondent banking institutions to hold stock as a condition of membership. The Bank’s conversion to a national charter required the purchase of $11.0 million of Federal Reserve Bank stock in September 2022. Additionally, in the second quarter of 2023, we joined the FHLB of Des Moines, which required a $9.1 million purchase of stock. While a fixed stock amount is required by each of these institutions, the FHLB stock requirement increases or decreases with the level of borrowing activity.
At September 30, 2024 and December 31, 2023 no investment securities were encumbered, as lines of credit established for borrowings were collateralized by loans.
The following table shows the contractual maturity distribution and the weighted average yield of our investment portfolio securities as of September 30, 2024 (dollars in thousands). The weighted average yield was calculated by dividing the amount of individual securities to total securities in each category, multiplying by the yield of the individual security and adding the results of those individual computations.
After
Zero
one to
five to
Over
to one
five
ten
year
yield
years
1,128
2.48%
6,550
2.79%
14,870
4.95%
8,470
3.86%
7.07%
10,565
6.88%
178,605
6.84%
45,006
6.64%
Tax-exempt obligations of states and political subdivisions(1)
1,000
3.10%
1,869
2.65%
2,017
3.87%
3,045
4.50%
14,708
3.15%
19,125
3.42%
1,174
4.33%
2.60%
5,096
4.55%
458,233
5.01%
4,302
2.75%
3.39%
24,177
3.93%
41,650
2.37%
88,207
3.45%
538,883
4.82%
116,568
4.21%
Weighted average yield
2.78%
3.65%
5.30%
4.92%
(1) If adjusted to their taxable equivalents, yields would approximate 3.92%, 3.35%, 4.90%, and 5.70% for zero to one year, one to five years, five to ten years, and over ten years, respectively, at a federal tax rate of 21%.
Of the six securities purchased by the Bank from our securitizations, all have been repaid except one issued by CRE-2, which is included in the commercial mortgage-backed securities classification in investment securities. As of September 30, 2024, the principal balance of the Bank’s CRE-2-issued security was $12.6 million, and it is subordinate to the repayment of a senior tranche with a remaining balance of $1.5 million and servicer obligations of $2.0 million. Thus, a total of $16.1 million is required for the Bank’s tranche to be repaid. The sole repayment source for the $16.1 million consists of the disposition of a suburban office building in New Jersey and a retail facility in Missouri. In the second quarter of 2024, the Bank received updated appraisals from the servicer for both properties which lowered estimated combined appraised values to $23.7 million. The excess of the $23.7 million appraised values over the $16.1 million to be repaid provides repayment protection for the Bank-owned tranche and accrued interest thereon. As a result of the reduced excess of appraised value over the Bank’s principal and accruing interest, the $12.6 million principal was placed in nonaccrual status and $1.3 million was reversed from securities interest in the second quarter of 2024. While the appraised values allocable to the Bank’s security exceed the principal and unpaid interest, there can be no assurance as to the amounts received upon the servicer’s disposition of these properties, which will reflect additional servicing fees, actual disposition prices and other disposition costs. The New Jersey suburban office complex is being marketed by the debtor in possession who expects a contract for sale by the end of 2024. The Missouri retail facility is held as real estate owned by the security’s trust and a sale is in process.
Commercial Loans, at Fair Value
Commercial loans, at fair value are comprised of non-SBA commercial real estate loans and SBA loans which had been originated for sale or securitization through the first quarter of 2020, and which are now being held on the balance sheet. SBA loans are valued on a pooled basis and commercial real estate bridge loans are valued individually. Commercial loans, at fair value decreased to $252.0 million at September 30, 2024 from $332.8 million at December 31, 2023, primarily reflecting the impact of loan repayments as this portfolio runs off. These loans continue to be accounted for at fair value. In the third quarter of 2021 we resumed originating non-SBA commercial real estate loans, after suspending such originations in the first quarter of 2020. These originations reflect lending criteria similar to the existing loan portfolio and are primarily comprised of multifamily (apartment buildings) collateral. The new originations, which are intended to be held for investment, are accounted for at amortized cost.
Loan Portfolio. Total loans increased to $5.91 billion at September 30, 2024 from $5.36 billion at December 31, 2023.
The following table summarizes our loan portfolio, excluding loans held at fair value, by loan category for the periods indicated (dollars in thousands):
(1) SBLOC are collateralized by marketable securities, while IBLOC, are collateralized by the cash surrender value of insurance policies. At September 30, 2024 and December 31, 2023, IBLOC loans amounted to $554.0 million and $646.9 million, respectively.
(2) In 2020, we began originating loans to investment advisors for purposes of debt refinancing, acquisition of another firm or internal succession. Maximum loan amounts are subject to LTV ratios of 70% of the business enterprise value based on a third-party valuation but may be increased depending upon the debt service coverage ratio. Personal guarantees and blanket business liens are obtained as appropriate.
(3) Consumer fintech loans included $111.0 million of secured credit card loans, with the balance consisting of other short-term extensions of credit..
(5) The SBLs held at fair value are comprised of the government guaranteed portion of 7(a) Program loans at the dates indicated.
The following table summarizes our SBL portfolio, including loans held at fair value, by loan category as of September 30, 2024 (dollars in thousands):
Loan principal
U.S. government guaranteed portion of SBA loans(1)
392,066
PPP loans(1)
1,594
Commercial mortgage SBA(2)
348,585
Construction SBA(3)
10,461
Non-guaranteed portion of U.S. government guaranteed 7(a) Program loans(4)
114,396
Non-SBA SBLs
72,617
Other(5)
28,527
Total principal
968,246
Unamortized fees and costs
10,905
Total SBLs
(1) Includes the portion of SBA 7(a) Program loans and PPP loans which have been guaranteed by the U.S. government, and therefore are assumed to have no credit risk.
(2) Substantially all these loans are made under the 504 Program, which dictates origination date LTV percentages, generally 50-60%, to which The Bancorp adheres.
(3) Includes $9.2 million in 504 Program first mortgages with an origination date LTV of 50-60% and $1.3 million in SBA interim loans with an approved SBA post-construction full takeout/payoff.
(4) Includes the unguaranteed portion of 7(a) Program loans which are generally 70% or more guaranteed by the U.S. government. SBA 7(a) Program loans are not made on the basis of real estate LTV; however, they are subject to SBA's "All Available Collateral" rule which mandates that to the extent a borrower or its 20% or greater principals have available collateral (including personal residences), the collateral must be pledged to fully collateralize the loan, after applying SBA-determined liquidation rates. In addition, all 7(a) Program loans and 504 Program loans require the personal guaranty of all 20% or greater owners.
(5) Comprised of $28.5 million of loans sold that do not qualify for true sale accounting.
The following table summarizes our SBL portfolio, excluding the government guaranteed portion of SBA 7(a) Program loans and PPP loans, by loan type as of September 30, 2024 (dollars in thousands):
SBL commercial mortgage(1)
SBL construction(1)
% Total
Hotels (except casino hotels) and motels
87,636
71
87,723
16%
Funeral homes and funeral services
20,240
27,623
47,863
9%
Full-service restaurants
29,339
1,969
1,826
33,134
Child day care services
23,153
1,011
1,395
25,559
Car washes
16,363
20,321
4%
General line grocery merchant wholesalers
17,302
3%
Homes for the elderly
15,840
15,908
Outpatient mental health and substance abuse centers
15,326
15,542
Gasoline stations with convenience stores
14,246
244
141
14,631
Fitness and recreational sports centers
7,663
2,341
10,004
2%
Nursing care facilities
9,467
Lawyer's office
9,119
Limited-service restaurants
3,599
3,062
7,588
Caterers
7,157
7,172
All other specialty trade contractors
315
7,043
General warehousing and storage
6,346
Appliance repair and maintenance
5,833
Other accounting services
5,258
377
5,635
Plumbing, heating, and air-conditioning contractors
4,636
838
5,474
Other miscellaneous durable goods merchant
Packaged frozen food merchant wholesalers
4,671
Lessors of nonresidential buildings (except miniwarehouses)
4,659
Other technical and trade schools
4,649
All other amusement and recreation industries
235
4,139
Other(2)
135,766
8,223
27,585
171,574
30%
463,560
16,357
66,142
546,059
100%
(1) Of the SBL commercial mortgage and SBL construction loans, $120.8 million represents the total of the non-guaranteed portion of SBA 7(a) Program loans and non-SBA loans. The balance of those categories represents SBA 504 Program loans with 50%-60% origination date LTVs. SBL Commercial excludes $28.5 million of loans sold that do not qualify for true sale accounting.
(2) Loan types of less than $3.8 million are spread over approximately one hundred different business types.
The following table summarizes our SBL portfolio, excluding the government guaranteed portion of SBA 7(a) Program loans and PPP loans, by state as of September 30, 2024 (dollars in thousands):
California
125,939
2,781
4,643
133,363
24%
Florida
75,897
5,105
3,746
84,748
North Carolina
44,895
4,593
50,415
New York
32,192
1,884
34,147
Pennsylvania
20,066
13,240
33,306
Texas
21,238
3,095
6,078
30,411
New Jersey
21,429
267
7,119
Georgia
25,383
1,760
1,162
28,305
Other States
96,521
2,351
23,677
122,549
23%
The following table summarizes the ten largest loans in our SBL portfolio, all commercial mortgages, including loans held at fair value, as of September 30, 2024 (dollars in thousands):
Type(1)
State
13,406
12,511
Outpatient mental health and substance abuse center
9,825
Maine
8,394
Hotel
8,213
Virginia
6,889
6,634
86,007
(1) The table above does not include loans to the extent that they are U.S. government guaranteed.
Commercial real estate loans, primarily real estate bridge loans and excluding SBA loans, were as follows as of September 30, 2024 (dollars in thousands):
# Loans
Weighted average origination date LTV
Weighted average interest rate
Real estate bridge loans (multifamily apartment loans recorded at amortized cost)(1)
70%
9.13%
Non-SBA commercial real estate loans, at fair value:
Multifamily (apartment bridge loans)(1)
113,009
74%
7.98%
Hospitality (hotels and lodging)
27,344
65%
9.82%
Retail
12,256
72%
8.19%
9,210
161,819
8.14%
Fair value adjustment
(3,704)
Total non-SBA commercial real estate loans, at fair value
158,115
Total commercial real estate loans
2,347,876
9.07%
(1) In the third quarter of 2021, we resumed the origination of bridge loans for multifamily apartment rehabilitation. These are similar to the multifamily apartment loans carried at fair value, but at origination are intended to be held on the balance sheet, so they are not accounted for at fair value. In addition to “as is” origination date appraisals, on which the weighted average origination date LTVs are based, third-party appraisers also estimated “as stabilized” values, which represents additional potential collateral value as rehabilitation progresses, and units are re-leased at stabilized rental rates. The weighted average origination date “as stabilized” LTV was estimated at 61%.
The following table summarizes our commercial real estate loans, primarily real estate bridge loans and excluding SBA loans, by state as of September 30, 2024 (dollars in thousands):
Origination date LTV
735,320
71%
261,609
230,491
68%
Michigan
135,879
Indiana
108,411
106,875
69%
Ohio
92,387
66%
Other States each <$65 million
676,904
The following table summarizes our fifteen largest commercial real estate loans, primarily real estate bridge loans and excluding SBA loans, as of September 30, 2024 (dollars in thousands). All of these loans are multifamily loans.
45,520
75%
Tennessee
40,000
38,158
62%
37,259
64%
67%
34,850
33,600
63%
33,588
76%
33,552
32,812
32,500
79%
Oklahoma
78%
31,050
77%
30,865
30,441
15 largest commercial real estate loans
521,666
The following table summarizes our institutional banking portfolio by type as of September 30, 2024 (dollars in thousands):
Type
Principal
% of total
55%
31%
14%
1,791,637
For SBLOC, we generally lend up to 50% of the value of equities and 80% for investment grade securities. While the value of equities has fallen in excess of 30% in recent years, the reduction in collateral value of brokerage accounts collateralizing SBLOCs generally has been less. This is because many collateral accounts are “balanced” and accordingly, have a component of debt securities, which have either not decreased in value as much as equities, or in some cases may have increased in value. Further, many of these accounts have the benefit of professional investment advisors who provided some protection against market downturns, through diversification and other means. Additionally, borrowers often utilize only a portion of collateral value, which lowers the percentage of principal to the market value of collateral.
The following table summarizes our ten largest SBLOC loans as of September 30, 2024 (dollars in thousands):
Principal amount
% Principal to collateral
9,465
41%
8,319
84%
8,031
7,904
7,356
44%
5,334
57%
5,204
4,996
58%
4,962
56%
4,894
43%
Total and weighted average
66,465
IBLOC loans are backed by the cash value of life insurance policies which have been assigned to us. We generally lend up to 95% of such cash value. Our underwriting standards require approval of the insurance companies which carry the policies backing these loans. Currently, fifteen insurance companies have been approved and, as of October 17, 2024, all were rated A- or better by AM Best.
The following table summarizes our direct lease financing portfolio by type as of September 30, 2024 (dollars in thousands):
Principal balance(1)
Government agencies and public institutions(2)
131,396
18%
Construction
112,187
Waste management and remediation services
96,770
Real estate and rental and leasing
86,310
Health care and social assistance
28,952
Other services (except public administration)
21,975
Professional, scientific, and technical services
21,527
General freight trucking
21,244
Finance and insurance
13,580
Transit and other transportation
12,788
Wholesale trade
9,936
Educational services
6,859
Other and non-classified
148,312
21%
(1) Of the total $711.8 million of direct lease financing, $648.3 million consisted of vehicle leases with the remaining balance consisting of equipment leases.
(2) Includes public universities and school districts.
The following table summarizes our direct lease financing portfolio by state as of September 30, 2024 (dollars in thousands):
Principal balance
107,511
15%
69,514
10%
Utah
57,858
8%
48,736
7%
Connecticut
45,232
41,826
39,198
36,363
Maryland
35,652
25,618
Idaho
18,501
Washington
15,601
13,577
13,547
Alabama
13,484
129,618
17%
The following table presents loan categories by maturity for the period indicated. Actual repayments historically have, and will likely in the future, differ significantly from contractual maturities because individual borrowers generally have the right to prepay loans, with or without prepayment penalties. See “Asset and Liability Management” in this MD&A for a discussion of interest rate risk.
Within
One to five
After five but
one year
within 15 years
After 15 years
625
28,999
180,520
1,043
211,187
17,398
20,886
236,681
462,724
737,689
3,212
2,597
24,466
30,275
Leasing
113,061
574,735
24,772
712,568
1,549,339
705
86,656
164,284
251,645
1,181,641
999,731
2,181,372
25,747
4,124
2,749
13,715
46,335
Loans at fair value excluding SBL
101,122
55,390
1,606
158,118
3,272,942
1,770,521
613,209
501,948
6,158,620
Loan maturities after one year with:
Fixed rates
2,699
3,007
5,706
11,487
2,886
14,373
21,113
595,848
86,253
162,574
248,827
735,576
3,463
1,532
11,437
16,432
Total loans at fixed rates
1,469,603
191,112
1,672,152
Variable rates
26,300
177,513
204,856
9,399
233,795
705,918
27,063
3,659
1,710
2,113
264,155
661
1,217
2,278
4,156
Total at variable rates
300,918
422,097
490,511
1,213,526
2,885,678
Allowance for Credit Losses
We review the adequacy of our ACL on at least a quarterly basis to determine a provision for credit losses to maintain our ACL at a level we believe is appropriate to recognize current expected credit losses. Our Chief Credit Officer oversees the loan review department, which measures the adequacy of the ACL independently of loan production officers. For detailed information on the ACL methodology, see “Note 6. Loans” to the unaudited consolidated financial statements herein.
At September 30, 2024, the ACL amounted to $31.0 million, which represented a $3.6 million increase compared to the $27.4 million ACL at December 31, 2023. The increase reflected the impact of a new qualitative factor for classified REBL loans, as the provision for credit losses was accordingly increased by $2.0 million in the third quarter of 2024. The increase also reflected the impact of higher leasing net charge-offs.
A detail of the changes in the ACL by loan category and summary of loans evaluated individually and collectively for credit deterioration is as follows (dollars in thousands):
A description of loan review coverage targets is set forth below.
The following loan review percentages are performed over periods of eighteen to twenty-four months. At September 30, 2024, in excess of 50% of the total loan portfolio was reviewed by the loan review department or, for SBLs, rated internally by that department. In addition to the review of all loans classified as either special mention or substandard, the targeted coverages and scope of the reviews are risk-based and vary according to each portfolio as follows:
SBLOC – The targeted review threshold is 40%, including a sample focusing on the largest 25% of SBLOCs by commitment. A random sample of at least twenty loans will be reviewed each quarter. At September 30, 2024, approximately 49% of the SBLOC portfolio had been reviewed.
IBLOC – The targeted review threshold is 40%, including a sample focusing on the largest 25% of IBLOCs by commitment. A random sample of at least twenty loans will be reviewed each quarter. At September 30, 2024, approximately 57% of the IBLOC portfolio had been reviewed.
Advisor Financing – The targeted review threshold is 50%. At September 30, 2024, approximately 88% of the advisor financing portfolio had been reviewed. The loan balance review threshold is $1.0 million.
SBLs – The targeted review threshold is 60%, to be rated and/or reviewed within 90 days of funding, excluding fully guaranteed loans purchased for CRA purposes, and fully guaranteed PPP loans. The loan balance review threshold is $1.5 million and additionally includes any classified loans. At September 30, 2024, approximately 70% of the non-government guaranteed SBL loan portfolio had been reviewed.
Direct Lease Financing – The targeted review threshold is 35%. At September 30, 2024, approximately 57% of the leasing portfolio had been reviewed. The loan balance review threshold is $1.5 million.
Commercial Real Estate Bridge Loans, at fair value and Commercial Real Estate Bridge Loans, at amortized cost (floating rate, excluding SBA, which are included in SBLs above) – The targeted review threshold is 60%. Floating rate loans will be reviewed initially within 90 days of funding and will be monitored on an ongoing basis as to payment status. Subsequent reviews will be performed for relationships over $10.0 million. At September 30, 2024, approximately 100% of the floating rate, non-SBA commercial real estate bridge loans outstanding for more than 90 days had been reviewed.
Commercial Real Estate Loans, at fair value (fixed rate, excluding SBA, which are included in SBLs above) – The targeted review threshold is 100%. At September 30, 2024, approximately 100% of the fixed rate, non-SBA commercial real estate loan portfolio had been reviewed.
Other minor loan categories are reviewed at the discretion of the loan review department.
The following tables present delinquencies by type of loan as of the dates specified (dollars in thousands):
Although we consider our ACL to be adequate based on information currently available, future additions to the ACL may be necessary due to changes in economic conditions, our ongoing loss experience and that of our peers, changes in management’s assumptions as to future delinquencies, recoveries and losses, deterioration of specific credits and management’s intent with regard to the disposition of loans and leases.
Management estimates the ACL quarterly and for most loan categories uses relevant available internal and external historical loan performance information to determine the quantitative component of the reserve, and current economic conditions and reasonable and supportable forecasts and other factors to determine the qualitative component of the reserve. Reserves on specific credit-deteriorated loans comprise the third and final component of the reserve. Historical credit loss experience provides the quantitative basis for the estimation of expected credit losses over the estimated remaining life of the loans. The qualitative component of the ACL is designed to be responsive to changes in portfolio credit quality and the impact of current and future economic conditions on loan performance, and is subjective. The review of the appropriateness of the ACL is performed by the Chief Credit Officer and presented to the Audit Committee of the Company’s Board of Directors for review. With the exception of SBLOC and IBLOC, which utilize probability of default/loss given default, and the other loan category, which uses discounted cash flow to determine a reserve, the quantitative components for remaining categories are determined by establishing reserves on loan pools with similar risk characteristics based on a lifetime loss-rate model, or vintage analysis, as described in the following paragraph. Loans that do not share risk characteristics are evaluated on an individual basis. If foreclosure is believed to be probable or repayment is expected from the sale of collateral, a reserve for deficiency is established within the ACL. Those reserves are estimated based on the difference between loan principal and the estimated fair value of the collateral, adjusted for estimated disposition costs.
Except for SBLOC, IBLOC and other loans as noted above, for purposes of determining the quantitative historical loss reserve for each similar risk pool, the loans not assigned an individual reserve are segregated by product type, to recognize differing risk characteristics within portfolio segments, and an average historical loss rate is calculated for each product type. Loss rates are computed by classifying net charge-offs by year of loan origination and dividing into total originations for that specific year. This methodology is referred to as vintage analysis. The average loss rate is then projected over the estimated remaining loan lives unique to each loan pool, to determine estimated lifetime losses. For SBLOC and IBLOC, since de minimis losses have been incurred, probability of default/loss given default considerations are utilized. For the other loan category discounted cash flow is utilized to determine a reserve. The Company also considers the need for an additional ACL based upon qualitative factors such as current loan performance statistics by pool, and economic conditions. These qualitative factors are intended to account for forward looking expectations over a twelve to eighteen month period not reflected in historical loss rates and otherwise unaccounted for in the quantitative process. Accordingly, such factors may increase or decrease the allowance compared to historical loss rates as the Company’s forward-looking expectations change. The qualitative factor percentages are applied against the pool balances as of the end of the period. Aside from the qualitative adjustments to account for forward looking expectations of loss over a twelve to eighteen month projection period, the balance of the ACL reverts to the Company’s quantitative analysis derived from its historical loss rates. The qualitative and quantitative historical loss rate components, together with the allowances on specific credit-deteriorated loans, comprise the total ACL.
A similar process is employed to calculate an ACL assigned to off-balance sheet commitments, which are comprised of unfunded loan commitments and letters of credit. That ACL for unfunded commitments is recorded in other liabilities. Even though portions of the ACL may be allocated to loans that have been individually measured for credit deterioration, the entire ACL is available for any credit that, in management’s judgment, should be charged off.
At September 30, 2024, the ACL amounted to $31.0 million of which $11.4 million of allowances resulted from the Company’s historical charge-off ratios, $3.5 million from reserves on specific loans, with the balance comprised of the qualitative components. The $11.4 million resulted primarily from SBA non-real estate lending and leasing charge-offs. The proportion of qualitative reserves compared to charge-off history related reserves reflects the general absence of charge-offs in the Company’s largest loan portfolios consisting of SBLOC and IBLOC and real estate bridge lending which results, at least in part, from the nature of related collateral. Such collateral respectively consists of marketable securities, the cash value of life insurance and workforce apartment buildings. As charge-offs are nonetheless possible, significant subjectivity is required to consider qualitative factors to derive the related components of the allowance.
The Company ranks its qualitative factors in five levels: minimal, low, moderate, moderate-high, and high-risk. The individual qualitative factors for each portfolio segment have their own scale based on an analysis of that segment. A high-risk ranking results in the largest increase in the ACL calculation with each level below having a lesser impact on a sliding scale. The qualitative factors used for each portfolio are described below in the description of each portfolio segment. As a result of continuing economic uncertainty in 2022, including heightened inflation and increased risks of recession, the qualitative factors which had previously been set in anticipation of a downturn, were maintained through the third quarter of 2022. In the fourth quarter of 2022, as risks of a recession increased, the economic qualitative risk factor was increased for non-real estate SBL and leasing. Those higher qualitative allocations were retained in the first quarter of 2023, as negative economic indications persisted. In the second quarter of 2023, CECL model adjustments of $1.7 million resulted from a $2.5 million CECL model decrease from changes in estimated average lives, partially offset by a $794,000 CECL model increase resulting from increasing economic and collateral risk factors to respective moderate-high and moderate risk levels. The elevated economic risk level for leasing reflected input from department heads regarding the potential borrower impact of the higher rate environment. The elevated collateral risk level for leasing reflected lower auction prices for vehicles and uncertainty over the extent to which such prices might decrease in the future. The adjustment for average lives reflected a change in the estimated lives of leases, higher variances for which may result from their short maturities. In the third quarter of 2023, there were indications of auction price stabilization, while the auto workers’ strike could reduce supply and drive up prices. Nonetheless, the elevated risk levels were maintained. In the second quarter of 2024, the provision for credit losses was reduced by $1.4 million to reflect reduced average lives for small business non-real estate loans.
The Company has not increased the qualitative risk levels for SBLOC or IBLOC because of the nature of related collateral. SBLOC loans are subject to maximum loan to marketable securities value, and notwithstanding historic drops in the stock market in recent years, losses have not been realized. IBLOC loans are limited to borrowers with insurance companies that exceed credit requirements, and loan amounts are limited to life insurance cash values. The Company had not, prior to the fourth quarter of 2023, increased the economic factor for multifamily real estate bridge lending. While Federal Reserve rate increases directly increase real estate bridge loan floating-rate borrowing costs, those borrowers are required to purchase interest rate caps that will partially limit the increase in borrowing costs during the term of the loan. Additionally, there continues to be several additional mitigating factors within the multifamily sector that should continue to fuel demand. Higher interest rates are increasing the cost to purchase a home, which in turn is increasing the number of renters and subsequent demand for multifamily. The softening demand for new homes should continue to exacerbate the current housing shortage, and therefore continue to fuel demand for multifamily apartment homes. Additionally, higher rents in the multifamily sector are causing renters to be more price sensitive, which is driving demand for most of the apartment buildings within the Company’s loan portfolio which management considers “workforce” housing. In the fourth quarter of 2023, an increasing trend in substandard loans was reflected in an increase in the risk level for the REBL ACL economic qualitative factor, which resulted in a $1.0 million increase in the fourth quarter provision for credit loss on loans. At September 30, 2024, real estate
bridge loans classified as special mention and substandard respectively amounted to $84.4 million and $155.4 million compared to $96.0 million and $80.4 million at June 30, 2024. Each classified loan was evaluated for a potential increase in the allowance for credit losses (“ACL”) on the basis of the aforementioned third-party appraisals of apartment building collateral. On the basis of “as is” and “as stabilized” LTVs, increases to the allowance were not required. The current allowance for credit losses for REBL, is primarily based upon historical industry losses for multi-family loans, in the absence of significant charge-offs within the Company’s REBL portfolio. As a result of increasing amounts of loans classified as special mention and substandard, the Company evaluated potential related sensitivity for REBL in the third quarter. Such evaluation is inherently subjective as it requires material estimates that may be susceptible to change as more information becomes available. As a result, the Company added a new qualitative factor to its ACL with a cumulative after-tax impact of approximately $1.5 million ($2.0 million pre-tax).
The economic qualitative factor is based on the estimated impact of economic conditions on the loan pools, as distinguished from the economic factors themselves, for the following reasons. The Company has experienced limited multifamily (apartment building) loan charge-offs, despite stressed economic conditions. Accordingly, the ACL for this pool was derived from a qualitative factor based on industry loss information for multifamily housing. The Company’s charge-offs have been miniscule for SBLOC and IBLOC notwithstanding stressed economic periods, and their ACL is accordingly also determined by a qualitative factor. Investment advisor loans were first offered in 2020 with limited performance history, during which charge-offs have not been experienced. For investment advisor loans, the nature of the underlying ultimate repayment source was considered, namely the fee-based advisory income streams resulting from investment portfolios under management, and the impact changes in economic conditions would have on those payment streams. The qualitative factors used for this and the other portfolios are described below in the description of each portfolio segment. Additionally, the Company’s charge-off histories for SBLs, primarily SBA, and leases have not correlated with economic conditions, including trends in unemployment. While specific economic factors did not correlate with actual historical losses, multiple economic factors are considered in the economic qualitative factor. For the non-guaranteed portion of SBA loans, leases, real estate bridge lending and investment advisor financing, the Company’s loss forecasting analysis included a review of industry statistics. However, the Company’s own charge-off history and average life estimates, for categories in which the Company has experienced charge-offs, was the primary quantitatively derived element in the forecasts. The qualitative component results from management’s qualitative assessments which consider internal and external inputs.
The following table summarizes select asset quality ratios for each of the periods indicated:
For the year ended
or as of September 30,
or as of December 31,
Ratio of:
ACL to total loans
0.52%
0.51%
ACL to non-performing loans(1)
101.70%
153.04%
206.33%
Non-performing loans to total loans(1)
0.30%
0.25%
Non-performing assets to total assets(1)
1.14%
0.39%
Net charge-offs to average loans
0.07%
0.05%
(1)Includes loans 90 days past due still accruing interest.
The ratio of the ACL to total loans increased to 0.52% as of September 30, 2024 from 0.46% at September 30, 2023 as the ACL increased proportionately more than total loans. The $6.9 million increase in the ACL between those dates, reflected approximately $1.7 million of increased reserves on specific distressed credits and approximately $1.0 million which was added in fourth quarter 2023 for the economic qualitative factor for an increasing trend in special mention and substandard real estate bridge loans. In the third quarter of 2024, $2.0 million was added as a result of a new real estate bridge loans related to an increase in special mention and substandard loans. Additionally, while reserves for SBLOC and IBLOC loans were reduced as a result of lower loan balances, the related reserve impact was more than offset by growth in other loan categories with higher ACL allocations. The lower reserve allocations for SBLOC and IBLOC reflect their respective marketable securities and cash value of insurance collateral. The ratio of the ACL to non-performing loans decreased to 101.70% at September 30, 2024, from 153.04% at September 30, 2023, primarily as a result of the increase in non-performing loans which proportionately exceeded the increase in the ACL. As a result of the increase in non-performing loans, the majority of which was a $12.3 million REBL loan, the ratio of non-performing loans to total loans also increased to 0.52% at September 30, 2024 from 0.30% at September 30, 2023. The ratio of non-performing assets to total assets increased to 1.14% at September 30, 2024 from 0.46% at September 30, 2023, reflecting the increase in non-performing loans, and a $39.4 million loan transferred to OREO in the second quarter of 2024 with a September 30, 2024 balance of $40.3 million. We intend to continue to manage the capital improvements on the underlying apartment complex. As the units become available for lease, the property manager will be tasked with leasing these units at market rents. The $40.3 million balance compares to a September 2023 third party “as is” appraisal of $47.8 million, or an 84% “as is” LTV, with additional potential collateral value as construction progresses, and units are re-leased at stabilized rental rates. The Company entered into a purchase and sale agreement for that apartment property acquired by the Bank through foreclosure. The purchaser has made earnest money deposits of $375,000, with additional required deposits projected to total $500,000 prior to the December 31, 2024 closing deadline. The sales price is expected to cover the Company’s current OREO balance plus the forecasted cost of improvements to the property. There can be no assurance that the purchaser will consummate the sale of the property,
but if not consummated, earnest money deposits are expected to accrue to the Company. The nonaccrual balances in this table as of September 30, 2024, are also reflected in the substandard loan totals. The ratio of net charge-offs to average loans was 0.07% for the nine months ended September 30, 2024, and 0.05% for the nine months ended September 30, 2023. The increase reflected an increase in direct lease financing net charge-offs.
Net Charge-offs
Net charge-offs were $3.7 million for the nine months ended September 30, 2024, an increase of $1.1 million from net charge-offs of $2.6 million during the nine months ended September 30, 2023. Charge-offs in both periods resulted primarily from non-real estate SBL and leasing charge-offs. SBL charge-offs resulted primarily from the non-government guaranteed portion of SBA loans.
The following tables reflect the relationship of year-to-date average loans outstanding, based upon quarter end averages, and net charge-offs by loan category (dollars in thousands):
431
(102)
(279)
Net charge-offs
329
Average loan balance
157,629
639,604
27,739
702,852
1,569,727
235,268
2,102,691
140,046
49,995
Ratio of net charge-offs during the period to average loans during the period
0.21%
0.48%
0.03%
871
2,804
(446)
(220)
(299)
Net charge-offs (recoveries)
425
2,584
(296)
120,845
518,304
28,264
660,022
1,885,857
187,414
1,808,924
57,218
Ratio of net charge-offs (recoveries) during the period to average loans during the period
(0.01%)
(0.51%)
We review charge-offs at least quarterly in loan surveillance meetings which include the chief credit officer, the loan review department and other senior credit officers in a process which includes identifying any trends or other factors impacting portfolio management. In recent periods charge-offs have been primarily comprised of the non-guaranteed portion of SBA 7(a) loans and leases. The charge-offs have resulted from individual borrower or business circumstances as opposed to overall trends or other factors.
Non-accrual Loans, Loans 90 Days Delinquent and Still Accruing, OREO and Modified Loans.
Loans are considered to be non-performing if they are on a non-accrual basis or they are past due 90 days or more and still accruing interest. A loan which is past due 90 days or more and still accruing interest remains on accrual status only when it is both adequately secured as to principal and interest, and is in the process of collection. We had $61.7 million of OREO at September 30, 2024 and $16.9 million of OREO at December 31, 2023. The following tables summarize our non-performing loans, OREO, and loans past due 90 days or more still accruing interest.
(1) The majority of the increase in Loans past due 90 days or more and still accruing resulted from vehicle leases to governmental entities and municipalities, the payments for which are sometimes subject to administrative delays, SBLOC loans secured by marketable securities and IBLOC loans which are secured by the cash value of life insurance.
(2) In the first quarter of 2024, a $39.4 million apartment building rehabilitation bridge loan was transferred to nonaccrual status. On April 2, 2024, the same loan was transferred from nonaccrual status to OREO, and comprised the majority of our OREO at September 30, 2024, with a balance at that date of $40.3 million. We intend to continue to manage the capital improvements on the underlying apartment complex. As the units become available for lease, the property manager will be tasked with leasing these units at market rents. The $40.3 million balance compares to a September 2023 third party “as is” appraisal of $47.8 million, or an 84% “as is” LTV, with additional potential collateral value as construction progresses, and units are re-leased at stabilized rental rates. The Company entered into a purchase and sale agreement for that apartment property acquired by the Bank through foreclosure. The purchaser has made earnest money deposits of $375,000, with additional required deposits projected to total $500,000 prior to the December 31, 2024 closing deadline. The sales price is expected to cover the Company’s current OREO balance plus the forecasted cost of improvements to the property. There can be no assurance that the purchaser will consummate the sale of the property, but if not consummated, earnest money deposits are expected to accrue to the Company. The nonaccrual balances in this table as of September 30, 2024, are also reflected in the substandard loan totals.
The following table summarizes the Company’s non-accrual loans and loans past due 90 days or more, by year of origination, at September 30, 2024 and December 31, 2023:
90+ Days past due
614
103
1,364
824
349
510
390
613
3,805
SBA commercial mortgage
1,379
1,717
1,548
875
111
81
1,907
1,229
1,588
2,025
1,297
176
91
5,179
Advisor Financing
Total Advisor Financing
Total other loans
Total 90+ Days past due
682
1,214
1,841
Total Non-accrual
4,650
16,945
668
2,778
294
522
190
792
2,178
1,929
58
1,775
1,688
212
356
1,921
1,729
4,270
384
310
476
273
276
4,995
1,186
3,275
For the three month and year-to-date periods ended September 30, 2024 and September 30, 2023, loans modified and related information are as follows (dollars in thousands):
(1) For the nine months ended September 30, 2024, the “as is” weighted average LTV of the real estate bridge lending balances was approximately 73%, and the “as stabilized” LTV was approximately 66% based upon appraisals performed within the past twelve months. “As stabilized” LTVs reflect the third-party appraiser’s estimated value after the rehabilitation is complete and units are released at stabilized rates. Apartment improvements and renovations continue, generally utilizing additional borrower capital. The balances for both periods were also classified as either special mention or substandard as of September 30, 2024.
The following table shows an analysis of loans that were modified during the three month and year-to-date periods ended September 30, 2024, and September 30, 2023 presented by loan classification (dollars in thousands):
There were $56.2 million and $96.1 million of loans classified as modified for the three month and year-to-date periods ended September 30, 2024, respectively, with specific reserves of zero and $5,000, for the three month and year-to-date periods ended September 30, 2024, respectively. There were zero and $156,000 of loans classified as modified for the three month and year-to-date periods ended September 30, 2023. Substantially all of the reserves at September 30, 2024 related to the non-guaranteed portion of SBA loans.
As a result of interest rate modifications, approximately $815,000 was reversed from interest income in the third quarter of 2024, which was applicable to prior periods.
The following table describes the financial effect of the modifications made for the three month and year-to-date periods ended September 30, 2024 and September 30, 2023 (dollars in thousands):
There were no loans that received a term extension modification that had a payment default during the period and were modified in the twelve months before default.
We had no commitments to extend additional credit to loans classified as modified as of September 30, 2024 or December 31, 2023.
We had $25.7 million of non-accrual loans at September 30, 2024, compared to $11.5 million of non-accrual loans at December 31, 2023. The $14.2 million increase in non-accrual loans was primarily due to $65.7 million of additions partially offset by $44.1 million transferred to OREO, $3.4 million of charge-offs, $1.5 million transferred to repossessed vehicle inventory, $2.7 million of payments and $129,000 returned to accrual status. Loans past due 90 days or more still accruing interest amounted to $4.7 million at September 30, 2024 and $1.7 million at December 31, 2023. The $3.0 million increase reflected $11.6 million of additions partially offset by $8.6 million of loan payments and $24,000 transferred to non-accrual loans.
We had $61.7 million of OREO at September 30, 2024 and $16.9 million of OREO at December 31, 2023. The change in balance reflected $45.0 million transferred from non-accrual loans.
We evaluate loans under an internal loan risk rating system as a means of identifying problem loans. At September 30, 2024 and December 31, 2023, classified loans were segregated by year of origination and are shown in “Note 6. Loans” to the unaudited consolidated financial statements herein.
Premises and Equipment, Net
Premises and equipment amounted to $28.1 million at September 30, 2024, compared to $27.5 million at December 31, 2023.
Other assets amounted to $157.5 million at September 30, 2024 compared to $133.1 million at December 31, 2023.
Our primary source of funding is deposit acquisition. We offer a variety of deposit accounts with a range of interest rates and terms, including demand, checking and money market accounts, through and with the assistance of affinity groups. The majority of our deposits are generated through prepaid card and debit and other payments related deposit accounts. At September 30, 2024, we had total deposits of $6.93 billion compared to $6.68 billion at December 31, 2023, which reflected an increase of $244.8 million, or 3.7%. Daily deposit balances are subject to variability, and deposits averaged $7.01 billion in the third quarter of 2024. Savings and money market balances are a modest percentage of our funding and we have swept such deposits off our balance sheet to other institutions. Such sweeps are utilized to optimize diversity within our funding structure by managing the percentage of individual client deposits to total deposits. A diversified group of prepaid and debit card accounts, which have an established history of stability and lower cost than certain other types of funding, comprise the majority of our deposits. Our product mix includes prepaid card accounts for salary, medical spending, commercial, general purpose reloadable, corporate and other incentive, gift, government payments and transaction accounts accessed by debit cards. Balances are subject to daily fluctuations, which may comprise a significant component of variances between dates. Our funding is comprised primarily of millions of small transaction-based consumer balances, the vast majority of which are FDIC-insured. We have multi-year, contractual relationships with affinity groups which sponsor such accounts and with whom we have had long-term relationships (see Item 1. “Business—Our Strategies” in our Annual Report on Form 10-K for the year ended December 31, 2023). Those long-term relationships comprise the majority of our deposits while we continue to grow and add new client relationships. Of our deposits at September 30, 2024, the top three affinity groups accounted for approximately $2.95 billion, the next three largest $1.58 billion, and the four subsequent largest $779.9 million. Of our deposits at year-end 2023, the top three affinity groups accounted for approximately $2.33 billion, the next three largest $1.46 billion, and the four subsequent largest $852.1 million. While certain of these relationships may have changed their ranking in the top ten, the affinity groups themselves were generally identical at both dates, with some movement in the ninth and tenth largest relationships. We believe that payroll, debit, and government-based accounts such as child support are comparable to traditional consumer checking accounts. Such balances in the top ten relationships at September 30, 2024 totaled $3.25 billion while balances related to consumer and business payment companies, including companies sponsoring incentive payments, amounted to $2.06 billion. Such balances in the top ten relationships at year-end 2023, totaled $2.91 billion while balances related to consumer and business payment companies, including companies sponsoring incentive and gift card payments, amounted to $1.72 billion. We pay interest directly to consumer account holders for an immaterial amount of deposit balances, while the vast majority of interest expense results from fees paid to affinity groups. The vast majority of such payments are variable rate and equate to varying contractual percentages tied to the effective federal funds rate, which results from Federal Reserve rate hikes and reductions. The effective federal funds rate also reflects a market rate which might be required to replace lower cost deposits, or fund loan growth in excess of deposit growth, at least in the short-term. Because underlying balances have generally exhibited stability, so too have trends in the cost of funds. The more consequential impact to cost of funds are market changes and the effective federal funds rate, specifically the impact of Federal Reserve rate hikes and reductions. We model significant fee-based relationships in our net interest income sensitivity modeling (see “Item 2 – Asset and Liability Management” above). The following discussion is applicable to our transaction accounts, comprising the majority of our deposits, in the 100 and 200 basis point rate increase and decrease scenarios as presented in the applicable table in that Asset and Liability Management section, above. The impact of the Federal Reserve rate hikes or reductions, which respectively increase or decrease interest expense, has approximated the ratio of our cost of funds divided by the effective federal funds rate, all else equal. However, there can be no assurance that such ratios could not change significantly given the other variables discussed in the Asset and Liability Management section. In third quarter 2024, our demand and interest checking balances averaged $6.94 billion, compared to $6.23 billion in third quarter 2023. The growth primarily reflected increases in payment company balances. Average savings and money market balances increased to $65.1 million the third quarter of 2024, compared to $56.5 million in the third quarter of 2023. We sweep deposits off our balance sheet to other institutions to optimize diversity within our funding structure by managing the percentage of individual client deposits to total deposits. Short-term time deposits have been used minimally to provide liquidity cushions, for instance when short-term loan origination exceeds short-term deposit growth, as was the case in 2022. In 2023, we did not use short-term time deposits after the first quarter of the year. Short-term time deposits are generated through established intermediaries such as banks and other financial companies. These deposits generally originate with investment or trust companies or banks, which offer those deposits at market rates to FDIC-insured institutions, such that the balances are fully FDIC-insured. These deposits are generally classified as brokered. While affinity groups may decide to pay interest or other remuneration to account holders, they do not currently do so for the vast majority of balances. The following table presents the average balance and rates paid on deposits for the periods indicated (dollars in thousands):
The following table presents the average balance and rates paid on deposits for the periods indicated (dollars in thousands):
balance
rate
Demand and interest checking(1)
6,308,509
2.30%
78,074
20,794
4.13%
6,407,377
2.32%
(1) Of the amounts shown for 2024 and 2023, $149.1 million and $177.0 million, respectively, represented balances on which the Bank paid interest. The remaining balance for each period reflects amounts subject to fees paid to third parties, which are based upon a contractual percentage applied to a rate index, generally the effective federal funds rate, and therefore classified as interest expense.
Short-term Borrowings
Short-term borrowings consist of amounts borrowed on our lines of credit with the Federal Reserve Bank or FHLB. There were $135.0 million of borrowings with FHLB at September 30, 2024. There were no borrowings on either line at December 31, 2023. We generally utilize overnight borrowings to manage our daily reserve requirements at the Federal Reserve. Period-end and year-to-date information for the dates shown is as follows.
Balance at period end
Average for the three months ended September 30, 2024
Average during the year
5,739
Maximum month-end balance
455,000
450,000
Weighted average rate during the period
4.72%
Rate at period end
Senior Debt
On August 13, 2020, we issued $100.0 million of the 2025 Senior Notes, with a maturity date of August 15, 2025, and a 4.75% interest rate, with interest paid semi-annually on March 15 and September 15. The 2025 Senior Notes are the Company’s direct, unsecured and unsubordinated obligations and rank equal in priority with all our existing and future unsecured and unsubordinated indebtedness and senior in right of payment to all our existing and future subordinated indebtedness. In lieu of repayment of debt from dividends paid by the Bank to the Company, industry practice includes the issuance of new debt to repay maturing debt.
Borrowings
At September 30, 2024, we had other long-term borrowings of $38.2 million compared to $38.6 million at December 31, 2023. The borrowings consisted of sold loans which were accounted for as a secured borrowing because they did not qualify for true sale accounting. We do not have any policy prohibiting us from incurring debt.
The 2038 Debentures, which total $13.4 million, mature in March 2038 and bear interest at SOFR plus 3.51%, are grandfathered to qualify as tier 1 capital at the Bank.
Other Liabilities
Other liabilities amounted to $70.8 million at September 30, 2024, compared to $69.6 million at December 31, 2023.
Shareholders’ Equity
As a means of returning capital to shareholders, the Company implemented stock repurchase programs which totaled $40.0 million, $60.0 million and $100.0 million, in equal quarterly amounts, respectively, in 2021, 2022 and 2023, with $200 million originally planned for 2024. Subsequently, the second quarter 2024 planned repurchase was increased from $50 million to $100 million, with $50 million in repurchases planned for each remaining quarter of 2024. The planned amounts of such repurchases are generally determined in the fourth quarter of the preceding year by assessing the impact of budgetary earnings projections on regulatory capital
requirements. The excess of projected earnings over amounts required to maintain capital requirements is the maximum available for capital return to shareholders, barring any need to retain capital for other purposes. A significant portion of such excess earnings has been utilized for stock repurchases in the amounts noted above, while cash dividends have not been paid. In determining whether capital is returned through stock repurchases or cash dividends, the Company calculates a maximum share repurchase price, based upon comparisons with what it concludes to be other exemplar peer share price valuations, with further consideration of internal growth projections. As these share prices, which are updated at least annually, have not been reached, capital return has consisted solely of stock repurchases. Exemplar share price comparisons are based upon multiples of earnings per share over time, with further consideration of returns on equity and assets. While repurchase amounts are planned in the fourth quarter of the preceding year, repurchases may be modified or terminated at any time, should capital need to be conserved.
Off-balance sheet arrangements
There were no off-balance sheet arrangements during the nine months ended September 30, 2024 that have or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our interests.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Information about market risk for the quarter ended September 30, 2024 is included under “Asset and Liability Management” in Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report on Form 10-Q. Except for such information, there has been no material change to our assessment of our sensitivity to market risk as discussed in the 2023 Form 10-K.
As noted under “Asset and Liability Management” in Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report on Form 10-Q, the Company’s exposure to interest rate risk is managed through the use of guidelines which limit interest rate exposure to higher interest rates. Because the Company has emphasized variable rate instruments in its loan and investment portfolios, it tends to benefit from higher interest rate environments. As a result of the Federal Reserve rate increases in 2022 and 2023, net interest income has increased and exceeded prior period levels. While future Federal Reserve rate reductions may result in lower net interest income, such exposure to lower rates was significantly reduced in the third quarter of 2024 with the purchase of fixed rate securities. In the third quarter of 2024 the Federal Reserve began lowering rates. In addition to the aforementioned guidelines which the Company uses to manage interest rate risk, the Company utilizes an asset liability committee to provide oversight by multiple departments and senior officers.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (our principal executive officer) and our Chief Financial Officer (our principal financial officer), as appropriate, to allow timely decisions regarding required disclosure. Because of inherent limitations, disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of disclosure controls and procedures are met.
Under the supervision of our Chief Executive Officer and Chief Financial Officer, our management conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at a reasonable level of assurance as of September 30, 2024.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
For a discussion of our material pending legal proceedings, see “Note 13. Legal” to the unaudited consolidated financial statements in this Quarterly Report on Form 10-Q, which is incorporated herein by reference.
Item 1A. Risk Factors
Our business, financial condition, operating results and cash flows are subject to various risks and uncertainties, including those described in Part I, Item 1A. “Risk Factors” in the 2023 Form 10-K. There have been no material changes from the risk factors disclosed in the 2023 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Stock Repurchases
On October 26, 2023, the Board approved the 2024 Repurchase Program, which authorized the Company to repurchase $50.0 million in value of the Company’s common stock per fiscal quarter in 2024, for a maximum amount of $200.0 million. The Company increased its share repurchase authorization for the second quarter of 2024 from $50.0 million to $100.0 million, which increased the maximum amount under the 2024 Repurchase Program to $250.0 million. Under the 2024 Repurchase Program, the Company intends to repurchase shares through open market purchases, privately-negotiated transactions, block purchases or otherwise in accordance with applicable federal securities laws, including Rule 10b-18 of the Exchange Act. The 2024 Repurchase Program may be modified or terminated at any time. With respect to further repurchases in subsequent quarters under this program, the Company cannot predict if, or when, it will repurchase any shares of common stock and the timing and amount of any shares repurchased will be determined by management based on its evaluation of market conditions and other factors.
The following table sets forth information regarding the Company’s repurchases of its common stock during the quarter ended September 30, 2024:
Period
Total number of shares purchased
Average price paid per share
Total number of shares purchased as part of publicly announced plans or programs(1)
Approximate dollar value of shares that may yet be purchased under the plans or programs(2)
July 1, 2024 - July 31, 2024
331,267
44.96
85,108
August 1, 2024 - August 31, 2024
356,544
48.77
67,720
September 1, 2024 -September 30, 2024
349,258
50.74
50,000
1,037,069
48.22
(1) During the third quarter of 2024, all shares of common stock were repurchased pursuant to the 2024 Repurchase Program, which was approved by the Board on October 26, 2023 and publicly announced on October 26, 2023. Under the 2024 Repurchase Program, the Company is authorized to repurchase shares of its common stock totaling up to $50.0 million per quarter, for a maximum amount of $200.0 million in 2024. The Company increased its share repurchase authorization for the second quarter of 2024 from $50.0 million to $100.0 million, which increased the maximum amount under the 2024 Repurchase Program to $250.0 million. The Company may repurchase shares through open market purchases, including through written trading plans under Rule 10b5-1 under the Exchange Act, privately-negotiated transactions, block purchases or otherwise in accordance with applicable federal securities laws, including Rule 10b-18 under the Exchange Act.
(2) The 2024 Repurchase Program may be suspended, amended or discontinued at any time and has an expiration date of December 31, 2024. With respect to further repurchases, the Company cannot predict if, or when, it will repurchase any shares of common stock, and the timing and amount of any shares repurchased will be determined by management based on its evaluation of market conditions and other factors.
Item 5. Other Information
During the quarter ended September 30, 2024, none of the Company’s directors or officers (as defined in Rule 16a-1(f) of the Exchange Act) adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as those terms are defined in Item 408 of Regulation S-K.
Item 6. Exhibits
Exhibit No.
31.1
Rule 13a-14(a)/15d-14(a) Certifications*
31.2
32.1
Section 1350 Certifications*
32.2
101.INS
Inline XBRL Instance Document**
101.SCH
Inline XBRL Taxonomy Extension Schema Document*
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document*
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document*
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)*
*
Filed herewith
**
The Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
THE BANCORP, INC.
(Registrant)
November 7, 2024
/S/ DAMIAN KOZLOWSKI
Date
Damian Kozlowski
Chief Executive Officer
/S/ PAUL FRENKIEL
Paul Frenkiel
Chief Financial Officer and Secretary