What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2025-08-05 compared with 2025-05-07 · 224 added, 109 removed, 400 unchanged (45% of the section changed)

64 unchanged sentences

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.

As of June 30, 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”).

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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”) 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.

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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.

Three months ended June 30, 2025 compared with three months ended June 30, 2024

For the three months ended June 30, 2025, the Company reported net income attributable to Live Oak Bancshares, Inc.

of $23.4 million, or $0.51 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.

of $27.0 million, or $0.59 per diluted share, for the second 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;

• Provision for credit losses increased by $11.5 million, or 97.6%, to $23.3 million, compared to $11.8 million for the second 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.

• Other noninterest income decreased by $6.1 million, or 55.6%, largely related to a $6.7 million gain arising from the sale of one of the Company’s aircraft in the second quarter of 2024;

• Other noninterest expense increased by $3.5 million, or 133.8%, principally driven by a $2.8 million loss arising from the early buyout of the Company's sole bioenergy lease.

Key factors largely offsetting the decrease in net income are increased levels of net interest income of $17.9 million, combined with increased net gains on sales of loans of $7.2 million.

Six months ended June 30, 2025 compared with six months ended June 30, 2024

For the six months ended June 30, 2025, the Company reported net income attributable to Live Oak Bancshares, Inc.

of $33.1 million, or $0.72 per diluted share, compared to net income attributable to Live Oak Bancshares, Inc.

of $54.5 million, or $1.20 per diluted share, for the six months ended June 30, 2024.

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

• Provision for credit losses increased by $24.1 million, or 85.6%, to $52.2 million, compared to $28.1 million for the first half of 2024;

• Management fee income decreased by $6.5 million, or 100.0%, due to reasons discussed above;

• Other noninterest income decreased by $11.8 million, or 57.0%, largely related to activity in the first half of 2024 arising from the above noted $6.7 million gain arising from the sale of one of the Company’s aircraft combined with a first quarter of 2024 gain arising from increased fair value of equity warrant assets;

• Noninterest expense increased by $17.9 million, or 11.5%.

This increase was principally comprised by increased levels of salary and employee benefits of $3.6 million, technology expense of $3.6 million and other expense of $3.0 million.

The increase in other expense was principally comprised of a $2.8 million loss arising from the early buyout of the Company's sole bioenergy lease;

• Net income tax expense increased by $7.7 million, from $3.6 million in the first half of 2024, to $11.3 million for the first half 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.

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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 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.

Three months ended June 30, 2025 compared with three months ended June 30, 2024

For the three months ended June 30, 2025, net interest income increased $17.9 million, or 19.6%, to $109.2 million compared to $91.3 million for the three months ended June 30, 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 outpacing the decrease in average cost of funds.

Average interest-earning assets increased by $2.16 billion, or 19.3%, to $13.36 billion for the second quarter of 2025, compared to $11.20 billion for the second quarter of 2024, while the yield on average interest-earning assets decreased 39 basis points to 6.73%.

The cost of funds on interest-bearing liabilities for the second quarter of 2025 decreased 37 basis points to 3.78% and the average balance of interest-bearing liabilities increased by $1.83 billion, or 17.6%, over the second quarter of 2024.

As indicated in the rate/volume analysis below, the overall increase discussed above is reflected in increased interest income of $25.8 million outpacing growth in interest expense of $7.9 million for the second quarter of 2025 compared to the second quarter of 2024.

The net interest margin remained stable at 3.28% for both the second quarters of 2024 and 2025.

Six months ended June 30, 2025 compared with six months ended June 30, 2024

For the six months ended June 30, 2025, net interest income increased $28.3 million, or 15.6%, to $209.8 million compared to $181.4 million for the six months ended June 30, 2024.

Average interest-earning assets increased by $2.01 billion, or 18.2%, to $13.06 billion for the six months ended June 30, 2025, compared to $11.05 billion for the six months ended June 30, 2024, while the yield on average interest-earning assets decreased 36 basis points to 6.75%.

The cost of funds on interest-bearing liabilities for the six months ended June 30, 2025 decreased 27 basis points to 3.84%, and the average balance of interest-bearing liabilities increased by $1.72 billion, or 16.7%, over the six months ended June 30, 2024.

The increase in average interest-bearing liabilities was largely driven by funding for significant loan originations and growth as well as maintenance of the Company's target liquidity profile.

As indicated in the rate/volume 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.

As indicated in the rate/volume analysis below, the overall increase discussed above is reflected in increased interest income of $46.5 million outpacing growth in interest expense of $18.2 million for the six months ended June 30, 2025 compared to the six months ended June 30, 2024.

The net interest margin decreased from 3.30% for the six months ended June 30, 2024 to 3.24% for the six months ended June 30, 2025.

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

In June 2025, 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.

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Loan fees are included in interest income on loans.

Three Months Ended March 31,

Three Months Ended June 30,

Balance Interest Average

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(1) Average loan and lease balances include non-accruing loans and leases.

Six Months Ended June 30,

Interest Average

Interest-earning assets:

Interest-earning balances in other banks $ 654,896 $ 14,523 4.47 % $ 550,608 $ 14,845 5.42 %

Investment securities 1,394,450 22,737 3.29 1,252,268 18,173 2.92

Loans held for sale 394,846 16,620 8.49 370,662 17,683 9.59

Loans and leases held for investment (1)

10,617,166 383,509 7.28 8,875,186 340,167 7.71

Total interest-earning assets 13,061,358 437,389 6.75 11,048,724 390,868 7.11

Allowance for credit losses on loans and leases

(175,728) (131,057)

Noninterest-earning assets 536,823 554,961

Total assets $ 13,422,453 $ 11,472,628

Interest-bearing liabilities:

Interest-bearing checking $ 350,736 $ 7,898 4.54 % $ 302,285 $ 8,450 5.62 %

Savings 5,892,536 108,133 3.70 4,678,214 94,788 4.07

Money market accounts 128,335 213 0.33 126,971 373 0.59

Certificates of deposit 5,477,278 108,024 3.98 5,063,704 103,745 4.12

Total deposits 11,848,885 224,268 3.82 10,171,174 207,356 4.10

Borrowings 110,684 3,368 6.14 73,047 2,081 5.73

Total interest-bearing liabilities 11,959,569 227,636 3.84 10,244,221 209,437 4.11

Noninterest-bearing deposits 359,084 218,298

Noninterest-bearing liabilities 56,214 74,305

Shareholders' equity 1,043,145 935,804

Non-controlling interest 4,441 —

Total liabilities and shareholders' equity

$ 13,422,453 $ 11,472,628

Net interest income and interest rate spread

$ 209,753 2.91 % $ 181,431 3.00 %

Net interest margin 3.24 % 3.30 %

Ratio of average interest-earning assets to average interest-bearing liabilities

109.21 % 107.85 %

(1) Average loan and lease balances include non-accruing loans and leases.

Rate/Volume Analysis.

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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 March 31,

Increase (Decrease) Due to

Rate Volume Total

Three Months Ended June 30, Six Months Ended June 30,

2024 2025 vs.

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

Rate Volume Total Rate Volume Total

Interest income:

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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 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.

For the second quarter of 2025, there was a provision for credit losses of $23.3 million compared to $11.8 million for the same period in 2024, an increase of $11.5 million.

For the six months ended June 30, 2025, there was a provision for credit losses of $52.2 million compared to $28.1 million for the same period in 2024, an increase of $24.1 million.

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

Loans and leases held for investment at historical cost were $10.71 billion as of June 30, 2025, increasing by $1.90 billion, or 21.6%, compared to June 30, 2024.

Net charge-offs for loans and leases carried at historical cost were $31.4 million, or 1.19% of average quarterly loans and leases held for investment, carried at historical cost, on an annualized basis, for the three months ended June 30, 2025, compared to net charge-offs of $8.3 million, or 0.38%, for the three months ended June 30, 2024, an increase of $23.2 million, or 281.0%.

The increase in net charge-offs compared to the second quarter of 2024 was largely concentrated to individually evaluated loans with specific reserves recorded in prior periods.

For the six months ended June 30, 2025, net charge-offs totaled $38.2 million compared to $11.4 million for the six months ended June 30, 2024 , an increase of $26.8 million , or 234.8% .

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 $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.

In addition, nonperforming loans and leases not guaranteed by the SBA or USDA, excluding $8.9 million and $9.6 million accounted for under the fair value option at June 30, 2025 and 2024, respectively, totaled $59.6 million, which was 0.56% of the held for investment loan and lease portfolio carried at historical cost at June 30, 2025, compared to $37.3 million, or 0.42% of loans and leases held for investment carried at historical cost at June 30, 2024.

Noninterest Income

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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.

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

Other less consistent elements of noninterest income include gains and losses on investments.

The following table shows the components of noninterest income and the dollar and percentage changes for the periods presented.

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

Three Months Ended June 30, 2025/2024 Increase (Decrease)

2025 2024 Amount Percent

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Net gains on sales of loans 21,641 14,395 7,246 50.3

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

Net gain on loans accounted for under the fair value option

1,082 172 910 529.1

Equity method investments (loss) income (2,716) (1,767) (949) (53.7)

Equity security investments gains (losses), net 20 (529) 549 103.8

Equity security investments gains, net 1,004 161 843 523.6

Lease income 3,103 2,423 680 28.1

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Total noninterest income $ 34,526 $ 34,159 $ 367 1.1 %

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.

Six Months Ended June 30, 2025/2024 Increase (Decrease)

2025 2024 Amount Percent

Noninterest income

Loan servicing revenue $ 16,863 $ 14,971 $ 1,892 12.6 %

Loan servicing asset revaluation (7,785) (5,622) (2,163) (38.5)

Net gains on sales of loans 40,289 25,897 14,392 55.6

Net gain (loss) on loans accounted for under the fair value option 48 (47) 95 202.1

Equity method investments (loss) income (4,955) (6,789) 1,834 27.0

Equity security investments gains, net 1,024 (368) 1,392 378.3

Lease income 5,676 4,876 800 16.4

Management fee income — 6,542 (6,542) (100.0)

Other noninterest income 8,947 20,796 (11,849) (57.0)

Total noninterest income $ 60,107 $ 60,256 $ (149) (0.2) %

For the three months ended June 30, 2025, noninterest income increased by $367 thousand, or 1.1%, compared to the three months ended June 30, 2024.

Principal changes when compared with the second quarter of 2024 are higher net gains on sales of loans of $7.2 million combined with a $3.3 million decrease in management fee income due to the restructuring of the Canapi Funds in the third quarter of 2024 and a $6.1 million decrease in other noninterest income largely related to a $6.7 million gain arising from the sale of one of the Company’s aircraft in the second quarter of 2024.

For the six months ended June 30, 2025, noninterest income decreased by $149 thousand, or 0.2%, compared to the six months ended June 30, 2024.

Principal changes when compared with the first half of 2024 are primarily a result of a $2.2 million increase in loss related to the servicing asset revaluation combined with a $6.5 million decrease in management fee income discussed above and a $11.8 million decrease in other noninterest income largely related to activity in the first half of 2024 arising from a $6.7 million gain arising from the sale of one of the Company’s aircraft combined with a gain arising from increased fair value of equity warrant assets.

Partially offsetting these negative changes was higher net gains on sales of loans of $14.4 million.

The following tables reflects loan and lease production, sales of guaranteed loans and the aggregate balance in guaranteed loans sold.

These components are key drivers of the Company's noninterest income.

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

Three months ended June 30, Three months ended March 31,

2025 2024 2025 2024

Amount of loans and leases originated $ 1,526,592 $ 1,171,141 $ 1,396,223 $ 805,129

Guaranteed portions of loans sold 322,317 250,466 266,275 186,654

Outstanding balance of guaranteed loans sold (1)

3,685,981 3,177,629 3,486,533 3,057,641

Six Months Ended June 30, For years ended December 31,

2025 2024 2024 2023 2022 2021

Amount of loans and leases originated

$ 2,922,815 $ 1,976,270 $ 5,155,244 $ 3,946,873 $ 4,007,621 $ 4,480,725

Guaranteed portions of loans sold

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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 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.

For the three months ended June 30, 2025, there was a net loss on loan servicing asset revaluation of $3.1 million, compared to a net loss of $2.9 million for the three months ended June 30, 2024.

For the six months ended June 30, 2025, there was a net loss on loan servicing asset revaluation of $7.8 million compared to a net loss of $5.6 million for the six months ended June 30, 2024, resulting in a negative comparative year-to-date change of $2.2 million.

The decrease in the valuation of the servicing asset compared to the first half of 2024 was principally the result of principal paydowns or runoff as well as less favorable market conditions in 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.

For the three months ended June 30, 2025, net gains on sales of loans increased $7.2 million, or 50.3%, compared to the three months ended June 30, 2024.

The volume of guaranteed loans sold increased $71.9 million, or 28.7%, for the three months ended June 30, 2025 to $322.3 million from $250.5 million for the three months ended June 30, 2024.

For the six months ended June 30, 2025, net gains on sales of loans increased $14.4 million, or 55.6%, compared to the six months ended June 30, 2024.

For the six months ended June 30, 2025, the volume of guaranteed loans sold increased $151.5 million, or 34.7%, to $588.6 million from $437.1 million for the six months ended June 30, 2024.

The average net gain on loan sale premium increased from 106% to 107% in the second quarters of 2024 and 2025, respectively, and for the six months ended June 30, 2024 and 2025.

The increase in net gains on sales of loans over the second quarter of 2024 and six months ended June 30, 2024 was principally related to a higher loan sale volume combined with improving premiums.

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 March 31, 2025/2024 Increase (Decrease)

Three Months Ended June 30, 2025/2024 Increase (Decrease)

2025 2024 Amount Percent

9 unchanged sentences

Other loan origination and maintenance expense 4,190 3,659 531 14.5

Renewable energy tax credit investment impairment

270 170 100 58.8

FDIC insurance 3,545 2,649 896 33.8

Other expense 6,161 2,635 3,526 133.8

Total non-employee expenses 40,156 31,401 8,755 27.9

Total noninterest expense $ 89,293 $ 77,656 $ 11,637 15.0 %

Six Months Ended June 30, 2025/2024 Increase (Decrease)

2025 2024 Amount Percent

Noninterest expense

Salaries and employee benefits $ 97,145 $ 93,530 $ 3,615 3.9 %

Non-employee expenses:

Travel expense 5,371 4,766 605 12.7

Professional services expense 5,898 4,939 959 19.4

Advertising and marketing expense 8,085 6,696 1,389 20.7

Occupancy expense 5,106 4,635 471 10.2

Technology expense 19,317 15,719 3,598 22.9

Equipment expense 7,430 6,585 845 12.8

Other loan origination and maintenance expense 8,775 7,570 1,205 15.9

Renewable energy tax credit investment (recovery) impairment 270 (757) 1,027 135.7

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Total noninterest expense $ 173,310 $ 155,393 $ 17,917 11.5 %

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.

Total noninterest expense for the three and six months ended June 30, 2025, increased $11.6 million, or 15.0%, and increased $17.9 million, or 11.5%, respectively, compared to the same periods in 2024.

The changes within noninterest expense for the comparable three and six month periods was largely driven by various components, as discussed below.

Salaries and employee benefits:

Total personnel expense for the three and six months ended June 30, 2025 increased by $2.9 million, or 6.2%, and increased by $3.6 million, or 3.9%, respectively, compared to the same periods in 2024.

The increase over both comparative periods of 2024 is principally related to investment in human resources to support strategic and growth initiatives.

Total full-time equivalent employees increased from 987 at June 30, 2024, to 1,056 at June 30, 2025.

Salaries and employee benefits expense included $6.9 million and $13.7 million of stock-based compensation for the three and six months ended June 30, 2025, respectively, compared to $6.8 million and $13.2 million for the three and six months ended June 30, 2024, respectively.

Expenses related to the employee stock purchase program, stock grants, stock option compensation and restricted stock expense are all considered stock-based compensation.

Technology expense :

For the three and six months ended June 30, 2025, technology expense increased $2.1 million, or 25.9%, and $3.6 million, or 22.9%, respectively, compared to the same periods in 2024.

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

Other expense :

For the three and six months ended June 30, 2025, other expense increased $3.5 million, or 133.8%, and $3.0 million, or 50.4%, respectively, compared to the same periods in 2024.

The increase over both comparative periods was principally driven by a $2.8 million loss arising from the early buyout of the Company's sole bioenergy lease in the second quarter of 2025.

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.

For the three months ended June 30, 2025, income tax expense was $7.8 million compared to income tax expense of $9.1 million in the second quarter of 2024, and the Company’s effective tax rates were 25.0% and 25.2%, respectively.

For the six months ended June 30, 2025, income tax expense was $11.3 million compared to $3.6 million for the six months ended June 30, 2024, and the Company’s effective tax rates were 25.4% and 6.2%, respectively.

The lower level of income tax expense for the second quarter of 2025 as compared to the second quarter of 2024 was largely the result of decreased pretax income during the current period.

The higher level of income tax expense for the first half of 2025 as compared to the first half of 2024 was largely the result of an additional $10.6 million in 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 in the first half of 2025 was decreased pretax income during the current period.

Discussion and Analysis of Financial Condition

March 31, 2025 vs.

June 30, 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.

Total assets at June 30, 2025 were $13.83 billion, an increase of $887.8 million, or 6.9%, 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.

• Cash and cash equivalents, comprised of cash and due from banks, combined with investment securities available-for-sale was $1.99 billion at June 30, 2025, an increase of $131.0 million, or 7.1%, 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.

• Growth in total loans and leases held for investment and held for sale of $785.5 million, or 7.4%, during the first half of 2025, from $10.58 billion at December 31, 2024, to $11.36 billion at June 30, 2025.

This growth was a result of strong origination activity during the first half of 2025 of $2.92 billion.

Total deposits were $12.59 billion at June 30, 2025, an increase of $834.3 million, or 7.1%, 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.

At June 30, 2025, the Bank’s total uninsured deposits were approximately $1.95 billion, or 15.4%, 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 March 31, 2025.

The following table provides information with respect to commercial real estate loans as of June 30, 2025.

Guaranteed Unguaranteed Total (1)

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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.

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.

Nonperforming assets, including loans measured at fair value, at June 30, 2025 were $473.5 million, which represented a $101.7 million, or 27.4%, increase from December 31, 2024.

These nonperforming assets at June 30, 2025 were comprised of $467.1 million in nonaccrual loans and leases and $6.3 million in foreclosed assets.

Of the $473.5 million of nonperforming assets, $402.8 million carried a government guarantee, leaving an unguaranteed exposure of $70.6 million in total nonperforming assets at June 30, 2025.

This represents a decrease of $20.9 million, or 22.9%, 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.

March 31, 2025 (1)

June 30, 2025 (1)

December 31, 2024 (1)

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Total nonperforming loans and leases guaranteed by the U.S government (all on nonaccrual) $ 336,777 $ 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 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.

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.

Nonperforming assets, excluding loans measured at fair value, at June 30, 2025 were $402.7 million, which represented a $96.4 million, or 31.5%, increase from December 31, 2024.

These nonperforming assets at June 30, 2025 were comprised of $396.3 million in nonaccrual loans and leases and $6.3 million in foreclosed assets.

Of the $402.7 million of nonperforming assets, $341.9 million carried a government guarantee, leaving an unguaranteed exposure of $60.7 million in total nonperforming assets at June 30, 2025.

This represents a decrease of $20.9 million, or 25.6%, from an unguaranteed exposure of $81.6 million at December 31, 2024.

See the below discussion related to the change in potential problem and individually evaluated 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 33.2% at June 30, 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 June 30, 2025 and December 31, 2024 were 5.0% and 7.2%, respectively.

As of June 30, 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.

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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.

At June 30, 2025 , the portion of criticized and classified loans and leases guaranteed by the SBA or USDA totaled $578.8 million and total portfolio unguaranteed exposure risk was $561.0 million , or 7.5% 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

As of June 30, 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 June 30, 2025 As of December 31, 2024

Vertical % of Criticized and Classified Loans and Leases

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Healthcare 8.3 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%

Sponsor Finance 5.8 Sponsor Finance 5.5

Auto Care 5.2 Wine & Craft Beverage 5.3

Self Storage 5.2 Search Fund Lending 5.0

Community Facilities 4.3 Community Facilities 4.8

Sponsor Finance 4.5% Self Storage 4.6%

Wine & Craft Beverage 4.3 Self Storage 4.6

% of Total Criticized and Classified Loans 63.9% % 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 total $97.8 million increase in potential problem and classified loans and leases in the first six months of 2025 was comprised of $59.9 million in increased levels of Risk Grade 50 loans and leases, as discussed below and $38.0 million in classified loans.

The overall increase in criticized and classified loans in the first half of 2025 was primarily driven by higher levels of commercial borrowers impacted by the challenging macroeconomic environment .

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.

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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.

At June 30, 2025, the Company had a total of $45.9 million in loans modified in 2025 to borrowers experiencing financial difficulty, excluding loans measured at fair value, $43.7 million of which remained current and $36.0 million of which are for an other-than-insignificant payment delay or term extension.

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.

At June 30, 2025 , and December 31, 2024 , Risk Grade 50 loans and leases, excluding lo ans measured at fair value, totaled $589.8 million and $529.9 million, respectively, for an increase of $59.9 million.

Relative to total held for investment unguaranteed exposure carried at historical cost at December 31, 2024 and June 30, 2025, unguaranteed Risk Grade 50 loans and leases increased from $357.9 million, or 5.3%, to $413.3 million, or 5.5%, 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.

June 30, 2025 vs.

December 31, 2024 Increase (Decrease)

Healthcare $ 26,396 37.1 %

Government Contractors 25,677 36.1

Sponsor Finance 15,117 21.3

Agriculture 12,373 17.4

Senior Housing 10,876 29.6

Care Services 8,745 23.8

Funeral Home & Cemetery 8,426 23.0

Auto Care 9,199 12.9

Hospitality 8,780 12.3

RV Parks 5,286 7.4

Self Storage (5,409) (7.6)

Quick Service Restaurants 5,045 13.7

Search Fund Lending (4,793) (13.1)

Hotels (5,051) (13.8)

Veterinary (6,799) (9.6)

Senior Housing (7,430) (10.4)

Commercial Real Estate Financing (7,498) (10.5)

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

General Lending (11,606) (16.3)

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.

Search Fund Lending (12,300) (17.3)

Total of largest changes in Risk Grade 50 loans and leases $ 51,786 72.8%

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

Of the above listed verticals, Government Contractors, Sponsor Finance, Hospitality, Senior Housing, 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 June 30, 2025, approximately 97.8% 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.

The ACL of $167.5 million at December 31, 2024, increased by $14.7 million, or 8.8%, to $182.2 million at June 30, 2025.

The ACL as a percentage of loans and leases held for investment at historical cost amounted to 1.7% at both December 31, 2024 and June 30, 2025, respectively.

The increase in the ACL during the first six months of 2025 was primarily the result of specific reserve changes on individually evaluated loans and continued growth of the loan and lease portfolio.

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

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.

Actual past due held for in vestment loans and leases, inclusive of loans measured at fair value, have de creased by $12.0 million since December 31, 2024 .

Total loans and leases 90 or more days past due in creased $46.3 million , or 18.1 %, compared to December 31, 2024 .

This increase was comprised of a $1.8 million increase in unguaranteed exposure combined with a $44.5 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.

At June 30, 2025 and 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 0.7% and 1.3% , respectively.

Total unguaranteed loa ns and leases past due were comprised of $48.5 million carried at historical cost, a de crease of $28.9 million , and $8.5 million measured at fair value, a decrease of $1.8 million , as of June 30, 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.

Management believes the ACL of $182.2 million at June 30, 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 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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(b) the outstanding balance of federal funds sold;

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

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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.

At June 30, 2025, the total amount of these four liquidity source items was $4.49 billion, or 32.5% of total assets, an increase of 0.1% 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.

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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.

At June 30, 2025, $ 597.0 million of the investment securities portfolio were pledged for unused borrowing capacity, leaving $728.2 million available to be pledged as collateral.

Contractual Obligations

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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 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.

As of June 30, 2025, the balance sheet’s total cumulative gap position was 5.3%, 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 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.

As of June 30, 2025, the Company’s interest rate risk profile under the instantaneous parallel interest rate shock scenarios applied to a static balance sheet is moderately 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 March 31, 2025, and December 31, 2024, are presented in the table below.

Capital amounts and ratios as of June 30, 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 - March 31, 2025

Consolidated - June 30, 2025

Common Equity Tier 1 (to Risk-Weighted Assets) $ 1,088,967 10.67 % $ 459,367 4.50 % N/A N/A

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Tier 1 Capital (to Average Assets) 1,088,967 7.90 551,427 4.00 N/A N/A

Bank - March 31, 2025

Bank - June 30, 2025

Common Equity Tier 1 (to Risk-Weighted Assets) $ 1,066,764 10.65 % $ 450,806 4.50 % $ 651,164 6.50 %

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis