What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-05-07 compared with 2024-11-05 · 152 added, 331 removed, 357 unchanged (57% of the section changed)

24 unchanged sentences

• 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;

• the impacts of any pandemic or public health situation 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;

• 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;

• risks relating to the material weakness we identified in our internal control over financial reporting;

• technological risks and developments, including cyber threats, attacks, or events;

5 unchanged sentences

• 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;

• changes in tariffs and trade barriers, including potential changes in U.S.

and international trade policies and the resulting impact on the Company and its customers;

• a deterioration of the credit rating for U.S.

21 unchanged sentences

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.

A significant portion of the loans originated by the Bank are partially 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.

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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”).

As of March 31, 2025 , 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 provided 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.

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”).

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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.

The Company generates revenue primarily from net interest income and secondarily through origination and sale of government guaranteed loans.

Income from the retention of loans is comprised principally of interest income.

1 unchanged sentence

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.”

The Company also has less routinely generated gains and losses arising from its financial technology investments.

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.

Three months ended March 31, 2025 compared with three months ended March 31, 2024

For the three months ended March 31, 2025, the Company reported net income attributable to Live Oak Bancshares, Inc.

of $9.7 million, or $0.21 per diluted share, compared to net income attributable to Live Oak Bancshares, Inc.

of $27.6 million, or $0.60 per diluted share, for the first quarter of 2024.

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;

• 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.

• Provision for credit losses increased by $12.6 million, or 77.0%, to $29.0 million, compared to $16.4 million for the first quarter of 2024;

• Management fee income decreased by $3.3 million, or 100.0%, due to the restructuring of the Canapi Funds in the third quarter of 2024;

• Other noninterest income decreased by $5.7 million, or 58.6%, largely related to a gain arising from increased fair value of equity warrant assets in the first quarter of 2024;

• Net income tax expense increased by $8.9 million, from a $5.5 million benefit in the first quarter of 2024, to an expense of $3.5 million for the first quarter of 2025.

This increase was largely the result of an additional $10.6 million in investment tax credits related to the Company's fourth quarter of 2023 renewable energy investment that became eligible for an extra 10% in tax credits in the first quarter of 2024.

Key factors largely offsetting the decrease in net income are increased levels of net interest income of $10.4 million, combined with increased net gains on sales of loans of $7.1 million.

Net Interest Income and Margin

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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.

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.

Three months ended March 31, 2025 compared with three months ended March 31, 2024

For the three months ended March 31, 2025, net interest income increased $10.4 million, or 11.6%, to $100.5 million compared to $90.1 million for the three months ended March 31, 2024.

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 the decrease in average yield on interest-earning assets exceeding the decrease in average cost of funds.

Average interest-earning assets increased by $1.87 billion, or 17.2%, to $12.76 billion for the first quarter of 2025, compared to $10.89 billion for the first quarter of 2024, while the yield on average interest-earning assets decreased 34 basis points to 6.77%.

The cost of funds on interest-bearing liabilities for the first quarter of 2025 decreased 17 basis points to 3.90% and the average balance of interest-bearing liabilities increased by $1.59 billion, or 15.8%, over the first quarter of 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.

As indicated in the rate/volume table below, the overall increase discussed above is reflected in increased interest income of $20.7 million outpacing growth in interest expense of $10.3 million for the first quarter of 2025 compared to the first quarter of 2024.

The net interest margin decreased from 3.33% for the first quarter of 2024 to 3.20% for the first quarter of 2025.

In March 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 which implied a decrease of the median Federal Funds rate 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.

4 unchanged sentences

Loan fees are included in interest income on loans.

Three Months Ended September 30,

Three Months Ended March 31,

Balance Interest Average

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Shareholders' equity 1,027,547 924,592

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.

Nine Months Ended September 30,

Interest Average

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

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

Non-controlling interest 4,465 —

Total liabilities and shareholders' equity

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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,

2023 2024 vs.

Increase (Decrease) Due to Increase (Decrease) Due to

Rate Volume Total Rate Volume Total

Three Months Ended March 31,

Increase (Decrease) Due to

Rate Volume Total

Interest income:

Interest-earning balances in other banks $ (1,539) $ 483 $ (1,056)

Federal funds sold — — — — (1,624) (1,624)

Investment securities 1,075 1,060 2,135

11 unchanged sentences

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.

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.

Commitments and Contingencies under the subheading Financial Instruments with Off-Balance-Sheet Risk 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 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.

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% .

For the first quarter of 2025, there was a provision for credit losses of $29.0 million compared to $16.4 million for the same period in 2024, an increase of $12.6 million.

The increase in provision was principally driven by loan growth amid a challenging macroeconomic environment including heightened levels of specific reserves on individually evaluated loans, where elevated interest rates and inflationary pressures placed financial strain on some small business borrowers.

Loans and leases held for investment at historical cost were $10.4 billion as of March 31, 2025, increasing by $1.84 billion, or 21.6%, compared to March 31, 2024.

Net charge-offs for loans and leases carried at historical cost were $6.8 million, or 0.27% of average quarterly loans and leases held for investment, carried at historical cost, on an annualized basis, for the three months ended March 31, 2025, compared to net charge-offs of $3.2 million, or 0.15%, for the three months ended March 31, 2024.

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.

In addition, nonperforming loans and leases not guaranteed by the SBA or USDA, excluding $9.9 million and $7.9 million accounted for under the fair value option at March 31, 2025 and 2024, respectively, totaled $99.9 million, which was 0.96% of the held for investment loan and lease portfolio carried at historical cost at March 31, 2025, compared to $43.1 million, or 0.51% of loans and leases held for investment carried at historical cost at March 31, 2024.

Noninterest Income

2 unchanged sentences

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.

Net 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) %

Nine Months Ended September 30, 2024/2023 Increase (Decrease)

Three Months Ended March 31, 2025/2024 Increase (Decrease)

2025 2024 Amount Percent

3 unchanged sentences

Net gains on sales of loans 18,648 11,502 7,146 62.1

Net gain (loss) on loans accounted for under the fair value option 2,208 (3,369) 5,577 165.5

Net loss on loans accounted for under the fair value option (1,034) (219) (815) (372.1)

Equity method investments (loss) income (2,239) (5,022) 2,783 55.4

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Total noninterest income $ 25,581 $ 26,097 $ (516) (2.0) %

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.

For the three months ended March 31, 2025, noninterest income decreased by $516 thousand, or 2.0%, compared to the three months ended March 31, 2024.

The decrease over the first quarter of 2024 is primarily a result of a $2.0 million increase in loss related to the servicing asset revaluation, a $3.3 million decrease in management fee income due to the restructuring of the Canapi Funds in the third quarter of 2024 and decreased other noninterest income of $5.7 million, largely related to the first quarter of 2024 gain arising from increased fair value of equity warrant assets associated with the Company’s wine & craft beverage vertical.

Largely offsetting the decrease over the first quarter of 2024 was higher net gains on sales of loans of $7.1 million combined with decreased equity method investment losses of $2.8 million, principally related to heightened levels of underlying losses in the first quarter of 2024.

The following table 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,

Three Months Ended March 31, For years ended December 31,

2025 2024 2024 2023 2022 2021

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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.

For the three months ended March 31, 2025, there was a net loss on loan servicing asset revaluation of $4.7 million, compared to a net loss of $2.7 million for the three months ended March 31, 2024, resulting in a negative comparative quarter change of $2.0 million.

The decrease in the valuation of the servicing asset compared to the three months ended March 31, 2024 was principally the result of principal paydowns or runoff as well as an increase in the prepayment assumption in the first quarter of 2025.

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.

For the three months ended March 31, 2025, net gains on sales of loans increased $7.1 million, or 62.1%, compared to the three months ended March 31, 2024.

The volume of guaranteed loans sold increased $79.6 million, or 42.7%, for the three months ended March 31, 2025 to $266.3 million from $186.7 million for the three months ended March 31, 2024.

The average net gain on loan sale premium remained relatively stable at 107% in the first quarters of 2025 and 2024, respectively.

The increase in net gains on sales of loans over the first quarter of 2024 was principally related to a higher loan sale volume.

Noninterest Expense

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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)

Three Months Ended March 31, 2025/2024 Increase (Decrease)

2025 2024 Amount Percent

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Other loan origination and maintenance expense 4,585 3,911 674 17.2

Renewable energy tax credit investment impairment (recovery) (642) 69 (711) (1,030.4)

Renewable energy tax credit investment (recovery) impairment — (927) 927 (100.0)

FDIC insurance 3,551 3,200 351 11.0

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Total noninterest expense $ 84,017 $ 77,737 $ 6,280 8.1 %

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.

Total noninterest expense for the three months ended March 31, 2025, increased $6.3 million, or 8.1%, compared to the three months ended March 31, 2024.

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

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.

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.

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.

For the three months ended March 31, 2025, income tax expense was $3.5 million compared to an income tax benefit of $5.5 million in the first quarter of 2024, and the Company’s effective tax rates were 26.4% and (24.8%), respectively.

The higher level of income tax expense for the first quarter of 2025 as compared to the first quarter of 2024 was largely the result of an additional $10.6 million in investment tax credits related to the Company's fourth quarter of 2023 renewable energy investment that became eligible for an extra 10% in tax credits in the first quarter of 2024.

Partially offsetting the comparative increase in income tax expense was decreased pretax income during the current period.

Discussion and Analysis of Financial Condition

September 30, 2024 vs.

March 31, 2025 vs.

December 31, 2024

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.

Total assets at March 31, 2025 were $13.60 billion, an increase of $652.3 million, or 5.0%, compared to total assets of $12.94 billion at December 31, 2024.

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

• Cash and cash equivalents, comprised of cash and due from banks, combined with investment securities available-for-sale was $2.06 billion at March 31, 2025, an increase of $199.9 million, or 10.8%, compared to $1.86 billion at December 31, 2024.

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 $482.5 million, or 4.6%, during the first three months of 2025, from $10.58 billion at December 31, 2024, to $11.06 billion at March 31, 2025.

This growth was a result of strong origination activity during the first three months of 2025 of $1.40 billion.

Total deposits were $12.40 billion at March 31, 2025, an increase of $635.5 million, or 5.4%, from $11.76 billion at December 31, 2024.

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.

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

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 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.

At March 31, 2025, the Bank’s total uninsured deposits were approximately $1.87 billion, or 15.0%, of total deposits.

Commercial Real Estate

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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.

The following table provides information with respect to commercial real estate loans as of March 31, 2025.

Guaranteed Unguaranteed Total (1)

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Small Business Banking $ 1,280,781 $ 1,159,111 $ 2,439,892

Specialty Lending — 7,581 7,581

Energy & Infrastructure 16,845 19,725 36,570

Commercial Banking 20,309 32,654 52,963

Total 1,301,090 1,191,765 2,492,855

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Small Business Banking 419,927 629,356 1,049,283

Specialty Lending — 875,092 875,092

Energy & Infrastructure 38,520 195,785 234,305

Commercial Banking 33,050 1,183,911 1,216,961

Total 452,977 1,813,267 2,266,244

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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.

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.

Total nonperforming assets, including loans measured at fair value, at March 31, 2025 were $494.7 million, which represented a $123.0 million, or 33.1%, increase from December 31, 2024.

These nonperforming assets at March 31, 2025 were comprised of $492.6 million in nonaccrual loans and leases and $2.1 million in foreclosed assets.

Of the $492.6 million of nonperforming assets, $383.6 million carried a government guarantee, leaving an unguaranteed exposure of $111.1 million in total nonperforming assets at March 31, 2025.

This represents an increase of $19.5 million, or 21.3%, from an unguaranteed exposure of $91.6 million at December 31, 2024.

The following table provides information with respect to nonperforming assets, excluding loans measured at fair value, at the dates indicated.

September 30, 2024 (1)

March 31, 2025 (1)

December 31, 2024 (1)

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Allowance for credit losses on loans and leases to total nonperforming loans and leases 44.97 % 55.05 %

(1) Excludes loans measured at fair value.

September 30, 2024 (1)

December 31, 2023 (1)

Nonaccrual loans and leases guaranteed by U.S.

Total nonperforming loans and leases guaranteed by the U.S government (all on nonaccrual) $ 322,993 $ 222,885

Total accruing loans and leases past due 90 days or more guaranteed by the U.S government — —

Foreclosed assets guaranteed by the U.S.

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(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.

Nonperforming assets, excluding loans measured at fair value, at March 31, 2025 were $425.0 million, which represented a $118.8 million, or 38.8%, increase from December 31, 2024.

These nonperforming assets at March 31, 2025 were comprised of $422.9 million in nonaccrual loans and leases and $2.1 million in foreclosed assets.

Of the $425.0 million of nonperforming assets, $324.7 million carried a government guarantee, leaving an unguaranteed exposure of $100.3 million in total nonperforming assets at March 31, 2025.

This represents an increase of $18.7 million, or 22.9%, from an unguaranteed exposure of $81.6 million at December 31, 2024.

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.

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.

As a percentage of the Bank’s total capital, nonperforming loans and leases, excluding loans measured at fair value, represented 36.5% at March 31, 2025, compared to 26.7% at December 31, 2024.

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 March 31, 2025 and December 31, 2024 were 8.6% and 7.2%, respectively.

As of March 31, 2025, and December 31, 2024, potential problem (also referred to as criticized) and classified loans and leases, excluding loans measured at fair value, totaled $1.14 billion and $1.04 billion, 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.

For a complete description of the risk grading system, see “Credit Quality Indicators” in Note 3 in the notes to consolidated financial statements in the Company’s 2024 Form 10-K.

At March 31, 2025 , the portion of criticized and classified loans and leases guaranteed by the SBA or USDA totaled $570.7 million and total portfolio unguaranteed exposure risk was $567.4 million , or 7.9% of total held for investment unguaranteed exposure carried at historical cost.

This compares to the December 31, 2024 portion of criticized and classified loans and leases guaranteed by the SBA or USDA which totaled $518.7 million and total portfolio unguaranteed exposure risk was $523.3 million , or 7.8% 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

As of March 31, 2025 and December 31, 2024 , 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 March 31, 2025 As of December 31, 2024

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

General Lending 13.4% General Lending 15.1%

Senior Housing 10.0% Bioenergy 11.1%

Bioenergy 9.6% Senior Housing 9.9%

Healthcare 8.0% Healthcare 6.9%

Self Storage 6.0% Sponsor Finance 5.5%

Search Fund Lending 4.8% Wine & Craft Beverage 5.3%

Wine & Craft Beverage 4.8% Search Fund Lending 5.0%

Community Facilities 4.6% Community Facilities 4.8%

Sponsor Finance 4.5% Self Storage 4.6%

% of Total Criticized and Classified Loans 65.7% % of Total Criticized and Classified Loans 68.2%

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.

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

The total $96.1 million increase in potential problem and classified loans and leases in the first three months of 2025 was comprised of $36.7 million in increased levels of Risk Grade 50 loans and leases, as discussed below and $59.4 million in classified loans.

The overall increase in criticized and classified loans in the first quarter of 2025 was primarily driven by higher levels of small business borrowers affected by challenging economic conditions .

The Company believes that its underwriting and credit quality standards have remained high and continues to consider changing economic conditions as well as the current 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 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.

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 March 31, 2025, the Company had a total of $12.1 million in loans modified in the first quarter of 2025 to borrowers experiencing financial difficulty, excluding loans measured at fair value, $5.3 million of which remained current and $6.8 million of which are 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.

At March 31, 2025 , and December 31, 2024 , Risk Grade 50 loans and leases, excluding lo ans measured at fair value, totaled $566.6 million and $529.9 million, respectively, for a three month increase of $36.7 million.

Relative to total held for investment unguaranteed exposure carried at historical cost at December 31, 2024 and March 31, 2025, unguaranteed Risk Grade 50 loans and leases increased from $357.9 million, or 5.3%, to $389.7 million, or 5.4%, respectively.

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.

March 31, 2025 vs.

December 31, 2024 Increase (Decrease)

Sponsor Finance $ 30,017 41.0 %

Healthcare $ 19,641 53.5 %

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 10,943 29.8

Educational Services (7,242) (9.9)

Fitness Centers (9,380) (12.8)

Government Contractors (11,864) (16.2)

Senior Housing 10,876 29.6

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.

Care Services 8,745 23.8

Funeral Home & Cemetery 8,426 23.0

Auto Care 7,206 19.6

Self Storage 6,679 18.2

Quick Service Restaurants 5,045 13.7

Search Fund Lending (4,793) (13.1)

Hotels (5,051) (13.8)

Commercial Real Estate Financing (7,498) (20.4)

Wine & Craft Beverage (7,658) (20.9)

General Lending (22,504) (61.3)

Total of largest changes in RG 50 loans and leases $ 30,057 81.7%

The increase in Risk Grade 50 loans and leases, exclusive of loans measured at fair value, during the first three months of 2025 was principally confined to 13 verticals, as reflected above.

Of the above listed verticals, Senior Housing, Hotels and Commercial Real Estate Financing are within the Company’s Commercial Banking division and the remainder of the above listed verticals are within the Small Business Banking division.

At March 31, 2025, approximately 98.8% 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.

The ACL of $167.5 million at December 31, 2024, increased by $22.7 million, or 13.5%, to $190.2 million at March 31, 2025.

The ACL as a percentage of loans and leases held for investment at historical cost amounted to 1.7% at December 31, 2024 and 1.8% at March 31, 2025, respectively.

The increase in the ACL during the first three months of 2025 was primarily the result of loan growth amid a challenging macroeconomic environment.

See also the above section captioned “Provision for Credit Losses” in “Results of Operations” for related information.

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 .

Actual past due held for investment loans and leases, inclusive of loans measured at fair value, have increased by $19.0 million since December 31, 2024.

Total loans and leases 90 or more days past due increased $60.6 million, or 23.7%, compared to December 31, 2024.

This increase was comprised of a $27.1 million increase in unguaranteed exposure combined with a $33.5 million increase in the guaranteed portion of past due loans compared to December 31, 2024.

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 1.3%, at March 31, 2025 and December 31, 2024, respectively.

Total unguaranteed loans and leases past due were comprised of $86.9 million carried at historical cost, an increase of $9.4 million, and $10.4 million measured at fair value, an increase of $560 thousand, as of March 31, 2025 compared to December 31, 2024.

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.

Management believes the ACL of $190.2 million at March 31, 2025 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 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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and (d) availability under lines of credit, FHLB advances and 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.

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 OCR model output is then used by management to ensure adequate liquidity sources are available during those future periods.

At March 31, 2025, the total amount of these four liquidity source items was $4.58 billion, or 33.7% of total assets, an increase of 1.3% of total assets from $4.20 billion, or 32.4% of total assets, at December 31, 2024.

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

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.

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 March 31, 2025, $611.3 million of the investment securities portfolio were pledged for unused borrowing capacity, leaving $701.4 million 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.

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.

Other than 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, 2024.

See the section titled “Liquidity Management” in Part II, Item 7 of the Company’s 2024 Form 10-K for additional discussion of 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.

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.

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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.

As of March 31, 2025, the balance sheet’s total cumulative gap position was 5.1%, 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.

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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.

As of March 31, 2025, the Company’s interest rate risk profile under the instantaneous parallel interest rate shock scenarios applied to a static balance sheet is slightly asset-sensitive.

For more information, see Item 3.

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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.

Capital amounts and ratios as of September 30, 2024, and December 31, 2023, are presented in the table below.

Capital amounts and ratios as of March 31, 2025, and December 31, 2024, are presented in the table below.

Actual Minimum Capital

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Amount Ratio Amount Ratio Amount Ratio

Consolidated - September 30, 2024

Consolidated - March 31, 2025

Common Equity Tier 1 (to Risk-Weighted Assets) $ 1,061,776 10.67 % $ 447,611 4.50 % N/A N/A

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Tier 1 Capital (to Average Assets) 1,061,776 8.03 528,694 4.00 N/A N/A

Bank - September 30, 2024

Bank - March 31, 2025

Common Equity Tier 1 (to Risk-Weighted Assets) $ 1,036,548 10.64 % $ 438,483 4.50 % $ 633,364 6.50 %

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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 policies and 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 policy and 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

• Valuation of loans accounted for under the fair value option;

• Valuation of servicing assets;

• 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.

Changes in this estimate, 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.

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-Q

Item 2. Management’s Discussion and Analysis