Live Oak Bancshares, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following presents management’s discussion and analysis of the financial condition and results of operations of Live Oak Bancshares, Inc. (individually, “Bancshares” and collectively with its subsidiaries including Live Oak Banking Company, the “Company”). This discussion should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included elsewhere in this quarterly report on Form 10-Q and with the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2023 (the “2023 Form 10-K”). Results of operations for the periods included in this quarterly report on Form 10-Q are not necessarily indicative of results to be obtained during any future period. Important Note Regarding Forward-Looking Statements This quarterly report on Form 10-Q contains statements that management believes are forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. These statements generally relate to the financial condition, results of operations, plans, objectives, future performance or business of Live Oak Bancshares, Inc. (the “Company”). They usually can be identified by the use of forward-looking terminology, such as “believes,” “expects,” or “are expected to,” “plans,” “projects,” “goals,” “estimates,” “will,” “may,” “should,” “could,” “would,” “continues,” “intends to,” “outlook” or “anticipates,” or variations of these and similar words, or by discussions of strategies that involve risks and uncertainties. You should not place undue reliance on these statements, as they are subject to risks and uncertainties, including but not limited to, those described in this Report. When considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements management may make. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information actually known to the Company at the time. Management undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Forward-looking statements contained in this Report are based on current expectations, estimates and projections about the Company’s business, management’s beliefs and assumptions made by management. These statements are not guarantees of the Company’s future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in the forward-looking statements. These risks, uncertainties and assumptions include, without limitation: • deterioration in the financial condition of borrowers resulting in significant increases in the Company’s provision for credit losses and other adverse impacts to results of operations and financial condition; • changes in Small Business Administration (“SBA”) rules, regulations and loan products, including specifically the Section 7(a) program, changes in SBA standard operating procedures or changes to the status of Live Oak Banking Company (the “Bank”) as an SBA Preferred Lender; • changes in rules, regulations or procedures for other government loan programs, including those of the United States Department of Agriculture (“USDA”); • changes in interest rates that affect the level and composition of deposits, loan demand and the values of loan collateral, securities, and interest sensitive assets and liabilities; • the failure of assumptions underlying the establishment of reserves for possible credit losses; • changes in loan underwriting, credit review or loss reserve policies associated with economic conditions, examination conclusions, or regulatory developments; • adverse developments in the banking industry highlighted by high-profile bank failures and the potential impact of such developments on customer confidence, liquidity, and regulatory responses to these developments; • the impacts of global health crises and pandemics, such as the Coronavirus Disease 2019 (“COVID-19”) pandemic, on trade (including supply chains and export levels), travel, employee productivity and other economic activities that may have a destabilizing and negative effect on financial markets, economic activity and customer behavior; 42 Table of Contents • a reduction in or the termination of the Company’s ability to use the technology-based platform that is critical to the success of the Company’s business model or to develop a next-generation banking platform, including a failure in or a breach of the Company’s operational or security systems or those of its third party service providers; • technological risks and developments, including cyber threats, attacks, or events; • changes in financial market conditions, either internationally, nationally or locally in areas in which the Company conducts operations, including reductions in rates of business formation and growth, demand for the Company’s products and services, commercial and residential real estate development and prices, premiums paid in the secondary market for the sale of loans, and valuation of servicing rights; • changes in accounting principles, policies, and guidelines applicable to bank holding companies and banking; • fluctuations in markets for equity, fixed-income, commercial paper and other securities, which could affect availability, market liquidity levels, and pricing; • the effects of competition from other commercial banks, non-bank lenders, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and mutual funds, and other financial institutions operating in the Company’s market area and elsewhere, including institutions operating regionally, nationally and internationally, together with such competitors offering banking products and services by mail, telephone and the Internet; • the Company's ability to attract and retain key personnel; • changes in governmental monetary and fiscal policies as well as other legislative and regulatory changes, including with respect to SBA or USDA lending programs and investment tax credits; • a deterioration of the credit rating for U.S. long-term sovereign debt, actions that the U.S. government may take to avoid exceeding the debt ceiling, and uncertainties surrounding the debt ceiling and the federal budget; • changes in political and economic conditions, including any prolonged U.S. government shutdown; • the impact of heightened regulatory scrutiny of financial products and services, primarily led by the Consumer Financial Protection Bureau and various state agencies; • the Company's ability to comply with any requirements imposed on it by regulators, and the potential negative consequences that may result; • operational, compliance and other factors, including conditions in local areas in which the Company conducts business such as inclement weather or a reduction in the availability of services or products for which loan proceeds will be used, that could prevent or delay closing and funding loans before they can be sold in the secondary market; • the effect of any mergers, acquisitions or other transactions, to which the Company or the Bank may from time to time be a party, including management’s ability to successfully integrate any businesses acquired; • adverse results, including related fees and expenses, from pending or future lawsuits, government investigations or private actions; • other risk factors listed from time to time in reports that the Company files with the SEC, including those described under “Risk Factors” in this Report; and • the Company’s success at managing the risks involved in the foregoing. 43 Table of Contents Except as otherwise disclosed, forward-looking statements do not reflect: (i) the effect of any acquisitions, divestitures or similar transactions that have not been previously disclosed; (ii) any changes in laws, regulations or regulatory interpretations; or (iii) any change in current dividend or repurchase strategies, in each case after the date as of which such statements are made. All forward-looking statements speak only as of the date on which such statements are made, and the Company undertakes no obligation to update any statement, to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. Amounts in all tables in Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) have been presented in thousands, except percentage, time period, stock option, share and per share data or where otherwise indicated. Nature of Operations Bancshares is a financial holding company and a bank holding company headquartered in Wilmington, North Carolina incorporated under the laws of the state of North Carolina in December 2008. The Company conducts business operations primarily through its commercial bank subsidiary, Live Oak Banking Company (the “Bank”). The Bank was incorporated in February 2008 as a North Carolina-chartered commercial bank. The Bank specializes in providing lending and deposit related services to small businesses nationwide. A significant portion of the loans originated by the Bank are guaranteed by the SBA under the 7(a) Loan Program and the U.S. Department of Agriculture’s (“USDA”) Rural Energy for America Program (“REAP”), Water and Environmental Program (“WEP”), Business & Industry (“B&I”) and Community Facilities loan programs. These loans are to small businesses and professionals with what the Bank believes are lower risk characteristics. Industries, or “verticals,” on which the Bank focuses its lending efforts are carefully selected. The Bank also lends more broadly to select borrowers outside of those verticals. The Company’s wholly owned material subsidiaries are the Bank, Government Loan Solutions (“GLS”), Live Oak Grove, LLC (“Grove”), Live Oak Ventures, Inc. (“Live Oak Ventures”) and Canapi Advisors, LLC (“Canapi Advisors”). GLS is a management and technology consulting firm that advises and offers solutions and services to participants in the government guaranteed lending sector. GLS primarily provides services in connection with the settlement, accounting, and securitization processes for government guaranteed loans, including loans originated under the SBA 7(a) loan programs and USDA guaranteed loans. The Grove provides Company employees and business visitors with on-site dining. Live Oak Ventures’ purpose is investing in businesses that align with the Company's strategic initiative to be a leader in financial technology. Canapi Advisors provided investment advisory services to a series of funds (the “Canapi Funds”) focused on providing venture capital to new and emerging financial technology companies. During the third quarter of 2024, the Canapi Funds were restructured and Canapi Advisors voluntarily withdrew as an investment advisor to the funds. The Bank’s wholly owned subsidiaries are Live Oak Number One, Inc., Live Oak Clean Energy Financing LLC (“LOCEF”), Live Oak Private Wealth, LLC (“Live Oak Private Wealth”) and Tiburon Land Holdings, LLC (“TLH”). Live Oak Number One, Inc. holds properties foreclosed on by the Bank. LOCEF provides financing to entities for renewable energy applications. Live Oak Private Wealth provides high-net-worth individuals and families with strategic wealth and investment management services. TLH holds land adjacent to the Bank's headquarters consisting of wetlands and other protected property for the use and enjoyment of the Bank's employees and customers. The Company generates revenue primarily from net interest income and secondarily through the origination and sale of government guaranteed loans. Income from the retention of loans is comprised principally of interest income. Income from the sale of loans is comprised of loan servicing revenue and revaluation of related servicing assets along with net gains on sales of loans. Offsetting these revenues are the cost of funding sources, provision for credit losses, any costs related to foreclosed assets and other operating costs such as salaries and employee benefits, travel, professional services, advertising and marketing and tax expense. The Company also has less routinely generated gains and losses arising from its financial technology investments predominantly in its Fintech segment, as discussed more fully later in this section under the caption “Results of Segment Operations.” 44 Table of Contents Results of Operations Performance Summary Three months ended September 30, 2024 compared with three months ended September 30, 2023 For the three months ended September 30, 2024, the Company reported net income of $13.0 million, or $0.28 per diluted share, compared to net income of $39.8 million, or $0.88 per diluted share, for the third quarter of 2023. The decrease in net income was principally due to the following items: • Increased provision for credit losses of $24.2 million. The level of provision in the third quarter of 2024 was primarily the result of specific reserve changes on individually evaluated loans and continued growth of the loan and lease portfolio. • Increased net loss on the loan servicing asset revaluation of $15.5 million. The level of negative change in valuation of servicing assets was principally due to the third quarter of 2023 change in valuation techniques used to estimate the fair value of servicing rights, which resulted in a nonrecurring gain of $13.7 million during that period. A key factor partially offsetting the decrease in net income for the third quarter of 2024 was increased net interest income of $7.6 million. Nine months ended September 30, 2024 compared with nine months ended September 30, 2023 For the nine months ended September 30, 2024, the Company reported net income of $67.6 million, or $1.48 per diluted share, compared to net income of $57.7 million, or $1.28 per diluted share, for the nine months ended September 30, 2023. The increase in net income was largely due to the following items: • Increased net interest income of $22.7 million, or 8.9%; • Increased net gains on sales of loans of $8.9 million, or 26.4%, principally the result of higher loan sale volumes combined with improving premiums in the first nine months of 2024; • A $5.6 million increase in the net gain on loans accounted for under the fair value option; and • Increased other noninterest income of $16.5 million, largely related to the combination of a $2.4 million gain from the sale of a building in the third quarter of 2024, $6.7 million gain arising from the sale of one of the Company’s aircraft in the second quarter of 2024 and a $5.7 million gain in the first quarter of 2024 arising from the increased fair value of a certain equity warrant asset. The key factors partially offsetting the increase in net income for the first nine months of 2024 was provision for credit losses of $20.3 million, increased net loss on the loan servicing asset revaluation of $18.7 million and increased salaries and employee benefits of $7.3 million. Net Interest Income and Margin Net interest income represents the difference between the income that the Company earns on interest-earning assets and the cost of interest-bearing liabilities. The Company’s net interest income depends upon the volume of interest-earning assets and interest-bearing liabilities and the interest rates that the Company earns or pays on them, respectively. Net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as “volume changes.” It is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds, referred to as “rate changes.” As a bank without a branch network, the Bank gathers deposits over the Internet and in the community in which it is headquartered. Due to the nature of a branchless bank and the relatively low overhead required for deposit gathering, the rates that the Bank offers are generally above the industry average. 45 Table of Contents Three months ended September 30, 2024 compared with three months ended September 30, 2023 For the three months ended September 30, 2024, net interest income increased $7.6 million, or 8.5%, to $97.0 million compared to $89.4 million for the three months ended September 30, 2023. This increase was principally due to the growth in the held for investment loan and lease portfolio outpacing growth in interest-bearing liabilities, offset by an increase in average cost of funds, which exceeded the increase in average yield on interest-earning assets. Average interest-earning assets increased by $1.05 billion, or 10.0%, to $11.57 billion for the third quarter of 2024, compared to $10.52 billion for the third quarter of 2023, while the yield on average interest-earning assets increased 37 basis points to 7.18%. The cost of funds on interest-bearing liabilities for the third quarter of 2024 increased 45 basis points to 4.17% and the average balance of interest-bearing liabilities increased by $946.9 million, or 9.7%, over the third quarter of 2023. The increase in cost of funds was largely influenced by repricing of short-term certificates of deposits. As indicated in the rate/volume analysis below, the overall increase discussed above is reflected in increased interest income of $28.3 million outpacing growth in interest expense of $20.7 million for the third quarter of 2024 compared to the third quarter of 2023. The net interest margin decreased from 3.37% for the third quarter of 2023 to 3.33% for the third quarter of 2024. Nine months ended September 30, 2024 compared with nine months ended September 30, 2023 For the nine months ended September 30, 2024, net interest income increased $22.7 million, or 8.9%, to $278.4 million compared to $255.7 million for the nine months ended September 30, 2023. This increase was principally due to the growth in the held for investment loan and lease portfolio outpacing growth in interest-bearing liabilities offset by an increase in average cost of funds which exceeded the increase in average yield on interest-earning assets. Average interest-earning assets increased by $1.05 billion, or 10.4%, to $11.22 billion for the nine months ended September 30, 2024, compared to $10.17 billion for the nine months ended September 30, 2023, while the yield on average interest-earning assets increased 54 basis points to 7.14%. The cost of funds on interest-bearing liabilities for the nine months ended September 30, 2024 increased 64 basis points to 4.13%, and the average balance of interest-bearing liabilities increased by $954.8 million, or 10.1%, over the nine months ended September 30, 2023. The increase in cost of funds was largely influenced by repricing of short-term certificates of deposit with the average cost of funds increasing from 3.49% for the nine months ended September 30, 2023 to 4.13% for the nine months ended September 30, 2024. The increase in average interest-bearing liabilities was largely driven by funding for significant loan originations and growth as well as maintenance of the Company's target liquidity profile. As indicated in the rate/volume analysis below, the overall increase discussed above is reflected in increased interest income of $98.1 million outpacing growth in interest expense of $75.4 million for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. The net interest margin decreased from 3.36% for the nine months ended September 30, 2023 to 3.31% for the nine months ended September 30, 2024. In September 2024, the Federal Reserve lowered the federal funds upper target rate by 50 basis points to 5.0%. The Federal Reserve released its most current federal funds target rate midpoint projections which implied a decrease of the median Federal Funds rate to 4.4% by the end of 2024 and a decrease of approximately 100 basis points to 3.4% by the end of 2025. There can be no assurance that any further decreases or increases in the Federal Funds rate will occur, and if they do, the amount and timing of actual adjustments are subject to change. See Item 3. Quantitative and Qualitative Disclosures About Market Risk for information about the Company’s sensitivity to interest rates. 46 Table of Contents Average Balances and Yields. The following table presents information regarding average balances for assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amount of interest expense on average interest-bearing liabilities, and the resulting average yields and costs. The yields and costs for the periods indicated are derived by dividing the income or expense by the average balances for assets or liabilities, respectively, for the periods presented and annualizing that result. Loan fees are included in interest income on loans. Three Months Ended September 30, 2024 2023 Average Balance Interest Average Yield/Rate Average Balance Interest Average Yield/Rate Interest-earning assets: Interest-earning balances in other banks $ 519,340 $ 7,016 5.37 % $ 677,857 $ 9,188 5.38 % Investment securities 1,287,410 9,750 3.01 1,257,740 8,701 2.74 Loans held for sale 409,902 9,859 9.57 602,109 13,271 8.74 Loans and leases held for investment (1) 9,354,522 182,311 7.75 7,978,870 149,451 7.43 Total interest-earning assets 11,571,174 208,936 7.18 10,516,576 180,611 6.81 Less: Allowance for credit losses on loans and leases (137,285) (119,941) Noninterest-earning assets 567,098 499,508 Total assets $ 12,000,987 $ 10,896,143 Interest-bearing liabilities: Interest-bearing checking $ 350,239 $ 4,892 5.56 % $ 300,059 $ 4,217 5.58 % Savings 5,043,930 51,516 4.06 4,588,085 45,778 3.96 Money market accounts 134,481 190 0.56 136,879 202 0.59 Certificates of deposit 5,028,830 53,576 4.24 4,675,075 40,717 3.46 Total deposits 10,557,480 110,174 4.15 9,700,098 90,914 3.72 Borrowings 116,925 1,762 6.00 27,425 287 4.15 Total interest-bearing liabilities 10,674,405 111,936 4.17 9,727,523 91,201 3.72 Noninterest-bearing deposits 237,387 237,545 Noninterest-bearing liabilities 90,079 78,930 Shareholders' equity 999,116 852,145 Total liabilities and shareholders' equity $ 12,000,987 $ 10,896,143 Net interest income and interest rate spread $ 97,000 3.01 % $ 89,410 3.09 % Net interest margin 3.33 % 3.37 % Ratio of average interest-earning assets to average interest-bearing liabilities 108.40 % 108.11 % (1) Average loan and lease balances include non-accruing loans and leases. 47 Table of Contents Nine Months Ended September 30, 2024 2023 Average Balance Interest Average Yield/Rate Average Balance Interest Average Yield/Rate Interest-earning assets: Interest-earning balances in other banks $ 540,109 $ 21,861 5.41 % $ 579,962 $ 21,228 4.89 % Federal funds sold — — — 46,165 1,624 4.70 Investment securities 1,264,067 27,923 2.95 1,232,737 24,751 2.68 Loans held for sale 383,817 27,542 9.59 559,770 37,410 8.94 Loans and leases held for investment (1) 9,036,152 522,478 7.72 7,751,863 416,726 7.19 Total interest-earning assets 11,224,145 599,804 7.14 10,170,497 501,739 6.60 Less: Allowance for credit losses on loans and leases (133,148) (107,686) Noninterest-earning assets 559,036 497,795 Total assets $ 11,650,033 $ 10,560,606 Interest-bearing liabilities: Interest-bearing checking $ 318,387 $ 13,342 5.60 % $ 208,278 $ 8,456 5.43 % Savings 4,801,008 146,304 4.07 4,359,136 123,959 3.80 Money market accounts 129,493 563 0.58 124,198 523 0.56 Certificates of deposit 5,051,995 157,321 4.16 4,668,087 110,574 3.17 Total deposits 10,300,883 317,530 4.12 9,359,699 243,512 3.48 Borrowings 87,780 3,843 5.85 74,163 2,498 4.50 Total interest-bearing liabilities 10,388,663 321,373 4.13 9,433,862 246,010 3.49 Noninterest-bearing deposits 224,708 207,009 Noninterest-bearing liabilities 79,600 74,645 Shareholders' equity 957,062 845,090 Total liabilities and shareholders' equity $ 11,650,033 $ 10,560,606 Net interest income and interest rate spread $ 278,431 3.01 % $ 255,729 3.11 % Net interest margin 3.31 % 3.36 % Ratio of average interest-earning assets to average interest-bearing liabilities 108.04 % 107.81 % (1) Average loan and lease balances include non-accruing loans and leases. 48 Table of Contents Rate/Volume Analysis. The following table sets forth the effects of changing rates and volumes on net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, increases or decreases attributable to changes in both rate and volume that cannot be segregated have been allocated proportionally based on the changes due to rate and the changes due to volume. Three Months Ended September 30, Nine Months Ended September 30, 2024 vs. 2023 2024 vs. 2023 Increase (Decrease) Due to Increase (Decrease) Due to Rate Volume Total Rate Volume Total Interest income: Interest-earning balances in other banks $ (27) $ (2,145) $ (2,172) $ 2,169 $ (1,536) $ 633 Federal funds sold — — — — (1,624) (1,624) Investment securities 834 215 1,049 2,511 661 3,172 Loans held for sale 1,018 (4,430) (3,412) 2,325 (12,193) (9,868) Loans and leases held for investment 6,571 26,289 32,860 34,102 71,650 105,752 Total interest income 8,396 19,929 28,325 41,107 56,958 98,065 Interest expense: Interest-bearing checking (28) 703 675 344 4,542 4,886 Savings 1,136 4,602 5,738 9,330 13,015 22,345 Money market accounts (9) (3) (12) 17 23 40 Certificates of deposit 9,434 3,425 12,859 36,223 10,524 46,747 Borrowings 332 1,143 1,475 818 527 1,345 Total interest expense 10,865 9,870 20,735 46,732 28,631 75,363 Net interest income $ (2,469) $ 10,059 $ 7,590 $ (5,625) $ 28,327 $ 22,702 Provision for Credit Losses The provision for credit losses represents the amount necessary to be charged against the current period’s earnings to maintain the allowance for credit losses (“ACL”) on loans and leases at a level that the Company believes is appropriate in relation to the estimated expected losses in the loan and lease portfolio. Losses inherent in loan relationships are mitigated if a portion of the loan is guaranteed by the SBA or USDA. Typical SBA 7(a) and USDA guarantees range from 50% to 90% depending on loan size and type, which serve to reduce the risk profile of these loans. The Company believes that its focus on compliance with regulations and guidance from the SBA and USDA are key factors to managing this risk. For the third quarter of 2024, there was a provision for credit losses of $34.5 million compared to $10.3 million for the same period in 2023, an increase of $24.2 million. For the nine months ended September 30, 2024, there was a provision for credit losses of $62.6 million compared to $42.3 million for the same period in 2023, an increase of $20.3 million. The increase in provision expense as compared to the third quarter of 2023 and nine months ended September 30, 2023 was primarily the result of specific reserve changes on individually evaluated loans and continued growth of the loan and lease portfolio. Provision expense for three individually evaluated loan relationships amounted to $13.6 million, or 56.3%, and 67.2% of the increase in the total provision for credit losses when compared to the third quarter of 2023 and nine months ended September 30, 2023, respectively. Loans and leases held for investment at historical cost were $9.49 billion as of September 30, 2024, increasing by $1.70 billion, or 21.8%, compared to September 30, 2023. 49 Table of Contents Net charge-offs for loans and leases carried at historical cost were $1.7 million, or 0.08% of average quarterly loans and leases held for investment, carried at historical cost, on an annualized basis, for the three months ended September 30, 2024, compared to net charge-offs of $9.1 million, or 0.48%, for the three months ended September 30, 2023, a decrease of $7.4 million, or 81.3%. The decrease in net charge-offs compared to the third quarter of 2023 was primarily related to one significant charge-off that occurred in the third quarter of 2023. For the nine months ended September 30, 2024 , net charge-offs totaled $13.1 million compared to $16.9 million for the nine months ended September 30, 2023 , a decrease of $3.8 million , or 22.5% . Net charge-offs are a key element of historical experience in the Company's estimation of the allowance for credit losses on loans and leases. In addition, nonperforming loans and leases not guaranteed by the SBA or USDA, excluding $8.7 million and $6.5 million accounted for under the fair value option at September 30, 2024 and 2023, respectively, totaled $49.4 million, which was 0.52% of the held for investment loan and lease portfolio carried at historical cost at September 30, 2024, compared to $33.3 million, or 0.43% of loans and leases held for investment carried at historical cost at September 30, 2023. Noninterest Income Noninterest income is principally comprised of net gains from the sale of SBA and USDA-guaranteed loans along with loan servicing revenue and related revaluation of the servicing asset. Revenue from the sale of loans depends upon the volume, maturity structure and rates of underlying loans as well as the pricing and availability of funds in the secondary markets prevailing in the period between completed loan funding and closing of sale. In addition, the loan servicing revaluation is significantly impacted by changes in market rates and other underlying assumptions such as prepayment speeds and default rates. Net gain (loss) on loans accounted for under the fair value option is also significantly impacted by changes in market rates, prepayment speeds and inherent credit risk. Other less consistent elements of noninterest income include gains and losses on investments. The following table shows the components of noninterest income and the dollar and percentage changes for the periods presented. Three Months Ended September 30, 2024/2023 Increase (Decrease) 2024 2023 Amount Percent Noninterest income Loan servicing revenue $ 8,040 $ 6,990 $ 1,050 15.0 % Loan servicing asset revaluation (4,207) 11,335 (15,542) (137.1) Net gains on sales of loans 16,646 12,675 3,971 31.3 Net gain (loss) on loans accounted for under the fair value option 2,255 (568) 2,823 497.0 Equity method investments (loss) income (1,393) (1,034) (359) (34.7) Equity security investments gains (losses), net 909 (783) 1,692 216.1 Lease income 2,424 2,498 (74) (3.0) Management fee income 1,116 3,277 (2,161) (65.9) Other noninterest income 7,142 3,501 3,641 104.0 Total noninterest income $ 32,932 $ 37,891 $ (4,959) (13.1) % 50 Table of Contents Nine Months Ended September 30, 2024/2023 Increase (Decrease) 2024 2023 Amount Percent Noninterest income Loan servicing revenue $ 23,011 $ 20,057 $ 2,954 14.7 % Loan servicing asset revaluation (9,829) 8,860 (18,689) (210.9) Net gains on sales of loans 42,543 33,654 8,889 26.4 Net gain (loss) on loans accounted for under the fair value option 2,208 (3,369) 5,577 165.5 Equity method investments (loss) income (8,182) (6,041) (2,141) (35.4) Equity security investments gains (losses), net 541 (585) 1,126 192.5 Lease income 7,300 7,568 (268) (3.5) Management fee income 7,658 10,015 (2,357) (23.5) Other noninterest income 27,938 11,467 16,471 143.6 Total noninterest income $ 93,188 $ 81,626 $ 11,562 14.2 % For the three months ended September 30, 2024, noninterest income decreased by $5.0 million, or 13.1%, compared to the three months ended September 30, 2023. The decrease over the prior year is primarily the result of a $15.5 million decrease in the valuation of the loan servicing asset. For the nine months ended September 30, 2024, noninterest income increased by $11.6 million, or 14.2%, compared to the nine months ended September 30, 2023. The increase over the prior year is primarily a result of higher net gains on sales of loans of $8.9 million, a $5.6 million increase in the net gain on loans accounted for under the fair value option and increased other noninterest income of $16.5 million. The increase in other noninterest income was largely related to the above mentioned $2.4 million gain from the sale of a building in the third quarter of 2024 combined with a $6.7 million gain arising from the sale of one of the Company’s aircraft in the second quarter of 2024 and a $5.7 million gain in the first quarter of 2024 arising from the increased fair value of a certain equity warrant asset. Partially offsetting the increase in total noninterest income over the prior year to date period was higher losses of $18.7 million related to the servicing asset revaluation. The following tables reflects loan and lease production, sales of guaranteed loans and the aggregate balance in guaranteed loans sold. These components are key drivers of the Company's noninterest income. Three months ended September 30, Three months ended June 30, Three months ended March 31, 2024 2023 2024 2023 2024 2023 Amount of loans and leases originated $ 1,757,856 $ 1,073,255 $ 1,171,141 $ 861,033 $ 805,129 $ 1,030,882 Guaranteed portions of loans sold 266,307 225,585 250,466 245,074 186,654 167,826 Outstanding balance of guaranteed loans sold (1) 3,300,524 2,909,343 3,177,629 2,808,200 3,057,641 2,695,757 Nine Months Ended September 30, For years ended December 31, 2024 2023 2023 2022 2021 2020 Amount of loans and leases originated $ 3,734,126 $ 2,965,170 $ 3,946,873 $ 4,007,621 $ 4,480,725 $ 4,450,198 Guaranteed portions of loans sold 703,427 638,485 877,551 580,889 668,462 542,596 Outstanding balance of guaranteed loans sold (1) 3,300,524 2,909,343 2,986,959 2,668,110 2,756,915 2,819,625 (1) This represents the outstanding principal balance of guaranteed loans serviced, as of the last day of the applicable period, which have been sold into the secondary market. 51 Table of Contents Changes in various components of noninterest income are discussed in more detail below. Loan Servicing Asset Revaluation: The Company revalues its serviced loan portfolio at least quarterly. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as adequate compensation for servicing, the discount rate, the custodial earnings rate, ancillary income, prepayment speeds and default rates and losses, with prepayment speed and discount rate being the most sensitive assumptions. For the three months ended September 30, 2024, there was a net loss on loan servicing asset revaluation of $4.2 million, compared to a net gain of $11.3 million for the three months ended September 30, 2023, resulting in a negative change of $15.5 million. For the nine months ended September 30, 2024, there was a net loss on loan servicing asset revaluation of $9.8 million compared to a net gain of $8.9 million for the nine months ended September 30, 2023, resulting in a negative change of $18.7 million. The negative change in valuation of the servicing asset compared to the third quarter of 2023 and nine months ended September 30, 2023 was principally the result of the third quarter of 2023 change in valuation techniques used to estimate the fair value of servicing rights. Net Gains on Sales of Loans: For the three months ended September 30, 2024, net gains on sales of loans increased $4.0 million, or 31.3%, compared to the three months ended September 30, 2023. The volume of guaranteed loans sold increased $40.7 million, or 18.1%, for the three months ended September 30, 2024 to $266.3 million from $225.6 million for the three months ended September 30, 2023. For the nine months ended September 30, 2024, net gains on sales of loans increased $8.9 million, or 26.4%, compared to the nine months ended September 30, 2023. For the nine months ended September 30, 2024, the volume of guaranteed loans sold increased $64.9 million, or 10.2%, to $703.4 million from $638.5 million for the nine months ended September 30, 2023. The average net gain on loan sale premium increased from 105% to 107% in the third quarters of 2023 and 2024, respectively, and remained relatively stable at 106% for the nine months ended September 30, 2023 and 2024. The increase in net gains on sales of loans over the third quarter of 2023 and nine months ended September 30, 2023 was principally related to a higher loan sale volume combined with improving premiums. Net Gain (Loss) on Loans Accounted for Under the Fair Value Option : For the three months ended September 30, 2024, the Company had a net gain on loans accounted for under the fair value option of $2.3 million compared to a net loss of $568 thousand for the third quarter of 2023, a positive change of $2.8 million, or 497.0%. For the nine months ended September 30, 2024, the Company had a net gain on loans accounted for under the fair value option of $2.2 million compared to a net loss of $3.4 million for the same period of 2023, a positive change of $5.6 million, or 165.5%. The carrying amount of loans accounted for under the fair value option at September 30, 2024 and 2023 was $343.4 million (all classified as held for investment) and $410.1 million (all classified as held for investment), respectively, a decrease of $66.8 million, or 16.3%. The increased levels of net gains arising from the valuation of loans accounted for under the fair value option for both comparative periods was principally due to the third quarter of 2023 change in valuation techniques used to estimate the fair value of loans. 52 Table of Contents Noninterest Expense Noninterest expense comprises all operating costs of the Company, such as employee related costs, travel, professional services, advertising and marketing expenses, exclusive of interest and income tax expense. The following table shows the components of noninterest expense and the related dollar and percentage changes for the periods presented. Three Months Ended September 30, 2024/2023 Increase (Decrease) 2024 2023 Amount Percent Noninterest expense Salaries and employee benefits $ 44,524 $ 42,947 $ 1,577 3.7 % Non-employee expenses: Travel expense 2,344 2,197 147 6.7 Professional services expense 3,287 1,762 1,525 86.5 Advertising and marketing expense 2,473 3,446 (973) (28.2) Occupancy expense 2,807 2,129 678 31.8 Technology expense 9,081 7,722 1,359 17.6 Equipment expense 3,472 3,676 (204) (5.5) Other loan origination and maintenance expense 4,872 3,498 1,374 39.3 Renewable energy tax credit investment impairment (recovery) 115 — 115 100.0 FDIC insurance 1,933 4,115 (2,182) (53.0) Other expense 2,681 2,770 (89) (3.2) Total non-employee expenses 33,065 31,315 1,750 5.6 Total noninterest expense $ 77,589 $ 74,262 $ 3,327 4.5 % Nine Months Ended September 30, 2024/2023 Increase (Decrease) 2024 2023 Amount Percent Noninterest expense Salaries and employee benefits $ 138,054 $ 130,778 $ 7,276 5.6 % Non-employee expenses: Travel expense 7,110 7,378 (268) (3.6) Professional services expense 8,226 4,685 3,541 75.6 Advertising and marketing expense 9,169 10,058 (889) (8.8) Occupancy expense 7,442 6,259 1,183 18.9 Technology expense 24,800 23,456 1,344 5.7 Equipment expense 10,057 11,517 (1,460) (12.7) Other loan origination and maintenance expense 12,442 10,867 1,575 14.5 Renewable energy tax credit investment impairment (recovery) (642) 69 (711) (1,030.4) FDIC insurance 7,782 12,579 (4,797) (38.1) Other expense 8,542 12,035 (3,493) (29.0) Total non-employee expenses 94,928 98,903 (3,975) (4.0) Total noninterest expense $ 232,982 $ 229,681 $ 3,301 1.4 % 53 Table of Contents Total noninterest expense for the three and nine months ended September 30, 2024, increased $3.3 million, or 4.5%, and increased $3.3 million, or 1.4%, respectively, compared to the same periods in 2023. The changes within noninterest expense for the comparable three and nine month periods was largely driven by various components, as discussed below. Salaries and employee benefits : Total personnel expense for the three and nine months ended September 30, 2024 increased by $1.6 million, or 3.7%, and increased by $7.3 million, or 5.6%, respectively, compared to the same periods in 2023. The increase over both comparative periods of 2023 is principally related to continued investment in human resources to support strategic and growth initiatives. Total full-time equivalent employees increased from 956 at September 30, 2023, to 999 at September 30, 2024. Salaries and employee benefits expense included $6.7 million and $19.9 million of stock-based compensation for the three and nine months ended September 30, 2024, respectively, compared to $217 thousand and $12.7 million for the three and nine months ended September 30, 2023, respectively. Expenses related to the employee stock purchase program, stock grants, stock option compensation and restricted stock expense are all considered stock-based compensation. Professional services expense: For the nine months ended September 30, 2024, professional services expense increased $3.5 million, or 75.6%, compared to the same period in 2023. The increase compared to the prior year was due to higher levels of legal fees partially offset by an insurance recovery of $1.3 million in the first quarter of 2023. FDIC insurance: For the three and nine months ended September 30, 2024, FDIC insurance decreased $2.2 million, or 53.0%, and $4.8 million, or 38.1%, respectively, compared to the same periods in 2023. This decrease is largely the product of favorable changes in the Company’s FDIC assessment rates. Other expense : For the nine months ended September 30, 2024, other expense decreased $3.5 million, or 29.0%, compared to the same period in 2023. This decrease was largely related to reserves for unfunded commitments, historically being presented in other expense. Beginning in the second quarter of 2024, this expense was classified in the provision for credit losses. Income Tax Expense For the three months ended September 30, 2024, income tax expense was $4.8 million compared to income tax expense of $3.0 million in the third quarter of 2023, and the Company’s effective tax rates were 27.0% and 6.9%, respectively. For the nine months ended September 30, 2024, income tax expense was $8.4 million compared to $7.6 million for the nine months ended September 30, 2023, and the Company’s effective tax rates were 11.1% and 11.6%, respectively. The higher level of income tax expense for the third quarter of 2024 as compared to the third quarter of 2023 was primarily the result of lower levels of anticipated investment tax credits in 2024 as compared to the prior year. Results of Segment Operations The Company’s operations are managed along two primary operating segments Banking and Fintech. A description of each segment and the methodologies used to measure financial performance is described in Note 11. Segments in the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements. Net income (loss) by operating segment is presented below: Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Banking $ 16,208 $ 42,389 $ 76,105 $ 64,400 Fintech (1,111) (1,418) (3,662) (2,506) Other (2,072) (1,178) (4,869) (4,159) Consolidated net income $ 13,025 $ 39,793 $ 67,574 $ 57,735 Banking For the three and nine months ended September 30, 2024, net income decreased $26.2 million and increased $11.7 million, respectively, compared to the same periods of 2023. Key factors influencing these changes are discussed below. 54 Table of Contents For the three and nine months ended September 30, 2024, net interest income increased $9.2 million, or 10.3%, and $25.8 million, or 10.1%, respectively, compared to the same periods of 2023. See above section captioned “Net Interest Income and Margin” as it is principally related to the Banking segment. The provision for credit losses for the three and nine months ended September 30, 2024, increased $24.2 million, or 235.7%, and $20.3 million, or 48.0%, respectively. See the analysis of provision for credit losses included in the above section captioned “Provision for Credit Losses” as it is entirely related to the Banking segment. For the three and nine months ended September 30, 2024, noninterest income decreased $4.5 million, or 12.7%, and increased $14.3 million, or 19.3%, respectively, compared to the same periods of 2023. The primary driver for lower noninterest income in the third quarter of 2024 was the net loss on the valuation of the loan servicing asset. Alternatively, the increase in noninterest income in the nine months ended September 30, 2024 was principally driven by higher net gains on sales of loans combined with increased levels of net gains on loans accounted for at fair value and heightened levels of other noninterest income. Partially offsetting the increase over the nine months ended September 30, 2023 was higher levels of net losses on the loan servicing asset revaluation. See the analysis of these categories of noninterest income included in the above section captioned “Noninterest Income” for additional discussion. For the three and nine months ended September 30, 2024, noninterest expense increased $3.9 million and $3.6 million, respectively, compared to the same periods of 2023. See the analysis of these categories of noninterest expense included in the above section captioned “Noninterest Expense” for additional discussion. For the three and nine months ended September 30, 2024, income tax expense increased $2.7 million and $4.5 million, respectively, compared to the same periods of 2023. The increase compared to the three months ended September 30, 2023 was largely the result of lower levels of anticipated investment tax credits in 2024 as compared to the prior year. See the above section captioned “Income Tax Expense” for further discussion. Fintech For the three and nine months ended September 30, 2024, net income increased by $307 thousand and decreased $1.2 million, respectively, compared to same periods of 2023. This decrease was largely related to decreased management fee income. This decrease was the result of a restructuring of the Canapi Funds in the third quarter of 2024. In connection with that restructuring, the Company’s subsidiary Canapi Advisors voluntarily withdrew as an advisor to the funds. The Company remains an investor in the Canapi Funds and continues its focus on new and emerging financial technology companies. Discussion and Analysis of Financial Condition September 30, 2024 vs. December 31, 2023 Total assets at September 30, 2024 were $12.61 billion, an increase of $1.34 billion, or 11.9%, compared to total assets of $11.27 billion at December 31, 2023. The growth in total assets was principally driven by the growth in total loans and leases held for investment of $1.20 billion, or 13.9%, during the first nine months of 2024, from $8.63 billion at December 31, 2023, to $9.83 billion at September 30, 2024. This growth was a result of record level origination activity during the nine months ended September 30, 2024 of $3.73 billion. Total deposits were $11.40 billion at September 30, 2024, an increase of $1.13 billion, or 11.0%, from $10.28 billion at December 31, 2023. The increase in total deposits from the prior period was to support growth in the loan and lease portfolio as well as the Company's targeted liquidity levels. At September 30, 2024, the Bank’s total uninsured deposits were approximately $1.65 billion, or 14.4%, of total deposits. Borrowings increased to $115.4 million at September 30, 2024, from $23.4 million at December 31, 2023. This increase was principally due to entering into a new loan agreement in the first quarter of 2024 to strategically enhance Bank capital levels in order to accommodate future growth expectations. See Note 8. Borrowings in the accompanying Notes to Unaudited Condensed Consolidated Financial Statements for a discussion of current sources of available debt capacity. 55 Table of Contents Regulatory Impact of Asset Growth General. In the first quarter of 2023, the Company and the Bank each first exceeded $10 billion in total assets. As of September 30, 2024, the Company and the Bank each had total assets of $12.61 billion and $12.53 billion, respectively. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and its implementing regulations impose various additional requirements on bank holding companies and banks with $10 billion or more in total consolidated assets. As a general matter, the Company and the Bank are not immediately subject to these additional requirements when they exceed $10 billion in assets; instead, the Company and the Bank will be subject to these various requirements over various dates, as described below. Consumer Financial Laws. Under the Dodd-Frank Act, the Consumer Financial Protection Bureau (CFPB) has near-exclusive supervision authority, including examination authority, to assess compliance with federal consumer financial laws for a bank and its affiliates if the bank has total assets of more than $10 billion. This provision becomes applicable to a bank following the fourth consecutive quarter where the total assets of the bank, as reported in its quarterly Call Report, exceed $10 billion and afterwards remains applicable to the bank unless the bank has reported total assets of $10 billion or less in its quarterly Call Report for four consecutive quarters. This provision became applicable to the Bank in the first quarter of 2024. Deposit Insurance Assessments. Also under the Dodd-Frank Act, the minimum ratio of net worth to insured deposits of the Deposit Insurance Fund administered by the FDIC was increased from 1.15 percent to 1.35 percent and the FDIC is required, in setting deposit insurance assessments, to offset the effect of the increase on institutions with assets of less than $10 billion, which results in institutions with assets greater than $10 billion paying higher assessments. In addition, following the fourth consecutive quarter where the total assets of a bank exceeds $10 billion, as reported in its quarterly Call Report, the FDIC utilizes a different method for determining deposit insurance assessments. This large bank method is based on a bank’s ability to withstand asset- and funding-related stress, its regulatory ratings, and potential losses to the FDIC in the event of the bank’s failure, subject to discretionary adjustments by the FDIC. Additionally, the large bank method captures risk mitigants such as the Bank's unique concentration of government guaranteed loans and its impact on our perceived loss severity measure which is generally favorable to the Bank's deposit insurance assessments. The Bank became subject to the large bank method for determining its deposit insurance assessments in the first quarter of 2024. Volcker Rule. Under provisions of the Dodd-Frank Act referred to as the “Volcker Rule,” certain limitations are placed on the ability of insured depository institutions and their affiliates to engage in sponsoring, investing in and transacting with certain investment funds, known as “covered funds” under the rule. There are a number of exclusions from the definition of “covered funds,” including for investments in Small Business Investment Companies, or SBICs, and certain qualifying venture capital funds. The Volcker Rule also places restrictions on proprietary trading, which could impact certain hedging activities. Limits on Interchange Fees. The Durbin Amendment to the Dodd-Frank Act gave the Federal Reserve Board the authority to establish rules regarding interchange fees charged for electronic debit transactions by a payment card issuer that, together with its affiliates, has assets of $10 billion or more, as of December 31 of the preceding calendar year, and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer. The Federal Reserve Board has adopted rules under this provision that limit the swipe fees that a debit card issuer can charge a merchant for a transaction to the sum of 21 cents and five basis points times the value of the transaction, plus up to one cent for fraud prevention costs. The Bank exceeded $10 billion in assets at December 31, 2023. This will trigger a reduction of annual pre-tax income from debit card interchange fees beginning July 1, 2024. 56 Table of Contents Commercial Real Estate Commercial real estate loans as indicated by the FDIC include loans secured by the following: construction, land development, multifamily property and nonfarm, nonresidential real property. The following table provides information with respect to commercial real estate loans as of September 30, 2024. Guaranteed Unguaranteed Total (1) Held for Investment Loans: Owner Occupied Small Business Banking $ 1,208,629 $ 1,089,445 $ 2,298,074 Specialty Lending — 7,581 7,581 Energy & Infrastructure 16,845 19,725 36,570 Total 1,225,474 1,116,751 2,342,225 Non-Owner Occupied Small Business Banking 363,264 513,652 876,916 Specialty Lending — 875,092 875,092 Energy & Infrastructure 38,520 195,785 234,305 Total 401,784 1,584,529 1,986,313 Total Held for Investment Commercial Real Estate $ 1,627,258 $ 2,701,280 $ 4,328,538 Held for Sale Loans: Owner Occupied Small Business Banking $ 64,929 $ — $ 64,929 Total 64,929 — 64,929 Non-Owner Occupied Small Business Banking 143,752 — 143,752 Total 143,752 — 143,752 Total Held for Sale Commercial Real Estate $ 208,681 $ — $ 208,681 Total Commercial Real Estate Loans $ 1,835,939 $ 2,701,280 $ 4,537,219 % of Total Commercial Real Estate Loans 40.5 % 59.5 % 100.0 % (1) Excludes retained loan discount and net deferred costs. Asset Quality Management considers asset quality to be of primary importance. A formal loan review function, independent of loan origination, is used to identify and monitor problem loans. This function reports directly to the Audit Committee of the Board of Directors. Nonperforming Assets The Bank places loans and leases on nonaccrual status when they become 90 days past due as to principal or interest payments, or prior to that if management has determined based upon current information available to them that the timely collection of principal or interest is not probable. When a loan or lease is placed on nonaccrual status, any interest previously accrued as income but not actually collected is reversed and recorded as a reduction of loan or lease interest and fee income. Typically, collections of interest and principal received on a nonaccrual loan or lease are applied to the outstanding principal as determined at the time of collection of the loan or lease. Nonperforming assets, including loans measured at fair value, at September 30, 2024 were $283.6 million, which represented a $91.4 million, or 47.6%, increase from December 31, 2023. These nonperforming assets at September 30, 2024 were comprised of $275.6 million in nonaccrual loans and leases and $8.0 million in foreclosed assets. Of the $275.6 million of nonperforming assets, $221.5 million carried a government guarantee, leaving an unguaranteed exposure of $62.1 million in total nonperforming assets at September 30, 2024. This represents an increase of $10.9 million, or 21.4%, from an unguaranteed exposure of $51.2 million at December 31, 2023. 57 Table of Contents The following table provides information with respect to nonperforming assets, excluding loans measured at fair value, at the dates indicated. September 30, 2024 (1) December 31, 2023 (1) Nonaccrual loans and leases: Total nonperforming loans and leases (all on nonaccrual) $ 215,575 $ 134,963 Foreclosed assets 8,015 6,481 Total nonperforming assets $ 223,590 $ 141,444 Allowance for credit losses on loans and leases $ 168,737 $ 125,840 Total nonperforming loans and leases to total loans and leases held for investment 2.27 % 1.64 % Total nonperforming loans and leases to total assets 1.76 % 1.24 % Allowance for credit losses on loans and leases to loans and leases held for investment 1.78 % 1.53 % Allowance for credit losses on loans and leases to total nonperforming loans and leases 78.27 % 93.24 % (1) Excludes loans measured at fair value. September 30, 2024 (1) December 31, 2023 (1) Nonaccrual loans and leases guaranteed by U.S. government: Total nonperforming loans and leases guaranteed by the U.S government (all on nonaccrual) $ 166,177 $ 95,678 Foreclosed assets guaranteed by the U.S. government 4,858 3,670 Total nonperforming assets guaranteed by the U.S. government $ 171,035 $ 99,348 Allowance for credit losses on loans and leases $ 168,737 $ 125,840 Total nonperforming loans and leases not guaranteed by the U.S. government to total held for investment loans and leases 0.52 % 0.48 % Total nonperforming loans and leases not guaranteed by the U.S. government to total assets 0.40 % 0.36 % Allowance for credit losses on loans and leases to total nonperforming loans and leases not guaranteed by the U.S. government 341.58 % 320.33 % (1) Excludes loans measured at fair value. Nonperforming assets, excluding loans measured at fair value, at September 30, 2024 were $223.6 million, which represented a $82.1 million, or 58.1%, increase from December 31, 2023. These nonperforming assets at September 30, 2024 were comprised of $215.6 million in nonaccrual loans and leases and $8.0 million in foreclosed assets. Of the $223.6 million of nonperforming assets, $171.0 million carried a government guarantee, leaving an unguaranteed exposure of $52.6 million in total nonperforming assets at September 30, 2024. This represents an increase of $10.5 million, or 24.8%, from an unguaranteed exposure of $42.1 million at December 31, 2023. See the below discussion related to the change in potential problem and impaired loans and leases for management’s overall observations regarding growth in total nonperforming loans and leases. As a percentage of the Bank’s total capital, nonperforming loans and leases, excluding loans measured at fair value, represented 19.2% and 14.6% September 30, 2024 and December 31, 2023, respectively. Adjusting the ratio to include only the unguaranteed portion of nonperforming loans and leases at historical cost to reflect management’s belief that the greater magnitude of risk resides in this portion, the ratios at both September 30, 2024 and December 31, 2023 were 4.4% and 4.3%, respectively. 58 Table of Contents As of September 30, 2024, and December 31, 2023, potential problem (also referred to as criticized) and classified loans and leases, excluding loans measured at fair value, totaled $951.5 million and $785.2 million, respectively. The following is a discussion of these loans and leases. Risk Grades 50 through 80 represent the spectrum of criticized and classified loans and leases. For a complete description of the risk grading system, see Note 5. Loans and Leases Held for Investment and Credit Quality. At September 30, 2024 , the portion of criticized and classified loans and leases guaranteed by the SBA or USDA totaled $448.8 million and total portfolio unguaranteed exposure risk was $502.7 million , or 7.9% of total held for investment unguaranteed exposure carried at historical cost. This compares to the December 31, 2023 portion of criticized and classified loans and leases guaranteed by the SBA or USDA which totaled $344.8 million and total portfolio unguaranteed exposure risk was $440.3 million , or 8.3% of total held for investment unguaranteed exposure carried at historical cost . As of September 30, 2024 and December 31, 2023 , loans and leases carried at historical cost within the following verticals comprise the largest portion of the total potential problem and classified loans and leases: As of September 30, 2024 As of December 31, 2023 Vertical % of Criticized and Classified Loans and Leases Vertical % of Criticized and Classified Loans and Leases General Lending 14.1% Senior Housing 16.5% Bioenergy 12.2 Bioenergy 14.4 Senior Housing 10.3 General Lending 12.2 Search Fund Lending 7.1 Search Fund Lending 8.6 Healthcare 7.0 Wine & Craft Beverage 5.6 Sponsor Finance 6.1 Healthcare 3.9 Wine & Craft Beverage 4.3 Hotels 3.3 Community Facilities 3.8 Self Storage 3.3 Veterinary 3.5 Senior Care 3.2 % of Total Criticized and Classified Loans 68.4% % of Total Criticized and Classified Loans 71.0% Of the above listed verticals, Senior Housing and Sponsor Finance are within the Company’s Specialty Lending division, Bioenergy, Community Facilities and Hotels are within the Energy & Infrastructure division, and the remainder of the above listed verticals are within the Small Business Banking division. Total criticized and classified loans and leases increased $166.3 million in the first nine months of 2024. This increase by loan and lease risk grade categories was comprised of a decrease of $73.2 million for those identified as criticized offset by an increase of $239.5 for those identified as classified, of which $169.4 million is guaranteed and $70.1 million is unguaranteed. There were five large loan relationships that were added to classified loans in the third quarter of 2024 which comprised 78.7% of the change in unguaranteed classified loans. The Company continues its focus on underwriting standards and credit quality in a high interest rate environment. Additionally, the Company actively considers changing economic conditions related to portfolio management. Loans and leases that experience insignificant payment delays and payment shortfalls are generally not individually evaluated for the purpose of estimating the allowance for credit losses. The Bank generally considers an “insignificant period of time” from payment delays to be a period of 90 days or less. The Bank would consider a modification for a customer experiencing what is expected to be a short-term event that has temporarily impacted cash flow. This could be due, among other reasons, to illness, weather, impact from a one-time expense, slower than expected start-up, construction issues or other short-term issues. Credit personnel will review the request to determine if the customer is stressed and how the event has impacted the ability of the customer to repay the loan or lease long term. At September 30, 2024, the Company had a total of $14.3 million in loans modified in 2024 to borrowers experiencing financial difficulties, all of which remained current with $8.3 million on principal payment deferral. Management endeavors to be proactive in its approach to identify and resolve p roblem loans and leases and is focused on working with the borrowers and guarantors of these loans and leases to provide loan and lease modifications when warranted. Management implements a proactive approach to identifying and classifying loans and leases as special mention (also referred to as criticized), Risk Grade 50. At September 30, 2024 , and December 31, 2023 , Risk Grade 50 loans and leases, excluding lo ans measured at fair value, totaled $526.0 million and $599.2 million, respectively, for a decrease of $73.2 million. Relative to total held for investment unguaranteed exposure carried at historical cost at September 30, 2024 and December 31, 2023, unguaranteed Risk Grade 50 loans and leases decreased to 5.5% from 7.3%, respectively. 59 Table of Contents The largest year-to-date changes in Risk Grade 50 loans and leases carried at historical cost were within the foll owing verticals : September 30, 2024 vs. December 31, 2023 Increase (Decrease) Vertical $ % Sponsor Finance $ 30,017 41.0 % Healthcare 29,715 40.6 Veterinary 18,239 24.5 RV Parks 10,284 14.0 Commercial Real Estate Financing 7,535 10.3 Deathcare 6,511 8.9 Venture Banking (6,157) (8.4) Agriculture (6,817) (9.3) Educational Services (7,242) (9.9) Fitness Centers (9,380) (12.8) Government Contractors (11,864) (16.2) Senior Housing (30,611) (41.8) Bioenergy (107,114) (146.3) Total of largest changes in Risk Grade 50 loans and leases $ (76,884) (105.4)% The decrease in Risk Grade 50 loans and leases, exclusive of loans measured at fair value, during the first nine months of 2024 was principally confined to 13 verticals, as reflected above. The primary driver for the decline in Risk Grade 50 loans and leases was a migration to improvement within the Senior Housing portfolio coupled with two large Bioenergy relationships moving to classified status in the third quarter of 2024. Of the above listed verticals, Sponsor Finance, Senior Housing, Government Contactors, Venture Banking and Commercial Real Estate Financing are within the Company’s Specialty Lending division, Bioenergy is within the Energy & Infrastructure division, and the remainder of the above listed verticals are within the Small Business Banking division. At September 30, 2024, approximately 94.4% of loans and leases classified as Risk Grade 50 are performing with no relationships having payments past due more than 30 days. While the level of nonperforming assets fluctuates in response to changing economic and market conditions, in light of the relative size and composition of the loan and lease portfolio and management’s degree of success in resolving problem assets, management believes that a proactive approach to early identification and intervention is critical to successfully managing a small business loan portfolio. Allowance for Credit Losses on Loans and Leases The ACL of $125.8 million at December 31, 2023, increased by $42.9 million, or 34.1%, to $168.7 million at September 30, 2024. The ACL as a percentage of loans and leases held for investment at historical cost amounted to 1.5% and 1.8% at December 31, 2023 and September 30, 2024, respectively. The increase in the ACL during the first nine months of 2024 was primarily the result of specific reserve changes on individually evaluated loans and continued growth of the loan and lease portfolio. See also the above section captioned “Provision for Credit Losses” in “Results of Operations” for related information. 60 Table of Contents Actual past due held for in vestment loans and leases, inclusive of loans measured at fair value, have in creased by $174.0 million since December 31, 2023 . Total loans and leases 90 or more days past due in creased $70.9 million , or 56.9%, compared to December 31, 2023 . This increase was comprised of a $917 thousand decrease in unguaranteed exposure combined with an offsetting $71.8 million increase in the guaranteed portion of past due loans compared to December 31, 2023 . At September 30, 2024 and December 31, 2023 , total held for investment unguaranteed loans and leases past due as a percentage of total held for investment unguaranteed loans and leases, inclusive of loans measured at fair value, was 1.8% and 0.8% , respectively. Total unguaranteed loa ns and leases past due were comprised of $104.8 million carried at historical cost, an in crease of $67.1 million , and $12.8 million measured at fair value, an increase of $3.0 million , as of September 30, 2024 compared to December 31, 2023 . Management continues to actively monitor and work to improve asset quality. Management believes the ACL of $168.7 million at September 30, 2024 is appropriate in light of the risk inherent in the loan and lease portfolio. Management’s judgments are based on numerous assumptions about current and expected events that it believes to be reasonable, but which may or may not be valid. Accordingly, no assurance can be given that management’s ongoing evaluation of the loan and lease portfolio in light of changing economic conditions and other relevant circumstances will not require significant future additions to the ACL, thus adversely affecting the Company’s operating results. Additional information on the ACL is presented in Note 5. Loans and Leases Held for Investment and Credit Quality of the Unaudited Condensed Consolidated Financial Statements in this report. Liquidity Management Liquidity management refers to the ability to meet day-to-day cash flow requirements based primarily on activity in loan and deposit accounts of the Company’s customers. Liquidity is immediately available from four major sources: (a) cash on hand and on deposit at other banks; (b) the outstanding balance of federal funds sold; (c) the market value of unpledged investment securities; and (d) availability under lines of credit, FHLB advances and Federal Reserve Discount Window. A primary tool in the Company's liquidity management process is the utilization of an Outflow Coverage Ratio (“OCR”) model to stress outflows in various scenarios with targeted days of liquidity coverage. At September 30, 2024, the total amount of these four liquidity source items was $4.36 billion, or 34.6% of total assets, a decrease of 3.2% of total assets from $4.26 billion, or 37.8% of total assets, at December 31, 2023. Loans and other assets are funded primarily by loan sales, wholesale deposits, and core deposits. To date, an increasing retail deposit base and a stable amount of brokered deposits have been adequate to meet loan obligations, while maintaining the desired level of immediate liquidity. The Company maintains an investment securities portfolio that is available for both immediate and secondary contingent liquidity purposes, whether via pledging to the Federal Home Loan Bank, Federal Reserve Bank, or through liquidation. Additionally, the Company maintains a guaranteed loan portfolio that is also a contingent liquidity source, whether via pledging to the Federal Reserve Discount Window or through liquidation. At September 30, 2024, none of the investment securities portfolio was pledged to secure public deposits or pledged to retail repurchase agreements, leaving $1.23 billion available to be pledged as collateral. Contractual Obligations The Company has entered into significant fixed and determinable contractual obligations for future payments. In March 2024, the Company entered into a $100.0 million term loan agreement with a third party correspondent bank. See Note 8. Borrowings in the accompanying notes to Unaudited Condensed Consolidated Financial Statements for more details. Other than the new borrowing previously mentioned and normal changes in the ordinary course of the Company’s operations, there have been no significant changes in the types of contractual obligations or amounts due since December 31, 2023. See the section titled “Liquidity Management” in Part II, Item 7 of the Company’s 2023 Form 10-K for additional discussion of contractual obligations. Off-Balance Sheet Arrangements In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with GAAP, are not recorded in the consolidated financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of commitments to extend credit and standby letters of credit. As of December 31, 2023, there was one airplane purchase agreement commitment outstanding and during 2024 the airplane was placed in service. For more information, see Note 10. Commitments and Contingencies in the accompanying notes to Unaudited Condensed Consolidated Financial Statements. 61 Table of Contents Asset/Liability Management and Interest Rate Sensitivity One of the primary objectives of asset/liability management is to maximize the net interest margin while minimizing the earnings risk associated with changes in interest rates. One method used to manage interest rate sensitivity is to measure the repricing differences, or interest rate gaps, between interest-earning assets and interest-bearing liabilities, across various time periods. As of September 30, 2024, the balance sheet’s total cumulative gap position was 3.1%, meaning that over the entire life of the Company's assets and liabilities, more assets will reprice than liabilities. For further information, see Item 3. Quantitative and Qualitative Disclosures About Market Risk. The interest rate gap method, however, addresses only the magnitude of asset and liability repricing timing differences as of the report date and does not address earnings, market value, changes in account behaviors based on the interest rate environment, or growth. Therefore, management also uses an earnings simulation model to prepare, on a regular basis, earnings projections based on a range of instantaneous parallel interest rate shocks applied to a static balance sheet and non-parallel interest rate shocks applied to a dynamic balance sheet to measure interest rate risk. As of September 30, 2024, the Company’s interest rate risk profile is asset-sensitive under the instantaneous parallel interest rate shock scenarios applied to a static balance sheet. For more information, see Item 3. Quantitative and Qualitative Disclosures About Market Risk. An asset-sensitive position means that net interest income will generally move in the same direction as interest rates. For instance, if interest rates increase, net interest income can be expected to increase, and if interest rates decrease, net interest income can be expected to decrease. The Company attempts to mitigate interest rate risk by match funding assets and liabilities with similar rate instruments. Asset/liability sensitivity is primarily derived from the prime-based loans that adjust as the prime interest rate changes, rates on cash accounts that adjust as the federal funds rate changes and the longer duration of indeterminate term deposits. Note that the Company regularly models various forecasted rate projections with non-parallel shifts that are reflective of potential current rate environment outcomes. Under these scenarios, the Company’s interest rate risk profile may increase in asset sensitivity, decrease in asset sensitivity, or depending on the scenario and timing of anticipated rate changes, may transition to a liability-sensitive interest rate risk profile. The Company believes that regular modeling of various interest rate outcomes allows it to assess and manage potential risks from various rate shifts. Capital The maintenance of appropriate levels of capital is a management priority and is monitored on a regular basis. The Company’s principal goals related to the maintenance of capital are the following: to provide adequate capital to support the Company’s risk profile consistent with the risk appetite approved by the Board of Directors; to provide financial flexibility to support future growth and client needs; to comply with relevant laws, regulations, and supervisory guidance; to achieve optimal ratings for the Company and its subsidiaries; and to provide a competitive return to shareholders. Management regularly monitors the capital position of the Company on both a consolidated and bank level basis. In this regard, management’s goal is to maintain capital at levels that are in excess of the regulatory “well capitalized” levels. Risk-based capital ratios, which include Tier 1 Capital, Total Capital and Common Equity Tier 1 Capital, are calculated based on regulatory guidance related to the measurement of capital and risk-weighted assets. 62 Table of Contents Capital amounts and ratios as of September 30, 2024, and December 31, 2023, are presented in the table below. Actual Minimum Capital Requirement Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions (1) Amount Ratio Amount Ratio Amount Ratio Consolidated - September 30, 2024 Common Equity Tier 1 (to Risk-Weighted Assets) $ 1,039,521 11.19 % $ 418,224 4.50 % N/A N/A Total Capital (to Risk-Weighted Assets) 1,156,496 12.44 743,509 8.00 N/A N/A Tier 1 Capital (to Risk-Weighted Assets) 1,039,521 11.19 557,632 6.00 N/A N/A Tier 1 Capital (to Average Assets) 1,039,521 8.60 483,345 4.00 N/A N/A Bank - September 30, 2024 Common Equity Tier 1 (to Risk-Weighted Assets) $ 1,007,058 11.17 % $ 405,866 4.50 % $ 586,251 6.50 % Total Capital (to Risk-Weighted Assets) 1,120,642 12.43 721,539 8.00 901,924 10.00 Tier 1 Capital (to Risk-Weighted Assets) 1,007,058 11.17 541,154 6.00 721,539 8.00 Tier 1 Capital (to Average Assets) 1,007,058 8.39 480,148 4.00 600,185 5.00 Consolidated - December 31, 2023 Common Equity Tier 1 (to Risk-Weighted Assets) $ 960,433 11.73 % $ 368,549 4.50 % N/A N/A Total Capital (to Risk-Weighted Assets) 1,063,157 12.98 655,198 8.00 N/A N/A Tier 1 Capital (to Risk-Weighted Assets) 960,433 11.73 491,399 6.00 N/A N/A Tier 1 Capital (to Average Assets) 960,433 8.58 447,561 4.00 N/A N/A Bank - December 31, 2023 Common Equity Tier 1 (to Risk-Weighted Assets) $ 823,478 10.40 % $ 356,426 4.50 % $ 514,837 6.50 % Total Capital (to Risk-Weighted Assets) 922,876 11.65 633,646 8.00 792,057 10.00 Tier 1 Capital (to Risk-Weighted Assets) 823,478 10.40 475,234 6.00 633,646 8.00 Tier 1 Capital (to Average Assets) 823,478 7.41 444,480 4.00 555,600 5.00 (1) Prompt corrective action provisions are not applicable at the bank holding company level. Critical Accounting Policies and Estimates The preparation of consolidated financial statements in accordance with GAAP requires the Company to make estimates and judgments that affect reported amounts of assets, liabilities, income and expenses and related disclosure of contingent assets and liabilities. The Company bases estimates on historical experience and on various other assumptions that are believed to be reasonable under current circumstances, results of which form the basis for making judgments about the carrying value of certain assets and liabilities that are not readily available from other sources. Estimates are evaluated on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions. Accounting policies, including those for the Company's critical accounting policies, as described in detail in the Notes to the Company’s Unaudited Condensed Consolidated Financial Statements in this report and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, are an integral part of the Company’s Consolidated Financial Statements. A thorough understanding of these accounting policies is essential when reviewing the Company’s reported results of operations and financial position. The Company’s most critical accounting policies and estimates are listed below. These estimates require the Company to make difficult, subjective or complex judgments about matters that are inherently uncertain. • Allowance for credit losses; • Valuation of loans accounted for under the fair value option; • Valuation of servicing assets; and 63 Table of Contents • Income taxes Changes in these estimates, that are likely to occur from period to period, or the use of different estimates that the Company could have reasonably used in the current period, could have a material impact on the Company’s financial position, results of operations or liquidity.