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Item 7. Management’s Discussion and Analysis

2026-02-27 compared with 2025-03-18 · 116 added, 165 removed, 694 unchanged (29% of the section changed)

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The following presents management’s discussion and analysis (“MD&A”) of the more significant factors that affected the Company's financial condition and results of operations for the year ended December 31, 2025 as compared to December 31, 2024.

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

For a comparison of 2024 results to 2023 and other 2023 information not included herein, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Part II, Item 7 of the 2024 Form 10-K/A filed with the SEC on November 17, 2025 .

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

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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.

During the fourth quarter of 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.

Synply is a cloud-based technology platform designed to simplify the loan syndication process for financial institutions.

The non-controlling interest in Synply is disclosed according to the Company’s consolidation policy.

As of December 31, 2025 , the Bank’s wholly owned subsidiaries were Live Oak Number One, Inc., Live Oak Clean Energy Financing LLC (“LOCEF”), Live Oak Private Wealth, LLC (“Live Oak Private Wealth”) and Tiburon Land Holdings, LLC (“TLH”).

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Live Oak Private Wealth provides high-net-worth individuals and families with strategic wealth and investment management services.

During the first quarter of 2022, Jolley Asset Management, LLC (“JAM”) was merged into Live Oak Private Wealth.

JAM was previously a wholly owned subsidiary of Live Oak Private Wealth.

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

Income from the sale of loans consists of loan servicing revenue and revaluation of related servicing assets along with net gains on sales of loans.

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.

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Income Statement Data

Net income attributable to Live Oak Bancshares, Inc.

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

Net income attributable to common shareholders $ 102,823 $ 77,474 $ 73,898

Per Common Share

Net income, diluted $ 2.23 $ 1.69 $ 1.64

Dividends declared 0.12 0.12 0.12

Book value 22.12 20.23 18.41

Tangible book value (1)

Dividends declared - common 0.12 0.12 0.12

Book value per common share 25.06 22.12 20.23

Tangible book value per common share (1)

24.97 22.05 20.15

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Return on average assets 0.74 % 0.65 % 0.69 %

Return on average equity 7.94 8.66 21.92

Return on average common equity 9.47 7.94 8.66

Net interest margin 3.30 3.27 3.35

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Substantial loan production in 2025 was the primary driver of growth in total assets, which increased to $15.13 billion at December 31, 2025 as compared to $12.94 billion at December 31, 2024 , for an increase of $2.19 billion, or 16.9%.

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

• Net income attributable to Live Oak Bancshares, Inc.

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

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

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

• Supporting loan growth, total deposits increased by $1.93 billion, or 16.4%, to $13.69 billion at the end of 2025 and shareholders’ equity increased $250.6 million, or 25.0%, driven by net income as discussed below and further bolstered by the issuance of depositary shares which resulted in net proceeds of $96.3 million .

• Net income attributable to common shareholders increased $25.3 million, or 32.7%, from $77.5 million, or $1.69 per diluted share, to $102.8 million, or $2.23 per diluted share, largely due to the following items:

◦ Net interest income increased by $72.5 million, or 19.3%, largely the result of robust loan growth, which led to an increase in net interest margin to 3.30% for 2025 as compared to 3.27% for 2024.

◦ The provision for credit losses of $96.3 million remained relatively flat year over year.

Total nonperforming unguaranteed loans and leases as a percentage of total loans and leases held for investment, excluding loans measured at fair value, increased from 0.82% at the end of 2024 to 0.87% at the end of 2025.

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

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

Net charge-offs as a percentage of average held for investment loans and leases carried at amortized cost, for the years ended December 31, 2025 and 2024 , were 0.63% and 0.52%, respectively.

◦ Increased total noninterest income of $16.8 million, or 14.9%, and increased total noninterest expense of $35.6 million, or 11.7%.

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

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Results of Operations

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

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

The Company reported net income attributable to common shareholders of $102.8 million, or $2.23 per diluted share, for 2025 compared to $77.5 million, or $1.69 per diluted share, for 2024.

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

• Increased net interest income of $72.5 million, or 19.3%;

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

• Increased other noninterest income of $14.0 million, largely related to the combination of a $2.4 million gain from the sale of a building in the third quarter of 2024, a $6.7 million gain arising from the sale of one of the Company’s aircraft in the second quarter of 2024 and a $5.7 million gain in the first quarter of 2024 arising from the increased fair value of a certain equity warrant asset.

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

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

• Increased net gains on sales of loans of $12.7 million, or 25.4%, principally the result of higher loan sale volumes in 2025;

• Increased equity method investments income of $28.3 million, largely comprised of a $24.1 million gain arising from the sale of the Company’s interest in Apiture, Inc.

Key factors partially offsetting the year-over-year increase in net income were comprised of decreases in management fee and other noninterest income of $7.7 million and $20.2 million, respectively, combined with increases in salary and employee benefits, technology expense and income tax expense of $14.7 million, $8.7 million and $25.4 million, respectively.

Net Interest Income and Margin

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For 2025, net interest income increased $72.5 million, or 19.3%, to $448.4 million compared to $375.9 million for 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 an increase in average cost of funds which exceeded the increase in average yield on interest-earning assets.

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

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

The increase in cost of funds was largely influenced by repricing of short-term certificates of deposit with the average cost of funds increasing from 3.31% in 2023 to 4.17% for in 2024.

This increase was principally due to the growth in the held for investment loan and lease portfolio outpacing growth in interest-bearing liabilities.

Average interest-earning assets increased by $2.10 billion, or 18.2%, to $13.59 billion for 2025 , compared to $11.50 billion for 2024, while the yield on average interest-earning assets decreased by 39 basis points to 6.68%.

The cost of funds on interest-bearing liabilities for 2025 decreased by 39 basis points to 3.72%, and the average balance of interest-bearing liabilities increased by $1.73 billion, or 16.3%, over 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 $96.1 million outpacing growth in interest expense of $23.6 million for 2025 compared to 2024.

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

The net interest margin slightly increased from 3.27% for 2024 to 3.30% for 2025 .

In January 2026, the Federal Reserve decided to maintain the federal funds upper target rate at 3.75%.

The Federal Reserve released its most current federal funds target rate midpoint projections at its previous meeting in December 2024 which implied a decrease of approximately 50 basis points to 3.9% by the end of 2025.

The Federal Reserve released its most current federal funds target rate midpoint projections at its previous meeting in December 2025 which implied a decrease of approximately 25 basis points to 3.4% by the end of 2026 and a decrease of approximately 25 basis points to 3.1% by the end of 2027.

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 7A.

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

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The provision for credit losses represents the amount necessary to be charged against the current period’s earnings to maintain the allowance for credit losses (“ACL”) on loans and leases at a level that the Company believes is appropriate in relation to the estimated losses inherent in the loan and lease portfolio.

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

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

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

See Note 1 to the consolidated financial statements included in Item 8 of this Report under the subheading Allowance for Off-Balance Sheet Credit Exposures for additional information.

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

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The Company believes that its focus on compliance with regulations and guidance from the SBA and USDA are key factors to managing this risk.

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

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

The provision for credit losses was $96.3 million in 2025 , relatively flat compared to $96.2 million in 2024, with an increase of $91 thousand.

Loans and leases held for investment at historical cost were $11.71 billion as of De cember 31, 2025, an increase of $1.81 billion , or 18.3%, c ompared to December 31, 2024.

Net charge-offs for loans and leases carried at historical cost were $68.8 million, or 0.63% of average loans and leases held for investment at amortized cost, excluding loans measured at fair value, for 2025, compared to net charge-offs of $46.7 million, or 0.52%, for 2024, an increase of $22.1 million, or 47.3%.

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

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

The increase in net charge-offs for 2025 was largely concentrated to individually evaluated loans with specific reserves recorded in prior periods.

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

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For 2025 , noninterest income increased by $16.8 million, or 14.9%, compared to 2024 .

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

The increase in other noninterest income was largely related to the previously mentioned $2.4 million gain from the sale of a building in the third quarter of 2024 combined with a $6.7 million gain arising from the sale of one of the Company’s aircraft in the second quarter of 2024 and a $5.7 million gain in the first quarter of 2024 arising from the increased fair value of a certain equity warrant asset.

Partially offsetting the increase in total noninterest income over the prior year-to-date period were higher losses of $17.0 million related to the servicing asset revaluation, $4.9 million in higher flow-through losses of equity method investments and a $5.7 million decrease in management fee income due to the restructuring of the Canapi Funds in the third quarter of 2024.

The increase over the prior year is primarily a result of higher servicing revenue of $3.4 million, increased net gains on sales of loans of $12.7 million, $28.3 million in increased equity method investments income, largely associated with the earlier mentioned gain arising from the sale of the Company’s interest in Apiture, Inc.

and a $5.2 million increase in equity security investments gains largely driven by a $9.0 million gain arising from the sale of a portfolio investment.

Partially offsetting the increase in total noninterest income over the prior year-to-date period was a $3.9 million increase in loss related to the servicing asset revaluation combined with a $7.7 million decrease in management fee income due to the restructuring of the Canapi Funds in the third quarter of 2024 and a $20.2 million decrease in other noninterest income.

The decrease in other noninterest income was largely due to fair value losses in equity warrant assets in 2025 of $5.5 million compared to 2024 higher income related to a $2.4 million gain from the sale of a building, a $6.7 million gain arising from an aircraft sale and a $5.7 million fair value gain in equity warrant assets.

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

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The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as adequate compensation for servicing, the discount rate, the custodial earnings rate, ancillary income, prepayment speeds and default rates and losses, with prepayment speed and discount rate being the most sensitive assumptions.

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

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

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

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

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

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

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

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

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

As of December.

31, 2024 As of December.

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

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

Prepayment Speed

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

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

Discount Rate

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

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

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

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

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

Changes in one factor may result in changes in another.

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

For 2025, there was a net loss on loan servicing asset revaluation of $16.1 million compared to a net loss of $12.2 million for 2024, resulting in a negative change of $3.9 million.

The negative change in valuation of the servicing asset compared to 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 2025, net gains on sales of loans increased $12.7 million, or 25.4%, compared to 2024.

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

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

The volume of guaranteed loans sold increased $201.9 million, or 20.6%, over 2024 while the average net gain on loan sale premium remained stable at 107% in both 2024 and 2025, respectively.

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

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

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

For 2025, the Company had a net gain on loans accounted for under the fair value option of $1.2 million compared to a net gain of $2.4 million for 2024, a negative change of $1.2 million.

The carrying amount of loans accounted for under the fair value option at December 31, 2025 and 2024 was $260.6 million (all classified as held for investment) and $328.7 million (all classified as held for investment), respectively, a decrease of $68.1 million, or 20.7%.

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

The reduction in net gain arising from the valuation of loans accounted for under the fair value option was principally the result of credit downgrades in the derivation of fair value for a portion of the underlying loans.

Noninterest Expense

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FDIC insurance 14,672 10,835 16,670 3,837 35.4 (5,835) (35.0)

Contributions and donations — — 6,462 — — (6,462) (100.0)

Other expense 18,245 12,411 17,152 5,834 47.0 (4,741) (27.6)

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Total noninterest expense $ 338,698 $ 303,110 $ 315,152 $ 35,588 11.7 % $ (12,042) (3.8) %

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

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

Total noninterest expense for 2025 increased $35.6 million, or 11.7%, compared to 2024.

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

Salaries and employee benefits :

Total personnel expense for 2024 increased by $8.2 million, or 4.7%, compared to 2023 .

Total perso nnel expense for 2025 increased by $14.7 million, or 8.4%, compared to 2024 .

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

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

Renewable energy tax credit investment impairment:

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

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

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

Technology expense:

Technology expense increased $8.7 million, or 25.6%, compared to the same period in 2024.

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

FDIC insurance:

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

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

FDIC insurance assessment expense increased $3.8 million, or 35.4%, compared to 2024 .

This increase is largely the product of the Company’s continued growth combined with increased FDIC assessment rates.

Other expense:

Other expense decreased $4.7 million, or 27.6%, compared to 2023 .

This decrease was largely related to reserves for unfunded commitments, historically being presented in other expense.

Beginning in the second quarter of 2024, this expense was classified in the provision for credit losses.

Other expense increased $5.8 million, or 47.0%, compared to 2024 .

The increase was principally driven by a $1.5 million special charitable donation during the fourth quarter of 2025 made in connection with the earlier discussed Apiture gain combined with 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

Income tax expense and related effective tax rate in 2025 was $37.2 million and 26.0% compared to $11.8 million and 13.2% in 2024.

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

The higher level of income tax expense in 2025 as compared to 2024 was largely the result of increased pretax income in 2025 and $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.

Discussion and Analysis of Financial Condition

Total assets at December 31, 2025 were $15.13 billion, an increase of $2.19 billion, or 16.9%, compared to total assets of $12.94 billion at December 31, 2024 .

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

The growth in total assets was principally driven by growth in total loans and leases held for investment and held for sale of $1.81 billion, or 17.1%, in 2025 , from $10.58 billion at December 31, 2024 to $12.39 billion at December 31, 2025 .

This growth was a result of strong origination activity during 2025 of $6.21 billion.

Total deposits were $13.69 billion at December 31, 2025 , an increase of $1.93 billion, or 16.4%, from $11.76 billion at December 31, 2024 .

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At December 31, 2025 , the Bank’s total uninsured deposits were approximately $2.16 billion, or 15.8%, of total deposits.

Borrowings increased to $112.8 million at December 31, 2024 from $23.4 million at December 31, 2023 .

This increase was principally due to entering into a new loan agreement in the first quarter of 2024 to strategically enhance Bank capital levels in order to accommodate future growth expectations.

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

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

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

Shareholders’ equity at December 31, 2025 was $1.25 billion as compared to $1.00 billion at December 31, 2024 .

The book value per share of our common stock was $25.06 at December 31, 2025 compared to $22.12 at December 31, 2024 .

Average equity to average assets was 8.1% for the year ended December 31, 2025 compared to 8.2% for the year ended December 31, 2024 .

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

Regulatory Impact of Asset Growth

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

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

The Dodd-Frank Act and its implementing regulations impose various additional requirements on bank holding companies and banks with $10 billion or more in total consolidated asset

Consumer Financial Laws.

Under the Dodd-Frank Act, the Consumer Financial Protection Bureau (CFPB) has near-exclusive supervision authority, including examination authority, to assess compliance with federal consumer financial laws for a bank and its affiliates if the bank has total assets of more than $10 billion.

This provision becomes applicable to a bank following the fourth consecutive quarter where the total assets of the bank, as reported in its quarterly Call Report, exceed $10 billion and afterwards remains applicable to the bank unless the bank has reported total assets of $10 billion or less in its quarterly Call Report for four consecutive quarters.

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

Deposit Insurance Assessments.

Also under the Dodd-Frank Act, the DIF reserve ratio was increased from 1.15 percent to 1.35 percent and the FDIC is required, in setting deposit insurance assessments, to offset the effect of the increase on institutions with assets of less than $10 billion, which results in institutions with assets greater than $10 billion paying higher assessments.

In addition, following the fourth consecutive quarter where the total assets of a bank exceeds $10 billion, as reported in its quarterly Call Report, the FDIC utilizes a different method for determining deposit insurance assessments.

This large bank method is based on a bank’s ability to withstand asset- and funding-related stress, its regulatory ratings, and potential losses to the FDIC in the event of the bank’s failure, subject to discretionary adjustments by the FDIC.

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

Volcker Rule.

Under provisions of the Dodd-Frank Act referred to as the “Volcker Rule,” certain limitations are placed on the ability of insured depository institutions and their affiliates to engage in sponsoring, investing in and transacting with certain investment funds, known as “covered funds” under the rule.

There are a number of exclusions from the definition of “covered funds,” including for investments in Small Business Investment Companies, or SBICs, and certain qualifying venture capital funds.

The Volcker Rule also places restrictions on proprietary trading, which could impact certain hedging activities.

Limits on Interchange Fees.

The Durbin Amendment to the Dodd-Frank Act gave the Federal Reserve Board the authority to establish rules regarding interchange fees charged for electronic debit transactions by a payment card issuer that, together with its affiliates, has assets of $10 billion or more, as of December 31 of the preceding calendar year, and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer.

The Federal Reserve Board has adopted rules under this provision that limit the swipe fees that a debit card issuer can charge a merchant for a transaction to the sum of 21 cents and five basis points times the value of the transaction, plus up to one cent for fraud prevention costs.

The Bank exceeded $10 billion in assets at December 31, 2023.

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

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

Risk Factors.

The increase in shareholders’ equity for 2025 was principally the result of $105.9 million in net income and $96.3 million in net proceeds from the issuance of depository shares.

Loans Held for Sale & Serviced Portfolio

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At December 31, 2025, 90.9%, or $11.30 billion, of the combined held for sale and held for investment loan and lease portfolio, including those at fair value, were composed of variable rate loans.

At December 31, 2024, $3.75 billion, or 36.6%, of loans held for investment, including those at fair value, matures in less than five years.

At December 31, 2025, $5.00 billion, or 41.6%, of loans held for investment, including those at fair value, mature in less than five years.

Loans and leases maturing in greater than five years total $7.01 billion of the total $12.01 billion.

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Adjusting the ratio to include only the unguaranteed portion of nonperforming loans and leases at historical cost to reflect management’s belief that the greater magnitude of risk resides in this portion, the ratio at December 31, 2025 and 2024 was 7.9% and 7.2%, respectively.

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

As of December 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 $1.39 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 to the notes to consolidated financial statements.

For a complete description of the risk grading system, see “Credit Quality Indicators” in Note 3 to the notes to consolidated financial statements included in Item 8 of this Report.

At December 31, 2025 , the portion o f criticized and classified loans and leases guaranteed by the SBA or USDA totaled $669.8 million and total portfolio unguaranteed exposure risk was $719.9 million, or 8.6% of total held for investment unguaranteed exposure carried at historic al cost.

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Vertical % of Criticized and Classified Loans and Leases

General Lending 15.1% Senior Housing 16.5%

Bioenergy 11.1 Bioenergy 14.4

Senior Housing 9.9 General Lending 12.2

General Lending 11.8% General Lending 15.1%

Solar Energy 7.5 Bioenergy 11.1

Senior Housing 6.1 Senior Housing 9.9

Bioenergy 6.1 Healthcare 6.9

Sponsor Finance 6.1 Sponsor Finance 5.5

Auto Care + Auto Dealerships 5.9 Wine & Craft Beverage 5.3

Healthcare 5.4 Search Fund Lending 5.0

Sponsor Finance 5.5 Wine & Craft Beverage 5.6

Wine & Craft Beverage 5.3 Healthcare 3.9

Search Fund Lending 5.0 Hotels 3.3

Community Facilities 4.8 Self Storage 3.3

Self Storage 4.6 Senior Care 3.2

Self Storage 5.4 Community Facilities 4.8

RV Parks 4.0 Self Storage 4.6

% of Total Criticized and Classified Loans 58.3% % of Total Criticized and Classified Loans 68.2%

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

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

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

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

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

The total $347.7 million increase in criticized and classified loans and leases in 2025 was comprised of $197.3 million in increased levels of Risk Grade 50 loans and leases, as discussed below, and $150.4 million in classified loans.

The increase in classified loans in 2025 was primarily driven by portfolio growth and isolated borrower-specific credit migrations, including movement of several larger individual exposures and isolated industries into classified status based on performance trends identified through ongoing credit reviews.

These changes reflect normal portfolio seasoning and idiosyncratic borrower developments, rather than broad-based or systemic credit deterioration.

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

Loans and leases that experience insignificant payment delays and payment shortfalls are generally not individually evaluated for the purpose of estimating the allowance for credit losses.

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

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

At December 31, 2025, the Company had a total of $119.5 million in loans modified in 2025 to borrowers experiencing financial difficulty, excluding loans measured at fair value.

Of the $119.5 million in loans modified, $116.2 million remained current and of the $119.5 million, $105.3 million were for an other-than-insignificant payment delay or term extension.

Management endeavors to be proactive in its approach to identify and resolve problem loans and leases and is focused on working with the borrowers and guarantors of these loans and leases to provide loan and lease modifications when warranted.

Management implements a proactive approach to identifying and classifying loans and leases as special mention (also referred to as criticized), Risk Grade 50.

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

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

At December 31, 2025, and December 31, 2024, Risk Grade 50 loans and leases, excluding loans measured at fair value, totaled $727.2 million and $529.9 million, respectively, for a year-over-year increase of $197.3 million.

Relative to total held for investment unguaranteed exposure carried at historical cost at December 31, 2024 and 2025, unguaranteed Risk Grade 50 loans and leases increased from $357.9 million, or 5.3%, to $465.7 million, or 5.5%, respectively.

The increase in unguaranteed Risk Grade 50 loans and leases was primarily driven by idiosyncratic credit migration of several larger individual exposures into Risk Grade 50, reflecting borrower-specific performance considerations and credit actions, rather than a broad-based deterioration linked to the macroeconomic environment.

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

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2024 Increase (Decrease)

Sponsor Finance $ 29,229 42.2 %

Healthcare 29,110 42.0

Veterinary 18,413 26.6

Self Storage 13,972 20.2

Solar Energy $ 88,396 44.8 %

Wine & Craft Beverage 12,774 18.4

Sponsor Finance 33,586 17.0

Government Contractors 22,679 11.5

RV Parks 21,585 10.9

Venture Banking (8,741) (12.6)

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

Fitness Centers (14,432) (20.8)

Search Fund Lending (16,328) (23.6)

Emerging Markets 16,889 8.6

Auto Care 14,627 7.4

Care Services 10,816 5.5

Restoration 10,441 5.3

Quick Service Restaurants 9,869 5.0

Agriculture 8,118 4.1

Veterinary (14,398) (7.3)

Wine and Craft Beverage (20,518) (10.4)

Senior Housing (26,517) (13.4)

Bioenergy (107,125) (154.6)

Total of largest changes in RG 50 loans and leases $ 175,573 89.0%

The decrease in Risk Grade 50 loans and leases, exclusive of loans measured at fair value, during 2024 was principally confined to 13 verticals, as reflected above.

The primary driver for the decline in Risk Grade 50 loans and leases was a migration to improvement within the Senior Housing portfolio coupled with two large Bioenergy relationships moving to classified status in the third quarter of 2024.

Of the above listed verticals, Sponsor Finance, Solar Energy, Venture Banking, Asset-Based Lending, Senior Housing, and Bioenergy are within the Company’s Commercial Banking division, the remainder of the above listed verticals are within the Small Business Banking division.

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

Of the above listed verticals, Solar Energy, Sponsor Finance, Government Contractors, Emerging Markets and Senior Housing are within the Company’s Commercial Banking division and the remainder of the above listed verticals are within the Small Business Banking division.

At December 31, 2025, approximately 99.7% of loans and leases classified as Risk Grade 50 are performing with no relationships having payments past due more than 30 days.

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The ACL as a percentage of loans and leases held for investment at historical cost amounted to 1.6% and 1.7% at December 31, 2025 and 2024 , respectively.

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

The increase in the ACL during 2025 was primarily the result of loan growth and charge-off activity amid a challenging macroeconomic environment, where elevated interest rates earlier in the year continued to pressure certain small business and commercial borrowers, despite more recent signs of stabilization in rate conditions.

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 $93.8 million since December 31, 2024.

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At December 31, 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 0.9% and 1.3%, respectively.

Total unguaranteed loans and leases past due were comprised of $77.5 million carried at historical cost, an increase of $39.8 million, and $10.3 million measured at fair value, an increase of $447 thousand, as of December 31, 2024 compared to December 31, 2023.

Total unguaranteed loans and leases past due were comprised of $69.2 million carried at historical cost, a decrease of $8.3 million, and $7.9 million measured at fair value, a decrease of $2.4 million, as of December 31, 2025 compared to December 31, 2024.

Management continues to actively monitor and work to improve asset quality.

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Additional information on the ACL is presented in “Note 3.

Loans and Leases Held for Investment and Credit Quality of the consolidated financial statements in this report.

Loans and Leases Held for Investment and Credit Quality” of the notes to consolidated financial statements in this report.

The following table sets forth the breakdown of the allowance for credit losses on loans and leases carried at historical cost by category at the dates indicated.

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Small Business Banking 77 691,364 — 16 592,007 — — 505,692 —

Commercial Banking — 515 — — — — — — —

Total 77 691,879 — 16 592,007 — — 505,692 —

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At December 31, 2025 and December 31, 2024, the Company had 98.9% and 98.4% of its total investment securities portfolio in mortgage-backed securities.

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

The Company has continued to purchase mortgage-backed securities with the goal of obtaining a favorable yield versus cash alternatives while still maintaining a low risk profile within the investment portfolio.

The following table sets forth the composition of deposits.

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Amount of time deposits in uninsured accounts $ 98,317 $ 60,545 $ 119,755 $ 4,913

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

Total borrowings decreased $10.4 million at December 31, 2025 from December 31, 2024 as a result of the following:

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

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At December 31, 2025, the total amount of these four liquidity source items was $4.89 billion, or 32.3% of total assets, a decrease 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.

Investments in loans, securities 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.

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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.

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 included in Item 8 of this Report.

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.

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

In 2025, the Company entered into airplane purchase agreement commitments.

For more information, see “Note 2.

Securities” and “Note 11.

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

Commitments and Contingencies” in the accompanying notes to the consolidated financial statements included in Item 8 of this Report.

Asset/Liability Management and Interest Rate Sensitivity

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To determine the ACL as of December 31, 2025, the Company utilized an external baseline forecast to generate its quantitatively modeled expected losses and considered alternative economic forecast scenarios to qualitatively adjust the modeled ACL by loan portfolio in order to reflect management’s reasonable expectations of current and future economic conditions.

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

The baseline forecast at December 31, 2025 assumes the Baa Corporate Bond Yield ending the fourth quarter of 2026 at 6.7%.

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

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

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

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

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

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

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

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

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

In this adverse environment, the U.S.

economy faces renewed weakness following late‑2025 softening in labor markets and persistent inflation pressures.

Elevated interest rates – declining more slowly than anticipated – continue to suppress credit‑sensitive consumer spending and business investment, while the expanded tariff regime introduced in 2025 further elevates goods prices and weighs on supply chains.

Also compiling into an adverse scenario are geopolitical tensions, including continued instability in Eastern Europe and heightened trade frictions with major partners, further disrupt supply chains and contribute to volatility in goods prices.

These developments, combined with limited fiscal space and slowing job creation, push the U.S.

economy into a mild recession by mid‑2026 under this scenario.

Under this scenario, as an example, the Baa Corporate Bond Yield increases from baseline levels and remains elevated for an extended period.

The estimated Baa Corporate Bond Yield in this scenario could reach 7.0% at the middle of 2026, approximately 120 basis points higher than the baseline scenario forecast start.

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

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“tangible shareholders’ equity;” “tangible assets;” “tangible shareholders’ equity to tangible assets;” “tangible book value per share;” and “efficiency ratio.” Management uses these non-GAAP financial measures in its analysis of the Company’s performance.

• “Tangible shareho lders’ equity” is total shareholders’ equity less goodwill and other intangible assets.

• “Tangible shareho lders’ equity” is total shareholders’ equity less preferred stock, non-controlling interest, goodwill and other intangible assets.

Management has not considered loan servicing rights as an intangible asset for purposes of this calculation.

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Management has not considered loan servicing rights as an intangible asset for purposes of this calculation.

• “Tangible shareholders’ equity to tangible assets” is defined as the ratio of shareholders’ equity less goodwill and other intangible assets, divided by total assets less goodwill and other intangible assets.

• “Tangible shareholders’ equity to tangible assets” is defined as the ratio of shareholders’ equity less preferred stock, non-controlling interest, goodwill and other intangible assets, divided by total assets less goodwill and other intangible assets.

Management believes this measure is important because it shows relative changes from period to period in equity and total assets, each exclusive of changes in intangible assets.

Management has not considered loan servicing rights as an intangible asset for purposes of this calculation.

• “Tangible book value per share” is defined as total equity reduced by goodwill and other intangible assets divided by total common shares outstanding.

• “Tangible book value per share” is defined as total equity reduced by preferred stock, non-controlling interest, goodwill and other intangible assets divided by total common shares outstanding.

Management believes this measure is important because it shows changes from period to period in book value per share exclusive of changes in intangible assets.

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Management believes this measure is important as an indicator of productivity because it shows the amount of noninterest expense that was required to generate a dollar of revenue.

While the efficiency ratio is a measure of productivity, its value reflects the unique attributes of the “high-touch business model” the Company employs.

While the efficiency ratio is a measure of productivity, its value also reflects the unique attributes of the “high-touch business model” the Company employs.

The Company believes these non-GAAP financial measures provide useful information to management and investors that is supplementary to the financial condition, results of operations and cash flows computed in accordance with GAAP;

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Total shareholders' equity $ 1,254,106 $ 1,003,496 $ 902,666

Preferred stock 96,266 — —

Non-controlling interest 4,238 — —

Total common shareholders' equity $ 1,153,602 $ 1,003,496 $ 902,666

Goodwill 1,797 1,797 1,797

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

What changed 10-K

Item 7. Management’s Discussion and Analysis