Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following presents management’s discussion and analysis of the financial condition and results of operations of Live Oak Bancshares, Inc. (individually, “Bancshares” and collectively with its subsidiaries including Live Oak Banking Company, the “Company”). This discussion should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included elsewhere in this quarterly report on Form 10-Q and with the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2024 (the “2024 Form 10-K”). Results of operations for the periods included in this quarterly report on Form 10-Q are not necessarily indicative of results to be obtained during any future period.
Important Note Regarding Forward-Looking Statements
This quarterly report on Form 10-Q contains statements that management believes are forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements generally relate to the financial condition, results of operations, plans, objectives, future performance or business of Live Oak Bancshares, Inc. (the “Company”). They usually can be identified by the use of forward-looking terminology, such as “believes,” “expects,” or “are expected to,” “plans,” “projects,” “goals,” “estimates,” “will,” “may,” “should,” “could,” “would,” “continues,” “intends to,” “outlook” or “anticipates,” or variations of these and similar words, or by discussions of strategies that involve risks and uncertainties. You should not place undue reliance on these statements, as they are subject to risks and uncertainties, including but not limited to, those described in this Report. When considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements management may make. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information actually known to the Company at the time. Management undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Forward-looking statements contained in this Report are based on current expectations, estimates and projections about the Company’s business, management’s beliefs and assumptions made by management. These statements are not guarantees of the Company’s future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in the forward-looking statements. These risks, uncertainties and assumptions include, without limitation:
• deterioration in the financial condition of borrowers resulting in significant increases in the Company’s provision for credit losses and other adverse impacts to results of operations and financial condition;
• changes in Small Business Administration (“SBA”) rules, regulations and loan products, including specifically the Section 7(a) program, changes in SBA standard operating procedures or changes to the status of Live Oak Banking Company (the “Bank”) as an SBA Preferred Lender;
• changes in rules, regulations or procedures for other government loan programs, including those of the United States Department of Agriculture (“USDA”);
• changes in interest rates that affect the level and composition of deposits, loan demand and the values of loan collateral, securities, and interest sensitive assets and liabilities;
• the failure of assumptions underlying the establishment of reserves for possible credit losses;
• changes in loan underwriting, credit review or loss reserve policies associated with economic conditions, examination conclusions, or regulatory developments;
• adverse developments in the banking industry highlighted by high-profile bank failures and the potential impact of such developments on customer confidence, liquidity, and regulatory responses to these developments;
• the impacts of 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;
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• 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;
• changes in financial market conditions, either internationally, nationally or locally in areas in which the Company conducts operations, including reductions in rates of business formation and growth, demand for the Company’s products and services, commercial and residential real estate development and prices, premiums paid in the secondary market for the sale of loans, and valuation of servicing rights;
• changes in accounting principles, policies, and guidelines applicable to bank holding companies and banking;
• fluctuations in markets for equity, fixed-income, commercial paper and other securities, which could affect availability, market liquidity levels, and pricing;
• the effects of competition from other commercial banks, non-bank lenders, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and mutual funds, and other financial institutions operating in the Company’s market area and elsewhere, including institutions operating regionally, nationally and internationally, together with such competitors offering banking products and services by mail, telephone and the Internet;
• the Company's ability to attract and retain key personnel;
• changes in governmental monetary and fiscal policies as well as other legislative and regulatory changes, including with respect to SBA or USDA lending programs and investment tax credits;
• 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. long-term sovereign debt, actions that the U.S. government may take to avoid exceeding the debt ceiling, and uncertainties surrounding the debt ceiling and the federal budget;
• changes in political and economic conditions, including any prolonged U.S. government shutdown;
• the impact of heightened regulatory scrutiny of financial products and services, primarily led by the Consumer Financial Protection Bureau and various state agencies;
• the Company's ability to comply with any requirements imposed on it by regulators, and the potential negative consequences that may result;
• operational, compliance and other factors, including conditions in local areas in which the Company conducts business such as inclement weather or a reduction in the availability of services or products for which loan proceeds will be used, that could prevent or delay closing and funding loans before they can be sold in the secondary market;
• the effect of any mergers, acquisitions or other transactions, to which the Company or the Bank may from time to time be a party, including management’s ability to successfully integrate any businesses acquired;
• adverse results, including related fees and expenses, from pending or future lawsuits, government investigations or private actions;
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• other risk factors listed from time to time in reports that the Company files with the SEC, including those described under “Risk Factors” in this Report; and
• the Company’s success at managing the risks involved in the foregoing.
Except as otherwise disclosed, forward-looking statements do not reflect: (i) the effect of any acquisitions, divestitures or similar transactions that have not been previously disclosed; (ii) any changes in laws, regulations or regulatory interpretations; or (iii) any change in current dividend or repurchase strategies, in each case after the date as of which such statements are made. All forward-looking statements speak only as of the date on which such statements are made, and the Company undertakes no obligation to update any statement, to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.
Amounts in all tables in Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) have been presented in thousands, except percentage, time period, stock option, share and per share data or where otherwise indicated.
Nature of Operations
Bancshares is a financial holding company and a bank holding company headquartered in Wilmington, North Carolina incorporated under the laws of the state of North Carolina in December 2008. The Company conducts business operations primarily through its commercial bank subsidiary, Live Oak Banking Company (the “Bank”). The Bank was incorporated in February 2008 as a North Carolina-chartered commercial bank. The Bank specializes in providing lending and deposit related services to small businesses nationwide. A significant portion of the loans originated by the Bank are 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. These loans are to small businesses and professionals with what the Bank believes are lower risk characteristics. Industries, or “verticals,” on which the Bank focuses its lending efforts are carefully selected. The Bank also lends more broadly to select borrowers outside of those verticals.
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 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, 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”). Live Oak Number One, Inc. holds properties foreclosed on by the Bank. LOCEF provides financing to entities for renewable energy applications. Live Oak Private Wealth provides high-net-worth individuals and families with strategic wealth and investment management services. TLH holds land adjacent to the Bank's headquarters consisting of wetlands and other protected property for the use and enjoyment of the Bank's employees and customers.
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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. Income from the sale of loans is comprised of loan servicing revenue and revaluation of related servicing assets along with net gains on sales of loans. Offsetting these revenues are the cost of funding sources, provision for credit losses, any costs related to foreclosed assets and other operating costs such as salaries and employee benefits, travel, professional services, advertising and marketing and tax expense. The Company also has less routinely generated gains and losses arising from its financial technology investments.
Results of Operations
Performance Summary
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:
• 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
Net interest income represents the difference between the income that the Company earns on interest-earning assets and the cost of interest-bearing liabilities. The Company’s net interest income depends upon the volume of interest-earning assets and interest-bearing liabilities and the interest rates that the Company earns or pays on them, respectively. Net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as “volume changes.” It is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds, referred to as “rate changes.” As a bank without a branch network, the Bank gathers deposits over the Internet and in the community in which it is headquartered. Due to the nature of a branchless bank and the relatively low overhead required for deposit gathering, the rates that the Bank offers are generally above the industry average.
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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 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. See Item 3. Quantitative and Qualitative Disclosures About Market Risk for information about the Company’s sensitivity to interest rates.
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Average Balances and Yields. The following table presents information regarding average balances for assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amount of interest expense on average interest-bearing liabilities, and the resulting average yields and costs. The yields and costs for the periods indicated are derived by dividing the income or expense by the average balances for assets or liabilities, respectively, for the periods presented and annualizing that result. Loan fees are included in interest income on loans.
Three Months Ended March 31,
2025 2024
Average
Balance Interest Average
Yield/Rate Average
Balance
Interest Average
Yield/Rate
Interest-earning assets:
Interest-earning balances in other banks $ 581,267 $ 6,400 4.47 % $ 542,243 $ 7,456 5.53 %
Investment securities 1,379,797 11,089 3.26 1,240,861 8,954 2.90
Loans held for sale 407,953 8,612 8.56 353,476 8,354 9.51
Loans and leases held for investment (1)
10,388,872 187,004 7.30 8,753,232 167,656 7.70
Total interest-earning assets 12,757,889 213,105 6.77 10,889,812 192,420 7.11
Less: Allowance for credit losses on loans and leases
(165,320) (125,447)
Noninterest-earning assets 534,133 550,839
Total assets $ 13,126,702 $ 11,315,204
Interest-bearing liabilities:
Interest-bearing checking $ 350,491 $ 3,929 4.55 % $ 300,067 $ 4,183 5.61 %
Savings 5,540,147 51,604 3.78 4,552,390 46,171 4.08
Money market accounts 127,908 120 0.38 125,317 187 0.60
Certificates of deposit 5,563,004 55,235 4.03 5,094,553 51,457 4.06
Total deposits 11,581,550 110,888 3.88 10,072,327 101,998 4.07
Borrowings 111,919 1,685 6.11 26,772 311 4.67
Total interest-bearing liabilities 11,693,469 112,573 3.90 10,099,099 102,309 4.07
Noninterest-bearing deposits 342,482 213,571
Noninterest-bearing liabilities 58,739 77,942
Shareholders' equity 1,027,547 924,592
Non-controlling interest 4,465 —
Total liabilities and shareholders' equity
$ 13,126,702 $ 11,315,204
Net interest income and interest rate spread
$ 100,532 2.87 % $ 90,111 3.04 %
Net interest margin 3.20 % 3.33 %
Ratio of average interest-earning assets to average interest-bearing liabilities
109.10 % 107.83 %
(1) Average loan and lease balances include non-accruing loans and leases.
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Rate/Volume Analysis. The following table sets forth the effects of changing rates and volumes on net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, increases or decreases attributable to changes in both rate and volume that cannot be segregated have been allocated proportionally based on the changes due to rate and the changes due to volume.
Three Months Ended March 31,
2025 vs. 2024
Increase (Decrease) Due to
Rate Volume Total
Interest income:
Interest-earning balances in other banks $ (1,539) $ 483 $ (1,056)
Investment securities 1,075 1,060 2,135
Loans held for sale (961) 1,219 258
Loans and leases held for investment (11,037) 30,385 19,348
Total interest income (12,462) 33,147 20,685
Interest expense:
Interest-bearing checking (888) 634 (254)
Savings (4,176) 9,609 5,433
Money market accounts (70) 3 (67)
Certificates of deposit (913) 4,691 3,778
Borrowings 238 1,136 1,374
Total interest expense (5,809) 16,073 10,264
Net interest income $ (6,653) $ 17,074 $ 10,421
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 10. 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. Typical SBA 7(a) and USDA guarantees range from 50% to 90% depending on loan size and type, which serve to reduce the risk profile of these loans. The Company believes that its focus on compliance with regulations and guidance from the SBA and USDA are key factors to managing this risk.
For the 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.
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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
Noninterest income is principally comprised of net gains from the sale of SBA and USDA-guaranteed loans along with loan servicing revenue and related revaluation of the servicing asset. Revenue from the sale of loans depends upon the volume, maturity structure and rates of underlying loans as well as the pricing and availability of funds in the secondary markets prevailing in the period between completed loan funding and closing of sale. In addition, the loan servicing revaluation is significantly impacted by changes in market rates and other underlying assumptions such as prepayment speeds and default rates. Net 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 March 31, 2025/2024 Increase (Decrease)
2025 2024 Amount Percent
Noninterest income
Loan servicing revenue $ 8,298 $ 7,624 $ 674 8.8 %
Loan servicing asset revaluation (4,728) (2,744) (1,984) (72.3)
Net gains on sales of loans 18,648 11,502 7,146 62.1
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
Equity security investments gains (losses), net 20 (529) 549 103.8
Lease income 2,573 2,453 120 4.9
Management fee income — 3,271 (3,271) (100.0)
Other noninterest income 4,043 9,761 (5,718) (58.6)
Total noninterest income $ 25,581 $ 26,097 $ (516) (2.0) %
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.
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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 March 31, For years ended December 31,
2025 2024 2024 2023 2022 2021
Amount of loans and leases originated
$ 1,396,223 $ 805,129 $ 5,155,244 $ 3,946,873 $ 4,007,621 $ 4,480,725
Guaranteed portions of loans sold
266,275 186,654 980,973 877,551 580,889 668,462
Outstanding balance of guaranteed loans sold (1)
3,486,533 3,057,641 3,379,477 2,986,959 2,668,110 2,756,915
(1) This represents the outstanding principal balance of guaranteed loans serviced, as of the last day of the applicable period, which have been sold into the secondary market.
Changes in various components of noninterest income are discussed in more detail below.
Loan Servicing Asset Revaluation: The Company revalues its serviced loan portfolio at least quarterly. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as adequate compensation for servicing, the discount rate, the custodial earnings rate, ancillary income, prepayment speeds and default rates and losses, with prepayment speed and discount rate being the most sensitive assumptions. For the three months ended 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 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.
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Noninterest Expense
Noninterest expense comprises all operating costs of the Company, such as employee related costs, travel, professional services, advertising and marketing expenses, exclusive of interest and income tax expense.
The following table shows the components of noninterest expense and the related dollar and percentage changes for the periods presented.
Three Months Ended March 31, 2025/2024 Increase (Decrease)
2025 2024 Amount Percent
Noninterest expense
Salaries and employee benefits $ 48,008 $ 47,275 $ 733 1.6 %
Non-employee expenses:
Travel expense 2,795 2,438 357 14.6
Professional services expense 3,024 1,878 1,146 61.0
Advertising and marketing expense 3,665 3,692 (27) (0.7)
Occupancy expense 2,737 2,247 490 21.8
Technology expense 9,251 7,723 1,528 19.8
Equipment expense 3,745 3,074 671 21.8
Other loan origination and maintenance expense 4,585 3,911 674 17.2
Renewable energy tax credit investment (recovery) impairment — (927) 927 (100.0)
FDIC insurance 3,551 3,200 351 11.0
Other expense 2,656 3,226 (570) (17.7)
Total non-employee expenses 36,009 30,462 5,547 18.2
Total noninterest expense $ 84,017 $ 77,737 $ 6,280 8.1 %
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 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.
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Discussion and Analysis of Financial Condition
March 31, 2025 vs. December 31, 2024
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 March 31, 2025, the Bank’s total uninsured deposits were approximately $1.87 billion, or 15.0%, of total deposits.
Commercial Real Estate
Commercial real estate loans as indicated by the FDIC include loans secured by the following: construction, land development, multifamily property and nonfarm, nonresidential real property. The following table provides information with respect to commercial real estate loans as of March 31, 2025.
Guaranteed Unguaranteed Total (1)
Held for Investment Loans:
Owner Occupied
Small Business Banking $ 1,280,781 $ 1,159,111 $ 2,439,892
Commercial Banking 20,309 32,654 52,963
Total 1,301,090 1,191,765 2,492,855
Non-Owner Occupied
Small Business Banking 419,927 629,356 1,049,283
Commercial Banking 33,050 1,183,911 1,216,961
Total 452,977 1,813,267 2,266,244
Total Held for Investment Commercial Real Estate $ 1,754,067 $ 3,005,032 $ 4,759,099
Held for Sale Loans:
Owner Occupied
Small Business Banking $ 48,887 $ — $ 48,887
Total 48,887 — 48,887
Non-Owner Occupied
Small Business Banking 168,501 — 168,501
Total 168,501 — 168,501
Total Held for Sale Commercial Real Estate $ 217,388 $ — $ 217,388
Total Commercial Real Estate Loans $ 1,971,455 $ 3,005,032 $ 4,976,487
% of Total Commercial Real Estate Loans 39.6 % 60.4 % 100.0 %
(1) Excludes retained loan discount and net deferred costs.
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Asset Quality
Management considers asset quality to be of primary importance. A formal loan review function, independent of loan origination, is used to identify and monitor problem loans. This function reports directly to the Risk Committee of the Board of Directors.
Nonperforming Assets
The Bank places loans and leases on nonaccrual status when they become 90 days past due as to principal or interest payments, or prior to that if management has determined based upon current information available to them that the timely collection of principal or interest is not probable. When a loan or lease is placed on nonaccrual status, any interest previously accrued as income but not actually collected is reversed and recorded as a reduction of loan or lease interest and fee income. Typically, collections of interest and principal received on a nonaccrual loan or lease are applied to the outstanding principal as determined at the time of collection of the loan or lease.
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.
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The following table provides information with respect to nonperforming assets, excluding loans measured at fair value, at the dates indicated.
March 31, 2025 (1)
December 31, 2024 (1)
Nonaccrual loans and leases:
Total nonperforming loans and leases (all on nonaccrual) $ 422,900 $ 304,297
Foreclosed assets 2,108 1,944
Total nonperforming assets $ 425,008 $ 306,241
Allowance for credit losses on loans and leases $ 190,184 $ 167,516
Total nonperforming loans and leases to total loans and leases held for investment 4.08 % 3.07 %
Total nonperforming loans and leases to total assets 3.18 % 2.41 %
Allowance for credit losses on loans and leases to loans and leases held for investment 1.83 % 1.69 %
Allowance for credit losses on loans and leases to total nonperforming loans and leases 44.97 % 55.05 %
Nonaccrual loans and leases guaranteed by U.S. government:
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. government 1,753 1,753
Total nonperforming assets guaranteed by the U.S. government $ 324,746 $ 224,638
Allowance for credit losses on loans and leases $ 190,184 $ 167,516
Total nonperforming loans and leases not guaranteed by the U.S. government to total held for investment loans and leases 0.96 % 0.82 %
Total nonperforming loans and leases not guaranteed by the U.S. government to total assets 0.75 % 0.65 %
Allowance for credit losses on loans and leases to total nonperforming loans and leases not guaranteed by the U.S. government 190.36 % 205.76 %
(1) Excludes loans measured at fair value.
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 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.
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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 “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 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
Vertical % of Criticized and Classified Loans and Leases
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, 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. The Bank generally considers an “insignificant period of time” from payment delays to be a period of 90 days or less. The Bank would consider a modification for a customer experiencing what is expected to be a short-term event that has temporarily impacted cash flow. This could be due, among other reasons, to illness, weather, impact from a one-time expense, slower than expected start-up, construction issues or other short-term issues. Credit personnel will review the request to determine if the customer is 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.
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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 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 :
March 31, 2025 vs. December 31, 2024 Increase (Decrease)
Vertical $ %
Healthcare $ 19,641 53.5 %
Agriculture 10,943 29.8
Senior Housing 10,876 29.6
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 $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.
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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 $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. Additional information on the ACL is presented in Note 5. Loans and Leases Held for Investment and Credit Quality of the Unaudited Condensed Consolidated Financial Statements in this report.
Liquidity Management
Liquidity management refers to the ability to meet day-to-day cash flow requirements based primarily on activity in loan and deposit accounts of the Company’s customers. Liquidity is immediately available from four major sources: (a) cash on hand and on deposit at other banks; (b) the outstanding balance of federal funds sold; (c) the market value of unpledged investment securities; and (d) availability under lines of credit, FHLB advances and 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. 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 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. 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.
Off-Balance Sheet Arrangements
In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with GAAP, are not recorded in the consolidated financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of commitments to extend credit and standby letters of credit. For more information, see Note 10. Commitments and Contingencies in the accompanying notes to Unaudited Condensed Consolidated Financial Statements.
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Asset/Liability Management and Interest Rate Sensitivity
One of the primary objectives of asset/liability management is to maximize the net interest margin while minimizing the earnings risk associated with changes in interest rates. One method used to manage interest rate sensitivity is to measure the repricing differences, or interest rate gaps, between interest-earning assets and interest-bearing liabilities, across various time periods. As of 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. Quantitative and Qualitative Disclosures About Market Risk.
The interest rate gap method, however, addresses only the magnitude of asset and liability repricing timing differences as of the report date and does not address earnings, market value, changes in account behaviors based on the interest rate environment, or growth. Therefore, management also uses an earnings simulation model to prepare, on a regular basis, earnings projections based on a range of instantaneous parallel interest rate shocks applied to a static balance sheet and non-parallel interest rate shocks applied to a dynamic balance sheet to measure interest rate risk. As of 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. Quantitative and Qualitative Disclosures About Market Risk.
An asset-sensitive position means that net interest income will generally move in the same direction as interest rates. For instance, if interest rates increase, net interest income can be expected to increase, and if interest rates decrease, net interest income can be expected to decrease. The Company attempts to mitigate interest rate risk by match funding assets and liabilities with similar rate instruments. Asset/liability sensitivity is primarily derived from the prime-based loans that adjust as the prime interest rate changes, rates on cash accounts that adjust as the federal funds rate changes and the longer duration of indeterminate term deposits. Note that the Company regularly models various forecasted rate projections with non-parallel shifts that are reflective of potential current rate environment outcomes. Under these scenarios, the Company’s interest rate risk profile may increase in asset sensitivity, decrease in asset sensitivity, or depending on the scenario and timing of anticipated rate changes, may transition to a liability-sensitive interest rate risk profile. The Company believes that regular modeling of various interest rate outcomes allows it to assess and manage potential risks from various rate shifts.
Capital
The maintenance of appropriate levels of capital is a management priority and is monitored on a regular basis. The Company’s principal goals related to the maintenance of capital are the following: to provide adequate capital to support the Company’s risk profile consistent with the risk appetite approved by the Board of Directors; to provide financial flexibility to support future growth and client needs; to comply with relevant laws, regulations, and supervisory guidance; to achieve optimal ratings for the Company and its subsidiaries; and to provide a competitive return to shareholders. Management regularly monitors the capital position of the Company on both a consolidated and bank level basis. In this regard, management’s goal is to maintain capital at levels that are in excess of the regulatory “well capitalized” levels. Risk-based capital ratios, which include Tier 1 Capital, Total Capital and Common Equity Tier 1 Capital, are calculated based on regulatory guidance related to the measurement of capital and risk-weighted assets.
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Capital amounts and ratios as of March 31, 2025, and December 31, 2024, are presented in the table below.
Actual Minimum Capital
Requirement Minimum To Be
Well Capitalized
Under Prompt
Corrective Action
Provisions (1)
Amount Ratio Amount Ratio Amount Ratio
Consolidated - March 31, 2025
Common Equity Tier 1 (to Risk-Weighted Assets) $ 1,061,776 10.67 % $ 447,611 4.50 % N/A N/A
Total Capital (to Risk-Weighted Assets) 1,187,087 11.93 795,753 8.00 N/A N/A
Tier 1 Capital (to Risk-Weighted Assets) 1,061,776 10.67 596,815 6.00 N/A N/A
Tier 1 Capital (to Average Assets) 1,061,776 8.03 528,694 4.00 N/A N/A
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 %
Total Capital (to Risk-Weighted Assets) 1,159,355 11.90 779,526 8.00 974,407 10.00
Tier 1 Capital (to Risk-Weighted Assets) 1,036,548 10.64 584,644 6.00 779,526 8.00
Tier 1 Capital (to Average Assets) 1,036,548 7.90 525,119 4.00 656,398 5.00
Consolidated - December 31, 2024
Common Equity Tier 1 (to Risk-Weighted Assets) $ 1,049,420 11.04 % $ 427,941 4.50 % N/A N/A
Total Capital (to Risk-Weighted Assets) 1,169,061 12.29 760,784 8.00 N/A N/A
Tier 1 Capital (to Risk-Weighted Assets) 1,049,420 11.04 570,588 6.00 N/A N/A
Tier 1 Capital (to Average Assets) 1,049,420 8.21 511,293 4.00 N/A N/A
Bank - December 31, 2024
Common Equity Tier 1 (to Risk-Weighted Assets) $ 1,020,820 10.96 % $ 418,992 4.50 % $ 605,210 6.50 %
Total Capital (to Risk-Weighted Assets) 1,138,006 12.22 744,874 8.00 931,093 10.00
Tier 1 Capital (to Risk-Weighted Assets) 1,020,820 10.96 558,656 6.00 744,874 8.00
Tier 1 Capital (to Average Assets) 1,020,820 8.04 507,725 4.00 634,657 5.00
(1) Prompt corrective action provisions are not applicable at the bank holding company level.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in accordance with GAAP requires the Company to make estimates and judgments that affect reported amounts of assets, liabilities, income and expenses and related disclosure of contingent assets and liabilities. The Company bases estimates on historical experience and on various other assumptions that are believed to be reasonable under current circumstances, results of which form the basis for making judgments about the carrying value of certain assets and liabilities that are not readily available from other sources. Estimates are evaluated on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions.
Accounting policies, including those for the Company's critical accounting policies, as described in detail in the Notes to the Company’s Unaudited Condensed Consolidated Financial Statements in this report and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2024, are an integral part of the Company’s consolidated financial statements. A thorough understanding of these accounting policies is essential when reviewing the Company’s reported results of operations and financial position. The Company’s most critical accounting 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
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.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.