Bancorp Inc
For the period ended Jun 30, 2024. Filed Aug 9, 2024.
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A company's report for each of its first three quarters. The financial statements are not audited. It shows how the business has moved since the last annual report, and what management says changed.
Jun 30, 2024 · Filed Aug 9, 2024
TBBK$48.25+1.1%Stored close · as of Nov 6, 2026
What changed in Management’s Discussion and Analysis?
Read the current filingPrevious report: 10-Q
Period ended 2024-03-31; filed 2024-05-10.
0001562762-24-000140
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsCurrent report: 10-Q
Period ended 2024-06-30; filed 2024-08-09.
0001562762-24-000203
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsThe baseline is this issuer’s latest earlier reporting period of the same form that was filed before the current report. A previous 10-Q is a different quarter, not a year-over-year comparison. Amendments are excluded.
Compared 216 previous paragraphs and 260 current paragraphs.
119 unchanged; 86 reworded; 46 added; 11 removed; 0 previous and 9 current paragraphs rearranged.
Tables are not compared: 33 previous and 36 current tables excluded. Dates, whitespace, punctuation and numbering changes are ignored; changes to financial figures remain significant.
A changed paragraph is not evidence that risk increased or decreased. An unchanged paragraph does not establish that risk stayed the same.
Added paragraphs (46)
Current report
our entry into consumer fintech lending and its future potential impact on our operations and financial condition;
Current report
In the second quarter of 2024, the Company’s common stock repurchases amounted to $100.0 million. Shares outstanding at June 30, 2024 amounted to 49.3 million compared to 53.2 million at December 31, 2023, a reduction of 7.4%.
Current report
The Company entered into a purchase and sale agreement for an apartment property acquired by The Bancorp Bank through foreclosure in connection with a real estate bridge lending (“REBL”) loan. At June 30, 2024, the related $39.4 million balance, comprised the majority of our other real estate owned (“OREO”). The purchaser made an earnest money deposit of $125,000 in July 2024, 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, it is expected that earnest money deposits would accrue to the Company.
Current report
beginning in 2024, consumer fintech lending.
Current report
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 $70.1 million of such loans at June 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.
Current report
Comparison of second quarter 2024 to second quarter 2023
Current report
Our net interest income for the second quarter of 2024 increased $6.6 million, or 7.6%, to $93.8 million from $87.2 million in the second quarter of 2023. Our interest income for the second quarter of 2024 increased to $137.3 million, an increase of $11.0 million, or 8.7%, from $126.3 million for the second quarter of 2023. The increase in interest income reflected an increase in loan yields resulting from the aforementioned Federal Reserve rate increases, and loan growth as our average loans and leases increased to $5.75 billion for the second quarter of 2024 from $5.73 billion for the second quarter of 2023, an increase of $20.0 million, or 0.3%. Related interest income increased $7.7 million on a tax equivalent basis. SBLOC and IBLOC balances at June 30, 2024 grew slightly compared to the prior quarter end, but were lower than the comparable prior year total. At June 30, 2024, the respective balances of SBLOC and IBLOC loans were $975.3 million and $582.8 million, respectively, compared to$1.08 billion and $806.1 million at June 30, 2023. Loans in other categories with higher yields more than offset the SBLOC and IBLOC decreases, which also contributed to the higher net interest income.
Current report
Our net interest margin (calculated by dividing net interest income by average interest-earning assets) for the second quarter of 2024 was 4.97% compared to 4.83% for the second quarter of 2023, an increase of 14 basis points. While the yield on interest-earning assets increased 27 basis points, the cost of deposits and interest-bearing liabilities increased 13 basis points, or a net change of 14 basis points. Average interest-earning deposits at the Federal Reserve Bank decreased $359.2 million, or 51.2%, to $341.9 million in the second quarter of 2024 from $701.1 million in the second quarter of 2023. In the second quarter of 2024, the average yield on our loans increased to 8.00% from 7.49% for the second quarter of 2023, an increase of 51 basis points. Yields on taxable investment securities in the second quarter of 2024 decreased to 4.82% compared to 5.08% for the second quarter of 2023, a decrease of 26 basis points. The decrease in investment securities yields reflected the $1.3 million impact of placing a security in nonaccrual status as described in “Note 6. Loans” to the unaudited consolidated financial statements herein.
Current report
For the second quarter of 2024, average interest-earning assets increased to $7.55 billion, an increase of $336.8 million, or 4.7%, from $7.22 billion in the second quarter of 2023. The increase reflected decreased average interest-earning deposits at the Federal Reserve Bank of $359.2 million, the impact of which was more than offset by increased average balances of loans and leases of $20.0 million, or 0.3%, and increased average investment securities of $676.0 million, or 86.5%. 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 $257.6 million, or 4.0%. The interest expense shown for demand and interest checking is primarily comprised of interest paid to our affinity groups.
Current report
Leasing related income decreased $82,000, or 5.4%, to $1.4 million for the second quarter of 2024 from $1.5 million for the second quarter of 2023.
Current report
Consumer fintech fees amounted to $140,000 for the second quarter of 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.
Current report
Other non-interest income decreased $403,000, or 31.0%, to $895,000 for the second quarter of 2024 from $1.3 million in the second quarter of 2023 which reflected higher prepayment fees on advisor financing loans.
Current report
Total non-interest expense was $51.4 million for the second quarter of 2024, an increase of $1.5 million, or 3.0%, compared to $49.9 million for the second quarter of 2023. A 2.1%, increase in salaries and employee benefits expense reflected increases in payments related financial crimes and IT salary expense, which were partially offset by decreases in incentive compensation.
Current report
Audit expense decreased $98,000, or 23.5%, to $319,000 in the second quarter of 2024 from $417,000 in the second quarter of 2023.
Current report
FDIC insurance expense increased $397,000, or 84.1%, to $869,000 for the second quarter of 2024 from $472,000 in the second quarter of 2023, reflecting a reduction in the quarterly assessed rate in 2023.
Current report
Software expense increased $320,000, or 7.4%, to $4.6 million in the second quarter of 2024 from $4.3 million in the second 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.
Current report
Consulting expense decreased $80,000, or 12.5%, to $562,000 in the second quarter of 2024 from $642,000 in the second quarter of 2023. The decrease reflected a wire and ACH risk assessment conducted in 2023.
Current report
Other non-interest expense increased $157,000, or 3.5%, to $4.6 million in the second quarter of 2024 from $4.5 million in the second quarter of 2023. Decreases in multiple expense categories were more than offset by a $708,000 increase in other real estate owned expense and a $174,000 increase in travel. The $708,000 increase in other real estate owned 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.”
Current report
Net Income
Current report
Net income for the first six months of 2024 was $110.1 million, or $2.10 per diluted share, compared to $98.1 million, or $1.76 per diluted share, for the first six months of 2023. Income before income taxes was $146.7 million in the first six months of 2024 compared to $131.1 million in the first six months of 2023. Income increased between those respective periods primarily as a result of higher net interest income, which reflected the impact of Federal Reserve rate increases on the loan and securities portfolios while growth in higher yielding loan categories offset reductions in lower yielding SBLOC and IBLOC balances.
Current report
Net Interest Income
Current report
Average Daily Balances
Current report
Provision for Credit Losses
Current report
Non-Interest Income
Current report
Consumer fintech fees amounted to $140,000 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.
Current report
Other non-interest income decreased $35,000, or 2.2%, to $1.5 million for the first six months of 2024 from $1.6 million in the first six months of 2023.
Current report
Non-Interest Expense
Current report
Salaries and employee benefits expense increased to $64.1 million for the first six months of 2024, an increase of $1.2 million, or 1.9%, from $63.0 million for the first six months of 2023.
Current report
Depreciation and amortization expense increased $574,000, or 40.9%, to $2.0 million in the first six months of 2024 from $1.4 million in the first six months of 2023, reflecting the impact of the Sioux Falls, South Dakota relocation to new and expanded offices and a new expanded data center.
Current report
Rent and related occupancy cost increased $571,000, or 20.7%, to $3.3 million in the first six months of 2024 from $2.8 million in the first six months of 2023, reflecting the impact of the Sioux Falls, South Dakota relocation to new and expanded offices and a new expanded data center.
Current report
Data processing expense increased $125,000, or 4.6%, to $2.8 million in the first six months of 2024 from $2.7 million in the first six months of 2023, reflecting higher transaction volume.
Current report
Printing and supplies expense decreased $111,000, or 40.7%, to $162,000 in the first six months of 2024 from $273,000 in the first six months of 2023.
Current report
Audit expense decreased $131,000, or 16.2%, to $678,000 in the first six months of 2024 from $809,000 in the first six months of 2023.
Current report
Legal expense decreased $453,000, or 23.8%, to $1.5 million in the first six months of 2024 from $1.9 million in the first six 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.
Current report
Insurance expense increased $6,000, or 0.2%, to $2.6 million in the first six months of 2024 compared to $2.6 million in the first six months of 2023.
Current report
Telecom and IT network communications expense decreased $114,000, or 15.4%, to $625,000 in the first six months of 2024 from $739,000 in the first six months of 2023.
Current report
Other non-interest expense decreased $1.3 million, or 14.0%, to $8.2 million in the first six months of 2024 from $9.5 million in the first six months of 2023. In addition to lesser decreases in a number of other categories, the $1.3 million decrease reflected the following decreases: a. regulatory examination fees of $284,000 b. contributions of $247,000 and c. other operating taxes of $267,000. Those decreases more than offset an increase of $336,000 in other real estate owned expense, which reflected expenses on the $39.4 million apartment property transferred to OREO in the second quarter of 2024, as described in “Note 6. Loans.”
Current report
Income Taxes
Current report
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.
Current report
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 June 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 $1.8 million and servicer advances of $800,000. Thus, a total of $15.2 million is required for the Bank’s tranche to be repaid. The sole repayment source for the $15.2 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 $15.2 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 servicer’s efforts to resolve the New Jersey suburban office loan and stabilize the property have not been successful to date. Negotiations with the borrower continue, with no plan for immediate liquidation. The Missouri retail facility is held as real estate owned by the security’s trust and is also not yet stabilized. The special servicer has advised that it is planning to auction the property in the fourth quarter of 2024 based upon their conclusion that such auction represents the highest net present value option for disposition.
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Removed paragraphs (11)
Previous report
Subsequent to the quarter-end, the Company announced that it had increased its share repurchase authorization for the second quarter of 2024 from $50.0 million to $100.0 million.
Previous report
Non-performing assets increased during the quarter, primarily as a result of a REBL apartment building loan for $39.4 million, which compares to a September 2023 independent “as is” appraisal of $47.8 million, or an 82% “as is” loan to value ratio (“LTV”), with additional potential collateral value as rehabilitation progresses and units are re-leased at stabilized rental rates. The $2.1 billion apartment bridge lending portfolio has a weighted average origination date “as is” LTV of 70%, based on third-party appraisals. Further, the weighted average origination date “as stabilized” LTV, which measures the estimated value of the apartments after the rehabilitation is complete may provide even greater protection. In its real estate bridge lending portfolio, 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 rental rates stabilized for an extended period, before being refinanced at lower rates through U.S. Government
Previous report
Other non-interest income increased $368,000, or 131.4%, to $648,000 for the first quarter of 2024 from $280,000 in the first quarter of 2023 which reflected the impact of prior year insurance related refunds received in 2024.
Previous report
Audit expense decreased $33,000, or 8.4%, to $359,000 in the first quarter of 2024 from $392,000 in the first quarter of 2023.
Previous report
Other non-interest expense decreased $1.5 million, or 29.6%, to $3.5 million in the first quarter of 2024 from $5.0 million in the first quarter of 2023. The $1.5 million decrease primarily reflected the following decreases: a. regulatory examination fees of $280,000 b. OREO expense of $372,000 c. contributions of $218,000 and d. other operating taxes of $163,000.
Previous report
(5)Comprised of $28.7 million of loans sold that do not qualify for true sale accounting.
Previous report
(3)Theincrease in OREO reflected the addition of a $2.6 million hotel securing an SBA loan. Should a loss be realized on the sale of this property, we believe that any such loss will be offset by a 75% SBA Guarantee, consistent with other such reimbursements from the SBA.
Previous report
(1) For the period ended March 31, 2024, the “as is” weighted average LTV of the real estate bridge lending balances was less than 72.5%, and the “as stabilized” LTV was approximately 68% based upon recent appraisals. “As stabilized” LTVs reflect the third-party appraiser’s estimated value after the rehabilitation is complete. For the period ended December 31, 2023, the weighted average loan to value was less than 70%, based on recent "as is" appraised value. On each property reflected in the balances, apartment improvements and renovations continue, utilizing additional borrower capital. The balances for both periods were also classified as either special mention or substandard as of March 31, 2024.
Previous report
(1) For the period ended March 31, 2024, the “as is” weighted average LTV of the real estate bridge lending balances was less than 72.5%, and the “as stabilized” LTV was approximately 68% based upon recent appraisals. “As stabilized” LTVs reflect the third-party appraiser’s estimated value after the rehabilitation is complete. For the period ended December 31, 2023, the weighted average loan to value was less than 70%, based on recent "as is" appraised value. On each property reflected in the balances, apartment improvements and renovations continue, utilizing additional borrower capital. The balances for both periods were also classified as either special mention or substandard as of March 31, 2024.
Previous report
(1) For the period ended March 31, 2024, the “as is” weighted average LTV of the real estate bridge lending balances was less than 72.5%, and the “as stabilized” LTV was approximately 68% based upon recent appraisals. “As stabilized” LTVs reflect the third-party appraiser’s estimated value after the rehabilitation is complete. For the period ended December 31, 2023, the weighted average loan to value was less than 70%, based on recent "as is" appraised value. On each property reflected in the balances, apartment improvements and renovations continue, utilizing additional borrower capital. The balances for both periods were also classified as either special mention or substandard as of March 31, 2024.
Previous report
The following table provides information about credit deteriorated loans at March 31, 2024 and December 31, 2023 (in thousands):
Reworded paragraphs (86)
Previous wording
any significant increase in the level of the Bank’s deposits that are uninsured by the FDIC;
Current wording
any significant increase in the level of the Bank’s deposits that are uninsured by the FDIC, or are otherwise regulated, includingas a result of the implementation or adoption of pending regulatory change;
Previous wording
In April 2024, the Company began purchasing additional U.S. government-sponsored agency fixed rate commercial and residential mortgage securities of varying maturities to reduce its exposure to lower levels of net interest income should the Federal Reserve begin decreasing rates. Such purchases would also reduce the additional net interest income which would result should the Federal Reserve increase rates. In April 2024, the Company purchased approximately $900 million of such securities, with respective estimated weighted average yields and lives of approximately 5.11% and eight years. These purchases and fixed loan originations have significantly reduced net interest income exposure to Federal Reserve changes to interest rates. See “Asset and Liability Management” in this MD&A.
Current wording
In April 2024, the Company purchased U.S. government-sponsored agency fixed rate commercial and residential mortgage securities of varying maturities to reduce its exposure to lower levels of net interest income should the Federal Reserve begin decreasing rates. Such purchases will also reduce the additional net interest income which would result should the Federal Reserve increase rates. In April 2024, the Company purchased approximately $900 million of such securities, with respective estimated weighted average yields and lives of approximately 5.11% and eight years. These purchases and fixed loan originations have significantly reduced net interest income exposure to Federal Reserve changes to interest rates. See “Asset and Liability Management” in this MD&A.
Previous wording
Sponsored Entities or other lenders. The rehabilitation real estate lending portfolio consists primarily of workforce housing, which we consider to be working class apartments at more affordable rental rates. Related collateral values should accordingly be more stable than higher rent properties, even in stressed economies. While the macro-economic environment has challenged the multifamily bridge space, the stability of The Bancorp’s rehabilitation bridge loan portfolio is evidenced by the estimated values of collateral for loans that have been classified as substandard. Recent third-party appraisals of those loans reflect a weighted average “as is” LTV of 79% and an “as stabilized” LTV of 76%. Accordingly, even with a higher interest rate environment and other stresses, LTVs for these loans have been significantly sustained and continue to provide protection against potential loss. As part of the underwriting process, The Bancorp reviews borrowers’ previous rehabilitation experience in addition to overall financial wherewithal. These transactions also include significant borrower equity contributions with required performance metrics. Underwriting generally includes, but is not limited to, assessment of local market information relating to vacancy and rental rates, review of post-rehabilitation rental rate assumptions against geo-specific affordability indices, negative news and lien searches, visitations by bank personnel and/or designated engineers, and other information sources. Rehabilitation progress is monitored through ongoing draw requests and financial reporting covenants. This generally allows for early identification of potential issues, and expedited action to address on a timely basis. Operations and ongoing loan evaluations are overseen by multiple levels of management, in addition to the real estate bridge lending team’s experienced professional staff and third-party consultants utilized during the underwriting and asset management process. This oversight includes a separate loan committee specific to real estate bridge lending, which is comprised of seasoned and experienced lending professionals who do not directly report to anyone on the real estate bridge lending team. There is also a separate loan review department, a surveillance committee and additional staff which evaluate potential losses under the current expected credit losses methodology (“CECL”), all of which similarly do not report to anyone on the real estate bridge lending team.
Current wording
One of the accounting estimates as described in the notes to our financial statements, is the allowance for credit losses (“ACL”), which is sensitive to a variety of inherent portfolio and external factors. REBL may be one of the more sensitive portfolios to such factors. In the second quarter of 2024, REBL loans classified as either special mention or substandard increased to $176.4 million from $165.2 million at March 31, 2024. Each classified loan was evaluated for a potential increase in the ACL on the basis of third-party appraisals of related apartment building collateral. On the basis of “as is” and “as stabilized” loan to values (“LTV’s”), increases to the allowance for specific loans were not required. The respective weighted average “as is” and “as stabilized” LTVs were 81% and 69%, based upon third party appraisals, the majority of which have been performed in 2024. The current allowance for credit losses for REBL, is primarily based upon historical industry losses for multi-family loans, in the absence of significant historical losses within the Company’s REBL portfolio. However, as a result of increasing amounts of loans classified as special mention and substandard, the Company will evaluate potential related sensitivity of that factor for REBL. This evaluation is inherently subjective as it requires material estimates that may be susceptible to change as more information becomes available. As part of the underwriting process, The Bancorp reviews borrowers’ previous rehabilitation experience in addition to overall financial wherewithal. These transactions also include significant borrower equity contributions with required performance metrics. Underwriting generally includes, but is not limited to, assessment of local market information relating to vacancy and rental rates, review of post-rehabilitation rental rate assumptions against geo-specific affordability indices, negative news and lien searches, visitations by bank personnel and/or designated engineers, and other information sources. Rehabilitation progress is monitored through ongoing draw requests and financial reporting covenants. This generally allows for early identification of potential issues, and expedited action to address on a timely basis. Operations and ongoing loan evaluations are overseen by multiple levels of management, in addition to the real estate bridge lending team’s experienced professional staff and third-party consultants utilized during the underwriting and asset management process. This oversight includes a separate loan committee specific to real estate bridge lending, which is comprised of seasoned and experienced lending professionals who do not directly report to anyone on the real estate bridge lending team. There is also a separate loan review department, a surveillance committee and additional staff which evaluate potential losses under the current expected credit losses methodology (“CECL”), all of which similarly do not report to anyone on t…
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Previous wording
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 respectively collateralized by marketable securities and the cash value of life insurance, while SBA loans are either SBA 7(a) loans that come with significant government-related guarantees, or SBA 405 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 Bancorp’s risk profile is the substantial earnings impact of its payment businesses.
Current wording
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 respectively collateralized by marketable securities and the cash value of life insurance, 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 Bancorp’s risk profile is the substantial earnings impact of its payment businesses.
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SBLs, consisting primarily of SBA loans; and
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SBLs, consisting primarily of SBA loans;
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non-SBA commercial real estate bridge loans.
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non-SBA commercial real estate bridge loans; and
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The majority of our deposit accounts and non-interest income are generated in our payments business line (such business line, the “Fintech Solutions Group”), which consists of consumer deposit accounts accessed by prepaid or debit cards, issuing deposit accounts, ACH accounts, other payments such as rapid funds transfer and the collection of payments through credit card companies on behalf of merchants. The issuing deposit accounts are comprised of debit and prepaid card accounts that are generated by independent companies that market directly to end users. Our issuing 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 and consumer payment accounts and others. Our ACH accounts facilitate bill payments, and our collection services for payments made to merchants consist of those which must be settled through associations such as Visa or MasterCard. We also provide banking services to organizations with a pre-existing customer base tailored to support or complement the services provided by these organizations to their customers, known as “affinity group 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.
Current wording
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.
Previous wording
Our net income increased to$56.4 million for the first quarter of 2024, from $49.1 million for the first quarter of 2023, primarily reflecting an$8.6 million increase in net interest income, a $393,000 increase in non-interest income, and a $1.3 million decrease in non-interest expense. Higher rates on loans and securities resulted in increases in net interest income, which offset the impact of lower securities and SBLOC and IBLOC balances. Our cost of funds rose to 2.49% in the first quarter of 2024, driven primarily by contractual adjustments for payments balances to Federal Reserve rate increases. 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.
Current wording
Our net income increased to$53.7 million for the second quarter of 2024, from $49.0 million for the second quarter of 2023, primarily reflecting a$6.6 million increase in net interest income, a $1.4 million increase in non-interest income, and a $1.5 million increase in non-interest expense. Higher rates on loans resulted in increases in net interest income, which offset the impact of lower SBLOC and IBLOC balances. Our cost of funds rose to 2.50% in the second quarter of 2024, driven primarily by contractual adjustments for payments balances to Federal Reserve rate increases. 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.
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Prepaid, debit card and other payment fees, including ACH, are the largest drivers of non-interest income. Such fees for the first quarter of 2024 increased $1.8 million over the comparable 2023 period.
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Prepaid, debit card and other payment fees, including ACH, are the largest drivers of non-interest income. Such fees for the second quarter of 2024 increased $3.1 million over the comparable 2023 period.
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First quarter of 2024 non-interest expense decreased $1.3 million from the first quarter of 2023, reflecting the first quarter 2023 $1.0 million write-down on OREO that resulted from a pending sale of a movie theater property as described in Note E to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 10-K”). The property had previously been recorded at appraised value, which was adjusted to the proposed sales price in the first quarter of 2023. There was a $2.2 million provision for credit losses in the first quarter of 2024, compared to a provision for credit losses of $1.9 million in the first quarter of 2023.
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There was a $1.5 million provision for credit losses in the second quarter of 2024, compared to a provision for credit losses of $428,000 in the second quarter of 2023.
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In the first quarter 2024, return on assets and return on equity amounted to 2.97% and 27.95% (annualized), respectively, compared to 2.63% and 28.07% (annualized) in the first quarter of 2023.
Current wording
In the second quarter of 2024, return on assets and return on equity amounted to 2.77% and 27.10% (annualized), respectively, compared to 2.65% and 26.67% (annualized) in the second quarter of 2023. For the six-month period ended June 30, 2024, return on assets, and return on equity amounted to 2.86% and 27.95% (annualized), respectively, compared to 2.64% and 27.42% (annualized) for the six-month period ended June 30, 2023.
Previous wording
At March 31, 2024, the ratio of equity to assets was 10.32%, compared to 9.53% at March 31, 2023, reflecting an increase in equity capital from retained earnings, partially offset by share repurchases.
Current wording
At June 30, 2024, the ratio of equity to assets was 9.54%, compared to 9.93% at June 30, 2023, reflecting an increase in equity capital from retained earnings, partially offset by share repurchases.
Previous wording
Net interest margin was 5.15% in the first quarter of 2024, versus 4.67% in the first quarter of 2023, reflecting a $8.6 million increase in net interest income in the first quarter of 2024 compared to the first quarter of 2023.
Current wording
Net interest margin was 4.97% in the second quarter of 2024, versus 4.83% in the second quarter of 2023, reflecting a $6.6 million increase in net interest income in the second quarter of 2024 compared to the second quarter of 2023.
Previous wording
Increases in the above KPIs in 2024 reflected the impact of higher rates on loans and securities as a result of Federal Reserve rate increases, while the impact of loan growth in certain categories was more than offset by SBLOC and IBLOC payoffs. We believe that these payoffs reflected customer sensitivity to the increasing rate environment. As a result of the SBLOC and IBLOC payoffs, average loans and leases decreased to $5.72 billion in the first quarter of 2024 compared to $5.99 billion in the first quarter of 2023. The provision for credit losses was $2.2 million in the first quarter of 2024 compared to a provision for credit losses of $1.9 million in the first quarter of 2023. Non-interest expense decreases over the prior year were primarily driven mostly by the $1.0 million write-down on OREO that resulted from a pending sale of a movie theater property as described in Note E to the December 31, 2022 consolidated financial statements included in the 2022 10-K. The property had previously been recorded at appraised value, which was adjusted to the proposed sales price in the first quarter of 2023.
Current wording
Increases in the above KPIs in 2024 reflected the impact of higher rates on loans as a result of Federal Reserve rate increases, while the impact of loan growth in certain categories was significantly offset by SBLOC and IBLOC payoffs. We believe that these payoffs reflected customer sensitivity to the increasing rate environment. Average loans and leases increased to $5.75 billion in the second quarter of 2024 compared to $5.73 billion in the second quarter of 2023. The provision for credit losses was $1.5 million in the second quarter of 2024 compared to a provision for credit losses of $428,000 in the second quarter of 2023.
Previous wording
Net income for the first quarter of 2024 was $56.4 million, or $1.06 per diluted share, compared to $49.1 million, or $0.88 per diluted share, for the first quarter of 2023. Income before income taxes was $74.9 million in the first quarter of 2024 compared to $64.9 million in the first quarter of 2023. Income increased between those respective periods primarily as a result of higher net interest income, which was primarily driven by the impact of Federal Reserve rate increases on the loan and securities portfolios. Variable rate loans and securities comprise the majority of the Company’s earning assets, and while they reprice on a lagged basis, they adjust more fully than deposits to Federal Reserve rate changes.
Current wording
Net income for the second quarter of 2024 was $53.7 million, or $1.05 per diluted share, compared to $49.0 million, or $0.89 per diluted share, for the second quarter of 2023. Income before income taxes was $71.8 million in the second quarter of 2024 compared to $66.2 million in the second quarter of 2023. Income increased between those respective periods primarily as a result of higher net interest income, which reflected the impact of Federal Reserve rate increases on the loan portfolio.
Previous wording
Our provision for credit losses was $2.2 million for the first quarter of 2024 compared to a provision of $1.9 million for the first quarter of 2023. The ACL was $28.7 million, or 0.53% of total loans, at March 31, 2024, compared to $27.4 million, or 0.51% of total loans, at December 31, 2023. The higher ratio at March 31, 2024 reflected the impact of higher leasing net charge-offs, primarily in long haul and local trucking, transportation and related activities for which total exposure was approximately $39 million at March 31, 2024. We believe that our ACL is appropriate and supportable. For more information about our provision and ACL and our loss experience, see “Financial Condition – Allowance for Credit Losses,” “– Net Charge-offs,” and “– Non-performing Loans, Loans 90 days Delinquent and Still Accruing, OREO, Modified Loans and Troubled Debt Restructurings,” below and “Note 6. Loans” to the unaudited consolidated financial statements herein.
Current wording
Our provision for credit losses was $1.5 million for the second quarter of 2024 compared to a provision of $428,000 for the second quarter of 2023. The ACL was $28.6 million, or 0.51% of total loans, at June 30, 2024, compared to $27.4 million, or 0.51% of total loans, at December 31, 2023. The provision reflected continuing higher leasing net charge-offs, primarily in long haul and local trucking, transportation and related activities for which total exposure was approximately $34 million at June 30, 2024. We believe that our ACL is appropriate and supportable. For more information about our provision and ACL and our loss experience, see “Financial Condition – Allowance for Credit Losses,” “– Net Charge-offs,” and “– Non-performing Loans, Loans 90 days Delinquent and Still Accruing, OREO, Modified Loans and Troubled Debt Restructurings,” below and “Note 6. Loans” to the unaudited consolidated financial statements herein.
Previous wording
Net realized and unrealized gains on commercial loans, at fair value, decreased $629,000, or 36.5%, to $1.1 million for the first quarter of 2024 from $1.7 million for the first quarter of 2023. The runoff of the commercial loans, at fair value portfolio, reduced the volume of loan payoffs and the income recognized at the time of payoff.
Current wording
Net realized and unrealized gains on commercial loans, at fair value, decreased $1.4 million, or 73.8%, to $503,000 for the second quarter of 2024 from $1.9 million for the second quarter 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.
Previous wording
Salaries and employee benefits expense increased to $30.3 million for the first quarter of 2024, an increase of $495,000, or 1.7%, from $29.8 million for the first quarter of 2023.
Current wording
Salaries and employee benefits expense increased to $33.9 million for the second quarter of 2024, an increase of $696,000, or 2.1%, from $33.2 million for the second quarter of 2023.
Previous wording
Depreciation and amortization expense increased $228,000, or 31.6%, to $949,000 in the first quarter of 2024 from $721,000 in the first quarter of 2023, reflecting the impact of the Sioux Falls, South Dakota relocation to new and expanded offices and a new expanded data center.
Current wording
Depreciation and amortization expense increased $346,000, or 50.8%, to $1.0 million in the second quarter of 2024 from $681,000 in the second quarter of 2023, reflecting the impact of the Sioux Falls, South Dakota relocation to new and expanded offices and a new expanded data center.
Previous wording
Rent and related occupancy cost increased $246,000, or 17.6%, to $1.6 million in the first quarter of 2024 from $1.4 million in the first quarter of 2023, reflecting the impact of the Sioux Falls, South Dakota relocation to new and expanded offices and a new expanded data center.
Current wording
Rent and related occupancy cost increased $325,000, or 23.9%, to $1.7 million in the second quarter of 2024 from $1.4 million in the second quarter of 2023, reflecting the impact of the Sioux Falls, South Dakota relocation to new and expanded offices and a new expanded data center.
Previous wording
Data processing expense increased $100,000, or 7.6%, to $1.4 million in the first quarter of 2024 from $1.3 million in the first quarter of 2023, reflecting higher transaction volume.
Current wording
Data processing expense increased $25,000, or 1.8%, to $1.4 million in the second quarter of 2024 from $1.4 million in the second quarter of 2023, reflecting higher transaction volume.
Previous wording
Printing and supplies expense decreased $42,000, or 29.0%, to $103,000 in the first quarter of 2024 from $145,000 in the first quarter of 2023.
Current wording
Printing and supplies expense decreased $69,000, or 53.9%, to $59,000 in the second quarter of 2024 from $128,000 in the second quarter of 2023.
Previous wording
Legal expense decreased $137,000, or 14.3%, to $821,000 in the first quarter of 2024 from $958,000 in the first quarter of 2023, reflecting a reduction in legal fees related to a Civil Investigative Demand from the Consumer Financial Protection Bureau as described in Note O to the audited consolidated financial statements in the 2023 Form 10-K.
Current wording
Legal expense decreased $316,000, or 33.3%, to $633,000 in the second quarter of 2024 from $949,000 in the second quarter 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.
Previous wording
Insurance expense increased $32,000, or 2.5%, to $1.3 million in the first quarter of 2024 compared to $1.3 million in the first quarter of 2023.
Current wording
Insurance expense decreased $26,000, or 2.0%, to $1.3 million in the second quarter of 2024 compared to $1.3 million in the second quarter of 2023.
Previous wording
Telecom and IT network communications expense decreased $105,000, or 27.9%, to $271,000 in the first quarter of 2024 from $376,000 in the first quarter of 2023.
Current wording
Telecom and IT network communications expense decreased $9,000, or 2.5%, to $354,000 in the second quarter of 2024 from $363,000 in the second quarter of 2023.
Previous wording
Income tax expense was $18.5 million for the first quarter of 2024 compared to $15.8 million in the first quarter of 2023. The increase resulted primarily from an increase in income, substantially all of which is subject to income tax. A 24.7% effective tax rate in 2024 and a 24.3% effective tax rate in 2023 primarily reflected a 21% federal tax rate and the impact of various state income taxes.
Current wording
Income tax expense was $18.1 million for the second quarter of 2024 compared to $17.2 million in the second quarter of 2023. The increase resulted primarily from an increase in income, substantially all of which is subject to income tax. A 25.2% effective tax rate in 2024 and a 26.0% effective tax rate in 2023 primarily reflected a 21% federal tax rate and the impact of various state income taxes.
Previous wording
Comparison of first quarter 2024 to first quarter 2023
Current wording
Comparison of first six months 2024 to first six months 2023
Previous wording
Our net interest income for the first quarter of 2024 increased $8.6 million, or 10.0%, to $94.4 million from $85.8 million in the first quarter of 2023. Our interest income for the first quarter of 2024 increased to $135.8 million, an increase of $13.6 million, or 11.2%, from $122.2 million for the first quarter of 2023. The increase in interest income resulted primarily from an increase in loan and securities yields resulting from the aforementioned Federal Reserve rate increases, as our average loans and leases decreased to $5.72 billion for the first quarter of 2024 from $5.99 billion for the first quarter of 2023, a decrease of $268.5 million, or 4.5%. Related interest income increased $8.0 million on a tax equivalent basis. Net paydowns of SBLOC and IBLOC continued in first quarter 2024, which partially offset the impact of higher rates and loan growth in other categories. At March 31, 2024, the respective balances of SBLOC and IBLOC loans were $954.8 million and $595.6 million, respectively, compared to $1.13 billion and $921.3 million at March 31, 2023. Continuing decreases in these balances will result in lower interest income, to the extent they are not replaced by loan growth in other categories. Additionally, overall net interest income may be reduced from current levels should the Federal Reserve begin lowering interest rates. The balance of our commercial loans, at fair value also decreased as a result of non-SBA commercial real estate bridge loan repayments. In the third quarter of 2021, we resumed originating such loans, referred to as real estate bridge loans which are included in loans, net on the balance sheet and which are held at amortized cost.
Current wording
Our net interest income for the first six months of 2024 increased $15.2 million, or 8.8%, to $188.2 million from $173.0 million in the first six months of 2023. Our interest income for the first six months of 2024 increased to $273.1 million, an increase of $24.6 million, or 9.9%, from $248.5 million for the first six 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 decreased to $5.74 billion for the first six months of 2024 from $5.86 billion for the first six months of 2023, a decrease of $123.5 million, or 2.1%. Related interest income increased $15.7 million on a tax equivalent basis. Net paydowns of SBLOC and IBLOC continued in the first quarter of 2024, which partially offset the impact of higher rates and loan growth in other categories. At June 30, 2024, the respective balances of SBLOC and IBLOC loans were $975.3 million and $582.8 million, respectively, compared to$1.08 billion and $806.1 million at June 30, 2023. Loans in other categories with higher yields partially offset the SBLOC and IBLOC decreases, which also contributed to the higher net interest income.
Previous wording
Of the total $8.0 million increase in loan interest income on a tax equivalent basis, the largest increases were $7.2 million for all real estate bridge loans, $2.9 million for small business lending, $2.7 million for leasing and $1.3 million for investment advisor financing, while total SBLOC and IBLOC decreased $6.8 million. Our average investment securities of $736.5 million for the first quarter of 2024 decreased $40.9 million from $777.4 million for the first quarter of 2023. Related tax equivalent interest income increased $343,000, primarily reflecting an increase in yields. Higher yields on loans and securities reflected the continuing impact of Federal Reserve rate increases as variable rate loans and securities repriced to higher rates. 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.
Current wording
Of the total $15.7 million increase in loan interest income on a tax equivalent basis, the largest increases were $12.4 million for all real estate bridge loans, $6.3 million for small business lending, $5.3 million for leasing and $2.7 million for investment advisor financing, while total SBLOC and IBLOC decreased $12.1 million. Our average investment securities of $1.10 billion for the first six months of 2024 increased $317.5 million from $779.4 million for the first six months of 2023. Related tax equivalent interest income increased $8.0 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. 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.
Previous wording
Our net interest margin (calculated by dividing net interest income by average interest-earning assets) for the first quarter of 2024 was 5.15% compared to 4.67% for the first quarter of 2023, an increase of 48 basis points. While the yield on interest-earning assets increased 76 basis points, the cost of deposits and interest-bearing liabilities increased 34 basis points, or a net change of 42 basis points. The more pronounced increase in the net interest margin compared to the net change reflected the impact of higher rates on assets funded by equity. Average interest-earning deposits at the Federal Reserve Bank increased $294.0 million, or 50.7%, to $874.1 million in the first quarter of 2024 from $580.1 million in the first quarter of 2023. In the first quarter of 2024, the average yield on our loans increased to 7.99% from 7.10% for the first quarter of 2023, an increase of 89 basis points. Yields on taxable investment securities in the first quarter of 2024 increased to 5.25% compared to 4.81% for the first quarter of 2023, an increase of 44 basis points.
Current wording
Our net interest margin (calculated by dividing net interest income by average interest-earning assets) for the first six months of 2024 was 5.06% compared to 4.75% for the first six months of 2023, an increase of 31 basis points. While the yield on interest-earning assets increased 51 basis points, the cost of deposits and interest-bearing liabilities increased 24 basis points, or a net change of 27 basis points. The more pronounced increase in the net interest margin compared to the net change reflected the impact of higher rates on assets funded by equity. 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 $32.9 million, or 5.1%, to $608.0 million in the first six months of 2024 from $640.9 million in the first six months of 2023. In the first six months of 2024, the average yield on our loans increased to 7.99% from 7.29% for the first six months of 2023, an increase of 70 basis points. Yields on taxable investment securities in the first six months of 2024 increased to 4.96% compared to 4.94% for the first six months of 2023, an increase of 2 basis points.
Previous wording
For the first quarter of 2024, average interest-earning assets decreased to $7.33 billion, a decrease of $15.4 million, or 0.2%, from $7.35 billion in the first quarter of 2023. The decrease reflected increased average interest-earning deposits at the Federal Reserve Bank of $294.0 million, the impact of which was more than offset by decreased average balances of loans and leases of $268.5 million, or 4.5%, and decreased average investment securities of $40.9 million, or 5.3%. For those respective periods, average demand and interest checking deposits increased $47.0 million, or 0.7%. An $81.3 million decrease in average savings and money market balances reflected the sweeping of 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. The interest expense shown for demand and interest checking is primarily comprised of interest paid to our affinity groups.
Current wording
For the first six months of 2024, average interest-earning assets increased to $7.44 billion, an increase of $161.1 million, or 2.2%, from $7.28 billion in the first six months of 2023. The increase reflected decreased average interest-earning deposits at the Federal Reserve Bank of $32.9 million and decreased average balances of loans and leases of $123.5 million, or 2.1%, the impact of which was more than offset by increased average investment securities of $317.5 million, or 40.7%. For those respective periods, average demand and interest checking deposits increased $151.4 million, or 2.4%. The interest expense shown for demand and interest checking is primarily comprised of interest paid to our affinity groups.
Previous wording
Non-interest income was $29.4 million in the first quarter of 2024 compared to $29.0 million in the first quarter of 2023. The $393,000, or 1.4%, increase between those respective periods reflected an increase in prepaid, debit card and related fees. Prepaid, debit card and related fees increased $963,000, or 4.1%, to $24.3 million for the first quarter of 2024, compared to $23.3 million in the first quarter 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 $793,000, or 36.5%, to $3.0 million for the first quarter of 2024, compared to $2.2 million in the first quarter of 2023, reflecting an increase in rapid funds transfer volume.
Current wording
Non-interest income was $60.1 million in the first six months of 2024 compared to $58.3 million in the first six months of 2023. The $1.8 million, or 3.1%, increase between those respective periods reflected an increase in prepaid, debit card and related fees. Prepaid, debit card and related fees increased $3.5 million, or 7.8%, to $49.0 million for the first six months of 2024, compared to $45.5 million in the first six 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 $1.4 million, or 29.7%, to $6.0 million for the first six months of 2024, compared to $4.6 million in the first six months of 2023, reflecting an increase in rapid funds transfer volume.
Previous wording
Leasing related income decreased $1.1 million, or 74.0%, to $388,000 for the first quarter of 2024 from $1.5 million for the first quarter of 2023, reflecting $1.1 million of losses related to an auto auction company which ceased operations.
Current wording
Leasing related income decreased $1.2 million, or 39.5%, to $1.8 million for the first six months of 2024 from $3.0 million for the first six months of 2023, reflecting $1.1 million of losses related to an auto auction company which ceased operations.
Previous wording
Total non-interest expense was $46.7 million for the first quarter of 2024, a decrease of $1.3 million, or 2.7%, compared to $48.0 million for the first quarter of 2023. The decrease reflects a prior year$1.0 million write-down of OREO which resulted from a pending sale of a movie theater property as described in Note E to the consolidated financial statements included in the 2022 10-K. The property had previously been recorded at appraised value, which was adjusted to the proposed sales price in the first quarter of 2023. While salaries and employee benefits increased 1.7%, increases in the payments business and related financial crimes and in IT salary expense, were offset by decreases in incentive compensation.
Current wording
Total non-interest expense was $98.2 million for the first six months of 2024, an increase of $185,000, or 0.2%, compared to $98.0 million for the first six months of 2023. While salaries and employee benefits increased 1.9%, increases in the payments business and related financial crimes and in IT salary expense, were offset by decreases in incentive compensation.
Previous wording
FDIC insurance expense decreased $110,000, or 11.5%, to $845,000 for the first quarter of 2024 from $955,000 in the first quarter of 2023, reflecting a reduction in the assessed rate.
Current wording
FDIC insurance expense increased $287,000, or 20.1%, to $1.7 million for the first six months of 2024 from $1.4 million in the first six months of 2023, reflecting a reduction in the quarterly assessed rate in 2023.
Previous wording
Software expense increased $252,000, or 5.9%, to $4.5 million in the first quarter of 2024 from $4.2 million in the first quarter of 2023. The increase reflected higher expenditures for information technology infrastructure including leasing, cybersecurity and cloud computing, which more than offset decreases in financial crimes management related expense.
Current wording
Software expense increased $572,000, or 6.7%, to $9.1 million in the first six months of 2024 from $8.6 million in the first six 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.
Previous wording
Consulting expense increased $256,000, or 79.5%, to $578,000 in the first quarter of 2024 from $322,000 in the first quarter of 2023. The increase reflected expenses related to the Company’s ongoing efforts of documenting and optimizing operational controls.
Current wording
Consulting expense increased $176,000, or 18.3%, to $1.1 million in the first six months of 2024 from $964,000 in the first six months of 2023. The increase reflected expenses related to the Company’s ongoing efforts of documenting and optimizing operational controls.
Previous wording
Our primary source of funding has been deposits. Average total deposits decreased by $118.6 million, or 1.8%, to $6.50 billion for the first quarter of 2024 compared to the first quarter of 2023. The decrease reflected the planned exit of higher cost deposits. Federal Reserve average balances increased to $874.1 million in the first quarter of 2024 from $580.1 million in the first quarter of 2023. The increased reflected lower average balances of SBLOC and IBLOC loans. As a result of the approximate $900 million of securities purchases in April 2024 as discussed under “Asset and Liability Management” in this MD&A, we have increased the use of FHLB advances to partially fund such purchases, at least temporarily.
Current wording
Our primary source of funding has been deposits. Average total deposits increased by $239.6 million, or 3.7%, to $6.72 billion for the second quarter of 2024 compared to the second quarter of 2023. The increase reflected the planned exit of higher cost deposits. Federal Reserve average balances decreased to $341.9 million in the second quarter of 2024 from $701.1 million in the second 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 $92.4 million for second quarter 2024.
Previous wording
One source of contingent liquidity is available-for-sale securities, which amounted to $718.2 million at March 31, 2024, compared to $747.5 million at December 31, 2023. The $900 million of securities purchases noted above, will serve to increase these balances. The majority of these securities, including the $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 March 31, 2024, outstanding loans amounted to $5.46 billion, compared to $5.36 billion at the prior year end, an increase of $98.2 million representing a use of funds. Commercial loans, at fair value, decreased to $283.0 million from $332.8 million between those respective dates, a decrease of $49.8 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.
Current wording
One source of contingent liquidity is available-for-sale securities, which amounted to $1.58 billion at June 30, 2024, compared to $747.5 million at December 31, 2023, reflecting the aforementioned securities purchases. The majority 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 June 30, 2024, outstanding loans amounted to $5.61 billion, compared to $5.36 billion at the prior year end, an increase of $244.6 million representing a use of funds. Commercial loans, at fair value, decreased to $265.2 million from $332.8 million between those respective dates, a decrease of $67.6 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.
Previous wording
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. Of our total deposits of $6.89 billion as of March 31, 2024, $551.0 million were classified as brokered and an estimated $573.5 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.
Current wording
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 $7.16 billion as of June 30, 2024, $440.8 million were classified as brokered and an estimated $493.8 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.
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Current report — wording carried from elsewhere
Of the total $7.7 million increase in loan interest income on a tax equivalent basis, the largest increases were $5.2 million for all real estate bridge loans, $3.4 million for small business lending, $2.6 million for leasing and $1.3 million for investment advisor financing, while total SBLOC and IBLOC decreased $5.3 million. Our average investment securities of $1.46 billion for the second quarter of 2024 increased $676.0 million from $781.3 million for the second quarter of 2023. Related tax equivalent interest income increased $7.6 million, primarily reflecting an increase in balances. Higher yields on loans reflected the continuing impact of Federal Reserve rate increases as variable rate repriced to higher rates and the growth of loan categories with higher rates, while lower yielding SBLOC and IBLOC balances declined. 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. Our variable rate loans generally reprice monthly or quarterly, although some reprice over several years.
Current report — wording carried from elsewhere
Non-interest income was $30.7 million in the second quarter of 2024 compared to $29.3 million in the second quarter of 2023. The $1.4 million, or 4.7%, increase between those respective periods reflected an increase in prepaid, debit card and related fees. Prepaid, debit card and related fees increased $2.6 million, or 11.6%, to $24.8 million for the second quarter of 2024, compared to $22.2 million in the second 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 $571,000, or 23.5%, to $3.0 million for the second quarter of 2024, compared to $2.4 million in the second quarter of 2023, reflecting an increase in rapid funds transfer volume.
Current report — wording carried from elsewhere
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:
Current report — wording carried from elsewhere
Our provision for credit losses was $3.8 million for the first six months of 2024 compared to a provision of $2.6 million for the first six months of 2023. The ACL was $28.6 million, or 0.51% of total loans, at June 30, 2024, compared to $27.4 million, or 0.51% of total loans, at December 31, 2023. The provision reflected continuing higher leasing net charge-offs, primarily in long haul and local trucking, transportation and related activities for which total exposure was approximately $34 million at June 30, 2024. We believe that our ACL is appropriate and supportable. For more information about our provision and ACL and our loss experience, see “Financial Condition – Allowance for Credit Losses,” “– Net Charge-offs,” and “– Non-performing Loans, Loans 90 days Delinquent and Still Accruing, OREO, Modified Loans and Troubled Debt Restructurings,” below and “Note 6. Loans” to the unaudited consolidated financial statements herein.
Current report — wording carried from elsewhere
Net realized and unrealized gains on commercial loans, at fair value, decreased $2.0 million, or 56.1%, to $1.6 million for the first six months of 2024 from $3.6 million for the first six 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.
Current report — wording carried from elsewhere
The following table presents the principal categories of non-interest expense for the periods indicated:
Current report — wording carried from elsewhere
Changes in categories of non-interest expense were as follows:
Current report — wording carried from elsewhere
Income tax expense was $36.6 million for the first six months of 2024 compared to $33.0 million in the first six months of 2023. The increase resulted primarily from an increase in income, substantially all of which is subject to income tax. A 25.0% effective tax rate in 2024 and a 25.1% effective tax rate in 2023 primarily reflected a 21% federal tax rate and the impact of various state income taxes.
Current report — wording carried from elsewhere
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.