Live Oak Bancshares Inc

Previous wording

The Company’s wholly owned material subsidiaries are the Bank, Government Loan Solutions (“GLS”), Live Oak Grove, LLC (“Grove”), Live Oak Ventures, Inc. (“Live Oak Ventures”) and Canapi Advisors, LLC (“Canapi Advisors”). GLS is a management and technology consulting firm that advises and offers solutions and services to participants in the government guaranteed lending sector. GLS primarily provides services in connection with the settlement, accounting, and securitization processes for government guaranteed loans, including loans originated under the SBA 7(a) loan programs and USDA guaranteed loans. The Grove provides Company employees and business visitors an on-site restaurant location. Live Oak Ventures’ purpose is investing in businesses that align with the Company's strategic initiative to be a leader in financial technology. Canapi Advisors provides investment advisory services to a series of funds (the “Canapi Funds”) focused on providing venture capital to new and emerging financial technology companies.

Current wording

The Company’s wholly owned material subsidiaries are the Bank, Government Loan Solutions (“GLS”), Live Oak Grove, LLC (“Grove”), Live Oak Ventures, Inc. (“Live Oak Ventures”) and Canapi Advisors, LLC (“Canapi Advisors”). GLS is a management and technology consulting firm that advises and offers solutions and services to participants in the government guaranteed lending sector. GLS primarily provides services in connection with the settlement, accounting, and securitization processes for government guaranteed loans, including loans originated under the SBA 7(a) loan programs and USDA guaranteed loans. The Grove provides Company employees and business visitors with on-site dining. Live Oak Ventures’ purpose is investing in businesses that align with the Company's strategic initiative to be a leader in financial technology. Canapi Advisors provides investment advisory services to a series of funds (the “Canapi Funds”) focused on providing venture capital to new and emerging financial technology companies.

Previous wording

The Bank’s wholly owned subsidiaries are Live Oak Number One, Inc., Live Oak Clean Energy Financing LLC (“LOCEF”), Live Oak Private Wealth, LLC (“Live Oak Private Wealth”) and Tiburon Land Holdings, LLC (“TLH”). Live Oak Number One, Inc. holds properties foreclosed on by the Bank. LOCEF provides financing to entities for renewable energy applications. Live Oak Private Wealth provides high-net-worth individuals and families with strategic wealth and investment management services. 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 was formed in the third quarter of 2022 to hold 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.

Current wording

The Bank’s wholly owned subsidiaries are Live Oak Number One, Inc., Live Oak Clean Energy Financing LLC (“LOCEF”), Live Oak Private Wealth, LLC (“Live Oak Private Wealth”) and Tiburon Land Holdings, LLC (“TLH”). Live Oak Number One, Inc. holds properties foreclosed on by the Bank. LOCEF provides financing to entities for renewable energy applications. Live Oak Private Wealth provides high-net-worth individuals and families with strategic wealth and investment management services. TLH holds land adjacent to the Bank's headquarters consisting of wetlands and other protected property for the use and enjoyment of the Bank's employees and customers.

Previous wording

The Company generates revenue primarily from net interest income and secondarily through origination and sale of government guaranteed loans. Income from the retention of loans is comprised principally of interest income. Income from the sale of loans is comprised of loan servicing revenue and revaluation of related servicing assets along with net gains on sales of loans. Offsetting these revenues are the cost of funding sources, provision for loan and lease credit losses, any costs related to foreclosed assets and other operating costs such as salaries and employee benefits, travel, professional services, advertising and marketing and tax expense. The Company also has less routinely generated gains and losses arising from its financial technology investments predominantly in its fintech segment, as discussed more fully later in this section under the caption “Results of Segment Operations.”

Current wording

The Company generates revenue primarily from net interest income and secondarily through the origination and sale of government guaranteed loans. Income from the retention of loans is comprised principally of interest income. Income from the sale of loans is comprised of loan servicing revenue and revaluation of related servicing assets along with net gains on sales of loans. Offsetting these revenues are the cost of funding sources, provision for credit losses, any costs related to foreclosed assets and other operating costs such as salaries and employee benefits, travel, professional services, advertising and marketing and tax expense. The Company also has less routinely generated gains and losses arising from its financial technology investments predominantly in its Fintech segment, as discussed more fully later in this section under the caption “Results of Segment Operations.”

Previous wording

For the three months ended March 31, 2024, the Company reported net income of $27.6 million, or $0.60 per diluted share, compared to net income of $398 thousand, or $0.01 per diluted share, for the first quarter of 2023.

Current wording

For the three months ended June 30, 2024, the Company reported net income of $27.0 million, or $0.59 per diluted share, compared to net income of $17.5 million, or $0.39 per diluted share, for the second quarter of 2023.

Previous wording

•Increase in net interest income of $8.1 million, or 9.9%, driven by increases in loan volumes, partially mitigated by a decrease in net interest margin arising from an increase in interest-bearing deposits combined with the increase in average cost of funds outpacing the average yield on interest-earning assets;

Current wording

•Increase in net interest income of $7.0 million, or 8.3%, driven by increases in loan volumes, partially mitigated by a decrease in net interest margin arising from an increase in interest-bearing deposits and borrowings combined with the increase in average cost of funds outpacing the increase in average yield on interest-earning assets; and

Previous wording

For the three months ended March 31, 2024, net interest income increased $8.1 million, or 9.9%, to $90.1 million compared to $82.0 million for the three months ended March 31, 2023. This increase was principally due to the growth in the held for investment loan and lease portfolio outpacing growth in interest-bearing liabilities offset by an increase in average cost of funds which exceeded the increase in average yield on interest-earning assets. Average interest-earning assets increased by $1.28 billion, or 13.4%, to $10.89 billion for the first quarter of 2024, compared to $9.61 billion for the first quarter of 2023, while the yield on average interest-earning assets increased 72 basis points to 7.11%. The cost of funds on interest-bearing liabilities for the first quarter of 2024 increased 96 basis points to 4.07% and the average balance of interest-bearing liabilities increased by $1.06 billion, or 11.8%, over the first quarter of 2023.

Current wording

For the three months ended June 30, 2024, net interest income increased $7.0 million, or 8.3%, to $91.3 million compared to $84.3 million for the three months ended June 30, 2023. This increase was principally due to the growth in the held for investment loan and lease portfolio outpacing growth in interest-bearing liabilities offset by an increase in average cost of funds which exceeded the increase in average yield on interest-earning assets. Average interest-earning assets increased by $930.3 million, or 9.1%, to $11.20 billion for the second quarter of 2024, compared to $10.27 billion for the second quarter of 2023, while the yield on average interest-earning assets increased 49 basis points to 7.12%. The cost of funds on interest-bearing liabilities for the second quarter of 2024 increased 56 basis points to 4.15% and the average balance of interest-bearing liabilities increased by $859.8 million, or 9.0%, over the second quarter of 2023. The increase in cost of funds was partially driven by a full quarter’s worth of interest expense on the $100.0 million incremental borrowing added in late first quarter of 2024.

Previous wording

As indicated in the rate/volume table below, the overall increase discussed above is reflected in increased interest income of $41.0 million outpacing growth in interest expense of $32.9 million for the first quarter of 2024 compared to the first quarter of 2023. The net interest margin decreased from 3.46% for the first quarter of 2023 to 3.33% for the first quarter of 2024.

Current wording

As indicated in the rate/volume analysis below, the overall increase discussed above is reflected in increased interest income of $28.7 million outpacing growth in interest expense of $21.7 million for the second quarter of 2024 compared to the second quarter of 2023. The net interest margin decreased from 3.29% for the second quarter of 2023 to 3.28% for the second quarter of 2024.

Previous wording

During the three months ended March 31, 2024, the Federal Reserve decided to maintain the federal funds upper target rate at 5.5%. In March 2024, the Federal Reserve released its most current federal funds target rate midpoint projections which maintained a median Federal Funds rate of 4.6% by the end of 2024 and a decrease of approximately 70 basis points to 3.9% by the end of 2025. There can be no assurance that any further increases or decreases in the Federal Funds rate will occur, and if they do, the amount and timing of actual adjustments are subject to change. See Item 3. Quantitative and Qualitative Disclosures About Market Risk for information about the Company’s sensitivity to interest rates.

Current wording

During the six months ended June 30, 2024 and in July 2024, the Federal Reserve decided to maintain the federal funds upper target rate at 5.5%. In June 2024, the Federal Reserve released its most current federal funds target rate midpoint projections which implied an increase of the median Federal Funds rate to 5.1% by the end of 2024 and a decrease of approximately 100 basis points to 4.1% by the end of 2025. There can be no assurance that any further increases or decreases in the Federal Funds rate will occur, and if they do, the amount and timing of actual adjustments are subject to change. See Item 3. Quantitative and Qualitative Disclosures About Market Risk for information about the Company’s sensitivity to interest rates.

Previous wording

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

Current wording

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.

Previous wording

For the first quarter of 2024, there was a provision for loan and lease credit losses of $16.4 million compared to $19.0 million for the same period in 2023, a decrease of $2.7 million. The decrease in provision expense as compared to the first quarter of 2023 was primarily the result of moderating effects arising from the combination of lower comparative levels of loan growth and charge-off impacts.

Current wording

For the second quarter of 2024, there was a provision for credit losses of $11.8 million compared to $13.0 million for the same period in 2023, a decrease of $1.3 million. For the first six months of 2024, there was a provision for credit losses of $28.1 million compared to $32.0 million for the same period in 2023, a decrease of $3.9 million. The decrease in provision expense as compared to the second quarter and first six months of 2023 was primarily the result of decreased specific reserves required for loans individually evaluated for impairment.

Previous wording

Loans and leases held for investment at historical cost were $8.53 billion as of March 31, 2024, increasing by $1.31 billion, or 18.2%, compared to March 31, 2023.

Current wording

Loans and leases held for investment at historical cost were $8.81 billion as of June 30, 2024, increasing by $1.41 billion, or 19.1%, compared to June 30, 2023.

Previous wording

Net charge-offs for loans and leases carried at historical cost were $3.2 million, or 0.15% of average quarterly loans and leases held for investment, carried at historical cost, on an annualized basis, for the three months ended March 31, 2024, compared tonet charge-offsof $6.7 million, or 0.38%, for the three months ended March 31, 2023. 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.

Current wording

Net charge-offs for loans and leases carried at historical cost were $8.3 million, or 0.38% of average quarterly loans and leases held for investment, carried at historical cost, on an annualized basis, for the three months ended June 30, 2024, compared tonet charge-offsof $1.2 million, or 0.06%, for the three months ended June 30, 2023, an increase of $7.1 million, or 615.2%. The increase in net charge-offs compared to the second quarter of 2023 was primarily related to the confirmation of impairments identified in the first quarter of 2024, largely concentrated to the Company's Small Business Banking class. For thesix months ended June 30, 2024, net charge-offs totaled$11.4 million compared to$7.8 million for thesix months ended June 30, 2023, an increase of $3.6 million, or 45.9%. 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.

Previous wording

In addition, nonperforming loans and leases not guaranteed by the SBA or USDA, excluding $7.9 million and $8.2 million accounted for under the fair value option at March 31, 2024 and 2023, respectively, totaled $43.1 million, which was 0.51% of the held for investment loan and lease portfolio carried at historical cost at March 31, 2024, compared to $22.0 million, or 0.30% of loans and leases held for investment carried at historical cost at March 31, 2023.

Current wording

In addition, nonperforming loans and leases not guaranteed by the SBA or USDA, excluding $9.6 million and $8.6 million accounted for under the fair value option at June 30, 2024 and 2023, respectively, totaled $37.3 million, which was 0.42% of the held for investment loan and lease portfolio carried at historical cost at June 30, 2024, compared to $44.9 million, or 0.61% of loans and leases held for investment carried at historical cost at June 30, 2023.

Previous wording

Noninterest income is principally comprised of net gains from the sale of SBA and USDA-guaranteed loans along with loan servicing revenue and related revaluation of the servicing asset. Revenue from the sale of loans depends upon the volume, maturity structure and rates of underlying loans as well as the pricing and availability of funds in the secondary markets prevailing in the period between completed loan funding and closing of sale. In addition, the loan servicing revaluation is significantly impacted by changes in market rates and other underlying assumptions such as prepayment speeds and default rates. Net (loss) gain on loans accounted for under the fair value option is also significantly impacted by changes in market rates, prepayment speeds and inherent credit risk. Other less consistent elements of noninterest income include gains and losses on investments.

Current wording

Noninterest income is principally comprised of net gains from the sale of SBA and USDA-guaranteed loans along with loan servicing revenue and related revaluation of the servicing asset. Revenue from the sale of loans depends upon the volume, maturity structure and rates of underlying loans as well as the pricing and availability of funds in the secondary markets prevailing in the period between completed loan funding and closing of sale. In addition, the loan servicing revaluation is significantly impacted by changes in market rates and other underlying assumptions such as prepayment speeds and default rates. Net 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.

Previous wording

For the three months ended March 31, 2024, noninterest income increased by $6.5 million, or 33.3%, compared to the three months ended March 31, 2023. The increase over the prior year is primarily a result of a $4.3 million decrease in the net loss on loans accounted for under the fair value option combined with increased other noninterest income of $5.7 million, largely related to a gain arising from increased fair value of equity warrant assets associated with the Company’s wine & craft beverage vertical. Partially offsetting the increase over the first quarter of 2023 was a $3.1 million incremental net loss related to the loan servicing asset revaluation combined with increased equity method investment losses of $2.1 million, principally related to heightened levels of underlying losses in several of the Company’s equity method investees.

Current wording

For the three months ended June 30, 2024, noninterest income increased by $10.0 million, or 41.4%, compared to the three months ended June 30, 2023. The increase over the prior year is primarily a result of higher net gains on sales of loans of $3.6 million combined with increased other noninterest income of $7.1 million, 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.

Previous wording

The following table reflects loan and lease production, sales of guaranteed loans and the aggregate balance in guaranteed loans sold. These components are key drivers of the Company's noninterest income.

Current wording

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.

Previous wording

Loan Servicing Asset Revaluation: The Company revalues its serviced loan portfolio at least quarterly. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as adequate compensation for servicing, the discount rate, the custodial earnings rate, ancillary income, prepayment speeds and default rates and losses, with the 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, 2024, there was a net loss on loan servicing asset revaluation of $2.7 million, compared to a net gain of $356 thousand for the three months ended March 31, 2023, resulting in a negative comparative quarter change of $3.1 million. The decrease in the valuation of the servicing asset compared to the three months ended March 31, 2023 was principally the result of increasing market prepayment speeds in the first quarter of 2024 while the net gain in the first quarter of 2023 was the result of positive movements in market premiums. In the third-quarter of 2023, the Company changed its valuation techniques in the estimation of fair value for servicing assets and loans accounted for under the fair value option.

Current wording

Loan Servicing Asset Revaluation: The Company revalues its serviced loan portfolio at least quarterly. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as adequate compensation for servicing, the discount rate, the custodial earnings rate, ancillary income, prepayment speeds and default rates and losses, with the prepayment speeds and default rates and losses, with prepayment speed and discount rate being the most sensitive assumptions. For the three months ended June 30, 2024, there was a net loss on loan servicing asset revaluation of $2.9 million, compared to a net loss of $2.8 million for the three months ended June 30, 2023. For the six months ended June 30, 2024, there was a net loss on loan servicing asset revaluation of $5.6 million compared to a net loss of $2.5 million for the six months ended June 30, 2023, resulting in a negative change of $3.1 million. The increase in the net loss in valuation of the servicing asset compared to the first half of 2023 was principally the result of the third quarter of 2023 change in valuation techniques used to estimate the fair value of servicing rights.

Previous wording

Net Loss on Loans Accounted for Under the Fair Value Option: For the three months ended March 31, 2024, the Company had a net loss on loans accounted for under the fair value option of $219 thousand compared to a net loss of $4.5 million for the first quarter of 2023, a positive change of $4.3 million, or 95.2%. The carrying amount of loans accounted for under the fair value option at March 31, 2024 and 2023 was $379.2 million (all classified as held for investment) and $467.0 million (all classified as held for investment), respectively, a decrease of $87.7 million, or 18.8%. The net loss in the valuation of loans accounted for under the fair value option in the first quarter of 2024 was largely the result of the above discussed increased levels of market prepayment speeds while the net loss in the first quarter of 2023 was the result of negative market impacts related to rising interest rates.

Current wording

Net Gain (Loss) on Loans Accounted for Under the Fair Value Option: For the three months ended June 30, 2024, the Company had a net gain on loans accounted for under the fair value option of $172 thousand compared to a net gain of $1.7 million for the second quarter of 2023, a negative change of $1.6 million, or 90.0%. For the six months ended June 30, 2024, the Company had a net loss on loans accounted for under the fair value option of $47 thousand compared to a net loss of $2.8 million for the same period of 2023, a positive change of $2.8 million, or 98.3%. The carrying amount of loans accounted for under the fair value option at June 30, 2024 and 2023 was $363.0 million (all classified as held for investment) and $441.8 million (all classified as held for investment), respectively, a decrease of $78.8 million, or 17.8%. The decrease in net loss in the valuation of loans accounted for under the fair value option in the first half of 2024 was largely the result of improvement in market conditions combined with the third quarter 2023 change in valuation techniques used to estimate the fair value of loans.

Previous wording

Total noninterest expense for the three months ended March 31, 2024, decreased $1.2 million, or 1.6%, compared to the three months ended March 31, 2023. The decrease in noninterest expense for the comparable three month period was largely driven by various components, as discussed below.

Current wording

Total noninterest expense for the three and six months ended June 30, 2024, increased $1.2 million, or 1.6%, and decreased $26 thousand, respectively, compared to the same periods in 2023. The changes within noninterest expense for the comparable three and six month periods was largely driven by various components, as discussed below.

Previous wording

Salaries and employee benefits: Total personnel expense for the three months ended March 31, 2024 increased $2.5 million, or 5.6%, compared to the same period in 2023. The increase over the first three months of 2023 is principally related to continued investment in human resources to support strategic and growth initiatives. Total full-time equivalent employees decreased from 968 at March 31, 2023, to 962 at March 31, 2024. Salaries and employee benefits expense included $6.4 million of stock-based compensation for the three months ended March 31, 2024, compared to $6.2 million for the three months ended March 31, 2023. Expenses related to the employee stock purchase program, stock grants, stock option compensation and restricted stock expense are all considered stock-based compensation.

Current wording

Salaries and employee benefits: Total personnel expense for the three and six months ended June 30, 2024 increased by $3.2 million, or 7.4%, and increased by $5.7 million, or 6.5%, respectively, compared to the same periods in 2023. The increase over both comparative periods of 2023 is principally related to continued investment in human resources to support strategic and growth initiatives. Total full-time equivalent employees increased from 984 at June 30, 2023, to 987 at June 30, 2024. Salaries and employee benefits expense included $6.8 million and $13.2 million of stock-based compensation for the three and six months ended June 30, 2024, respectively, compared to $6.3 million and $12.5 million for the three and six months ended June 30, 2023, respectively. Expenses related to the employee stock purchase program, stock grants, stock option compensation and restricted stock expense are all considered stock-based compensation.

Previous wording

For the three months ended March 31, 2024, income tax benefit was $5.5 million compared to income tax expense of $3.2 million in the first quarter of 2023, and the Company’s effective tax rates were (24.8%) and 89.0%, respectively. The lower level of income tax expense for the first quarter of 2024 as compared to the first quarter of 2023 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. The trigger for this first quarter 2024 additional eligibility was the result of the March 22, 2024 Internal Revenue Service (“IRS”) Notice 2024-30, which expanded the list of geographic areas which qualify for increased investment tax credit levels. The location of the underlying renewable energy project was an addition to the recent IRS Notice. Partially offsetting this decrease was increased pretax income during the current period.

Current wording

For the three months ended June 30, 2024, income tax expense was $9.1 million compared to income tax expense of $1.4 million in the second quarter of 2023, and the Company’s effective tax rates were 25.2% and 7.5%, respectively. For the six months ended June 30, 2024, income tax expense was $3.6 million compared to $4.6 million for the first half of 2023, and the Company’s effective tax rates were 6.2% and 20.6%, respectively. The higher level of income tax expense for the second quarter of 2024 as compared to the second quarter of 2023 was primarily the result of the combination of increased pretax income and lower levels of anticipated investment tax credits in 2024 as compared to the prior year. The lower level of income tax expense in the first half of 2024 compared to the same period in 2023 was principally related to $10.6 million in increased levels of investment tax credits in the first quarter of 2024, arising from the Internal Revenue Service’s expansion of qualifying energy communities during that quarter in combination with discrete items in the first quarter of 2023 related to stock compensation.

Previous wording

For the three months ended March 31, 2024, net income increased $27.3 million compared to the same period of 2023. Key factors influencing these changes are discussed below.

Current wording

For the three and six months ended June 30, 2024, net income increased $10.6 million and $37.9 million, respectively, compared to the same periods of 2023. Key factors influencing these changes are discussed below.

Previous wording

For the three months ended March 31, 2024, net interest income increased $8.1 million, or 9.8% compared to the same period of 2023. See above section captioned “Net Interest Income and Margin” as it is principally related to the Banking segment.

Current wording

For the three and six months ended June 30, 2024, net interest income increased $8.5 million, or 10.1%, and $16.6 million, or 10.0%, respectively, compared to the same periods of 2023. See above section captioned “Net Interest Income and Margin” as it is principally related to the Banking segment.

Previous wording

The provision for loan and lease credit losses for the three months ended March 31, 2024, decreased $2.7 million. See the analysis of provision for loan and lease credit losses included in the above section captioned “Provision for Loan and Lease Credit Losses” as it is entirely related to the Banking segment.

Current wording

The provision for credit losses for the three and six months ended June 30, 2024, decreased $1.3 million, or 9.7%, and $3.9 million, or 12.2%, respectively. See the analysis of provision for credit losses included in the above section captioned “Provision for Credit Losses” as it is entirely related to the Banking segment.

Previous wording

For the three months ended March 31, 2024, noninterest income increased $8.2 million, or 48.0%, compared to the same period of 2023. The increase for the three month comparative period was principally driven by an incremental decline in the net loss on loans accounted for at fair value of $4.3 million combined with the previously discussed gain of $5.7 million included in other noninterest income arising from increased fair value of equity warrant assets. Partially offsetting these three month contributors to increased noninterest income was incremental net losses on the loan servicing asset revaluation of $3.1 million. See the analysis of these categories of noninterest income included in the above section captioned “Noninterest Income” for additional discussion.

Current wording

For the three and six months ended June 30, 2024, noninterest income increased $10.7 million, or 49.8%, and $18.9 million, or 49.0%, respectively, compared to the same periods of 2023. The increase for the three and six month comparative periods was principally driven by increased net gains on sales of loans combined with increased levels of other noninterest income. Also contributing to the comparative change over the first half of 2023 was decreased net losses on loans accounted for under the fair value option and higher levels of losses on the loan servicing asset revaluation. See the analysis of these categories of noninterest income included in the above section captioned “Noninterest Income” for additional discussion.

Previous wording

For the three months ended March 31, 2024, income tax expense decreased $7.0 million compared to the same period of 2023. The decrease compared to the first quarter of 2023 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 increased tax credits in the first quarter of 2024. See the above section captioned “Income Tax Expense” for further discussion around the increased investment tax credits.

Current wording

For the three and six months ended June 30, 2024, income tax expense increased $8.8 million and $1.8 million, respectively, compared to the same periods of 2023. The increase compared to the three months ended June 30, 2023 was largely the result of increased pretax income and lower levels of anticipated investment tax credits in 2024 as compared to the prior year. See the above section captioned “Income Tax Expense” for further discussion.

Previous wording

For the three months ended March 31, 2024, net income decreased by $1.0 million compared to same period of 2023. This decrease was largely related to increased equity method and equity security investment losses.

Current wording

For the three and six months ended June 30, 2024, net income decreased by $452 thousand and $1.5 million, respectively, compared to same periods of 2023. This decrease was largely related to increased equity method and equity security investment losses.

Previous wording

Total assets at March 31, 2024 were $11.51 billion, an increase of $234.1 million, or 2.1%, compared to total assets of $11.27 billion at December 31, 2023. The growth in total assets was principally driven by the growth in total loans and leases held for investment and held for sale of $202.4 million, or 2.2%, during the first three months of 2024, from $9.02 billion at December 31, 2023, to $9.22 billion at March 31, 2024. This growth was a result of strong origination activity during the first three months of 2024 of $805.1 million.

Current wording

Total assets at June 30, 2024 were $11.87 billion, an increase of $597.1 million, or 5.3%, compared to total assets of $11.27 billion at December 31, 2023. The growth in total assets was principally driven by the growth in total loans and leases held for investment of $538.3 million, or 6.2%, during the first six months of 2024, from $8.63 billion at December 31, 2023, to $9.17 billion at June 30, 2024. This growth was a result of strong origination activity during the first six months of 2024 of $1.98 billion.

Previous wording

Total deposits were $10.38 billion at March 31, 2024, an increase of $108.3 million, or 1.1%, from $10.28 billion at December 31, 2023. The increase in total deposits from the prior period was to support growth in the loan and lease portfolio as well as the Company's targeted liquidity levels. At March 31, 2024, the Bank’s total uninsured deposits were approximately $1.47 billion, or 14.0%, of total deposits.

Current wording

Total deposits were $10.71 billion at June 30, 2024, an increase of $432.0 million, or 4.2%, from $10.28 billion at December 31, 2023. The increase in total deposits from the prior period was to support growth in the loan and lease portfolio as well as the Company's targeted liquidity levels. At June 30, 2024, the Bank’s total uninsured deposits were approximately $1.56 billion, or 14.4%, of total deposits.

Previous wording

Borrowings increased to $120.2 million at March 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. See Note 8. Borrowings in the accompanying Notes to Unaudited Condensed Consolidated Financial Statements for a discussion of current sources of available debt capacity.

Current wording

Borrowings increased to $117.7 million at June 30, 2024, from $23.4 million at December 31, 2023. This increase was principally due to entering into a new loan agreement in the first quarter of 2024 to strategically enhance Bank capital levels in order to accommodate future growth expectations. See Note 8. Borrowings in the accompanying Notes to Unaudited Condensed Consolidated Financial Statements for a discussion of current sources of available debt capacity.

Previous wording

General. In the first quarter of 2023, the Company and the Bank each first exceeded $10 billion in total assets. As of March 31, 2024, the Company and the Bank each had total assets of $11.51 billion and $11.42 billion, respectively. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and its implementing regulations impose various additional requirements on bank holding companies and banks with $10 billion or more in total consolidated assets. As a general matter, the Company and the Bank are not immediately subject to these additional requirements when they exceed $10 billion in assets; instead, the Company and the Bank will be subject to these various requirements over various dates, as described below.

Current wording

General. In the first quarter of 2023, the Company and the Bank each first exceeded $10 billion in total assets. As of June 30, 2024, the Company and the Bank each had total assets of $11.87 billion and $11.79 billion, respectively. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and its implementing regulations impose various additional requirements on bank holding companies and banks with $10 billion or more in total consolidated assets. As a general matter, the Company and the Bank are not immediately subject to these additional requirements when they exceed $10 billion in assets; instead, the Company and the Bank will be subject to these various requirements over various dates, as described below.

Previous wording

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 is became applicable to the Bank in the first quarter of 2024.

Current wording

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.

Previous wording

Nonperforming assets, including loans measured at fair value, at March 31, 2024 were $215.3 million, which represented a $23.1 million, or 12.0%, increase from December 31, 2023. These nonperforming assets at March 31, 2024 were comprised of $206.7 million in nonaccrual loans and leases and $8.6 million in foreclosed assets. Of the $206.7 million of nonperforming assets, $158.7 million carried a government guarantee, leaving an unguaranteed exposure of $56.6 million in total nonperforming assets at March 31, 2024. This represents an increase of $5.4 million, or 10.5%, from an unguaranteed exposure of $51.2 million at December 31, 2023.

Current wording

Nonperforming assets, including loans measured at fair value, at June 30, 2024 were $231.6 million, which represented a $39.4 million, or 20.5%, increase from December 31, 2023. These nonperforming assets at June 30, 2024 were comprised of $223.6 million in nonaccrual loans and leases and $8.0 million in foreclosed assets. Of the $223.6 million of nonperforming assets, $179.8 million carried a government guarantee, leaving an unguaranteed exposure of $51.8 million in total nonperforming assets at June 30, 2024. This represents an increase of $646 thousand, or 1.3%, from an unguaranteed exposure of $51.2 million at December 31, 2023.

Previous wording

Nonperforming assets, excluding loans measured at fair value, at March 31, 2024 were $157.0 million, which represented a $15.6 million, or 11.0%, increase from December 31, 2023. These nonperforming assets at March 31, 2024 were comprised of $148.5 million in nonaccrual loans and leases and $8.6 million in foreclosed assets. Of the $157.0 million of nonperforming assets, $110.7 million carried a government guarantee, leaving an unguaranteed exposure of $46.3 million in total nonperforming assets at March 31, 2024. This represents an increase of $4.3 million, or 10.1%, from an unguaranteed exposure of $42.1 million at December 31, 2023.

Current wording

Nonperforming assets, excluding loans measured at fair value, at June 30, 2024 were $168.1 million, which represented a $26.7 million, or 18.9%, increase from December 31, 2023. These nonperforming assets at June 30, 2024 were comprised of $160.1 million in nonaccrual loans and leases and $8.0 million in foreclosed assets. Of the $168.1 million of nonperforming assets, $127.6 million carried a government guarantee, leaving an unguaranteed exposure of $40.5 million in total nonperforming assets at June 30, 2024. This represents a decrease of $1.6 million, or 3.8%, from an unguaranteed exposure of $42.1 million at December 31, 2023.

Previous wording

As a percentage of the Bank’s total capital, nonperforming loans and leases, excluding loans measured at fair value, represented 14.1% at March 31, 2024, compared to 14.6% at December 31, 2023. 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, 2024 and December 31, 2023 were 4.1% and 4.3%, respectively.

Current wording

As a percentage of the Bank’s total capital, nonperforming loans and leases, excluding loans measured at fair value, represented 14.6% at both June 30, 2024 and December 31, 2023. 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, 2024 and December 31, 2023 were 3.4% and 4.3%, respectively.

Previous wording

As of March 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 $908.2 million and $785.2 million, respectively. The following is a discussion of these loans and leases. Risk Grades 5 through 8 represent the spectrum of criticized and classified loans and leases. For a complete description of the risk grading system, see Note 3. Loans and Leases Held for Investment and Credit Quality in the Company’s 2023 Form 10-K. At March 31, 2024, the portion of criticized and classified loans and leases guaranteed by the SBA or USDA totaled$391.7 million and total portfolio unguaranteed exposure risk was$516.6 million, or 9.4% of total held for investment unguaranteed exposure carried at historical cost. This compares to the December 31, 2023 portion of criticized and classified loans and leases guaranteed by the SBA or USDA which totaled$344.8 million and total portfolio unguaranteed exposure risk was$440.3 million, or 8.3% of total held for investment unguaranteed exposure carried at historical cost.

Current wording

As of June 30, 2024, and December 31, 2023, potential problem (also referred to as criticized) and classified loans and leases, excluding loans measured at fair value, totaled $913.9 million and $785.2 million, respectively. The following is a discussion of these loans and leases. Risk Grades 5 through 8 represent the spectrum of criticized and classified loans and leases. For a complete description of the risk grading system, see Note 3. Loans and Leases Held for Investment and Credit Quality in the Company’s 2023 Form 10-K. At June 30, 2024, the portion of criticized and classified loans and leases guaranteed by the SBA or USDA totaled$410.6 million and total portfolio unguaranteed exposure risk was$503.3 million, or 8.7% of total held for investment unguaranteed exposure carried at historical cost. This compares to the December 31, 2023 portion of criticized and classified loans and leases guaranteed by the SBA or USDA which totaled$344.8 million and total portfolio unguaranteed exposure risk was$440.3 million, or 8.3% of total held for investment unguaranteed exposure carried at historical cost.

Previous wording

Of the above listed verticals, Senior Housing and Sponsor Financeare within the Company’s Specialty Lending division while Bioenergy and Hotels are within the Energy & Infrastructure division, the remainder of the above listed verticals are within the Small Business Banking division. The majority of the $123.0 million increase in potential problem and classified loans and leases in the first three months of 2024 was comprised of increased levels of Risk Grade 5 loans and leases, as discussed below. The Company believes that its underwriting and credit quality standards have remained high and continues to consider changing economic conditions in a rising interest rate environment.

Current wording

Of the above listed verticals, Senior Housing and Sponsor Financeare within the Company’s Specialty Lending division, Bioenergy and Hotels arewithin the Energy & Infrastructure division, and the remainder of the above listed verticals are within the Small Business Banking division. The majority of the $128.7 million increase in potential problem and classified loans and leases in the first six months of 2024 was comprised of increased levels of Risk Grade 5 loans and leases, as discussed below. The Company believes that its underwriting and credit quality standards have remained high and continues to consider changing economic conditions in a rising interest rate environment.

Previous wording

Loans and leases that experience insignificant payment delays and payment shortfalls are generally not individually evaluated for the purpose of estimating the allowance for credit losses. The Bank generally considers an “insignificant period of time” from payment delays to be a period of 90 days or less. The Bank would consider a modification for a customer experiencing what is expected to be a short-term event that has temporarily impacted cash flow. This could be due, among other reasons, to illness, weather, impact from a one-time expense, slower than expected start-up, construction issues or other short-term issues. Credit personnel will review the request to determine if the customer is stressed and how the event has impacted the ability of the customer to repay the loan or lease long term. During the three months ended March 31, 2024, there were no loan modifications made for borrowers experiencing financial difficult on loans held at amortized cost.

Current wording

Loans and leases that experience insignificant payment delays and payment shortfalls are generally not individually evaluated for the purpose of estimating the allowance for credit losses. The Bank generally considers an “insignificant period of time” from payment delays to be a period of 90 days or less. The Bank would consider a modification for a customer experiencing what is expected to be a short-term event that has temporarily impacted cash flow. This could be due, among other reasons, to illness, weather, impact from a one-time expense, slower than expected start-up, construction issues or other short-term issues. Credit personnel will review the request to determine if the customer is stressed and how the event has impacted the ability of the customer to repay the loan or lease long term. At June 30, 2024, the Company had a total of $8.8 million in loans modified in 2024 to borrowers experiencing financial difficulties, all of which remained current with $8.8 million on principal payment deferral.

Previous wording

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 5. At March 31, 2024, and December 31, 2023, Risk Grade 5 loans and leases, excluding loans measured at fair value, totaled $669.2 million and $599.2 million, respectively, for a three month increase of $70.0 million. Relative to total held for investment unguaranteed exposure carried at historical cost at March 31, 2024 and December 31, 2023, unguaranteed Risk Grade 5 loans and leases increased from 6.9% to 7.7%, respectively.

Current wording

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 5. At June 30, 2024, and December 31, 2023, Risk Grade 5 loans and leases, excluding loans measured at fair value, totaled $673.8 million and $599.2 million, respectively, for a six month increase of $74.6 million. Relative to total held for investment unguaranteed exposure carried at historical cost at June 30, 2024 and December 31, 2023, unguaranteed Risk Grade 5 loans and leases increased to 7.3% from 6.9%, respectively.

Previous wording

The increase in Risk Grade 5 loans and leases, exclusive of loans measured at fair value, during the first three months of 2024 was principally confined to 13 verticals, as reflected above. The underlying factor in this increase in Risk Grade 5 loans in 2024 was largely a result of softer than expected starts for new projects in certain verticals due to delays in both construction completion and ramp up time, stemming from downstream effects of pandemic-related impacts. Of the above listed verticals, Sponsor Finance, Senior Housing, Asset-Based Lending and Government Contracting are within the Company’s Specialty Lending division, Bioenergy is within the Energy & Infrastructure division and the remainder of the above listed verticals are within the Small Business Banking division.

Current wording

The increase in Risk Grade 5 loans and leases, exclusive of loans measured at fair value, during the first half of 2024 was principally confined to 14 verticals, as reflected above. Of the above listed verticals, Sponsor Finance, Senior Housing, and Asset-Based Lending are within the Company’s Specialty Lending division, Bioenergy is within the Energy & Infrastructure division, and the remainder of the above listed verticals are within the Small Business Banking division.