The Bancorp Profile
The Bancorp, Inc. operates as the bank holding company for The Bancorp Bank that provides various banking products and services.
The company’s specialty lending groups include institutional banking, real estate bridge lending, small business lending and commercial fleet leasing. Its institutional banking business line offers securities-backed lines of credit (SBLOC) and insurance policy cash value-backed lines of credit (IBLOC) through investment advisors. It also offers investment advisor financing to investment advisors. SBLOCs and IBLOCs are loans, which are generated through institutional banking affinity groups and are respectively collateralized by marketable securities and the cash value of insurance policies. SBLOCs and IBLOCs are typically offered in conjunction with brokerage accounts. Investment advisor loans are made to investment advisors for purposes of debt refinance, acquisition of another firm or internal succession.
The company offers commercial real estate bridge loans (REBL), the vast majority of which are collateralized by apartment buildings. The company also offers small business loans (SBL) which primarily include Small Business Administration (SBA) loans and vehicle fleet 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 its payments business, which consists of consumer deposit accounts accessed by bank-issued prepaid or debit cards, automated clearing house (ACH) accounts, the collection of card payments on behalf of merchants and other payments. The card-accessed deposit accounts include 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 its acquiring accounts provide clearing and settlement services for payments made to merchants which must be settled through associations, such as Visa or MasterCard.
The company also provides banking services to organizations with a pre-existing customer base tailored to support or complement the services provided by these organizations to their customers. These services include loan and deposit accounts for investment advisory companies through the company’s institutional banking department. The company provides these services under the name and through the facilities of each organization with whom it develops a relationship. It refers to this, generally, as affinity banking.
Lending Activities
The company focuses its lending activities upon its specialty lending segments, including SBLOC, IBLOC and investment advisor loans, direct lease financing and SBL loans.
Securities-Backed Lines of Credit (SBLOC), Insurance Policy Cash Value-Backed Lines of (Credit) IBLOC and Investment Advisor Financing: The company makes 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 it 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.
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. Its 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 it sells the leased asset and the stated termination value.
Small Business Loans (SBL) Loans: SBL, or small business loans, consist primarily of Small Business Administration (SBA) loans. The company participates in two ongoing loan programs established by the SBA: the 7a Loan Guarantee Program and the 504 Fixed Asset Financing Program. The 7a Loan Guarantee 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. 7a 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 have been pledged.
The 504 Fixed Asset Financing 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 loan may not be used for working capital, trading asset purchases or investment in rental real estate.
SBA 7a and 504 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.
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, it considers franchisee failure rates for the specific franchise concept.
In both 2020 and 2021, the company also participated in the Paycheck Protection Program, or ‘PPP’, which was a temporary program to provide COVID-19 pandemic relief to small businesses. PPP loans are fully guaranteed by the U.S. government and are expected to be repaid within one year of origination or less.
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 its 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 (apartments) but also include, retail, office and hotel real estate, and do not have recourse to the borrower (except for carve-outs, such as fraud) and, accordingly, 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 such loans, which it also plans to retain, and which are transitional commercial mortgage loans to improve and rehabilitate existing properties.
Deposit Products and Services
The company offers a range of deposit products and services deployed through its Fintech Solutions and Institutional Banking groups for the benefit of its affinity group clients and their customer bases. These include checking accounts; savings accounts; money market accounts; commercial accounts; and various types of prepaid and debit cards. The company also offers ACH bill payment and other payment services.
Fintech Solutions Group: Payments Products and Services
The company provides a variety of checking and savings accounts and other banking services to fintechs 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 capabilities, etc.
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 cards are offered to end users through its relationships with benefits administrators, third-party administrators, insurers, corporate incentive companies, rebate fulfillment organizations, payroll administrators, large retail chains, consumer service organizations and fintechs. The company’s cards are network-branded through its agreements with Visa, MasterCard, and Discover. The majority of fees that it 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. The company’s accounts are offered throughout the United States.
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. It 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. The company has designed products that enable 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 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 its website. This access may allow account holders to apply for loans, review account activity, pay bills electronically, receive statements electronically and print statements.
Call Centers: A third-party servicer provides call center operations that serve inbound customer support, including after hours and overflow support for certain lending businesses and general inquiries. The call center provides account holders or potential account holders with assistance accessing the bank’s products and services, and in resolving any related customer issues that may arise. Located in Manila, the Philippines, TELUS International operates 24 hours a day, seven days a week. Other call centers are utilized for various Fintech Solutions group affinity products.
Third-Party Service Providers: The company outsources certain bank operations and systems to third-party service providers, principally, including 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 networks; bank accounting and general ledger system; data warehousing services; and certain software development.
Strategy
The company’s principal strategies are to fund its 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 its services through private label banking; offer products through private label banking; and use its existing infrastructure as a platform for growth.
Investment Portfolio
As of December 31, 2022, 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.
Sales and Marketing
Affinity Group Banking Relationships: The company’s sales and marketing efforts to existing and potential affinity group organizations and fintechs 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 its marketing staff, with relationship managers focusing on particular regional markets.
Loan Administration and Business Development Offices: The company maintains offices to market and administer its leasing programs in Crofton, Maryland, Kent, Washington, Raritan, New Jersey, Logan, Utah, Norristown and Warminster, Pennsylvania, and Orlando, Florida. It maintains SBL loan offices in suburban Chicago (Westmont), Illinois and suburban Raleigh (Morrisville), North Carolina, primarily for SBA loans. The company maintains a loan administration office in New York, New York.
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.
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 and Goldman Sachs. For SBA loans, the company’s competitors include Live Oak Bank, and for leasing its competitors include Enterprise.
History
The Bancorp, Inc., a Delaware corporation, was incorporated in 1999.
