What changed in this filing

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Item 7. Management’s Discussion and Analysis

2025-03-18 compared with 2024-02-22 · 200 added, 324 removed, 659 unchanged (44% of the section changed)

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For a comparison of 2023 results to 2022 and other 2022 information not included herein, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Part II, Item 7 of the 2023 Form 10-K filed with the SEC on February 22, 2024 .

This discussion should be read in conjunction with the financial statements and related notes included elsewhere in this Report on Form 10-K.

This discussion should be read in conjunction with the financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

Results of operations for the periods included in this review are not necessarily indicative of results to be obtained during any future period.

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The Bank also lends more broadly to select borrowers outside of those verticals.

As of December 31, 2023, the Company’s wholly owned material subsidiaries were the Bank, Government Loan Solutions (“GLS”), Live Oak Grove, LLC (“Grove”), Live Oak Ventures, Inc.

(“Live Oak Ventures”) and Canapi Advisors, LLC (“Canapi Advisors”).

As of December 31, 2024, the Company’s wholly owned material subsidiaries were the Bank, Government Loan Solutions (“GLS”), Live Oak Grove, LLC (“Grove”) and Live Oak Ventures, Inc.

(“Live Oak Ventures”).

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.

The Grove provides Company employees and business visitors with on-site dining at the Company’s Wilmington, North Carolina headquarters.

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 provides investment advisory services to a series of funds (the “Canapi Funds”) focused on providing venture capital to new and emerging financial technology companies.

Canapi Advisors, LLC (“Canapi Advisors”) was a wholly owned subsidiary providing 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.

Canapi Advisors was subsequently dissolved in the fourth quarter of 2024.

As of December 31, 2024, Live Oak Ventures consolidated its investment in Synply, Inc.

as a result of its controlling interest in that entity.

Synply is a cloud-based technology platform designed to simplify the loan syndication process for financial institutions and discloses the non-controlling interest according to the Company’s consolidation policy.

As of December 31, 2024, the Bank’s wholly owned subsidiaries were 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”).

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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 loan and lease 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.”

Income from the retention of loans consists principally of interest income.

Income from the sale of loans consists 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.

Executive Summary

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Income Statement Data

Net income $ 73,898 $ 176,208 $ 166,995

Net income attributable to Live Oak Bancshares, Inc.

$ 77,474 $ 73,898 $ 176,208

Per Common Share

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The following is a summary of the Company's financial highlights and events for 2024:

• Loans and leases held for sale and investment increased by $1.12 billion, or 14.2%.

Total loan originations in 2023 were $3.95 billion compared to $4.01 billion in 2022, a decrease of 1.5%.

• Record year of loan production with total loans and leases held for sale and investment increasing by $1.56 billion, or 17.3%.

Total loan originations in 2024 were $5.16 billion compared to $3.95 billion in 2023, an increase of 30.6%.

Substantial loan production in 2024 was the primary driver of growth in total assets which increased to $12.94 billion at December 31, 2024 as compared to $11.27 billion at December 31, 2023 , for an increase of $1.67 billion, or 14.8%.

• Supporting loan growth, total deposits increased by $1.49 billion, or 14.5%, to $11.76 billion at the end of 2024.

• Net income decreased $102.3 million, or 58.1%, from $176.2 million, or $3.92 per diluted share, to $73.9 million, or $1.64 per diluted share.

This decrease was primarily the result of significant one-time gains in 2022 from the sale of two equity method investments.

A detailed overview of key drivers of year over year changes in reported net income is outlined more fully in the opening to the section titled “Results of Operations.”

• The banking crisis in the spring of 2023 temporarily drove strategically higher levels of liquidity and affected the Company’s offering of products which provide depositors with FDIC insurance in excess of $250 thousand, and heightened industry attention to uninsured deposit risk.

At December 31, 2023 the Company’s uninsured deposits were $1.46 billion, or 14.2%, of total deposits.

• In the second consecutive year of continued Federal Reserve rate increases, net interest margin declined to 3.35% for 2023 as compared to 3.87% for 2022.

This decline in net interest margin was outpaced by 2023 loan growth which largely drove an increase in net interest income of $17.8 million, or 5.4%.

• In the third quarter of 2023, the Company changed the valuation techniques used to estimate the fair value of its servicing rights and loans measured at fair value as a result of rising interest rates and their impacts on market conditions.

These revisions were made to provide estimates which the Company believes are more representative of fair value.

These estimate changes were implemented as of July 1, 2023 and resulted in one-time adjustments on that date to increase the estimated value of the servicing asset by $13.7 million and loans measured at fair value by $1.3 million, or a total impact to noninterest income of $15.0 million.

• The provision for loan and lease credit losses increased $10.4 million, largely the result of significant held for investment loan growth combined with charge-off experience impacts.

Total nonperforming unguaranteed loans and leases as a percentage of total loans and leases held for investment, both excluding loans measured at fair value, increased from 0.27% at the end of 2022 to 0.48% at the end of 2023.

• Net income attributable to Live Oak Bancshares, Inc.

increased $3.6 million, or 4.8%, from $73.9 million, or $1.64 per diluted share, to $77.5 million, or $1.69 per diluted share, largely due to the following items.

• Net interest income increased by $30.6 million, or 8.9%, largely the result of robust loan growth, partially offset by higher funding costs which were reflected in a decline in net interest margin to 3.27% for 2024 as compared to 3.35% for 2023.

• The provision for credit losses increased $44.9 million, or 87.5%, driven by record loan growth combined with the impacts of the current macroeconomic environment.

Total nonperforming unguaranteed loans and leases as a percentage of total loans and leases held for investment, excluding loans measured at fair value, increased from 0.48% at the end of 2023 to 0.82% at the end of 2024.

Net charge-offs as a percentage of average held for investment loans and leases carried at historical cost, for the years ended December 31, 2024 and 2023 , were 0.52% and 0.28%, respectively.

Business Outlook

Below is a discussion of management’s current expectations regarding Company performance over the near-term based on market conditions, the regulatory environment and business strategies as of the time the Company filed this Report.

Actual outcomes and results may differ materially from what is expressed or forecasted in these forward-looking statements.

See “Important Note Regarding Forward-Looking Statements” in this Report for more information on forward-looking statements.

The Company's results for 2023 demonstrated a continuation of solid growth momentum in building predictable long-term core earnings, proactive credit risk management and a resilient business model.

Management continues to focus on building recurring revenue streams, promoting change within the financial technology industry, and building out selected existing verticals while adding new verticals to the Company's business model.

Management anticipates that the Company's loan and lease portfolios will continue to grow as a result of its proven customer first focus combined with the continued pursuit of expanded small business lending within the SBA and other government programs as well as conventional lending.

• Increased total noninterest income of $12.0 million, or 10.8%, and decreased total noninterest expense of $8.6 million, or 2.7%.

A detailed overview of key drivers of year-over-year changes in reported net income is outlined more fully in the opening to the section titled “Results of Operations.”

Non-GAAP Financial Measures

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Results of Operations

The Company reported net income of $73.9 million, or $1.64 per diluted share, for 2023 compared to $176.2 million, or $3.92 per diluted share, for 2022.

The decrease in net income was principally due to the decrease in equity method investment income of $150.2 million, primarily a result of the aggregate $149.2 million gains included in equity method investments income in 2022 related to the sales of the Company’s investments in Finxact, Inc.

(“Finxact”) and Payrailz, LLC (“Payrailz”).

To a lesser extent, the decrease was also influenced by a $10.4 million increase in the provision for loan and lease credit losses, which was primarily the result of loan growth and charge-off related impacts.

Key factors partially offsetting the year-over-year decrease in net income were:

• Increase in net interest income of $17.8 million, or 5.4%, driven by increases in loan volumes, partially mitigated by a decrease in net interest margin arising from an increase in interest-bearing liabilities combined with average cost of funds outpacing the average yield on interest-earning assets;

• Increase in the loan servicing asset revaluation income of $21.5 million, principally due to the third quarter of 2023 change in valuation techniques used to estimate the fair value of servicing rights;

• A decrease in income tax expense of $25.2 million, or 73.8%, primarily related to decreased pretax income.

The Company reported net income attributable to Live Oak Bancshares, Inc.

of $77.5 million, or $1.69 per diluted share, for 2024 compared to $73.9 million, or $1.64 per diluted share, for 2023.

The increase in net income was largely due to the following items:

• Increased net interest income of $30.6 million, or 8.9%;

• Increased net gains on sales of loans of $14.4 million, or 30.8%, principally the result of higher loan sale volumes combined with improving premiums in 2024;

• Increased other noninterest income of $14.0 million, largely related to the combination of a $2.4 million gain from the sale of a building in the third quarter of 2024, 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.

• Decreased impairment charges of $14.1 million, arising from a fourth quarter of 2023 renewable energy tax credit investment.

Key factors partially offsetting the year-over-year increase in net income were a combination of increased provision for credit losses of $44.9 million, increased net loss on the loan servicing asset revaluation of $17.0 million and increased salaries and employee benefits of $8.2 million.

Net Interest Income and Margin

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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 the Bank offers are generally competitive with other digital deposit product offerings.

Due to the nature of a branchless bank and the relatively low overhead required for deposit gathering, the rates the Bank offers are generally above the industry average.

For 2024, net interest income increased $30.6 million, or 8.9%, to $375.9 million compared to $345.3 million for 2023.

This increase was principally due to the significant 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.

Excluding PPP loan impacts, comprised of amortization of net deferred fees combined with a 1% annualized interest rate less the related interest expense from funding activity, net interest income increased by $24.3 million.

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 $1.20 billion, or 11.6%, to $11.50 billion for 2024 , compared to $10.30 billion for 2023, while the yield on average interest-earning assets increased 39 basis points to 7.07%.

The cost of funds on interest-bearing liabilities for 2024 increased 52 basis points to 4.11%, and the average balance of interest-bearing liabilities increased by $1.08 billion, or 11.3%, over 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 3.31% in 2023 to 4.17% for in 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.

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The net interest margin decreased from 3.35% for 2023 to 3.27% for 2024 .

During 2023, the Federal Reserve increased the federal funds upper target rate by 100 basis points to 5.5%.

In December 2023, the Federal Reserve released its most current federal funds target rate midpoint projections which implied a decrease of the median Federal Funds rate to 4.6% by the end of 2024 and a decrease of approximately 100 basis points to 3.6% by the end of 2025.

There can be no assurance that any further increases or decreases in the Federal Funds rate will occur, and if they do, the amount and timing of actual adjustments are subject to change.

In January 2025, the Federal Reserve decided to maintain the federal funds upper target rate at 4.5%.

The Federal Reserve released its most current federal funds target rate midpoint projections at its previous meeting in December 2024 which implied a decrease of approximately 50 basis points to 3.9% 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.

Quantitative and Qualitative Disclosures About Market Risk for information about the Company’s sensitivity to interest rates.

Average Balances and Yields.

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Shareholders' equity 975,215 853,588 803,814

Non-controlling interest 782 — —

Total liabilities and shareholders' equity $ 11,916,511 $ 10,684,863 $ 8,970,479

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Net interest income $ (12,058) $ 42,658 $ 30,600 $ (33,646) $ 51,450 $ 17,804

Provision for Loan and Lease Credit Losses

The provision for loan and lease 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 losses inherent in the loan and lease portfolio.

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 losses inherent in the loan and lease portfolio.

Beginning in the second quarter of 2024, expense related to off-balance sheet credit exposures was also included in the provision for credit losses in response to growth in the amount of loans with applicable off-balance sheet credit risk.

See Note 1 under the subheading Allowance for Off-Balance Sheet Credit Exposures for additional information.

Losses inherent in loan relationships are mitigated if a portion of the loan is guaranteed by the SBA or USDA.

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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 2023, the provision for loan and lease credit losses was $51.3 million compared to $40.9 million in 2022, an increase of $10.4 million.

The 2023 increase in provision was primarily the result of loan growth and charge-off related impacts.

For 2024, the provision for credit losses was $96.2 million compared to $51.3 million in 2023, an increase of $44.9 million.

The 2024 increase in provision was primarily the result of record loan growth combined with the impacts of the current macroeconomic environment, which adversely affected some borrowers’ performance.

Loans and leases held for investment at historical cost were $9.90 billion as of De cember 31, 2024, an increase of $1.66 billion , or 20.1%, c ompared to December 31, 2023.

Net charge-offs for loans and leases carried at historical cost were $46.7 million, or 0.52% of average loans and leases held for investment at amortized cost, excluding loans measured at fair value, for 2024, compared to net charge-offs of $21.4 million, or 0.28%, for 2023, an increase of $25.3 million, or 118.5%.

The increase in net charge-offs for 2023 was primarily isolated to six relationships.

The increase in net charge-offs for 2024 was primarily related to an increase in activity within five verticals, Search Fund Lending, General Lending, Government Contracting, Community Facilities and Wine & Craft Beverage.

The increase was largely due to the high interest rate environment and inflationary pressures, which increased financial strain on borrowers.

Net charge-offs are a key element of historical experience in the Company's estimation of the allowance for credit lo sses on loans and leases.

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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 asset revaluation is significantly impacted by changes in market rates and other underlying assumptions such as prepayment speeds and default rates.

Net (loss) gain on loans accounted for under the fair value option is also significantly impacted by changes in market rates, prepayment speeds and inherent credit risk.

In addition, the loan servicing asset revaluation is significantly impacted by changes in market rates and other underlying assumptions such as prepayment speeds.

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.

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Net gains on sales of loans 60,899 46,545 43,244 14,354 30.8 3,301 7.6

Net (loss) gain on loans accounted for under the fair value option (3,539) 1,046 4,257 (4,585) (438.3) (3,211) (75.4)

Net gain (loss) on loans accounted for under the fair value option 2,403 (3,539) 1,046 5,942 167.9 (4,585) (438.3)

Equity method investments (loss) income (10,921) (5,994) 144,250 (4,927) (82.2) (150,244) (104.2)

Equity security investments (losses) gains, net (969) 3,355 44,752 (4,324) (128.9) (41,397) (92.5)

Equity security investments gains (losses), net 553 (969) 3,355 1,522 157.1 (4,324) (128.9)

Lease income 9,756 10,007 10,084 (251) (2.5) (77) (0.8)

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Years ended December 31, 2024 vs.

For 2023 , noninterest income decreased by $126.3 million, or 53.1%, compared to 2022 .

The decrease over the prior year is primarily a result of the aggregate $149.2 million in Finxact and Payrailz gains included in equity method investments income in 2022.

To a lesser extent, the decrease was also influenced by a $4.6 million negative change in net losses on loans accounted for under the fair value option and decreased equity security investments gains of $4.3 million.

Partially offsetting the decrease over 2022 was an increased net gain of $21.5 million related to the loan servicing asset revaluation combined with increased net gains on sales of loans of $3.3 million and a $3.2 million increase in management fee income generated by Canapi Advisors.

Canapi Advisors is included in the Company's Fintech segment.

For 2024 , noninterest income increased by $12.0 million, or 10.8%, compared to 2023 .

The increase over the prior year is primarily a result of higher servicing revenue of $4.1 million, increased net gains on sales of loans of $14.4 million, a $5.9 million increase in the net gain on loans accounted for under the fair value option and increased other noninterest income of $14.0 million.

The increase in other noninterest income was largely related to the previously 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 were higher losses of $17.0 million related to the servicing asset revaluation, $4.9 million in higher flow-through losses of equity method investments and a $5.7 million decrease in management fee income due to the restructuring of the Canapi Funds in the third quarter of 2024.

The tables below reflect loan and lease production, sales of guaranteed loans and the aggregate balance in guaranteed loans sold that are being serviced.

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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 the prepayment speed and discount rate being the most sensitive assumptions.

For 2023, there was a net gain on loan servicing asset revaluation of $4.9 million compared to a net loss of $16.6 million for 2022, resulting in a positive change of $21.5 million, or 129.5%.

The increase in the valuation of the servicing asset compared to 2022 was principally the result of the third quarter of 2023 change in valuation techniques used to estimate the fair value of servicing rights with a one-time positive adjustment of $13.7 million as a result of rising interest rates and their impacts on market conditions.

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 2024, there was a net loss on loan servicing asset revaluation of $12.2 million compared to a net gain of $4.9 million for 2023, resulting in a negative change of $17.0 million.

The negative change in valuation of the servicing asset compared to 2023 was principally the result of the third quarter of 2023 change in valuation techniques used to estimate the fair value of servicing rights.

The fair value of servicing rights is highly sensitive to changes in underlying assumptions.

Changes in prepayment speed and discount rate assumptions typically have the most significant impacts on the fair value of servicing rights.

Generally, as interest rates rise on variable rate loans, loan prepayments increase due to an increase in refinance activity, which results in a decrease in the fair value of servicing assets, however, weakening economic conditions or significant declines in interest rates can also increase loan prepayment activity.

The discount rate used in the estimation process is tied to a benchmark risk-free rate with a risk premium added using a build-up method.

Measurement of fair value is limited to the conditions existing and the assumptions used as of a particular point in time, and those assumptions may not be appropriate if they are applied at a different time.

At December 31, 2024, the key assumptions used to determine the fair value of the Company’s servicing rights included a weighted average prepayment speed equal to 15.6% and a weighted average discount rate equal to 13.5%.

The table below reflects the sensitivity of the current fair value of servicing assets to immediate adverse changes in the above key assumptions with all other assumptions remaining static:

As of December.

31, 2024 As of December.

Fair value of servicing rights $55,788 $48,186

Incremental Increase (Decrease) in Value Incremental Increase (Decrease) in Value

Prepayment Speed

20% increase ($3,459) ($2,815)

10% increase (1,785) (1,452)

Discount Rate

200 basis point increase (2,603) (2,186)

100 basis point increase (1,331) (1,117)

The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance.

As indicated, changes in fair value based on changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear.

Also, in this table, the effect of a variation in a particular assumption on the fair value of the servicing rights is calculated without changing any other assumption.

Changes in one factor may result in changes in another.

Servicing Assets in the notes to consolidated financial statements for further details of the factors considered by the Company in estimating the fair value of servicing assets.

Net Gains on Sales of Loans:

For 2024, net gains on sales of loans increased $14.4 million, or 30.8%, compared to 2023.

The volume of guaranteed loans sold increased $296.7 million, or 51.1%, over 2022 while the average net gain on loan sale premium decreased from 108% to 105% in 2022 and 2023, respectively.

The increase in net gains on sales of loans over 2022 was principally the result of higher loan sale volume.

Net (Loss) Gain on Loans Accounted for Under the Fair Value Option :

For 2023, the Company had a net loss on loans accounted for under the fair value option of $3.5 million compared to a net gain of $1.0 million for 2022, a negative change of $4.6 million.

The volume of guaranteed loans sold increased $103.4 million, or 11.8%, over 2023 while the average net gain on loan sale premium increased from 105% to 107% in 2023 and 2024, respectively.

The increase in net gains on sales of loans over 2023 was principally related to a higher loan sale volume combined with improving premium.

Net Gain (Loss) on Loans Accounted for Under the Fair Value Option :

For 2024, the Company had a net gain on loans accounted for under the fair value option of $2.4 million compared to a net loss of $3.5 million for 2023, a positive change of $5.9 million.

The carrying amount of loans accounted for under the fair value option at December 31, 2024 and 2023 was $328.7 million (all classified as held for investment) and $388.0 million (all classified as held for investment), respectively, a decrease of $59.3 million, or 15.3%.

The incremental net loss on loans accounted for under the fair value option compared to both prior periods was largely the result of negative market trends between the comparative periods.

The increased levels of net gains arising from the valuation of loans accounted for under the fair value option was principally due to the third quarter of 2023 change in valuation techniques used to estimate the fair value of loans.

Noninterest Expense

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Total noninterest expense $ 314,239 $ 322,885 $ 314,226 $ (8,646) (2.7) % $ 8,659 2.8 %

Total noninterest expense for 2023 increased $8.7 million, or 2.8%, compared to 2022.

The increase in noninterest expense was predominately driven by the following items.

Total noninterest expense for 2024 decreased $8.6 million, or 2.7%, compared to 2023.

The decrease in noninterest expense was predominately driven by the following items.

Salaries and employee benefits :

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The increase in salaries and employee benefits was principally related to continued investment in human resources to support strategic and growth initiatives.

Total full-time equivalent employees decreased from 970 at December 31, 2022 to 952 at December 31, 2023, however, average full-time equivalent employees for 2023 was 966 as compared to 887 for 2022 .

Total full-time equivalent employees increased from 952 at December 31, 2023 to 1,014 at December 31, 2024 .

Salaries and employee benefits expense included $26.4 million of stock-based compensation for 2024 , compared to $17.9 million for 2023 .

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:

Professional services expense decreased $4.0 million, or 34.1%, compared to 2022 .

This decrease was due to lower levels of legal fees combined with an insurance recovery of $1.3 million in 2023 related to previously expensed legal fees.

Technology expense:

Technology expense increased $3.4 million, or 12.0%, compared to 2022 .

This increase was primarily related to enhanced investments in the Company’s technology resources.

Renewable energy tax credit investment impairment:

Renewable energy tax credit investment impairment decreased $14.1 million which was the result of a renewable energy tax credit investment in the fourth quarter of 2023 which resulte d in $14.6 million in impairment charges during that year.

Investments of this type generate a return primarily through the realization of income tax credits and other benefits;

accordingly, impairment of the investment amount is recognized in conjunction with the realization of related tax benefits

FDIC insurance:

FDIC insurance increased $6.9 million, or 70.9%, compared to 2022 .

This is largely the result of a one-time increase in insurance assessment rates effective in 2023, combined with the ongoing growth in total consolidated assets at the Company.

Contributions and donations:

For 2023 , contributions and donations expense decreased $6.5 million, or 100.0%, compared to 2022.

This decrease is principally related to a special charitable donation during the second quarter of 2022 of $5.0 million made in connection with the earlier discussed Finxact gain.

FDIC insurance decreased $5.8 million, or 35.0%, compared to 2023 .

This decrease is largely the product of favorable changes in the Company’s FDIC assessment rates in 2024.

Other expense:

Other expenses increased $4.8 million, or 38.5%, compared to 2022 .

This increase is largely related to $2.5 million in increased levels of provision for unfunded commitment reserves, principally a product of refinements in estimation assumptions in the first quarter of 2023.

Other expense decreased $4.7 million, or 27.6%, compared to 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

Income tax expense and related effective tax rate in 2024 was $11.8 million and 13.2% compared to $8.9 million and 10.8% in 2023.

The Company's renewable energy investments generated federal investment tax credits of $16.4 million in both 2023 and 2022, which reduced its effective tax rate for both years.

The lower effective tax rate of 10.8% for 2023 was principally due lower pretax income in 2023 relative to consistent levels of renewable energy tax credits in both 2023 and 2022.

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 15.

Segments in the accompanying notes to the consolidated financial statements.

Net income (loss) by operating segment is presented below:

Years ended December 31,

2023 2022 2021

Banking $ 82,796 $ 71,937 $ 145,662

Fintech (3,156) 109,692 27,667

Other (5,742) (5,421) (6,334)

Consolidated net income $ 73,898 $ 176,208 $ 166,995

Net income increased $10.9 million, or 15.1%, compared to 2022.

Key factors influencing these changes are discussed below.

For 2023, net interest income increased $16.9 million, or 5.1%, compared to 2022.

See above section captioned “Net Interest Income and Margin” as it is principally related to the Banking segment.

The provision for loan and lease credit losses for 2023 increased $10.4 million, or 25.4%, over 2022.

See the analysis of provision for loan and lease credit losses included in the above section captioned “Provision for Loan and Lease Credit Losses” as it is entirely related to the Banking segment.

Noninterest income increased $20.5 million, or 25.4%, over 2022.

This increase was principally driven by an incremental net gain on the loan servicing asset revaluation.

Also contributing to the increase was higher net gains on sales of loans.

Partially offsetting the increased noninterest income was incremental net losses on loans accounted for under the fair value option.

See the analysis of these categories of noninterest income included in the above section captioned “Noninterest Income” for additional discussion.

Noninterest expense increased $6.8 million, or 2.3%, compared to 2022.

See the analysis of these categories of noninterest expense included in the above section captioned “Noninterest Expense” for additional discussion.

Income tax expense increased $9.3 million compared to 2022.

This was primarily the result of a higher level of pretax income.

Net income decreased by $112.8 million over 2022.

The decrease was principally due to equity method investment gains of $28.4 million and $120.8 million from the sale of Payrailz and Finxact, respectively.

Income tax expense decreased $35.0 million, compared to 2022.

This decrease is a product of the above discussed decrease in Fintech segment income.

The higher level of income tax expense for 2024 was primarily the result of lower levels of anticipated investment tax credits in 2024 as compared to the prior year.

Discussion and Analysis of Financial Condition

Total assets at December 31, 2024 were $12.94 billion, an increase of $1.67 billion, or 14.8%, compared to total assets of $11.27 billion at December 31, 2023 .

The growth in total assets was principally driven by the following:

• Cash and cash equivalents, comprised of cash and due from banks and federal funds sold, combined with investment securities available-for-sale was $1.71 billion at December 31, 2023 , an increase of $277.3 million, or 19.4%, compared to $1.43 billion at December 31 , 2022.

This increase reflects growing deposit levels combined with maintenance of the Company's targeted liquidity profile.

• Growth in total loans and leases held for investment and held for sale of $1.12 billion resulti ng from strong origination activity in 2023 of $3.95 billion.

The growth in total assets was principally driven by the growth in total loans and leases held for investment of $1.60 billion, or 18.5%, from $8.63 billion at December 31, 2023, to $10.23 billion at December 31, 2024.

Total deposits were $11.76 billion at December 31, 2024 , an increase of $1.49 billion, or 14.5%, 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 combined with strong deposit inflows.

Borrowings decreased to $23.4 million at December 31, 2023 from $83.2 million at December 31, 2022 .

This decrease was principally due to paying off the Company’s Fed Funds line of credit in the first quarter of 2023.

Borrowings in the accompanying notes to the consolidated financial statements for a discussion of current sources of available debt capacity.

Shareholders’ equity at December 31, 2023 was $902.7 million as compared to $811.0 million at December 31, 2022 .

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 December 31, 2024, the Bank’s total uninsured deposits were approximately $1.71 billion, or 14.5%, of total deposits.

Borrowings increased to $112.8 million at December 31, 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.

Borrowings in the accompanying Notes to Consolidated Financial Statements for a discussion of current sources of available debt capacity.

Shareholders’ equity at December 31, 2024 was $1.00 billion as compared to $902.7 million at December 31, 2023 .

The book value per share was $22.12 at December 31, 2024 compared to $20.23 at December 31, 2023 .

Average equity to average assets was 8.2% for the year ended December 31, 2024 compared to 8.0% for the year ended December 31, 2023 .

The increase in shareholders’ equity for 2023 was principally the result of $73.9 million in net income and stock-based compensation expense of $17.9 million and other comprehensive income associated with positive market impacts on the Company’s available-for-sale investment portfolio of $7.6 million.

The increase in shareholders’ equity for 2024 was principally the result of $77.5 million in net income and stock-based compensation expense of $26.4 million.

Regulatory Impact of Asset Growth

In the first quarter of 2023, the Company and the Bank each first exceeded $10 billion in total assets.

As of December 31, 2023, the Company and the Bank each had total assets of $11.27 billion and $11.21 billion , respectively, ending their first four consecutive quarters of reported assets in excess of $10 billion.

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 of December 31, 2024 , the Company and the Bank each had total assets of $12.94 billion and $12.86 billion .

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 asset

Consumer Financial Laws.

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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 is expected to be applicable to the Bank in the first quarter of 2024.

This provision became applicable to the Bank in the first quarter of 2024.

Deposit Insurance Assessments.

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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.

The Bank expects to become subject to the large bank method for determining its deposit insurance assessments in 2024.

The Bank became subject to the large bank method for determining its deposit insurance assessments in 2024.

Volcker Rule.

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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.

This triggered a reduction of annual pre-tax income from debit card interchange fees beginning July 1, 2024.

Additional information regarding the Durbin Amendment is presented in Item 1A.

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Loans and leases maturing in greater than five years total $6.51 billion of the total $10.26 billion.

The variable rate portion of the total held for investment loans and leases, excluding PPP loans, is 81.4%, which reflects the Company’s strategy to minimize interest rate risk through the use of variable rate products.

The variable rate portion of the total held for investment loans and leases is 87.9%, which reflects the Company’s strategy to minimize interest rate risk through the use of variable rate products.

At December 31, 2024

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Small Business Banking $ 6,499 $ 108,594 $ 177,111 $ 2,852 $ 295,056

Specialty Lending 11,377 321,002 5,213 3,783 341,375

Energy & Infrastructure 19,057 10,249 69,164 111,982 210,452

Commercial Banking 9,130 78,156 82,485 187,154 356,925

Paycheck Protection Program 551 1,176 635 — 2,362

2 unchanged sentences

Small Business Banking 5,732 6,161 431 2,132 14,456

Specialty Lending — 5,256 — — 5,256

Total 5,732 6,161 431 2,132 14,456

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Small Business Banking 5,759 65,736 22,945 140,098 234,538

Specialty Lending — 83,439 1,398 5,549 90,386

Energy & Infrastructure — 14,742 — 116 14,858

Commercial Banking 228 33,303 3,059 5,558 42,148

Total 5,987 99,039 26,004 145,656 276,686

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Small Business Banking 28,471 293,120 1,749,285 78,369 2,149,245

Specialty Lending 109,294 620,555 67,536 562 797,947

Energy & Infrastructure 186,128 30,222 156,533 312,608 685,491

Commercial Banking 337,615 1,245,125 210,825 356,638 2,150,203

Total 366,086 1,538,245 1,960,110 435,007 4,299,448

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Small Business Banking 6,006 29,386 38,055 431,051 504,498

Specialty Lending — 42,163 — — 42,163

Energy & Infrastructure — 7,541 — — 7,541

Commercial Banking — 85,456 — — 85,456

Total 6,006 114,842 38,055 431,051 589,954

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Small Business Banking 53,093 148,621 397,025 2,147,731 2,746,470

Specialty Lending 88,019 340,231 5,109 — 433,359

Energy & Infrastructure — 56,416 32,023 76,138 164,577

Commercial Banking 172,821 737,398 42,314 80,187 1,032,720

Total 225,914 886,019 439,339 2,227,918 3,779,190

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Small Business Banking $ 1,250,540 $ 1,124,834 $ 2,375,374

Specialty Lending — 87,922 87,922

Energy & Infrastructure 9,517 20,584 30,101

Commercial Banking 20,698 27,084 47,782

Total 1,271,238 1,151,918 2,423,156

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Small Business Banking 388,242 595,426 983,668

Specialty Lending — 482,146 482,146

Energy & Infrastructure 35,416 122,899 158,315

Commercial Banking 38,246 1,075,267 1,113,513

Total 426,488 1,670,693 2,097,181

6 unchanged sentences

Small Business Banking 168,033 — 168,033

Energy & Infrastructure 891 — 891

Total 168,033 — 168,033

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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.

This function reports directly to the Risk Committee of the Board of Directors.

Nonperforming Assets

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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.

The Company adopted ASU 2022-02 on January 1, 2023.

Accordingly, the prior period discussed below has been adjusted to exclude previously disclosed troubled debt restructurings for comparative purposes.

Organization and Summary of Significant Accounting Policies in the accompanying notes to the consolidated financial statements for additional information about the adoption of ASU 2022-02.

Total nonperforming assets, including loans measured at fair value, at December 31, 2024 were $371.7 million, which represented a $179.5 million, or 93.4%, increase from December 31, 2023.

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Allowance for credit losses on loans and leases to total nonperforming loans and leases 55.05 % 93.24 %

(1) Excludes loans measured at fair value.

Nonaccrual loans and leases guaranteed by U.S.

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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 ratio at December 31, 2024 and 2023 was 7.2% and 4.3%, respectively.

As of December 31, 2023 , and December 31, 2022 , potential problem (also referred to as criticized) and classified loans and leases, excluding loans measured at fair value, totaled $785.2 million and $424.7 million, respectively.

As of December 31, 2024 , and December 31, 2023 , potential problem (also referred to as criticized) and classified loans and leases, excluding loans measured at fair value, totaled $1.04 billion and $785.2 million, respectively.

The following is a discussion of these loans and leases.

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Vertical % of Criticized and Classified Loans and Leases

Senior Housing 16.5% Wine & Craft Beverage 11.5%

Bioenergy 14.4% General Lending 10.3%

General Lending 15.1% Senior Housing 16.5%

Search Fund Lending 8.6% Search Fund Lending 7.8%

Bioenergy 11.1 Bioenergy 14.4

Senior Housing 9.9 General Lending 12.2

Healthcare 6.9 Search Fund Lending 8.6

Sponsor Finance 5.5 Wine & Craft Beverage 5.6

Wine & Craft Beverage 5.3 Healthcare 3.9

Healthcare 3.9% Hotels 5.9%

Hotels 3.3% Fitness Centers 5.1%

Self Storage 3.3% Agriculture 4.5%

Senior Care 3.2% Senior Care 4.0%

Search Fund Lending 5.0 Hotels 3.3

Community Facilities 4.8 Self Storage 3.3

Self Storage 4.6 Senior Care 3.2

% of Total Criticized and Classified Loans 68.2% % of Total Criticized and Classified Loans 71.0%

Of the above listed verticals, Senior Housing is within the Company’s Specialty Lending division while Hotels and Bioenergy are within the Energy & Infrastructure division, the remainder of the above listed verticals are within the Small Business Banking division.

The majority of the $360.5 million increase in potential problem and classified loans and leases in 2023 was comprised of increased levels of Risk Grade 5 loans and leases, as discussed below.

The Company believes that its underwriting and credit quality standards have remained high and continues to consider changing economic conditions in a rising interest rate environment.

Of the above listed verticals, Bioenergy, Senior Housing, Sponsor Finance, Community Facilities and Hotels is within the Company’s Commercial Banking division, the remainder of the above listed verticals are within the Small Business Banking division.

Total criticized and classified loans and leases increased $256.8 million in 2024.

This increase by loan and lease risk grade categories was comprised of a decrease of $69.3 million for those identified as criticized offset by an increase of $326.1 million for those identified as classified, of which $236.7 million is guaranteed and $89.4 million is unguaranteed.

Additionally, the Company believes that its underwriting and credit quality standards have remained high and continues to consider changing economic conditions in a rising interest rate environment.

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.

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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 December 31, 2023, the Company had a total of $37.2 million in loans modified in 2023 to borrowers experiencing financial difficulty, all of which remained current with $14.6 million on principal payment deferral.

Credit personnel will review the request to determine if the customer is experiencing financial stress and how the event has impacted the ability of the customer to repay the loan or lease long term.

At December 31, 2024, the Company had a total of $26.5 million in loans modified in 2024 to borrowers experiencing financial difficulty, excluding loans measured at fair value, all of which remained current and none of which are on principal payment deferral.

Management endeavors to be proactive in its approach to identify and resolve problem 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 December 31, 2023, and December 31, 2022, Risk Grade 5 loans and leases, excluding loans measured at fair value, totaled $599.2 million and $286.5 million, respectively, for a year-over-year increase of $312.7 million.

Relative to total held for investment unguaranteed exposure carried at historical cost at December 31, 2022 and 2023, unguaranteed Risk Grade 5 loans and leases increased from 4.1% to 6.9%, respectively.

At December 31, 2024, and December 31, 2023, Risk Grade 50 loans and leases, excluding loans measured at fair value, totaled $529.9 million and $599.2 million, respectively, for a year-over-year decrease of $69.3 million.

Relative to total held for investment unguaranteed exposure carried at historical cost at December 31, 2023 and 2024, unguaranteed Risk Grade 50 loans and leases decreased from $364.4 million, or 6.9%, to $357.9 million, or 5.3%, respectively.

The largest year-over-year changes in Risk Grade 50 loans and leases carried at historical cost were within the foll owing verticals :

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2023 Increase (Decrease)

Bioenergy $ 113,065 37.9 %

Senior Housing 73,722 24.7

General Lending 25,852 8.7

Search Fund Lending 25,004 8.4

Sponsor Finance $ 29,229 42.2 %

Healthcare 29,110 42.0

Veterinary 18,413 26.6

Self Storage 13,972 20.2

Government Contracting 15,301 5.1

Asset Based Lending 14,677 4.9

Hotels 9,709 3.3

Senior Care 9,527 3.2

Health Care 8,153 2.7

Broadband (12,352) (4.1)

Solar Energy 13,765 19.9

Wine & Craft Beverage 12,774 18.4

Entertainment Centers (11,435) (3.8)

RV Parks 11,920 17.2

Venture Banking (8,741) (12.6)

Asset-Based Lending (11,715) (16.9)

Fitness Centers (14,432) (20.8)

Search Fund Lending (16,328) (23.6)

Senior Housing (37,515) (54.2)

Bioenergy (107,125) (154.6)

Total of largest changes in RG 50 loans and leases $ (66,673) (96.2)%

The increase in Risk Grade 5 loans and leases, exclusive of loans measured at fair value, during 2023 was principally confined to ten verticals, as reflected above.

The increase in Risk Grade 5 loans in 2023 was largely a result of softer than expected starts for new projects in certain verticals due to delays in both construction completion and ramp up time, stemming from downstream effects of pandemic-related impacts.

Of the above listed verticals, Senior Housing, Asset-Based Lending and Government Contracting are within the Company’s Specialty Lending division while Hotels and Bioenergy are within the Energy & Infrastructure division, the remainder of the above listed verticals are within the Small Business Banking division.

The decrease in Risk Grade 50 loans and leases, exclusive of loans measured at fair value, during 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, Solar Energy, Venture Banking, Asset-Based Lending, Senior Housing, and Bioenergy are within the Company’s Commercial Banking division, the remainder of the above listed verticals are within the Small Business Banking division.

At December 31, 2024, approximately 97.4% 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 iden tification and intervention is critical to successfully managing a small business loan portfolio.

As government payment assistance began to expire toward the end of 2020, borrowers with continuing difficulties arising from the pandemic were provided additional relief through payment deferrals.

At December 31, 2023, the Company had $11.0 million in unguaranteed loans on SBA payment assistance.

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

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The ACL as a percentage of loans and leases held for investment at historical cost amounted to 1.7% and 1.5% at December 31, 2024 and 2023 , respectively.

The increase in the ACL during 2023 was primarily due to significant loan growth combined with charge-off related impacts, as addressed more fully in the above section captioned “Provision for Loan and Lease Credit Losses” in “Results of Operations.”

The increase in the ACL during 2024 was primarily due to record loan growth combined with the impacts of the current macroeconomic environment, as addressed more fully in the above section captioned “Provision for Credit Losses” in “Results of Operations.”

Actual past due held for investment loans and leases, inclusive of loans measured at fair value, have increased by $197.4 million since December 31, 2023.

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Management believes the ACL of $167.5 million at December 31, 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 prove to be accurate.

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 prove to 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.

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Small Business Banking $ 95,341 $ 2,324,924 56.9 % 23.4 % $ 49,120 $ 2,125,163 39.0 % 25.7 %

Specialty Lending 25,807 1,131,493 20.5 13.7 17,216 754,271 17.8 11.0

Energy & Infrastructure 12,646 849,757 10.0 10.3 6,278 423,529 6.5 6.2

Commercial Banking 33,666 2,457,359 20.1 24.8 38,453 1,981,250 30.6 23.9

Paycheck Protection Program — 2,361 — — 8 5,595 — 0.1

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Small Business Banking 4,157 518,953 2.5 5.2 3,320 415,094 2.7 5.0

Specialty Lending 1,207 47,419 1.0 0.6 2,038 104,069 2.1 1.5

Energy & Infrastructure 190 7,541 0.2 0.1 203 13,753 0.2 0.2

Commercial Banking 786 85,456 0.5 0.9 1,397 54,960 1.1 0.7

Total 4,943 604,409 3.0 6.1 4,717 470,054 3.8 5.7

1 unchanged sentence

Small Business Banking 22,196 2,873,260 13.2 28.9 14,743 2,465,576 11.7 29.8

Specialty Lending 10,754 523,744 8.5 6.3 4,233 306,785 4.4 4.5

Energy & Infrastructure 3,367 161,685 2.7 2.0 4,060 139,778 4.2 2.0

Commercial Banking 7,305 1,055,843 4.4 10.6 14,121 685,429 11.2 8.3

Total 29,501 3,929,103 17.6 39.5 28,864 3,151,005 22.9 38.1

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Small Business Banking $ 34,341 $ 2,231,976 1.5 % $ 13,705 $ 2,086,469 0.7 % $ 5,423 $ 1,639,650 0.3 %

Specialty Lending 7,966 1,002,418 0.8 1,383 580,940 0.2 — 247,856 —

Energy & Infrastructure — 564,070 — 411 350,910 0.1 — 167,521 —

Commercial Banking 8,703 2,138,080 0.4 7,966 1,566,488 0.5 1,794 931,850 0.2

Paycheck Protection Program — 3,922 — — 8,283 — 5 81,250 —

2 unchanged sentences

Small Business Banking 338 289,198 0.1 — 274,777 — (3) 271,596 —

Specialty Lending — 41,230 — — 72,996 — — 19,120 —

Energy & Infrastructure — 6,914 — — 12,751 — — 45,639 —

Commercial Banking — 55,440 — — 48,144 — — 85,747 —

Total 338 344,638 0.1 — 322,921 — (3) 357,343 —

1 unchanged sentence

Small Business Banking 3,105 2,811,072 0.1 1,416 2,463,238 0.1 489 1,904,876 —

Specialty Lending — 448,958 — — 214,760 — 254 92,888 0.3

Energy & Infrastructure (1,714) 134,959 (1.3) (388) 120,783 (0.3) — 127,456 —

Commercial Banking 189 897,927 — (1,714) 583,917 (0.3) (388) 335,543 (0.1)

Total 3,294 3,708,999 0.1 (298) 3,047,155 — 101 2,240,419 —

8 unchanged sentences

The increase in the investment portfolio for 2024 was to support earnings through additional yield compared to cash alternatives, continue to provide a contingent funding source and act as a mechanism to manage the Company’s interest rate risk.

This also included purchases of $206.9 million in mortgage-backed securities, including $14.7 million for purposes of complying with the Community Reinvestment Act and purchases of $32.1 million in collateralized mortgage obligations to increase yield and duration.

This also included purchases of $263.9 million in mortgage-backed securities, including $42.9 million for purposes of complying with the Community Reinvestment Act and purchases of $66.4 million in collateralized mortgage obligations to diversify the reinvestment of portfolio cash flows.

The investment securities portfolio consists entirely of available-for-sale securities.

The Company purchases securities for the investment securities portfolio to manage interest rate risk, ensure a stable source of liquidity and to provide a steady source of income in excess of cost of funds.

At December 31, 2023, the modified duration of the overall available-for-sale securities portfolio was approximately 6.45 years.

At December 31, 2024, the effective duration of the overall available-for-sale securities portfolio was approximately 3.72 years.

The following table sets forth the stated maturities and weighted average yields of investment securities at December 31, 2024.

Weighted average yields were calculated using amortized cost and coupon rate at the balance sheet date.

Yields are not presented on a tax-equivalent basis.

Certain mortgage related securities have adjustable interest rates and will reprice annually within the various maturity ranges.

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Municipal bonds 3,176 — — — — 3,080 4.50 96 5.22

Other debt securities — — — — — — — — —

Total securities $ 1,356,549 $ 25,479 3.16 % $ 202,982 2.95 % $ 233,879 2.92 % $ 894,209 3.27 %

At December 31, 2023 and December 31, 2022, the Company had 98.3% of its total investment securities portfolio in mortgage-backed securities.

At December 31, 2024 and December 31, 2023, the Company had 98.4% and 98.3% of its total investment securities portfolio in mortgage-backed securities.

The Company has continued to purchase mortgage-backed securities in order to obtain a favorable yield versus cash alternatives while still maintaining a low risk profile within the investment portfolio.

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Amount of time deposits in uninsured accounts $ 96,713 $ 63,987 $ 128,125 $ 4,247

Total borrowings decreased $59.8 million at December 31, 2023 from December 31, 2022 as a result of the following:

Total borrowings increased $89.5 million at December 31, 2024 from December 31, 2023 as a result of the following:

In March 2024, the Company entered into a 60-month term loan agreement of $100.0 million with a third party correspondent bank.

The loan accrues interest at a fixed rate of 5.95% with monthly interest payments until maturity on March 28, 2029, and $33.0 million of principal to be paid in year 4, and $67.0 million of principal to be paid in year 5.

The Company paid the Lender a non-refundable $600 thousand loan origination fee upon signing of the Note that is represented as a direct deduction from the carrying amount of the loan and will be amortized into interest expense over the life of the loan.

In March 2021, the Company entered into a 60 -month term loan agreement of $50.0 million with a third party correspondent bank.

The loan accrues interest at a fixed rate of 2.95% with a monthly payment sufficient to fully amortize the loan, with all remaining unpaid principal and interest due at maturity on March 30, 2026 .

The Company paid the Lender a non-refundable $325 thousand loan origination fee upon signing of the Note that is presented as a direct deduction from the carrying amount of the loan and will be amortized into interest expense over the life of the loan.

In April 2020, the Company entered into the Federal Reserve Bank's PPPLF.

Under the PPPLF, advances must be secured by pledges of loans to small businesses originated by the Company under the U.S.

Small Business Administration's 7(a) loan program titled the Paycheck Protection Program.

The PPPLF accrues interest at thirty-five basis points and matures at various dates equal to the maturity date of the PPPLF collateral pledged to secure the advance, and will be accelerated on and to the extent of any 7(a) loan forgiveness reimbursement by the SBA for any PPPLF collateral or the date of purchase by the SBA from the borrower of any PPPLF collateral.

On the maturity date of each advance, the Company repays the advance plus accrued interest.

This borrowing was paid in full at September 30, 2022.

In September 2020, the Company renewed a $50.0 million revolving line of credit originally issued in 2017 with a third party correspondent bank.

Subsequently on October 20, 2021, the Company renewed and increased the revolving line of credit from $50.0 million to $100.0 million and increased the term from 12 months to 36 months.

In September 2023, the Company modified the revolving line of credit and extended the maturity 12 months to a maturity date of October 10, 2026.

In September 2024, the Company modified a $100.0 million revolving line of credit with a third party correspondent bank.

The line of credit is unsecured and accrues interest at 30-day SOFR plus 1.25%, with an interest rate cap of 6.75% and an interest rate floor of 2.75%.

The line of credit was extended 12 months to a maturity date of October 10, 2027.

Payments are interest only with all principal and accrued interest due at maturity.

The terms of this loan require the Company to maintain minimum capital and debt service coverage ratios.

The Company paid the Lender a non-refundable $750 thousand loan origination fee upon signing of the Note and a non-refundable $250 thousand renewal fee in September 2023 that will be amortized into interest expense over the life of the loan.

The Company made an advance of $8.0 million on December 20, 2021 and $12.0 million on March 16, 2022.

The Company paid down this balance in full on May 20, 2022 and there is $100.0 million of available credit remaining at December 31, 2023 .

On December 30, 2022, the Company made an advance of $50.0 million on an overnight Fed Funds line of credit that was unsecured with an interest rate of 4.65% with $50.0 million of available credit remaining at December 31, 2022.

The Company paid down this balance in full on January 3, 2023 and there is $100.0 million of available credit remaining at December 31, 2023.

The Company paid the Lender a non-refundable $250 thousand renewal fee in September 2024 that will be amortized into interest expense over the life of the loan.

As of December 31, 2024 and 2023 there was $100.0 million of available credit .

Liquidity Management

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and (d) availability under lines of credit, FHLB advances, Federal Reserve Bank Term Funding Program and the Federal Reserve Discount Window.

and (d) availability under lines of credit, FHLB advances and the 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.

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At December 31, 2024, the total amount of these four liquidity source items was $4.20 billion, or 32.4% of total assets, a decrease of 5.4% 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 Term Funding Program, 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 December 31, 2023, none of the investment securities portfolio was pledged to secure public deposits or pledged to retail repurchase agreements, leaving $1.13 billion available to be pledged as collateral.

Loans and other assets are funded primarily by customer deposits, brokered deposits and loan sales.

Additionally, the Company maintains a guaranteed and unguaranteed loan portfolio that is also a contingent liquidity source, whether via pledging to the Federal Reserve Discount Window or through liquidation.

At December 31, 2024, $621.4 million of the investment securities portfolio were pledged for unused borrowing capacity, leaving $626.8 million available to be pledged as collateral.

Contractual Obligations

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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.

In 2022, the Company entered into airplane purchase agreement commitments of which one airplane was placed in service in 2023 and one airplane purchase agreement commitment is outstanding as of December 31, 2023.

The Company is also in the process of constructing a new facility to accommodate expansion of its main campus.

In 2022, the Company entered into airplane purchase agreement commitments and one airplane purchase agreement commitment was outstanding as of December 31, 2023, which was placed in service in 2024.

For more information, see Note 2.

Securities and Note 11.

Commitments and Contingencies in the accompanying notes to the consolidated financial statements.

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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 estimates are listed below.

These estimates require the Company to make difficult, subjective or complex judgments about matters that are inherently uncertain.

The Company’s most critical accounting estimate is listed below.

This estimate requires the Company to make difficult, subjective or complex judgments about matters that are inherently uncertain.

Allowance for credit losses (ACL)

The Company’s policy is to maintain the ACL at a level to absorb expected credit losses.

The loan and lease portfolio is periodically reviewed by management to identify trends and to measure asset quality.

Accounting policies related to the ACL on financial instruments including loans and off-balance-sheet credit exposures are considered to be critical as these policies involve considerable subjective judgment and estimation by the Company.

The ACL is a valuation account that is deducted from the amortized cost basis of loans and leases to present a net amount expected to be collected over the life of the asset.

The Company’s ACL on loans and leases is estimated using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts, and measured on a pooled basis where loans with similar risk characteristics (such as industry and type of collateral) are collectively evaluated for impairment.

The ACL is computed using a discounted cash flow (“DCF”) methodology that utilizes inputs and assumptions that require significant judgement.

The most significant assumptions used are:

1) economic forecast assumptions, 2) prepayment assumptions, and 3) application of qualitative factors, the most significant of which is related to the loan risk grading process.

Sensitivities to these three areas are disclosed below to demonstrate how a change in economic forecast, prepayment assumptions and risk grades may impact the ACL.

The below sensitivities only consider each variable individually in isolation as compared to the reported total of the ACL and factor in no correlated impacts to other inputs or factors of the ACL model.

Economic forecast

Probability of default (“PD”) and loss given default (“LGD”) rates within the DCF model are adjusted for national unemployment rates during the reasonable and supportable forecast period.

The Company has determined that a reasonable and supportable forecast period is four quarters with loss rates reverting back to a historical loss rate over the subsequent four quarters on a straight-line basis.

The ACL is highly sensitive to the unemployment economic forecast used.

Due to the high level of uncertainty regarding significant assumptions, the Company often evaluates various economic scenarios from authoritative industry sources to assess variability of economic outlooks.

At December 31, 2023, the Company utilized economic assumptions that management believed were the most likely to occur during the duration of the forecast period which had current unemployment levels remaining relatively stable during the one-year forecast period.

Selecting a different forecast in the current environment could result in a significantly different ACL.

The following table summarizes the impact of more severe unemployment forecast scenarios if they had been selected at December 31, 2023.

Approximate increase to ACL

Scenario Forecasted Unemployment $ %

Severe Current unemployment levels increase to 5.6% in the first quarter of 2024 and increase to 9.2% by the end of a one-year forecast period.

At the end of the forecast period adjusted loss rates revert back to a historical rate over a one-year period.

$30.9 million 24.6 %

Moderate Current unemployment levels increase to 4.6% in the first quarter of 2024 and increase to 7.2% by the end of a one-year forecast period.

At the end of the forecast period adjusted loss rates revert back to a historical rate over a one-year period.

17.6 million 14.0

Mild Current unemployment levels decrease to 4.1% in the first quarter of 2024 before increasing to 5.2% by the end of a one-year forecast period.

At the end of the forecast period adjusted loss rates revert back to a historical rate over a one-year period.

6.2 million 4.9

If facts and circumstances supported the Company’s utilization of more severe unemployment scenario other impacts to the model would also be factored in which could result in a materially different estimate than that provided above.

Prepayment assumptions

Expected losses are calculated as the product of PD, LGD, and exposure at default (“EAD”).

Expected losses are then discounted using the loan or leases effective interest rate, adjusted for estimated prepayments.

Changes to the prepayment assumptions used would result in a different estimated ACL.

To illustrate, if the weighted average prepayment assumption were decreased by 25%, the ACL as of December 31, 2023 would increase by approximately $6.0 million or 4.7%.

Loan risk grade - qualitative adjustments

Historical loss information is adjusted for differences in current risk characteristics that are not considered within the quantitative modeling process of the ACL but are relevant in assessing the expected credit losses.

These qualitative adjustments include risk grades, delinquency levels, pool age, portfolio mix and growth rates and the status of servicing efforts that may be impacted by natural disasters or health pandemics.

As indicated above, the loan risk grading process generally has the most significant impact on the ACL.

Accordingly, the Company’s resulting loss estimates are highly dependent on the accuracy for the risk rating assigned to each loan and lease.

The inherent imprecision in the risk rating system resulting from inaccuracy in assigning and/or entering risk ratings in the loan accounting system is monitored by the Company’s internal and external asset quality review functions.

Changes to internal risk ratings, would result in a different estimated allowance for credit losses.

To illustrate, if all loans in the Company’s five largest industry verticals ($2.17 billion or 41.0% of unguaranteed held for investment loans not accounted for under the fair value option) were adjusted down by one risk grade (e.g., RG 4 to RG 5) across all pools, the ACL as of December 31, 2023 would increase by approximately $13.9 million, or 11.0%.

The Company’s ACL at December 31, 2024 represents the Company’s current estimate of the lifetime credit losses expected from its loan and lease portfolio.

Management estimates the ACL by projecting probability of default, loss given default and exposure at default, conditional on economic parameter(s), for the remaining contractual term.

To determine the ACL as of December 31, 2024, the Company utilized an external baseline forecast to generate its quantitatively modeled expected losses and considered alternative economic forecast scenarios to qualitatively adjust the modeled ACL by loan portfolio in order to reflect management’s reasonable expectations of current and future economic conditions.

The baseline forecast at December 31, 2024 assumes the Federal Reserve Board will cut the policy rate twice in 2025, the CPI rising 2.9% in 2025, GDP ending the fourth quarter of 2025 at 1.7%, and the unemployment rate ending the fourth quarter of 2025 at 4.1%.

One of the most significant judgments influencing the ACL is the external macroeconomic forecasts.

Changes in the economic forecasts could significantly affect the estimated credit losses which could potentially lead to materially different allowance levels from one reporting period to the next.

To illustrate a hypothetical sensitivity analysis, management calculated a quantitative allowance using a 100% weighting applied to an adverse scenario.

This scenario contemplates elevated interest rates weakening credit-sensitive consumer spending, growing concerns about the impact of potential tariffs, and deepening fiscal disputes in Congress causing further sentiment decline.

Increased geopolitical tensions between China and Taiwan briefly impact the supply chain for semiconductors and the threat of a wider conflict causes consumer confidence to fall.

Additionally, the Russian invasion of Ukraine lasts longer than in the baseline scenario and concerns increase around the current conflict in the Middle East leading to a broader war in the region.

The combination of still elevated interest rates, political tensions, and tightening lending standards cause the economy to fall into a recession in the first quarter of 2025.

Despite the recession, rising inflation causes the Federal Reserve to reverse course and raise the federal funds rate further before resuming rate cuts in the third quarter as the recession persists, resulting in a fed funds rate below the baseline forecast.

Under this scenario, as an example, the unemployment rate increases from baseline levels and remains elevated for an extended period.

The estimated unemployment rate in this scenario reaches 8.2% at the end of 2025, approximately 4.1% higher than the baseline scenario projection.

To demonstrate the sensitivity to key economic parameters, management calculated the difference between a 100% baseline weighting and a 100% adverse scenario weighting for quantitative modeled results.

This scenario would result in an incremental quantitative impact to the ACL of approximately $33.5 million at December 31, 2024.

This resulting difference is not intended to represent an expected increase in ACL levels since (i) the Company may use a weighted approach applied to multiple economic scenarios for its ACL process, (ii) the highly uncertain economic environment, and (iii) the sensitivity analysis does not account for any qualitative adjustments incorporated by the Company as part of its overall ACL framework.

Other Considerations

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Loans and Leases Held for Investment and Credit Quality in the notes to consolidated financial statements for further details of the factors considered by the Company in estimating the necessary level of the ACL.

Valuation of loans accounted for under the fair value option

Management estimates the fair value of loans accounted for under the fair value option using a DCF methodology.

The estimate incorporates assumptions that market participants would use to estimate the fair value of similar assets such as prepayment speeds, default and severity rates, and a discount rate.

This evaluation is inherently subjective as it requires assumptions that are susceptible to significant revision as more information becomes available.

The fair value of loans accounted for under the fair value option is highly sensitive to changes in the discount rate assumption.

The discount rate used in the estimation process is tied to a benchmark risk-free rate with an additional spread based on loan maturity, size, rate structure, and credit risk.

Generally, the value of the fair value option portfolio is inversely correlated to changes in the risk-free rate.

At December 31, 2023, the weighted average discount rate of loans accounted for under the fair value option was 9.6%.

The table below reflects the sensitivity of the Company’s loans measured at fair value to immediate changes in the discount rate assumption with all other assumptions remaining static:

As of December 31, 2023

Fair value of loans accounted for under the fair value option $388,036

Incremental Increase (Decrease) in Value

Discount Rate

200 basis point increase ($19,469)

100 basis point increase (9,917)

100 basis point decrease 10,738

200 basis point decrease 21,925

All loans accounted for under the fair value option were originated prior to 2021.

Fair Value of Financial Instruments in the notes to consolidated financial statements for further details.

Valuation of servicing assets

The fair value of servicing assets is based on market prices for comparable servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income.

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, an inflation rate, ancillary income, prepayment speeds and default rates and losses.

The fair value of servicing rights is highly sensitive to changes in underlying assumptions.

Changes in prepayment speed and discount rate assumptions typically have the most significant impacts on the fair value of servicing rights.

The discount rate used in the estimation process is tied to a benchmark risk-free rate with a risk premium added using a build-up method.

At December 31, 2023, the key assumptions used to determine the fair value of the Company’s servicing rights included a weighted average prepayment speed equal to 15.3% and a weighted average discount rate equal to 14.5%.

The table below reflects the sensitivity of the current fair value of servicing assets to immediate changes in the above key assumptions with all other assumptions remaining static:

As of December 31, 2023

Fair value of servicing rights $48,186

Incremental Increase (Decrease) in Value

Prepayment Speed

20% increase ($2,815)

10% increase (1,452)

10% decrease 1,549

20% decrease 3,203

Discount Rate

200 basis point increase ($2,186)

100 basis point increase (1,117)

100 basis point decrease 1,170

200 basis point decrease 2,396

The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance.

Also, in this table, the effect of a variation in a particular assumption on the fair value of the servicing rights is calculated without changing any other assumption.

Changes in one factor may result in changes in another.

Servicing Assets in the notes to consolidated financial statements for further details of the factors considered by the Company in estimating the fair value of servicing assets.

The income tax provision calculation is complex and requires the use of estimates and judgment in its determination.

The exercise of significant judgment arises in the interpretation of these tax laws and regulations, in various jurisdictions in which the Company operates and actual liabilities could significantly vary based upon the taxing authority’s interpretation.

Specifically, significant estimates in accounting for income taxes relate to the valuation of deferred tax assets and liabilities, evaluations of the Company’s ability to realize deferred tax assets, including income tax credits and net operating loss carryforwards, and the need for a valuation allowance, the calculation of taxable income, the estimation of uncertain tax positions and the determination of temporary differences between book and tax bases.

Adjustments to these items may occur due to modifications in tax rates, newly enacted laws, issuance of tax regulations, resolution of items with taxing authorities, alterations to interpretative statutory, judicial, and regulatory guidance that affects the Company’s tax positions, changes in the Company's tax accounting methods or elections, or other facts and circumstances.

Management closely monitors tax developments and the potential timing of these changes in order to evaluate the effect they may have on the Company’s overall tax position and the estimates and judgments used in determining the income tax provision and records adjustments as necessary.

To the extent the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made.

Non-GAAP Measures

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis