Bancorp, Inc.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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Item 2. Management’s Discussion and Analysisof Financial Condition and Results of Operations

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The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) provides information about the Company’s results of operations, financial condition, liquidity and asset quality. This information is intended to facilitate your understanding and assessment of significant changes and trends related to our financial condition and results of operations. This MD&A should be read in conjunction with our financial information in our Form 10-K for the fiscal year ended 2023 (the “2023 Form 10-K”) and the unaudited interim consolidated financial statements and notes thereto contained in this Quarterly Report on Form 10-Q.

Current wording

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) provides information about the Company’s results of operations, financial condition, liquidity and asset quality. This information is intended to facilitate your understanding and assessment of significant changes and trends related to our financial condition and results of operations. This MD&A should be read in conjunction with our financial information in our Form 10-K, as amended, for the fiscal year ended 2024 (the “2024 Form 10-K, as amended”) and the unaudited interim consolidated financial statements and notes thereto contained in this Quarterly Report on Form 10-Q.

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When used in this Quarterly Report on Form 10-Q, statements regarding The Bancorp’s business, that are not historical facts, are “forward-looking statements.” These statements may be identified by the use of forward-looking terminology, including, but not limited to the words “intend,” “may,” “believe,” “will,” “expect,” “look,” “anticipate,” “plan,” “estimate,” “continue,” or similar words. Forward-looking statements include but are not limited to, statements regarding our annual fiscal 2024 results, profitability, and increased volumes, and relate to our current assumptions, projections, and expectations about our business and future events, including current expectations about important economic, political, and technological factors, among other factors, and are subject to risks and uncertainties, which could cause the actual results, events, or achievements to differ materially from those set forth in or implied by the forward-looking statements and related assumptions. Factors that could cause results to differ from those expressed in the forward-looking statements also include, but are not limited to, the risks and uncertainties referenced or described in The Bancorp’s filings with the Securities and Exchange Commission, including the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023 and other documents that the Company files from time to time with the Securities and Exchange Commission as well as the following:

Current wording

When used in this Quarterly Report on Form 10-Q, statements regarding The Bancorp’s business, that are not historical facts, are “forward-looking statements.” These statements may be identified by the use of forward-looking terminology, including, but not limited to the words “intend,” “may,” “believe,” “will,” “expect,” “look,” “anticipate,” “plan,” “estimate,” “continue,” or similar words. Forward-looking statements include but are not limited to, statements regarding our annual fiscal 2025 results, profitability, and increased volumes, and relate to our current assumptions, projections, and expectations about our business and future events, including current expectations about important economic, political, and technological factors, among other factors, and are subject to risks and uncertainties, which could cause the actual results, events, or achievements to differ materially from those set forth in or implied by the forward-looking statements and related assumptions. Factors that could cause results to differ from those expressed in the forward-looking statements also include, but are not limited to, the risks and uncertainties referenced or described in The Bancorp’s filings with the Securities and Exchange Commission, including the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of the Company’s Annual Report on Form 10-K, as amended, for the fiscal year ended December 31, 2024 and other documents that the Company files from time to time with the Securities and Exchange Commission as well as the following:

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our entry into consumer fintech lending and its future potential impact on our operations and financial condition;

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our entry into consumer fintech lending and its future potential impact on our operations and financial condition may result in new operational, legal and financial risks;

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(2)In the first quarter of 2024, a $39.4 million apartment building rehabilitation bridge loan was transferred to nonaccrual status. On April 2, 2024, the same loan was transferred from nonaccrual status to OREO, and comprised the majority of our OREO at September 30, 2024, with a balance at that date of $40.3 million. We intend to continue to manage the capital improvements on the underlying apartment complex. As the units become available for lease, the property manager will be tasked with leasing these units at market rents. The $40.3 million balance compares to a September 2023 third party “as is” appraisal of $47.8 million, or an 84% “as is”LTV, with additional potential collateral value as construction progresses, and units are re-leased at stabilized rental rates. The Company entered into a purchase and sale agreement for that apartment property acquired by the Bank through foreclosure. The purchaser has made earnest money deposits of $375,000, with additional required deposits projected to total $500,000 prior to the December 31, 2024 closing deadline. The sales price is expected to cover the Company’s current OREO balance plus the forecasted cost of improvements to the property. There can be no assurance that the purchaser will consummate the sale of the property, but if not consummated, earnest money deposits are expected to accrue to the Company. The nonaccrual balances in this table as of September 30, 2024, are also reflected in the substandard loan totals.

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In the first quarter of 2024, a $39.4 million apartment building rehabilitation bridge loan was transferred to nonaccrual status. On April 2, 2024, the same loan was transferred from nonaccrual status to other real estate owned. We completed the majority of the capital improvements at the property and have agreed to a sale with a sales price that is expected to cover the current balance plus the forecasted cost of improvements to the property. The March 31, 2025, other real estate owned balance of $42.5 million compares to a September 2023 third-party "as is" appraisal of $47.8 million, or an 86% "as is" LTV, after considering $1.6 million of earnest money deposits in connection with the property’s sale in process. We received an additional earnest money deposit of $1.4 million on May 1, 2025, and the purchaser has made additional investments, including providing insurance coverage at the property. The closing date remains May 23, 2025, with an option for two additional, 30-day extensions in exchange for additional consideration of $1.0 million per extension. Any additional such earnest money deposits, in addition to the $3.0 million already received, should accrue to the benefit of the Company should the sale not close.

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SBLs, consisting primarily of SBA loans;

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SBLs, consisting primarily of SBA loans; and

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non-SBA commercial real estate bridge loans; and

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non-SBA commercial real estate bridge loans.

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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.

Current wording

The majority of our deposits and non-interest income are generated in our fintech segment, 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.

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Our net income increased to$51.5 million for the third quarter of 2024, from $50.1 million for the third quarter of 2023. Our cost of funds rose slightly to 2.54% in the third quarter of 2024 from 2.50% in the third quarter of 2023. See “Asset and Liability Management” in this MD&A for further discussion of how our funding sources and loans adjust to Federal Reserve rate changes.

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Our net income increased to$57.2 million for the first quarter of 2025, from $56.4 million for the first quarter of 2024. Our cost of funds decreased to 2.28% in the first quarter of 2025 from 2.49% in the first quarter of 2024. 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 third quarter of 2024 increased $3.7 million over the comparable 2023 period.

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Fintech fees are the largest drivers of non-interest income. Such fees for the first quarter of 2025 increased $7.2 million over the comparable 2024 period.

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In the third quarter of 2024, return on assets and return on equity amounted to 2.55% and 25.74% (annualized), respectively, compared to 2.71% and 26.12% (annualized) in the third quarter of 2023. For the nine-month period ended September 30, 2024, return on assets, and return on equity amounted to 2.76% and 26.61% (annualized), respectively, compared to 2.66% and 27.01% (annualized) for the nine-month period ended September 30, 2023.

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In the first quarter of 2025, return on assets and return on equity amounted to 2.49% and 28.64% (annualized), respectively, compared to 2.97% and 27.95% (annualized) in the first quarter of 2024.

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At September 30, 2024, the ratio of equity to assets was 10.07%, compared to 10.36% at September 30, 2023, reflecting an increase in equity capital from retained earnings and an increase in unrealized income on securities partially offset by share repurchases. The ratio fell slightly as a result of the increase in period end assets.

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At March 31, 2025, the ratio of equity to assets was 8.84%, compared to 10.32% at March 31, 2024, reflecting an increase in equity capital from retained earnings and an increase in unrealized income on securities partially offset by share repurchases. The ratio fell as a result of the increase in period end assets.

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Our accounting and reporting policies conform with GAAP and general practices within the financial services industry. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates. We view critical accounting estimates as those estimates made in accordance with GAAP that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations. Our critical accounting policies and estimates as of September 30, 2024, remain unchanged from those presented in the 2023 Form 10-K under Part II, Item 7.“Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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Our accounting and reporting policies conform with GAAP and general practices within the financial services industry. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates. We view critical accounting estimates as those estimates made in accordance with GAAP that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations. Our critical accounting policies and estimates as of March 31, 2025, remain unchanged from those presented in the 2024 Form 10-K, as amended, under Part II, Item 7.“Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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Comparison of first nine months 2024 to first nine months 2023

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Comparison of first quarter of 2025 to first quarter of 2024

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Net income for the third quarter of 2024 was $51.5 million, or $1.04 per diluted share, compared to $50.1 million, or $0.92 per diluted share, for the third quarter of 2023. Income before income taxes was $69.0 million in the third quarter of 2024 compared to $66.5 million in the third quarter of 2023. Income increased between those respective periods primarily as a result of higher net interest income, which resulted primarily from higher loan and investment securities balances and higher fintech related payment and credit fees.

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Net income for the first quarter of 2025 was $57.2 million, or $1.19 per diluted share, compared to $56.4 million, or $1.06 per diluted share, for the first quarter of 2024. Income before income taxes was $75.2 million in the first quarter of 2025 compared to $74.9 million in the first quarter of 2024.

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Our net interest income for the third quarter of 2024 increased $4.9 million, or 5.5%, to $93.7 million from $88.9 million in the third quarter of 2023. Our interest income for the third quarter of 2024 increased to $139.7 million, an increase of $10.7 million, or 8.3%, from $129.0 million for the third quarter of 2023. The increase in interest income resulted primarily from higher investment securities andloan balances as our average loans and leases increased to $6.02 billion for the third quarter of 2024 from $5.61 billion for the third quarter of 2023, an increase of $415.0 million, or 7.4%. Related interest income increased $5.9 million on a tax equivalent basis. SBLOC and IBLOC balances at September 30, 2024 were approximately 1% lower than those at June 30, 2024, after having shown larger decreases in prior periods. At September 30, 2024, the respective balances of SBLOC and IBLOC loans were $989.3 million and $554.0 million, respectively, compared to$1.01 billion and $712.6 million at September 30, 2023. Loans in other categories with higher yields more than offset the impact of the SBLOC and IBLOC decreases, which also contributed to the higher net interest income. Of the total $5.9 million increase in loan interest income on a tax equivalent basis, the largest increases were $2.2 million for all real estate bridge loans, $3.3 million for small business lending, $2.8 million for leasing and $1.3 million for investment advisor financing, while total SBLOC and IBLOC decreased $4.1 million.

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Our net interest income for the first quarter of 2025 decreased $2.7 million, or 2.8%, to $91.7 million from $94.4 million in the first quarter of 2024. Our interest income for the first quarter of 2025 increased to $139.8 million, an increase of $4.0 million, or 2.9%, from $135.8 million for the first quarter of 2024. The decrease in interest income reflected the impact of Federal Reserve rate decreases partially offset by higher investment securities andloan balances as our average loans and leases increased to $6.39 billion for the first quarter of 2025 from $5.72 billion for the first quarter of 2024, an increase of $664.5 million, or 11.6%. Related interest income decreased $5.3 million on a tax equivalent basis. Additionally, fees on the majority of growing consumer fintech loan balances are recorded as non-interest income, which impacts both net interest income and net interest margin. Of the total $5.3 million decrease in loan interest income on a tax equivalent basis, the largest decreases were $5.5 million for all real estate bridge loans, $3.8 million for SBLOC and IBLOC, while small business lending, investment advisor financing, and leasing increased $2.0 million, $894,000, and $773,000, respectively.

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Our average investment securities of $1.58 billion for the third quarter of 2024 increased $806.6 million from $771.4 million for the third quarter of 2023. Related tax equivalent interest income increased $10.1 million, primarily reflecting an increase in balances.

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Our average investment securities of $1.50 billion for the first quarter of 2025 increased $759.1 million from $736.5 million for the first quarter of 2024. Related tax equivalent interest income increased $8.5 million, primarily reflecting an increase in balances.

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Our net interest margin (calculated by dividing net interest income by average interest-earning assets) for the third quarter of 2024 was 4.78% compared to 5.07% for the third quarter of 2023, a decrease of 29 basis points. While the yield on interest-earning assets decreased 23 basis points, the cost of deposits and interest-bearing liabilities increased 4 basis points, or a net change of 27 basis points. Average interest-earning deposits at the Federal Reserve Bank decreased $392.6 million, or 61.3%, to $247.3 million in the third quarter of 2024 from $639.9 million in the third quarter of 2023, reflecting the impact of the purchase of approximately $900 million of securities in April 2024. In the third quarter of 2024, the average yield on our loans decreased to 7.73% from 7.89% for the third quarter of 2023, a decrease of 16 basis points. Yields on taxable investment securities in the third quarter of 2024 was 5.02% compared to 5.02% for the third quarter of 2023.

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Our net interest margin (calculated by dividing net interest income by average interest-earning assets) for the first quarter of 2025 was 4.07% compared to 5.15% for the first quarter of 2024, a decrease of 108 basis points. While the yield on interest-earning assets decreased 121 basis points, the cost of deposits and interest-bearing liabilities decreased 21 basis points, or a net change of 100 basis points. Average interest-earning deposits at the Federal Reserve Bank increased $262.3 million, or 30.0%, to $1.14 billion in the first quarter of 2025 from $874.1 million in the first quarter of 2024. In the first quarter of 2025, the average yield on our loans decreased to 6.82% from 7.99% for the first quarter of 2024, a decrease of 117 basis points. Yields on taxable investment securities in the first quarter of 2025 was 4.87% compared to 5.25% for the first quarter of 2024.

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For the first nine months of 2024, average interest-earning assets increased to $7.58 billion, an increase of $385.7 million, or 5.4%, from $7.19 billion in the first nine months of 2023. The increase reflected decreased average interest-earning deposits at the Federal Reserve Bank of $153.7 million, the impact of which was more than offset by increased average balances of loans and leases of $57.6 million, or 1.0%, and increased average investment securities of $481.8 million, or 62.0%. For those respective periods, average demand and interest checking deposits increased $341.0 million, or 5.4%. The interest expense shown for demand and interest checking is primarily comprised of interest paid to our affinity groups.

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For the first quarter of 2025, average interest-earning assets increased to $9.02 billion, an increase of $1.69 billion, or 23.0%, from $7.33 billion in the first quarter of 2024. The increase reflected increased average interest-earning deposits at the Federal Reserve Bank of $262.3 million, increased average balances of loans and leases of $664.5 million, or 11.6%, and increased average investment securities of $759.1 million, or 103.1%. For those respective periods, average demand and interest checking deposits increased $1.72 billion, or 26.7%. The interest expense shown for demand and interest checking is primarily comprised of interest paid to our affinity groups.

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Our provision for credit losses was $3.5 million for the third quarter of 2024 compared to a provision of $1.8 million for the third quarter of 2023. The ACL was $31.0 million, or 0.52% of total loans, at September 30, 2024, compared to $27.4 million, or 0.51% of total loans, at December 31, 2023. As a result of a new qualitative factor for classified REBL loans, the provision for credit losses was increased by $2.0 million in the third quarter of 2024. The provision also reflected the impact of continuing higher leasing net charge-offs, especiallyin long haul and local trucking, transportation and related activities for which total exposure was approximately $34 million at September 30, 2024. We believe that our ACL is appropriate and supportable. For more information about our provision and ACL and our loss experience, see “Item 2 – Allowance for Credit Losses,” “Item 2 – Net Charge-offs,” and “Item 2 – Non-accrual Loans, Loans 90 days Delinquent and Still Accruing, OREO and Modified Loans,” below and “Note 6. Loans” to the unaudited consolidated financial statements herein.

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Our provision for credit losses on non-consumer fintech loans was $874,000 for the first quarter of 2025 compared to a provision of $2.4 million for the first quarter of 2024. The ACL was $52.5 million, or 0.82% of total loans, at March 31, 2025, compared to $44.9 million, or 0.73% of total loans, at December 31, 2024. We believe that our ACL is appropriate and supportable. For more information about our provision and ACL and our loss experience, see “Item 2 – Allowance for Credit Losses,” “Item 2 – Net Charge-offs,” and “Item 2 – Non-accrual Loans, Loans 90 Days Delinquent and Still Accruing, OREO and Modified Loans,” below and “Note 6. Loans” to the unaudited consolidated financial statements herein.

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Non-interest income was $32.1 million in the third quarter of 2024 compared to $26.8 million in the third quarter of 2023. The $5.3 million, or 19.9%, increase between those respective periods reflected an increase in prepaid, debit card and related fees. The increase also reflected increased ACH, card and other payment processing fees. Prepaid, debit card and related fees increased $2.4 million, or 11.1%, to $23.9 million for the third quarter of 2024, compared to $21.5 million in the third quarter of 2023. The increase reflected higher transaction volume from new clients and organic growth from existing clients. ACH, card and other payment processing fees increased $1.3 million, or 52.4%, to $3.9 million for the third quarter of 2024, compared to $2.6 million in the third quarter of 2023, reflecting an increase in rapid funds transfer volume.

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Non-interest income was $83.6 million in the first quarter of 2025 compared to $29.4 million in the first quarter of 2024. The $54.3 million, or 184.7%, increase between those respective periods reflected$45.9 million of consumer fintech loan credit enhancement income which correlated to a like amount for provision for credit losses on 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. Prepaid, debit card and related fees increased $1.4 million, or 5.9%, to $25.7 million for the first quarter of 2025, compared to $24.3 million in the first quarter of 2024. The increase reflected higher transaction volume from new clients and organic growth from existing clients. ACH, card and other payment processing fees increased $2.2 million, or 73.1%, to $5.1 million for the first quarter of 2025, compared to $3.0 million in the first quarter of 2024, reflecting an increase in rapid funds transfer volume.

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Consumer credit fintech fees amounted to $1.6 million for the third quarter of 2024, as we began our entry into consumer fintech lending in the second quarter of 2024. Such lending may also be reflected in a lower cost of deposits, as a result of associated deposits.

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Consumer credit fintech fees amounted to $3.6 million for the first quarter of 2025. The impact of such lending may also be reflected in a lower cost of deposits, as a result of associated deposits.

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Net realized and unrealized gains on commercial loans, at fair value, increased $81,000, or 15.4%, to $606,000 for the third quarter of 2024 from $525,000 for the third quarter of 2023.

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Net realized and unrealized gains on commercial loans, at fair value, decreased $735,000, or 67.1%, to $361,000 for the first quarter of 2025 from $1.1 million for the first quarter of 2024, as related loan balances continue to paydown.

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Leasing related income decreased $1.9 million, or 39.4%, to $2.9 million for the first nine months of 2024 from $4.8 million for the first nine months of 2023, reflecting $1.1 million of losses related to an auto auction company which ceased operations.

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Leasing related income increased $1.6 million, or 408.2%, to $2.0 million for the first quarter of 2025 from $388,000 for the first quarter of 2024. First quarter 2024 reflected $1.1 million of losses related to an auto auction company which ceased operations.

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Other non-interest income increased $609,000, or 144.3%, to $1.0 million for the third quarter of 2024 from $422,000 in the third quarter of 2023 which reflected increased payoff fees on advisor financing loans.

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Other non-interest income increased $347,000, or 53.5%, to $995,000 for the first quarter of 2025 from $648,000 in the first quarter of 2024 which reflected increased payoff fees on advisor financing loans.

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Total non-interest expense was $53.3 million for the third quarter of 2024, an increase of $5.8 million, or 12.2%, compared to $47.5 million for the third quarter of 2023. An 11.0%, increase in salaries and employee benefits expense reflected increases in payments related financial crimes and IT salary expense and an increase in incentive compensation expenses.

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Total non-interest expense was $53.3 million for the first quarter of 2025, an increase of $6.6 million, or 14.1%, compared to $46.7 million for the first quarter of 2024. Of the $6.6 million increase, $3.4 million resulted from an increase in salaries and benefits expense.

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Data processing expense increased $4,000, or 0.3%, to $1.4 million in the third quarter of 2024 from $1.4 million in the third quarter of 2023, reflecting higher transaction volume.

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Data processing expense decreased $216,000, or 15.2%, to $1.2 million in the first quarter of 2025 from $1.4 million in the first quarter of 2024 reflecting the impact of newly effective contract terms.

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FDIC insurance expense increased $98,000, or 12.2%, to $904,000 for the third quarter of 2024 from $806,000 in the third quarter of 2023, reflecting increases in liabilities against which insurance rates are applied.

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FDIC insurance expense increased $208,000, or 24.6%, to $1.1 million for the first quarter of 2025 from $845,000 in the first quarter of 2024, reflecting increases in liabilities against which insurance rates are applied.

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Software expense increased $134,000, or 3.0%, to $4.6 million in the third quarter of 2024 from $4.4 million in the third quarter of 2023. The increase reflected higher expenditures for information technology infrastructure including leasing, institutional banking, cybersecurity, and enterprise risk, which more than offset decreased expenses related to financial crimes management.

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Software expense increased $524,000, or 11.7%, to $5.0 million in the first quarter of 2025 from $4.5 million in the first quarter of 2024. The increase reflected higher expenditures for information technology infrastructure including leasing, institutional banking, cybersecurity, and enterprise risk.

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Insurance expense decreased $75,000, or 5.7%, to $1.2 million in the third quarter of 2024 compared to $1.3 million in the third quarter of 2023.

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Insurance expense decreased $81,000, or 6.1%, to $1.3 million in the first quarter of 2025 compared to $1.3 million in the first quarter of 2024.

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Telecom and IT network communications expense decreased $22,000, or 7.2%, to $283,000 in the third quarter of 2024 from $305,000 in the third quarter of 2023.

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Telecom and IT network communications expense increased $62,000, or 22.9%, to $333,000 in the first quarter of 2025 from $271,000 in the first quarter of 2024.

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Income tax expense was $17.5 million for the third quarter of 2024 compared to $16.3 million in the third quarter of 2023. The increase resulted primarily from an increase in income, substantially all of which is subject to income tax. A 25.4% effective tax rate in 2024 and a 24.6% effective tax rate in 2023 primarily reflected a 21% federal tax rate and the impact of various state income taxes.

Current wording

Income tax expense was $18.1 million for the first quarter of 2025 compared to $18.5 million in the first quarter of 2024. The decrease reflected a lower effective tax rate in 2025. A 24.0% effective tax rate in 2025 and a 24.7% effective tax rate in 2024 primarily reflected a 21% federal tax rate and the impact of various state income taxes.

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One source of contingent liquidity is available-for-sale securities, which amounted to $1.59 billion at September 30, 2024, compared to $747.5 million at December 31, 2023, reflecting $900 million of securities purchases in April, 2024. In excess of $1.0 billion of these securities, including those $900 million of April 2024 purchases, can be pledged to facilitate extensions of credit in addition to loans already pledged against lines of credit, as discussed later in this section. At September 30, 2024, outstanding loans amounted to $5.91 billion, compared to $5.36 billion at the prior year end, an increase of $545.5 million representing a use of funds. Commercial loans, at fair value, decreased to $252.0 million from $332.8 million between those respective dates, a decrease of $80.8 million, which provided funding. In 2019 and previous years, these loans were generally originated for securitization and sale, but in 2020 we decided to retain such loans on the balance sheet. While we suspended originating such loans after the first quarter of 2020, we resumed originations, which consist primarily of non-SBA commercial real estate bridge loans, in the third quarter of 2021. Such originations are held for investment and are included in “Loans, net of deferred loan fees and costs” on the balance sheet. Accordingly, commercial loans, at fair value will continue to run off. Our liquidity planning has not previously placed undue reliance on securitizations, and while our future planning excludes the impact of securitizations, other liquidity sources, primarily deposits, are determined to be adequate.

Current wording

One source of contingent liquidity is available-for-sale securities, which amounted to $1.49 billion at March 31, 2025, compared to $1.50 billion at December 31, 2024. At March 31, 2025, outstanding loans amounted to $6.38 billion, compared to $6.11 billion at the prior year end, an increase of $266.5 million representing a use of funds. Commercial loans, at fair value, decreased to $211.6 million from $223.1 million between those respective dates, a decrease of $11.5 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. On July 30, 2024, the FDIC proposed a regulation eliminating certain automatic exceptions which resulted in the reclassification of significant amounts of our deposits from brokered to non-brokered as a result of the December 2020 rules changes, while retaining the ability of financial institutions to reapply. If the proposed regulation is adopted, significant amounts of our deposits could be reclassified as brokered, which could also result in an increase in our federal deposit insurance rate and expense. Of our total deposits of $6.93 billion as of September 30, 2024, $586.8 million were classified as brokered and an estimated $485.3 million were not insured by FDIC insurance, which requires identification of the depositor and is limited to $250,000 per identified depositor. Uninsured accounts may represent a greater liquidity risk than FDIC-insured accounts should large depositors withdraw funds as a result of negative financial developments either at the Bank or in the economy. Significant amounts of our uninsured deposits are comprised of small balances, such as anonymous gift cards and corporate incentive cards for which there is no identified depositor. We do not believe that such uninsured accounts present a significant liquidity risk.

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 $8.36 billion as of March 31, 2025, $672.4 million were classified as brokered and an estimated $464.9 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

While consumer deposit accounts, including prepaid and debit card accounts, comprise the vast majority of our funding needs, we maintain secured borrowing lines with the FHLB and the Federal Reserve. Our collateralized line of credit with the Federal Reserve Bank had available accessible capacity of$1.97 billion as of September 30, 2024, and was collateralized by loans. We have also pledged in excess of $2.21 billion of multifamily loans to the FHLB. As a result, we have approximately $1.11 billion of availability on that line of credit which we can also access at any time. There was $135.0 million drawn against the FHLB line at September 30, 2024. We expect to continue to maintain our facilities with the FHLB and Federal Reserve.

Current wording

While consumer deposit accounts, including prepaid and debit card accounts, comprise the vast majority of our funding needs, we maintain secured borrowing lines with the FHLB and the Federal Reserve. Our collateralized line of credit with the Federal Reserve Bank had available accessible capacity of$2.01 billion as of March 31, 2025, and was collateralized by loans. We have also pledged in excess of $2.20 billion of multifamily loans to the FHLB. As a result, we have approximately $1.07 billion of availability on that line of credit which we can also access at any time. There wasno amount outstanding on the Federal Reserve line or on our FHLB line at March 31, 2025. We expect to continue to maintain our facilities with the FHLB and Federal Reserve.

Previous wording

As a holding company conducting substantially all our business through our subsidiaries, the Company’s near-term need for liquidity consists principally of cash for required interest payments on our subordinated debentures, consisting of 2038 Debentures, and senior debt, consisting of $100.0 million senior notes with an interest rate of 4.75% and maturing in August 2025 (the “2025 Senior Notes”). Semi-annual interest payments on the 2025 Senior Notes are approximately $2.4 million, and quarterly interest payments on the 2038 Debentures are approximately $300,000. As of September 30, 2024, we had cash reserves of approximately $8.9 million at the holding company. Stock repurchases are funded by dividends from the Bank, as are interest payments on the above debt instruments. Stock repurchases may be terminated at any time. The holding company’s sources of liquidity are primarily comprised of dividends paid by the Bank to the Company, and the issuance of debt.

Current wording

As a holding company conducting substantially all our business through our subsidiaries, the Company’s near-term need for liquidity consists principally of cash for required interest payments on our subordinated debentures, consisting of 2038 Debentures, and senior debt, consisting of $100.0 million senior notes with an interest rate of 4.75% and maturing in August 2025 (the “2025 Senior Notes”). Semi-annual interest payments on the 2025 Senior Notes are approximately $2.4 million, and quarterly interest payments on the 2038 Debentures are approximately $300,000. As of March 31, 2025, we had cash reserves of approximately $9.5 million at the holding company. Stock repurchases are funded by dividends from the Bank, as are interest payments on the above debt instruments. Stock repurchases may be terminated at any time. The holding company’s sources of liquidity are primarily comprised of dividends paid by the Bank to the Company, and the issuance of debt.

Previous wording

Included in our cash and cash-equivalents at September 30, 2024 were $47.1 million of interest-earning deposits which primarily consisted of deposits with the Federal Reserve.

Current wording

Included in our cash and cash-equivalents at March 31, 2025 were $1.01 billion of interest-earning deposits which primarily consisted of deposits with the Federal Reserve.

Previous wording

In 2024, $179.9 million of redemptions were exceeded by purchases of $969.4 million of securities. We had outstanding commitments to fund loans, including unused lines of credit, of $1.77 billion and $1.79 billion as of September 30, 2024, and December 31, 2023, respectively. The majority of our commitments are variable rate and originate with SBLOC. The recorded amount of such commitments has, for many accounts, been based on the full amount of collateral in a customer’s investment account. The funding requirements for such commitments occur on a measured basis over time and would be funded by normal deposit growth. Additionally, these loans are “demand” loans and as such, represent a contingent source of funding.

Current wording

In 2025, $11.0 million of securities purchases were exceeded by $47.9 million of redemptions of securities redemptions. We had outstanding commitments to fund loans, including unused lines of credit, of $2.01 billion and $1.98 billion as of March 31, 2025, and December 31, 2024, respectively. The majority of our commitments are variable rate and originate with SBLOC. The recorded amount of such commitments has, for many accounts, been based on the full amount of collateral in a customer’s investment account. The funding requirements for such commitments occur on a measured basis over time and would be funded by normal deposit growth. Additionally, these loans are “demand” loans and as such, represent a contingent source of funding.

Previous wording

We have adopted policies designed to manage net interest income and preserve capital over a broad range of interest rate movements. To effectively administer the policies and to monitor our exposure to fluctuations in interest rates, we maintain an asset/liability committee, consisting of the Bank’s Chief Executive Officer, Chief Accounting Officer, Chief Financial Officer, Chief Credit Officer and others. This committee meets quarterly to review our financial results, develop strategies to optimize margins and to respond to market conditions. The primary goal of our policies is to optimize margins and manage interest rate risk, subject to overall policy constraints for prudent management of interest rate risk.

Current wording

We have adopted policies designed to manage net interest income and preserve capital over a broad range of interest rate movements. To effectively administer the policies and to monitor our exposure to fluctuations in interest rates, we maintain an asset/liability committee, consisting of the Bank’s Chief Executive Officer, Chief Accounting Officer, Interim Chief Financial Officer, Chief Credit Officer and others. This committee meets quarterly to review our financial results, develop strategies to optimize margins and to respond to market conditions. The primary goal of our policies is to optimize margins and manage interest rate risk, subject to overall policy constraints for prudent management of interest rate risk.

Previous wording

The following table sets forth the estimated maturity or repricing structure of our interest-earning assets and interest-bearing liabilities at September 30, 2024. Except as stated below, the amounts of assets or liabilities shown which reprice or mature during a particular period were determined in accordance with the contractual terms of each asset or liability. The majority of transaction and savings balances are assumed to be “core” deposits, or deposits that will generally remain with us regardless of market interest rates. We estimate the repricing characteristics of these deposits based on historical performance, past experience, judgmental predictions and other deposit behavior assumptions. However, we may choose not to reprice liabilities proportionally to changes in market interest rates for competitive or other reasons. Additionally, although non-interest-bearing transaction accounts are not paid interest, we estimate certain of the balances will reprice as a result of the contractual fees that are paid to the affinity groups which are based upon a rate index, and therefore are included in interest expense. We have adjusted the transaction account balances in the table downward, to better reflect the impact of their partial adjustment to changes in rates. Loans and security balances, which adjust more fully to market rate changes, are based upon actual balances. The table does not assume any prepayment of fixed-rate loans and mortgage-backed securities are scheduled based on their anticipated cash flow, including prepayments based on historical data and current market trends. The table does not necessarily indicate the impact of general interest rate movements on our net interest income because the repricing and related behavior of certain categories of assets and liabilities (for example, prepayments of loans and withdrawal of deposits) is beyond our control. As a result, certain assets and liabilities indicated as repricing within a stated period may in fact reprice at different times and at different rate levels. For instance, the majority of REBL loans are variable rate with floors, but prepayments may offset the benefit of such floors in decreasing rate environments.

Current wording

The following table sets forth the estimated maturity or repricing structure of our interest-earning assets and interest-bearing liabilities at March 31, 2025. Except as stated below, the amounts of assets or liabilities shown which reprice or mature during a particular period were determined in accordance with the contractual terms of each asset or liability. The majority of transaction and savings balances are assumed to be “core” deposits, or deposits that will generally remain with us regardless of market interest rates. We estimate the repricing characteristics of these deposits based on historical performance, past experience, judgmental predictions and other deposit behavior assumptions. However, we may choose not to reprice liabilities proportionally to changes in market interest rates for competitive or other reasons. Additionally, although non-interest-bearing transaction accounts are not paid interest, we estimate certain of the balances will reprice as a result of the contractual fees that are paid to the affinity groups which are based upon a rate index, and therefore are included in interest expense. We have adjusted the transaction account balances in the table downward, to better reflect the impact of their partial adjustment to changes in rates. Loans and security balances, which adjust more fully to market rate changes, are based upon actual balances. The table does not assume any prepayment of fixed-rate loans and mortgage-backed securities are scheduled based on their anticipated cash flow, including prepayments based on historical data and current market trends. The table does not necessarily indicate the impact of general interest rate movements on our net interest income because the repricing and related behavior of certain categories of assets and liabilities (for example, prepayments of loans and withdrawal of deposits) is beyond our control. As a result, certain assets and liabilities indicated as repricing within a stated period may in fact reprice at different times and at different rate levels.