Bancorp Inc

Previous wording

We are a Delaware financial holding company and our primary, wholly-owned subsidiary is The Bancorp Bank, National Association, or the Bank. The vast majority of our revenue and income is currently generated through the Bank. We have four primary lines of specialty lending:

Current wording

We are a Delaware financial holding company and our primary, wholly-owned subsidiary is The Bancorp Bank, National Association. The vast majority of our revenue and income is currently generated through the Bank. In our continuing operations, we have five primary lines of specialty lending in our national specialty finance segment:

Previous wording

non-SBA commercial real estate bridge loans.

Current wording

non-SBA commercial real estate bridge loans; and

Previous wording

SBLOCs and IBLOCs are loans which are generated through affinity groups such as investment advisors and are respectively collateralized by marketable securities and the cash value of insurance policies. SBLOCs are typically offered in conjunction with brokerage accounts and are offered nationally. IBLOC loans are typically viewed as an alternative to standard policy loans from insurance companies and are utilized by our existing advisor base as well as insurance agents throughout the country. Investment advisor financing are loans made to investment advisors for purposes of debt refinance, acquisition of another investment firm or internal succession. Vehicle fleet and, to a lesser extent, other equipment leases are generated in a number of Atlantic Coast and other states and are collateralized primarily by vehicles. SBA loans are generated nationally and are collateralized by commercial properties and other types of collateral. Our non-SBA commercial real estate bridge loans, at fair value, are primarily collateralized by multi-family properties (apartment buildings), and to a lesser extent, by hotel and retail properties. These loans were originally generated for sale through securitizations. In 2020, we decided to retain these loans on our balance sheet as interest-earning assets and resumed originating such loans in the third quarter of 2021. These new originations are identified as real estate bridge loans and are held for investment in the loan portfolio. Prior originations originally intended for securitizations continue to be accounted for at fair value, and are included on the balance sheet in “Commercial loans, at fair value.”

Current wording

SBLOCs and IBLOCs are loans that are generated through affinity groups and are respectively collateralized by marketable securities and the cash value of insurance policies. SBLOCs are typically offered in conjunction with brokerage accounts and are offered nationally. IBLOC loans are typically viewed as an alternative to standard policy loans from insurance companies and are utilized by our existing advisor base as well as insurance agents throughout the country. Investment advisor financing are loans made to investment advisors for purposes of debt refinance, acquisition of another investment firm or internal succession. Vehicle fleet and, to a lesser extent, other equipment leases are generated in a number of Atlantic Coast and other states and are collateralized primarily by vehicles. SBA loans are generated nationally and are collateralized by commercial properties and other types of collateral. Our non-SBA commercial real estate bridge loans, at fair value, are primarily collateralized by multifamily properties (apartment buildings), and to a lesser extent, by hotel and retail properties. These loans were originally generated for sale through securitizations. In 2020, we decided to retain these loans on our balance sheet as interest-earning assets and resumed originating such loans in the third quarter of 2021. These new originations are identified as real estate bridge loans, consist of apartment building loans, and are held for investment in the loan portfolio. Prior originations originally intended for securitizations continue to be accounted for at fair value, and are included on the balance sheet in “Commercial loans, at fair value.”

Previous wording

Our Fintech Solutions Group generates the majority of our deposit accounts and non-interest income within our payments segment, which includes consumer and commercial deposit accounts accessed by prepaid or debit cards, corporate payments, ACH accounts, other payments such as rapid funds transfer and the collection of payments through credit card companies on behalf of merchants. These consumer and commercial deposits are generated by independent companies that market directly to end users. Our 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” 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.

Current wording

The majority of our deposits and non-interest income are generated in our fintech 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, 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. In 2024, we began offering loans through credit sponsorship with third parties, in our fintech segment.

Previous wording

In the past three years, we have continued to target loan niches which we believe have lower credit risk than certain other forms of lending. These include SBLOC and IBLOC; SBA loans, a significant portion of which are government guaranteed or must have loan-to-value ratios lower than other forms of lending; leasing to which we have access to underlying vehicles; and real estate bridge lending for apartment buildings in selected national regions. The majority of these loan categories are variable rate and in 2023, adjusted more fully to Federal Reserve rate increases than did our deposits, which are derived primarily from our payments businesses. Average loans and leases grew to $5.73 billion in 2023 from $5.67 billion in 2022.

Current wording

In the past three years, we have continued to target loan niches which we believe have lower credit risk than certain other forms of lending. These include SBLOC and IBLOC; SBA loans, a significant portion of which are government guaranteed or must have loan-to-value ratios lower than other forms of lending; leasing to which we have access to underlying vehicles; and real estate bridge lending for apartment buildings in selected national regions. Significant amounts of balances of these loans are variable rate and adjust more fully to Federal Reserve rate changes than do our deposits, which are derived primarily from our payments businesses. In 2024, we significantly increased our fixed rate investment portfolio to reduce exposure to lower rate environments. Average loans and leases grew to $5.93 billion in 2024 from $5.73 billion in 2023.

Previous wording

Increases in the above KPIs in 2023 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 offset by SBLOC and IBLOC payoffs. We believe that these payoffs reflected customer sensitivity to the increasing rate environment. Reflecting those higher rates, the net interest margin increased to 4.95% in 2023 from 3.55% in 2022 and return on assets and return on equity respectively amounted to 2.59% and 25.6%, compared to 1.81% and 19.3%. We attempt to manage increases in non-interest expense in conjunction with revenue increases, to achieve our budgetary projections. Increases in book value per common share and the equity to assets ratio primarily reflect earnings retention, net of the impact of share repurchases and changes in the value of available-for-sale securities.

Current wording

Increases in the return on average assets (‘ROA”) and return on average common equity (“ROE”) KPIs in 2024 reflected the impact of net loan growth and higher rates on loans as a result of Federal Reserve rate increases, prior to decreases which began in September 2024. The impact of loan growth in certain categories was offset by SBLOC and IBLOC payoffs, which we believe resulted from customer resistance to such higher rates. The net interest margin decreased to 4.85% in 2024 from 4.95% in 2023 and return on assets and return on equity respectively amounted to 2.71% and 27.24%, compared to 2.59% and 25.62%. ROA and ROE also reflected growth in ACH, card and other payment processing fees, prepaid, debit card and related fees and consumer credit fintech fees. Changes in book value per common share and the equity to assets ratio primarily reflect earnings retention, net of the impact of share repurchases and changes in the value of available-for-sale securities.

Previous wording

Our accounting and reporting policies conform with GAAP and general practices within the financial services industry. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates. We believe that the determination of (1) our allowance for credit losses on loans, leases and securities, (2) the fair value of financial instruments (loans and securities) and the level in which an instrument is placed within the valuation hierarchy, (3) the fair value of stock grants and (4) the realizability of deferred income taxes require estimates made in accordance with GAAP that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations.

Current wording

Our accounting and reporting policies conform with GAAP and general practices within the financial services industry. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates. We believe that the determination of our allowance for credit losses on loans, leases and securities requires estimates made in accordance with GAAP that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations.

Previous wording

Net interest income continued its upward trend in 2023, increasing $105.2 million to$354.1 million in 2023 from $248.8 millionin 2022. The increase reflected the impact of the higher interest rate environment on variable rate loans and securities, partially offset by the impact of lower balances for securities and SBLOCs and IBLOCs, and commercial loans, at fair value which are in runoff. At December 31, 2023, our total loans, including commercial loans, at fair value, amounted to $5.69 billion, a decrease of $382.1 million, or 6.3%, over the $6.08 billion balance at December 31, 2022, as the decreases in SBLOCs and IBLOCs and commercial loans, at fair value offset increases in other loan categories. Our investment securities available-for-sale decreased $18.5 million to $747.5 million from $766.0 million between those respective dates reflecting prepayments on mortgage-backed and other higher rate securities as a result of the lower rate environment. The provision for credit losses on loans increased $1.2 million to $8.3 million in 2023, reflecting higher leasing related provisions. Please see “Results of Operations-Provision for Credit Losses on Loans” below.

Current wording

Net interest income continued its upward trend in 2024, increasing $22.2 million to$376.2 million in 2024 from $354.1 millionin 2023. The increase reflected the impact of the higher interest rate environment on loans and growth in certain loan categories, partially offset by the impact of lower balances for SBLOCs and IBLOCs, and commercial loans, at fair value which are in runoff. At December 31, 2024, our total loans, including commercial loans, at fair value, amounted to $6.34 billion, an increase of $642.8 million, or 11.3%, over the $5.69 billion balance at December 31, 2023. Our investment securities available-for-sale increased $755.3 million to $1.50 billion from $747.5 million between those respective dates reflecting$900 million of fixed rate securities purchases in April, 2024. Those securities purchases were made to reduce exposure to lower rate environments. The provision for credit losses on non-consumer fintech loans increased $854,000 to $9.3 million in 2024, reflecting the $2.0 million impact of a new qualitative factor for classified REBL loans in the third quarter of 2024. The provision also reflected the impact of continuing higher leasing net charge-offs. Please see “Results of Operations-Provision for Credit Losses on Loans” below.

Previous wording

In 2023, total non-interest expense increased $21.5 million to $191.0 million compared to $169.5 million in 2022, reflectingan increase of $15.7 million in salaries expense which reflected higher numbers of staff.

Current wording

In 2024, total non-interest expense increased $12.2 million to $203.2 million compared to $191.0 million in 2023, reflectingan increase of $10.5 million in salaries expense which reflected increases in payments related financial crimes and IT salary expenseand incentive compensation expense, including stock compensation expense.

Previous wording

Net income was $192.3 million in 2023 compared to $130.2 million in 2022, while income before taxes was, respectively, $256.8 million and $177.9 million, an increase of $78.9 million. In 2023, net interest income grew by $105.2 million and non-interest income increased $6.4 million. The $105.2 million, or 42.3%, increasein 2023 net interest income over 2022 reflected theimpact of Federal Reserve rate increases on our variable rate loans and securities as they repriced more fully to such increases than did deposits. The $6.4 million increase in non-interest income reflecteda $9.8 million decrease in net realized and unrealized gains on commercial loans, primarily non-SBA commercial real estate loans, at fair value. The decrease reflected lower fees recognized at the time those loans are repaid, as a result of the run-off of that fair value portfolio.

Current wording

Net income was $217.5 million in 2024 compared to $192.3 million in 2023, while income before taxes was, respectively, $292.2 million and $256.8 million, an increase of $35.4 million. In 2024, net interest income grew by $22.2 million and non-interest income increased $34.4 million. The $22.2 million, or 6.3%, increasein 2024 net interest income over 2023 reflected theimpact of net loan growth and Federal Reserve rate increases. While the Federal Reserve began decreasing rates in September 2024, approximately $900 million of fixed rate securities purchases in April 2024, had significantly reduced related downward exposure to our net interest income resulting from our variable rate loan and securities portfolios. The $34.4 million increase in non-interest income reflected $19.6 million of consumer fintech loan credit enhancement income, which correlated to a like amount for provision for credit loss for consumer fintech loans, and an increase in prepaid, debit card and related fees. The increase also reflected increased ACH, card and other payment processing fees partially offset by a $1.0 million decrease in net realized and unrealized gains on commercial loans, primarily non-SBA commercial real estate loans, at fair value. That decrease reflected lower fees recognized at the time those loans are repaid, as a result of the run-off of that fair value portfolio.

Previous wording

Reflecting the above changes, net income amounted to $192.3 million in 2023 compared to $130.2 million in 2022, or earnings per diluted share of $3.49 compared to $2.27 in 2022.

Current wording

Reflecting the above changes, net income amounted to $217.5 million in 2024 compared to $192.3 million in 2023, or earnings per diluted share of $4.29 compared to $3.49 in 2023.

Previous wording

Our net interest income for 2023 increased to $354.1 million, an increase of $105.2 million, or 42.3%, from $248.8 million for 2022, reflecting a $201.2 million, or 65.3%, increase in interest income to $509.5 million from $308.3 million for 2022. The growth in interest income resulted primarily from increases in variable rate loan and securities yields as a result of Federal Reserve rate hikes.

Current wording

Our net interest income for 2024 increased to $376.2 million, an increase of $22.2 million, or 6.3%, from $354.1 million for 2023, reflecting a $42.1 million, or 8.3%, increase in interest income to $551.6 million from $509.5 million for 2023. The growth in interest income reflected net loan growth andincreases in yields as a result of Federal Reserve rate hikes, prior to reductions which began in September 2024.

Previous wording

Our average loans and leases increased 1.0% to $5.73 billion in 2023 from $5.67 billion for 2022. The increase in loans reflected growth in, SBA, direct lease financing, real estate bridge lending and investment advisor loans, partially offset by decreases in SBLOC and IBLOC loans. The balance of our commercial loans, at fair value also decreased primarily reflecting non-SBA commercial real estate loan payoffs of loans previously held for sale, but which continue to be accounted for at fair value. In the third quarter of 2021, we resumed originating such loans, referred to as real estate bridge loans which are accounted for as held for investment. Of the total $160.8 million increase in loan interest income on a tax equivalent basis, the largest increases were $46.4 million for SBLOC, IBLOC and investment advisor financing, $85.8 million for all real estate bridge loans, $11.3 million for leasing, and $16.5 million for SBA loans. Our average investment securities were $770.0 million for 2023 compared to $859.2 million for 2022, while related interest income increased $13.5 million on a tax equivalent basis primarily reflecting an increase in yields.

Current wording

Our average loans and leases increased 3.4% to $5.93 billion in 2024 from $5.73 billion for 2023. The increase in loans reflected growth in, SBA, direct lease financing, real estate bridge lending and investment advisor loans, partially offset by decreases in SBLOC and IBLOC loans. The balance of our commercial loans, at fair value also decreased primarily reflecting non-SBA commercial real estate loan payoffs of loans previously held for sale, but which continue to be accounted for at fair value. In the third quarter of 2021, we resumed originating such loans, referred to as real estate bridge loans which are accounted for as held for investment. Of the total $22.2 million increase in loan interest income on a tax equivalent basis, the largest increases were $13.1 million for all real estate bridge loans, $12.2 million for small business lending, $9.7 million for leasing and $5.3 million for investment advisor financing, while total SBLOC and IBLOC decreased $19.9 million. Our average investment securities were $1.33 billion for 2024 compared to $770.0 million for 2023, while related interest income increased $27.2 million on a tax equivalent basis primarily reflecting an increase in yields.

Previous wording

Our net interest margin (calculated by dividing net interest income by average interest-earning assets) for 2023 increased 140 basis points to 4.95% from 3.55% for 2022, as the increase in the yield on interest-earning assets was greater than the increase in the cost of funds. The average yield on our interest-earning assets increased to 7.13% from 4.40% for 2022, an increase of 273 basis points, while the cost of total deposits and interest-bearing liabilities increased to 2.38% for 2023 from 0.92% for 2022, an increase of 146 basis points. The net of the 273 basis point increase in asset yields less the 146 basis point increase in funding costs resulted in a spread of 127 basis points which was exceeded by the 140 basis point increase in net interest margin, reflecting the impact of earning assets funded by equity. The yield on loans in total increased to 7.62% from 4.86%, an increase of 276 basis points, while the yield ontaxable investment securities increased 211 basis points to 5.10% from 2.99%.

Current wording

Our net interest margin (calculated by dividing net interest income by average interest-earning assets) for 2024 decreased 10 basis points to 4.85% from 4.95% for 2023. The average yield on our interest-earning assets decreased to 7.11% from 7.13% for 2023, a decrease of 2 basis points, while the cost of total deposits and interest-bearing liabilities increased to 2.46% for 2024 from 2.38% for 2023, an increase of 8 basis points, or a net change of 10 basis points. The yield on loans in total increased to 7.74% from 7.62%, an increase of 12 basis points, while the yield ontaxable investment securities decreased 12 basis points to 4.98% from 5.10%.

Previous wording

In 2023, average demand and interest checking deposits amounted to $6.31 billion, compared to $5.67 billion in 2022, an increase of 11.2%, reflecting growth in debit, prepaid card account and other payments balances. The yield on those deposits increased to 2.30% in 2023 compared to 0.70% in 2022, reflecting the impact of Federal Reserve rate hikes on contractually based fees. Savings and money market balances averaged $78.1 million in 2023 compared to $510.4 million in 2022 with an average 3.66% rate in 2023 compared to 1.67% in 2022. The $432.3 million decrease in savings and money market between these respective periods 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.

Current wording

In 2024, average demand and interest checking deposits amounted to $6.88 billion, compared to $6.31 billion in 2023, an increase of 9.0%, reflecting growth in debit, prepaid card account and other payments balances. The yield on those deposits increased to 2.35% in 2024 compared to 2.30% in 2023, reflecting the impact of Federal Reserve rate hikes on contractually based fees. Savings and money market balances averaged $72.0 million in 2024 compared to $78.1 million in 2023 with an average 3.52% rate in 2024 compared to 3.66% in 2023. Lower savings and money market balances compared to prior periods 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.

Previous wording

In 2023 compared to 2022, average interest-earning assets increased to $7.15 billion, an increase of $135.3 million, or 1.9%. The increase reflected a $54.3 million, or 1.0%, increase in average loans and leases. The increase in average loans reflected decreases in SBLOC and IBLOC and commercial loans, at fair value which offset increases in small business, direct lease financing, real estate bridge lending and investment advisor financing. Average balances of investment securities decreased $89.2 million, or 10.4%, reflecting the repayment of securities and the deferral of purchases in favor of reinvestment in higher rate environments. In 2023, average demand and interest checking deposits amounted to $6.31 billion, compared to $5.67 billion in 2022, an increase of 11.2%, reflecting growth in debit and prepaid card account balances. Savings and money market balances were reduced in 2023, as we swept 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.

Current wording

In 2024 compared to 2023, average interest-earning assets increased to $7.76 billion, an increase of $608.9 million, or 8.5%. The increase reflected a $196.9 million, or 3.4%, increase in average loans and leases. The increase in average loans reflected decreases in SBLOC and IBLOC and commercial loans, at fair value which partially offset increases in small business, direct lease financing, real estate bridge lending and investment advisor financing. Average balances of investment securities increased $564.7 million, or 73.3%, reflecting$900 million of securities purchases in April, 2024.

Previous wording

Our provision for credit losses on loans was $8.3 million for 2023 and $7.1 million for 2022. Provisions are based on our evaluation of the adequacy of our ACL, particularly in light of the estimated impact of charge-offs and the potential impact of current economic conditions which might impact our borrowers. The increased provision in 2023 over 2022 reflected higher provisions for leasing, including the impact of higher leasing charge-offs. For additional related information see “Note E—Loans”to the audited consolidated financial statements herein. At December 31, 2023, our ACL amounted to $27.4 million, or 0.51%, of total loans. We believe that our allowance is appropriate and supportable in providing for current and future expected losses, consistent with CECL guidance. For more information about our provision and ACL and our loss experience see“—Financial Condition—Allowance for Credit Losses” and“—Summary of Loan and Lease Loss Experience,” below.

Current wording

Our provision for credit losses onnon-consumer fintech loans was $9.3 million for 2024 and $8.5 million for 2023. Provisions are based on our evaluation of the adequacy of our ACL, particularly in light of the estimated impact of charge-offs and the potential impact of current economic conditions which might impact our borrowers. The increased provision in 2024 over 2023 reflected a new qualitative factor for classified REBL loans, which resulted in a $2.0 million increase in the provision in the third quarter of 2024. The provision in both years also reflected the impact of continuing higher leasing net charge-offs, especially in long haul and local trucking, transportation and related activities for which total exposure was approximately $32 million at December 31, 2024. For additional related information see “Note E—Loans”to the audited consolidated financial statements herein. At December 31, 2024, our ACL amounted to $31.9 million, or 0.52%, of total loans. We believe that our allowance is appropriate and supportable in providing for current and future expected losses, consistent with CECL guidance. For more information about our provision and ACL and our loss experience see“—Financial Condition—Allowance for Credit Losses” and“—Summary of Loan and Lease Loss Experience,” below.

Previous wording

The Bank owns one trust preferred security, which it purchased in 2006, and which has a par value of $10.0 million, and owns no other such security or similar security. The security was issued by an aggregator of insurance lines in run-off, including workmen’s compensation lines. In the third quarter of 2023, the Bank was notified that interest payments were being deferred on the security, as permitted under the terms of the trust preferred indenture which permits such deferrals for up to twenty consecutive quarters. At the end of the deferral, deferred interest must be repaid, including interest on the deferred interest. The Bank placed the security in non-accrual status and continued previous efforts to obtain financial information from the issuer, which is not required to provide such information under the terms of the related indenture. Limited financial and other information finally distributed to holders in the fourth quarter of 2023, did not provide a substantial basis for repayment. Accordingly, the Bank provided for a potential loss for the full amount of the $10.0 million par value of the security through a provision of $10.0 million. The security had previously been valued at $6.3 million through adjustments to equity. While the security has previously been subject to interest deferral which was repaid, there can be no assurance that repayment will occur for the current deferral.

Current wording

The Bank owns one trust preferred security, which it purchased in 2006, and which has a par value of $10.0 million, and owns no other such security or similar security. The security was issued by an aggregator of insurance lines in run-off, including workmen’s compensation lines. In the third quarter of 2023, the Bank was notified that interest payments were being deferred on the security, as permitted under the terms of the trust preferred indenture which permits such deferrals for up to twenty consecutive quarters. At the end of the deferral, deferred interest must be repaid, including interest on the deferred interest. The Bank placed the security in non-accrual status and continued previous efforts to obtain financial information from the issuer, which is not required to provide such information under the terms of the related indenture. Limited financial and other information finally distributed to holders in the fourth quarter of 2023, did not provide a substantial basis for repayment. Accordingly, the Bank provided for a potential loss for the full amount of the $10.0 million par value of the security through a provision of $10.0 million. The security had previously been valued at $6.3 million through adjustments to equity. In the fourth quarter of 2024, the issuer tendered an offer to repurchase these securities which the Company accepted. Accordingly, $1.0 million was recovered which resulted in a reversal of the provision for credit loss in that amount, and a charge-off of the remaining $9.0 million of the security.

Previous wording

Non-interest income was $112.1 million for 2023 compared to $105.7 million for 2022. The $6.4 million, or 6.1%, increase between those respective periods reflecteda $12.2 million increase in prepaid, debit card and related fees, partially offset by a $9.8 million decrease in net realized and unrealized gains on commercial loans, at fair value, as a result of the runoff of that fair value portfolio. The $3.7 million net realized and unrealized gains on commercial loans, at fair value for 2023 was comprised of $7.0 million of non-SBA commercial real estate bridge loan repayment related income, partially offset by $3.1 million of fair value losses and $124,000 of hedge lossses. The $13.5 million net realized and unrealized gains on commercial loans, at fair value for 2022 was comprised of the $3.5 million adjustment described under “Provision for Credit Losses” in our Annual Report on Form 10-K for the year ended December 31, 2022, $15.1 million of non-SBAcommercial real estate bridge loan repayment related income and $964,000 of hedge gains, partially offset by $6.1 million of fair value losses. The $6.1 million reflected a $4.0 million third quarter 2022 charge on the only loan in the portfolio collateralized by a movie theater.

Current wording

Non-interest income was $146.5 million for 2024 compared to $112.1 million for 2023. The $34.4 million, or 30.7%, increase between those respective periods reflected$19.6 million of consumer fintech loan credit enhancement income which correlated to a like amount for provision for credit loss for consumer fintech loans, and an $8.0 million increase in prepaid, debit card and related fees. The increase also reflected increased ACH, card and other payment processing fees, partially offset by a $1.0 million decrease in net realized and unrealized gains on commercial loans, at fair value, as a result of the runoff of that fair value portfolio. The $2.7 million net realized and unrealized gains on commercial loans, at fair value for 2024 was comprised of $3.7 million of non-SBA commercial real estate bridge loan repayment related income, partially offset by $683,000 of fair value losses and $285,000 of hedge losses. The $3.7 million net realized and unrealized gains on commercial loans, at fair value for 2023 was comprised of $7.0 million of non-SBA commercial real estate bridge loan repayment related income, partially offset by $3.1 million of fair value losses and $124,000 of hedge losses.

Previous wording

Prepaid and debit card and related fees increased $12.2 million, or 15.8%, to $89.4 million for 2023 from $77.2 million for 2022. The increase reflected higher transaction volume from organic growth with existing partners and the impact of clients added within the past year. ACH, card and other payment processing fees increased $887,000, or 9.9%, to $9.8 million for 2023 compared to $8.9 million for 2022, reflecting an increase in rapid funds transfer volume.

Current wording

Prepaid and debit card and related fees increased $8.0 million, or 8.9%, to $97.4 million for 2024 from $89.4 million for 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 $4.8 million, or 48.6%, to $14.6 million for 2024 compared to $9.8 million for 2023, reflecting an increase in rapid funds transfer volume.

Previous wording

Salaries and employee benefits expense increased to $121.1 million, an increase of $15.7 million, or 14.9%, from $105.4 million for 2022.

Current wording

Salaries and employee benefits expense increased to $131.6 million, an increase of $10.5 million, or 8.7%, from $121.1 million for 2023.

Previous wording

Depreciation and amortization expense increased $172,000, or 5.9%, to $3.1 million in 2023 from $2.9 million in 2022, reflecting the impact of the Sioux Falls, South Dakota relocation to new and expanded offices.

Current wording

Depreciation expense increased $1.1 million, or 35.2%, to $4.2 million in 2024 from $3.1 million in 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 $787,000, or 15.2%, to $6.0 million in 2023 from $5.2 million in 2022, reflecting the impact of the Sioux Falls, South Dakota relocation to new and expanded offices.

Current wording

Rent and related occupancy cost increased $766,000, or 12.8%, to $6.7 million in 2024 from $6.0 million in 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 $475,000, or 9.6%, to $5.4 million in 2023 from $5.0 million in 2022, reflecting higher transaction volume.

Current wording

Data processing expense increased $219,000, or 4.0%, to $5.7 million in 2024 from $5.4 million in 2023, reflecting higher transaction volume.

Previous wording

Audit expense increased $94,000, or 6.2%, to $1.6 million in 2023 from $1.5 million in 2022.

Current wording

Audit expense decreased $136,000, or 8.4%, to $1.5 million in 2024 from $1.6 million in 2023.

Previous wording

Legal expense decreased $28,000, or 0.7%, to $3.9 million for 2023 from $3.9 million in 2022, reflecting decreased legal costs related to the SEC matters discussed in “Note O—Commitments and Contingencies” to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2022.

Current wording

Legal expense decreased $769,000, or 20.0%, to $3.1 million for 2024 from $3.9 million in 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

Software expense increased $1.1 million, or 7.0%, to $17.3 million in 2023 from $16.2 million in 2022. The increase reflected higher expenditures for information technology infrastructure including those to service the payments businesses.

Current wording

Software expense increased $564,000, or 3.3%, to $17.9 million in 2024 from $17.3 million in 2023. The increase reflected higher expenditures for information technology infrastructure including leasing, institutional banking, cybersecurity, cloud computing and enterprise risk, which more than offset decreased expenses related to financial crimes management.

Previous wording

Insurance expense increased $113,000, or 2.2%, to $5.1 million in 2023 from $5.0 million in 2022, reflecting higher rates, especially for cyber insurance.

Current wording

Insurance expense increased $56,000, or 1.1%, to $5.2 million in 2024 from $5.1 million in 2023.

Previous wording

Telecom and IT network communications expense decreased $141,000, or 9.7%, to $1.3 million in 2023 from $1.5 million in 2022.

Current wording

Telecom and IT network communications expense decreased $89,000, or 6.8%, to $1.2 million in 2024 from $1.3 million in 2023.

Previous wording

Income tax expense was $64.5 million and $47.7 million respectively, for 2023 and 2022. The effective tax rate was 25.1% in 2023 compared to 26.8% in 2022 and reflects a 21% federal tax rate and state taxes. The lower rate in 2023 reflected the impact of adjustments related to state taxes in multiple states, including those related to the relocation of the Bank’s corporate headquarters to South Dakota.

Current wording

Income tax expense was $74.6 million and $64.5 million respectively, for 2024 and 2023. The increase resulted primarily from an increase in income, substantially all of which is subject to income tax. The effective tax rate was 25.5% in 2024 compared to 25.1% in 2023 and reflects a 21% federal tax rate and state taxes. The lower rate in 2023 reflected the impact of adjustments related to state taxes in multiple states, including those related to the relocation of the Bank’s corporate headquarters to South Dakota.

Previous wording

Liquidity defines our ability to generate funds at a reasonable cost to support asset growth, meet deposit withdrawals, satisfy borrowing needs and otherwise operate on an ongoing basis. Maintaining an adequate level of liquidity depends on the institution’s ability to efficiently meet both expected and unexpected cash flows without adversely affecting daily operations or financial condition. Our liquidity management policy requirements include sustaining defined liquidity minimums, concentration monitoring and management, stress testing, contingency planning and related oversight. Based on our sources of funding and liquidity discussed below, we believe we have sufficient liquidity and capital resources available for our needs in the next 12 months and for the longer-term beyond 12 months. The adequacy of liquidity is supported by a. the historical stability and growth of its relationships which are further subject to multi-year contracts, b. access to contingent funding and c. the short terms and liquidity of significant amounts of our assets. We invest the funds we do not need for daily operations primarily in our interest-bearing account at the Federal Reserve.

Current wording

Liquidity defines our ability to generate funds at a reasonable cost to support asset growth, meet deposit withdrawals, satisfy borrowing needs and otherwise operate on an ongoing basis. Maintaining an adequate level of liquidity depends on the institution’s ability to efficiently meet both expected and unexpected cash flows without adversely affecting daily operations or financial condition. Our liquidity management policy requirements include sustaining defined liquidity minimums, concentration monitoring and management, stress testing, contingency planning and related oversight. Based on our sources of funding and liquidity discussed below, we believe we have sufficient liquidity and capital resources available for our needs in the next 12 months and for the longer-term beyond 12 months. The adequacy of liquidity is supported by (a) the historical stability and growth of its relationships which are further subject to multi-year contracts, (b) access to contingent funding and (c) the short terms and liquidity of significant amounts of our assets. We invest the funds we do not need for daily operations primarily in our interest-bearing account at the Federal Reserve. Interest-bearing balances at the FRB, maintained on an overnight basis, averaged $527.8 million for the fourth quarter of 2024, compared to the prior year fourth quarter average of $677.5 million.

Previous wording

Our primary source of funding has been deposits, comprised primarily of millions of small transaction-based consumer balances, the majority of which are FDIC-insured. We have multi-year, contractual relationships with affinity groups which sponsor such accounts and with whom we have had long-term relationships (see Item 1, “Business—Our Strategies”). Those long-term relationships comprise the majority of our deposits and in addition to related organic growth, we continue to add new affinity groups. We do not believe that the changes in our deposits in the past two years significantly impacted overall liquidity or cost of funds as a result of such long-term relationships and a history of stability, further managed through multi-year contracts. Average deposits in 2023 increased by $139.3 million, or 2.2%, to $6.41 billion compared to$6.27 billion in 2022. Average savings and money market account balances decreased $432.3 million between those periods, reflecting 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. Additionally, $86.9 million of average time deposits were utilized in 2022 as loan growth exceeded deposit growth in other deposit categories. Overnight borrowings are also periodically utilized as a funding source to facilitate cash management, but average balances have generally not been significant.

Current wording

Our primary source of funding has been deposits, comprised primarily of millions of small transaction-based consumer balances, the majority of which are FDIC-insured. We have multi-year, contractual relationships with affinity groups which sponsor such accounts and with whom we have had long-term relationships (see Item 1, “Business—Our Strategies”). Those long-term relationships comprise the majority of our deposits and in addition to related organic growth, we continue to add new affinity groups. We do not believe that the changes in our deposits in the past two years significantly impacted overall liquidity or cost of funds as a result of such long-term relationships and a history of stability, further managed through multi-year contracts. Average deposits in 2024 increased by $540.0 million, or 8.4%, to $6.95 billion compared to$6.41 billion in 2023. Average savings and money market account balances decreased $6.1 million between those periods, reflecting 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. Overnight borrowings are also periodically utilized as a funding source to facilitate cash management.

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 brokered deposits 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 resulted in the majority of our deposits being reclassified from brokered to non-brokered. Of our total deposits of $6.68 billion as of December 31, 2023, $527.4 million were classified as brokered. Of our total deposits of $7.03 billion as of December 31, 2022, $953.9 million were classified as brokered. Those deposits fell under the brokered designation because they were obtained with the assistance of third parties. Certain of those balances classified as brokered, could be reclassified as non-brokered, based upon FDIC approval. Such approval requires an application similar to those which we submitted which resulted in the majority of our deposits to be reclassified from brokered to non-brokered.

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 were to be 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. On January 21, 2025, the FDIC announced that the proposed regulation would not be adopted. Of our total deposits of $7.75 billion as of December 31, 2024, $810.6 million were classified as brokered and an estimated $501.1 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.

Previous wording

Certain components of our deposits experience seasonality, creating greater excess liquidity at certain times. The largest deposit inflows have generally occurred in the first quarter of the year when certain of our accounts are credited with tax refund payments from the U.S. Treasury.

Current wording

Certain components of our deposits experience seasonality, creating excess liquidity at certain times. The largest deposit inflows have generally occurred in the first quarter of the year when certain of our accounts are credited with tax refund payments from the U.S. Treasury.

Previous wording

While consumer deposit accounts, including prepaid and debit card accounts, comprise the majority of our funding needs, we maintain secured borrowing lines with the FHLB and the Federal Reserve which are collateralized by certain of our loans. The amount of loans pledged against these lines varies and the collateral may be unpledged at any time to the extent remaining collateral value exceeds advances. Our collateralized line of credit with the Federal Reserve Bank had available accessible capacity of$1.95 billion as of December 31, 2023 and was collateralized by loans. We have also pledged in excess of $1.10 billion of multi-family loans to the FHLB. As a result, we have approximately $731.5 million of availability on that line of credit which we can also access at any time. As of December 31, 2023, we had no amount outstanding on the Federal Reserve line or on our FHLB line. We expect to continue to maintain our facilities with the FHLB and Federal Reserve, which, with the approximate $350 million of U.S. government agency securities, represent our most readily accessible liquidity sources. We actively monitor our positions and contingent funding sources daily. Included in our cash and cash-equivalents at December 31, 2023, were $1.03 billion of interest-earning deposits, which primarily consisted of deposits with the Federal Reserve. These amounts may vary on a daily basis.

Current wording

While consumer deposit accounts, including prepaid and debit card accounts, comprise the majority of our funding needs, we maintain secured borrowing lines with the FHLB and the Federal Reserve which are collateralized by certain of our loans. The amount of loans pledged against these lines varies and the collateral may be unpledged at any time to the extent remaining collateral value exceeds advances. Our collateralized line of credit with the Federal Reserve Bank had available accessible capacity of$1.99 billion as of December 31, 2024 and was collateralized by loans. We have also pledged in excess of $2.22 billion of multifamily loans to the FHLB. As a result, we have approximately $1.02 billion of availability on that line of credit which we can also access at any time. As of December 31, 2024, we had no amount outstanding on the Federal Reserve line or on our FHLB line. We expect to continue to maintain our facilities with the FHLB and Federal Reserve, which, with the approximate $1.0 billion of U.S. government agency securities, represent our most readily accessible liquidity sources. We actively monitor our positions and contingent funding sources daily. Included in our cash and cash-equivalents at December 31, 2024, were $564.1 million of interest-earning deposits, which primarily consisted of deposits with the Federal Reserve. These amounts may vary on a daily basis.

Previous wording

In 2023, $71.1 million of securities sales and repayments exceeded purchases of $49.0 million. In 2022, $161.1 million of securities sales and repayments exceeded purchases of $24.2 million. In 2021, $492.3 million of securities sales and repayments exceeded purchases of $259.1 million. In 2023, loan repayments exceeded disbursements. As shown in the consolidated statements of cash flows, cash required to fund loans was $1.68 billion in 2022 and $1.10 billion in 2021.

Current wording

In 2024, $242.7 million of securities redemptions were exceeded by purchases of $991.2 million. In 2023, $71.1 million of securities redemptions exceeded purchases of $49.0 million. In 2022, $161.1 million ofredemptions exceeded purchases of $24.2 million. As shown in the consolidated statements of cash flows, cash required to fund loans was $877.4 million in 2024 and $1.68 billion in 2022. In 2023, loan repayments exceeded disbursements.

Previous wording

At December 31, 2023, we had outstanding commitments to fund loans, including unused lines of credit, of $1.79 billion, the vast majority of which are SBLOC lines of credit which are variable rate. We attempt to increase such line usage; however, usage percentages have been historically consistent and the majority of these lines of credit have historically not been drawn. The recorded amount of such commitments has, for many accounts, been based on the full amount of collateral in a customer’s investment account. Accordingly, the funding requirements for such commitments occur on a measured basis over time and are expected to be funded by deposit growth. Additionally, these loans are “demand” loans and as such, represent a contingency source of funding.

Current wording

At December 31, 2024, we had outstanding commitments to fund loans, including unused lines of credit, of $1.98 billion, the vast majority of which are SBLOC lines of credit which are variable rate. We attempt to increase such line usage; however, usage percentages have been historically consistent and the majority of these lines of credit have historically not been drawn. The recorded amount of such commitments has, for many accounts, been based on the full amount of collateral in a customer’s investment account. Accordingly, the funding requirements for such commitments occur on a measured basis over time and are expected to be funded by deposit growth. Additionally, these loans are “demand” loans and as such, represent a contingency source of funding.

Previous wording

As a holding company conducting substantially all of our business through our subsidiaries, our near term needs for liquidity consist principally of cash needed to make required interest payments on oursubordinated debentures, consisting of $13.4 million of debentures bearing interest at Secured Overnight Financing Rate (“SOFR”) plus 3.51% and maturing in March 2038 (the “2038 Debentures”), and senior debt, consisting of $100.0 million senior notes with an interest rate of 4.75% and maturing in August 2025 (the “2025 Senior Notes”). Semi-annual interest payments on the 2025 Senior Notes are approximately $2.4 million, and quarterly interest payments on the 2038 Debentures are approximately $300,000. As of December 31, 2023, we had cash reserves of approximately $8.9 million at the holding company. In the fourth quarter of 2022, the Bank began paying dividends to the holding company to pay interest on these obligations and to fund ongoing common stock repurchases. Stock repurchases are discretionary and may be terminated at any time. To the extent that planned repurchases of $50.0 million per quarter in 2024 continue, they will likely continue to be funded by dividends from the Bank to the holding company. The holding company’s sources of liquidity are primarily comprised of dividends paid to it by the Bank and the issuance of debt.

Current wording

As a holding company conducting substantially all of our business through our subsidiaries, our near term needs for liquidity consist principally of cash needed to make required interest payments on oursubordinated debentures, consisting of $13.4 million of debentures bearing interest at Secured Overnight Financing Rate (“SOFR”) plus 3.51% and maturing in March 2038 (the “2038 Debentures”), and senior debt, consisting of $100.0 million senior notes with an interest rate of 4.75% and maturing in August 2025 (the “2025 Senior Notes”). Semi-annual interest payments on the 2025 Senior Notes are approximately $2.4 million, and quarterly interest payments on the 2038 Debentures are approximately $300,000. We may repay the notes with a dividend from the bank, or refinance the debt with a new debt offering. As of December 31, 2024, we had cash reserves of approximately $10.7 million at the holding company. In the fourth quarter of 2022, the Bank began paying dividends to the holding company to pay interest on these obligations and to fund ongoing common stock repurchases. Stock repurchases are discretionary and may be terminated at any time. To the extent that planned repurchases of $37.5 million per quarter in 2025 continue, they will likely continue to be funded by dividends from the Bank to the holding company. The holding company’s sources of liquidity are primarily comprised of dividends paid to it by the Bank and the issuance of debt.

Previous wording

The management of rate sensitive assets and liabilities is essential to controlling interest rate risk and optimizing interest margins. An interest rate sensitive asset or liability is one that, within a defined time period, either matures or experiences an interest rate change in line with general market rates. Interest rate sensitivity measures the relative volatility of an institution’s interest margin resulting from changes in market interest rates. While it is difficult to predict the impact of inflation and responsive Federal Reserve rate changes on our net interest income, the Federal Reserve has historically utilized interest rate increases in the overnight federal funds rate as one tool in fighting inflation. As a result of high rates of inflation, the Federal Reserve raised rates in each quarter of 2022 and in the first three quarters of 2023. Our largest funding source, prepaid and debit card accounts, contractually adjusts to only a portion of increases or decreases in rates which are largely determined by such Federal Reserve actions. That pricing has generally supported the maintenance of a balance sheet for which net interest income tends to increase with increases in rates. While deposits reprice to only a portion of rate increases, interest-earning assets tend to adjust more fully to rate increases at contractual pricing intervals which may be monthly or up to several years. The majority of our loans and securities are variable rate and generally reprice monthly or quarterly, although some reprice over several years. Additionally, the impact of loan interest rate floors which must be exceeded before rates on certain loans increase, may result in decreases in net interest income with lesser increases in rates. At December 31, 2023, all of the floors had been exceeded.

Current wording

The management of rate sensitive assets and liabilities is essential to controlling interest rate risk and optimizing interest margins. An interest rate sensitive asset or liability is one that, within a defined time period, either matures or experiences an interest rate change in line with general market rates. Interest rate sensitivity measures the relative volatility of an institution’s interest margin resulting from changes in market interest rates. While it is difficult to predict the impact of inflation and responsive Federal Reserve rate changes on our net interest income, the Federal Reserve has historically utilized interest rate increases in the overnight federal funds rate as one tool in fighting inflation. As a result of high rates of inflation, the Federal Reserve raised rates in each quarter of 2022 and in the first three quarters of 2023. In the third quarter of 2024 the Federal Reserve began lowering rates. Our largest funding source, prepaid and debit card accounts, contractually adjusts to only a portion of increases or decreases in rates which are largely determined by such Federal Reserve actions. While deposits reprice to only a portion of rate increases, interest-earning assets tend to adjust more fully to rate increases at contractual pricing intervals which may be monthly or up to several years. While significant amounts of our loans and securities are variable rate and reprice monthly, quarterly or over several years, we increased fixed rate loans and securities in 2024, to reduce exposure to lower interest rate environments. Additionally, the impact of loan interest rate floors which must be exceeded before rates on certain loans increase, may result in decreases in net interest income with lesser increases in rates. At December 31, 2024, all of the floors had been exceeded.

Previous wording

As a financial institution, potential interest rate volatility is a primary component of our market risk. Fluctuations in interest rates will ultimately impact the level of our earnings and the market value of our interest-earning assets, other than those with short-term maturities. We do not own any trading assets. We used hedging transactions only for fixed rate commercial loans previously originated for sale into secondary securities markets. We no longer originate loans for sale or securitization and no longer engage in new hedging transactions.

Current wording

As a financial institution, potential interest rate volatility is a primary component of our market risk. Fluctuations in interest rates will ultimately impact the level of our earnings and the market value of our interest-earning assets, other than those with short-term maturities. We do not own any trading assets nor do we engage in hedging transactions.