The Bancorp Stock

The Bancorp, Inc. operates as the bank holding for The Bancorp Bank, National Association that provides various banking products and services.

The company’s national specialty lending segment includes institutional banking, commercial real estate bridge lending, small business lending and commercial fleet leasing. The company’s institutional banking business line offers securities-backed lines of credit (‘SBLOC’) and insurance policy cash value-backed lines of credit (‘IBLOC’) through affinity groups such as investment advisors. SBLOCs and IBLOCs are collateralized by marketable securities and the cash value of insurance policies, respectively, and are typically offered in conjunction with brokerage accounts. The company’s institutional banking business line also offers financing to investment advisors, made for purposes of debt refinance, acquisition of another firm or internal succession. Additionally, the company offers commercial real estate bridge loans (sometimes referred to herein as ‘REBL’ or ‘real estate bridge loans’), the vast majority of which are collateralized by apartment buildings. The company also offers small business loans (‘SBLs’) which are primarily comprised Small Business Administration (‘SBA’) loans and vehicle fleet leasing and, to a lesser extent, other equipment leasing (‘direct lease financing’) to small- and medium-sized businesses. Vehicle fleet and equipment leases consist of commercial vehicles, including trucks and special purpose vehicles and equipment.

The majority of the company’s deposits and non-interest income are generated in the company’s 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 the bank. The card-accessed deposit accounts are consisted of debit and prepaid card accounts that are generated by companies that market directly to end users. The company’s 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. The company’s ACH accounts facilitate bill payments and the company’s 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 the company refers to as ‘affinity or private label banking.’ These services include loan and deposit accounts for investment advisory companies through the company’s Institutional Banking department. The company typically provides these services under the name and through the facilities of each organization with whom the company develops a relationship.

Strategies

The company’s business strategy is focused on payments and deposit related activities.

The company’s principal strategies are to fund the company’s loan and investment portfolio growth with stable deposits and generate non-interest income from prepaid and debit card accounts and other payment processing; develop relationships with affinity groups to gain sponsored access to their membership, client or customer bases to market the company’s services through private label banking; offer products through private label banking; service companies which provide payment services to businesses and individuals; and use the company’s existing infrastructure as a platform for growth.

Specialty Finance: Lending Activities

Lending activities within the company’s specialty lending segment include SBLOC, IBLOC and investment advisor loans, direct lease financing and SBLs.

SBLOC, IBLOC and Investment Advisor Financing. The company makes SBLOC loans to individuals, trusts and entities which are secured by a pledge of marketable securities maintained in one or more accounts with respect to 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. Most of the company’s SBLOCs are drawn to meet a specific need of the borrower (such as for bridge financing of real estate) and are typically drawn for 12 to 18 months at a time.

The company also makes loans, which are collateralized by the cash surrender value of eligible life insurance policies, or IBLOCs. 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 the company’s standards. Additionally, the bank utilizes assignments of cash surrender value.

The bank also originates loans to investment advisors for purposes of debt refinance, acquisition of another firm or internal succession. Maximum loan amounts are limited to 70% of the estimated 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.

SBLOC and IBLOC loans are demand loans and generally reprice monthly, as the prime rate changes. Investment advisor loans generally have seven year terms with fixed rates.

Leases. The company provides lease financing for commercial and government vehicle fleets, including trucks and other special purpose vehicles and, to a lesser extent, provide lease financing for other equipment. The company’s 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 company 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 company, as lessor. The company uses a credit matrix which outlines the required financial information needed to evaluate credits over $150,000. For amounts less than $150,000 that meet a set criteria, the company supports its decisioning process by utilizing a scoring model. Terms for leases are generally 36 to 60 months.

SBLs. SBLs, or small business loans, consist primarily of SBA loans. The company participates as an SBA Preferred Lender in two ongoing loan programs established by the SBA: the 7(a) Loan Guarantee Program (the ‘7(a) Program’) and the 504 Fixed Asset Financing Program (the ‘504 Program’). 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 terms of the loans must come within parameters set by the SBA, including borrower eligibility, loan maturity, and maximum loan amount. While 7(a) Program loans have historically had five to seven year average lives, they initially reprice between 90 days to 60 months, at which point rates are variable and adjust on a quarterly basis based on prime rate changes. 7(a) Program loan amounts are not limited to a percentage of estimated collateral value and are instead based on the business’s ability to repay the loan from its cash flow. 7(a) Program loans must be secured by all available business assets and personal real estate until the recovery value equals the loan amount or until all personal real estate of the borrower has been pledged. Personal guarantees are required from all owners of 20% or more of the equity of the business, although lenders may also require personal guarantees of owners of less than 20%. Loan guarantees can range up to 85% of loan principal for loans of up to $150,000 and 75% for loans in excess of that amount.

The SBA loan guaranty is typically paid to the lender after the liquidation of all collateral, but may be paid prior to liquidation of certain assets, mitigating the losses due to collateral deficiencies up to the percentage of the guarantee. To maintain the guarantee, the company must comply with applicable SBA regulations.

The 504 Program is designed to provide small businesses with financing for the purchase of fixed assets, including real estate and buildings; the purchase of improvements to real estate; the construction of new facilities or modernizing, renovating or converting existing facilities; the purchase of long-term machinery and equipment; and debt refinancing. A 504 Program loan may not be used for working capital, trading asset purchases or investment in rental real estate. In a 504 Program financing, the borrower must supply 10% of the financing amount, the company provides 50% of the financing amount and a Certified Development Company (‘CDC’) provides 40% of the financing amount. If the borrower has less than two years of operating history or if the assets being financed are considered ‘special purpose,’ the funding percentages are 15%, 50% and 35%, respectively. If both conditions are met, the funding percentages are 20%, 50% and 30%, respectively. The company receives a first lien on the assets being financed and the CDC receives a second lien. Personal guarantees of the principal owners of the business are required. The funds for the CDC loans are raised through a monthly auction of bonds that are guaranteed by the U.S. government and, accordingly, if the government guarantees are curtailed or terminated, the company’s ability to make 504 Program loans would be curtailed or terminated. Certain basic loan terms, as with the 7(a) Program, are established by the SBA, including borrower eligibility, maximum loan amount, maximum maturity date, interest rates and loan fees. While real estate is appraised and values are established for other collateral, and the loan amount is limited to a percentage of cost of the assets being acquired by the borrower, such amounts may not be realized upon resale if the borrower defaults and the bank forecloses on the collateral. 504 Program loans generally have rates which are variable after an initial five year period, at which point rates adjust every 90 days or 60 months based on prime rate changes.

SBA 7(a) Program and 504 Program loans may include construction advances which are subject to risk inherent to construction projects, including environmental risks, engineering defects, contractor risk and risk of project completion. Delays in construction may also compromise the owner’s business plan and result in additional stresses on cash flow required to service the loan. Higher than expected construction costs may also result, impacting repayment capability and collateral values.

Additionally, the company makes SBA loans to franchisees of various business concepts, including loans to multiple franchisees with the same concept. In making loans to franchisees, the company considers franchisee failure rates for the specific franchise concept. However, factors adversely affecting a specific type of franchisor or franchise concept, including in particular risks that a franchise concept loses popularity with consumers or encounters negative publicity about its products or services, could harm the value not only of a particular franchisee’s business but also of multiple loans to other franchisees with the same concept.

Non-SBA Commercial Loans, at Fair Value and Real Estate Bridge Lending. Prior to 2020, the company originated commercial real estate loans for sale into securitizations. In 2020, the company decided to retain the loans which had not been sold on the company’s balance sheet and continue to account for such loans at fair value. These loans are collateralized by various types of commercial real estate, primarily multi-family (apartment buildings) but also include legacy amounts of retail, hotel and office real estate, and do not have recourse to the borrower (except for carve-outs such as fraud) and, accordingly, generally depend on cash reserves and cash generated by the underlying properties for repayment. In the third quarter of 2021, the company resumed the origination of apartment loans, which the company also plans to retain and which are transitional commercial mortgage loans to improve and rehabilitate existing properties that already have cash flow. While these loans generally have three year terms, the vast majority are variable rate, with monthly rate adjustments and, as a result, higher market rates will result in higher payments and greater cash flow requirements, although such loans generally require an interest rate cap to mitigate that risk. Should cash flow and available cash reserves prove inadequate to cover debt service on these loans, repayment will primarily depend upon the sponsor’s ability to service the debt, or the value of the property in disposition. Low occupancy or rental rates may negatively impact loan repayment. Because these loans were previously originated for sale, or because the company may decide to sell certain REBL loans in the future, the underwriting and other criteria used were those which buyers in the capital markets indicated were most crucial when determining whether to buy the loans. Such criteria include the loan-to-value ratio and debt yield (net operating income divided by first mortgage debt). However, property values may fall below appraised values and below the outstanding balance of the loan, which would reduce the price at which the company could sell the loan.

Deposit Products and Services

The company offers a range of deposit products and services deployed through the company’s Fintech Solutions and Institutional Banking groups for the benefit of the company’s affinity group clients and their customer bases. These products may be offered directly, or through the company’s private label banking strategy. These include checking accounts; savings accounts; commercial accounts; and various types of prepaid and debit cards.

The company also offers ACH bill payment and other payment services.

Payments Products and Services Offered Through The company’s Fintech Solutions Group

The company provides a variety of checking and savings accounts and other banking services to fintech companies and other affinity groups, which may vary and which include fraud detection, anti-money laundering, consumer compliance and other regulatory functions, reconciliation, sponsorship in Visa or Mastercard associations, ACH processing, rapid funds transfer and other payment capabilities.

Card Issuing Services. The company issues debit and prepaid cards to access diverse types of deposit accounts, including: consumer and business debit, general purpose reloadable prepaid, pre-tax medical spending benefit, payroll, gift, government, corporate incentive, reward, business payment accounts and others. The company’s accounts are offered to end users throughout the United States through the company’s relationships with fintech companies, benefits administrators, third-party administrators, insurers, corporate incentive companies, rebate fulfillment organizations, payroll administrators, large retail chains, consumer service organizations and others. The company’s cards are network-branded through its agreements with Visa, Mastercard, and Discover. The majority of fees that the company earns result from contractual fees paid by third-party sponsors, computed on a per transaction basis, and monthly service fees. Additionally, the company earns interchange fees paid through settlement associations, such as Visa, which are also determined on a per transaction basis.

Card Payment, Bill Payment and ACH Processing. The company acts as the depository institution for the processing of credit and debit card payments made to various businesses, which require collection through associations, such as Visa and Mastercard. The company also acts as the bank sponsor and depository institution for independent service organizations that process such payments and for other companies, such as bill payment companies for which the company processes ACH payments enabling those organizations to more easily process electronic payments and to better manage their risk of loss. These accounts are a source of demand deposits and fee income.

Institutional Banking

The company has developed strategic relationships with affinity-based clients, such as limited-purpose trust companies, registered investment advisers, broker-dealers and other firms offering institutional banking services. In addition to the SBLOC, IBLOC and investment advisor loans discussed above, the company’s Institutional Banking business also provides customized, private label deposit products such as demand and money market accounts to customers of these affinity-based clients.

Other Operations

Account Services. Depending upon the product, account holders may access the company’s products through the website or app of their affinity group, or through the company’s website. This access may allow account holders to apply for loans, review account activity, pay bills electronically, receive statements electronically and print statements.

Third-Party Service Providers. To capitalize on the technical capabilities of selected vendors, the company outsources certain bank operations and systems to third-party service providers, principally the following: data processing services, check imaging, loan processing, electronic bill payment and statement rendering; servicing of prepaid and debit card accounts; call center customer support, including institutional banking for overflow and after-hours support; access to automated teller machine (‘ATM’) networks; bank accounting and general ledger system; data warehousing services; and certain software development.

Sales and Marketing

Affinity Group Banking Relationships. The company’s sales and marketing efforts to existing and potential affinity group organizations and fintech companies are national in scope. The company uses a personal sales/targeted media advertising approach to market to these clients and business partners. Under the company’s direction, the affinity group organizations with which the company has relationships perform additional sales and marketing functions to the ultimate individual customers. The company’s marketing program to affinity group organizations consists of print and digital advertising; attending and creating presentations at trade shows and other events for targeted affinity organizations; and direct contact with potential affinity organizations by the company’s marketing staff, with relationship managers focusing on particular regional markets.

Investment Portfolio

As of December 31, 2023, the company’s investment securities portfolio included the U.S. government agency securities; asset-backed securities; tax-exempt obligations of states and political subdivisions; taxable obligations of states and political subdivisions; residential mortgage-backed securities; collateralized mortgage obligation securities; commercial mortgage-backed securities; and corporate debt securities.

Competition

For prepaid and debit accounts, the company’s largest source of funding and fee income, competitors include Pathward Financial and for SBLOC competitors include TriState Capital. For SBA loans, the company’s competitors include Live Oak Bank, and for leasing the company’s competitors include Enterprise. For REBL loans, competitors include companies such as Bridge Investment Group.

Regulation

The company is a Delaware corporation and a financial holding company registered with the Board of Governors of the Federal Reserve System (Federal Reserve). Both the company and the bank are subject to extensive regulation in connection with their respective activities and operations. The regulatory framework by which both the company and the bank are supervised and examined is complex and dynamic and is designed to protect customers of and depositors in insured depository institutions, the Deposit Insurance Fund (DIF), and the U.S. banking system.

In addition to regulation and supervision by the Federal Reserve Bank (FRB), the company is a reporting company under the Securities Exchange Act of 1934, as amended (Exchange Act), and is required to file reports with the Securities and Exchange Commission (SEC) and otherwise comply with federal securities laws.

The bank is a nationally chartered and federally insured commercial bank supervised and examined by the Office of the Comptroller of the Currency (OCC) as its primary regulator, and the Federal Deposit Insurance Corporation (FDIC), the federal agency that administers the Deposit Insurance Fund (DIF). The bank’s deposits are insured to the maximum extent permitted by the Deposit Insurance Fund. The bank’s authority to engage in transactions with related parties or ‘affiliates’ (that is, any entity that controls, is controlled by or is under common control with an institution, including the company and its non-bank subsidiaries) is limited by Sections 23A and 23B of the Federal Reserve Act (FRA) and Regulation W promulgated thereunder.

The bank’s authority to extend credit to its directors, executive officers and 10% shareholders, as well as to entities controlled by such persons, is governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act (FRA) and Regulation O of the Federal Reserve. The bank Secrecy Act (BSA) requires the bank to implement a risk-based compliance program in order to protect the bank from being used as a conduit for financial or other illicit crimes, including but not limited to money laundering and terrorist financing.

Under the bank Secrecy Act (BSA) regulations, the bank is subject to various reporting requirements, such as currency transaction reporting, monitoring of customer activity and transactions and filing a suspicious activity report when warranted.

The bank is subject to numerous federal consumer protection laws related to its lending activities, including but not limited to, the Truth in Lending Act, governing disclosures of credit terms to consumer borrowers; the Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves; the Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit; the Fair Credit Reporting Act of 1978, as amended by the Fair and Accurate Credit Transactions Act, governing the use and provision of information to credit reporting agencies, certain identity theft protections and certain credit and other disclosures; the Fair Debt Collection Practices Act, governing the manner in which consumer debts may be collected by collection agencies; the Home Ownership and Equity Protection Act prohibiting unfair, abusive or deceptive home mortgage lending practices, restricting mortgage lending activities and providing advertising and mortgage disclosure standards; the Service Members Civil Relief Act, postponing or suspending some civil obligations of service members during periods of transition, deployment and other times; and the rules and regulations of the various federal agencies charged with the responsibility of implementing these federal laws.

Deposit-related activities of the bank are subject to various consumer protection laws, including but not limited to, the Truth in Savings Act, which imposes disclosure obligations to enable consumers to make informed decisions about accounts at depository institutions; the Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; the Expedited Funds Availability Act, which establishes standards related to when financial institutions must make various deposit items available for withdrawal, and requires depository institutions to disclose their availability policies to their depositors; the Electronic Fund Transfer Act, which governs electronic fund transfers to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machine and other electronic banking services, as well as the process for reporting and investigating errors; and the rules and regulations of various federal agencies charged with the responsibility of implementing these federal laws.

The bank operates its Community Reinvestment Act (CRA) program under an FDIC-approved CRA Strategic Plan and was assigned an ‘Outstanding’ CRA rating.

History

The Bancorp, Inc., a Delaware corporation, was founded in 1999. The company was incorporated in 1999.