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 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.

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 provided investment advisory services to a series of funds (the “Canapi Funds”) focused on providing venture capital to new and emerging financial technology companies. During the third quarter of 2024, the Canapi Funds were restructured and Canapi Advisors voluntarily withdrew as an investment advisor to the funds.

Previous 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.

Current wording

For the three months ended September 30, 2024, the Company reported net income of $13.0 million, or $0.28 per diluted share, compared to net income of $39.8 million, or $0.88 per diluted share, for the third quarter of 2023.

Previous wording

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

Current wording

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

Previous wording

The key factor partially offsetting theincrease in net income for the first half of 2024 was increased salaries and employee benefits of $5.7 million.

Current wording

A key factor partially offsetting the decrease in net income for the third quarter of 2024 was increased net interest income of $7.6 million.

Previous wording

For the six months ended June 30, 2024, the Company reported net income of $54.5 million, or $1.20 per diluted share, compared to net income of $17.9 million, or $0.40 per diluted share, for the first half of 2023.

Current wording

For the nine months ended September 30, 2024, the Company reported net income of $67.6 million, or $1.48 per diluted share, compared to net income of $57.7 million, or $1.28 per diluted share, for the nine months ended September 30, 2023.

Previous wording

•Increased net gains on sales of loans of $4.9 million, or 23.4%, principally the result of higher loan sale volumes combined with improving premiums in the first half of 2024; and

Current wording

•Increased net gains on sales of loans of $8.9 million, or 26.4%, principally the result of higher loan sale volumes combined with improving premiums in the first nine months of 2024;

Previous wording

•Increased other noninterest income of $12.8 million, largely related to above mentioned gain arising from the sale of one of the Company’s aircraft in the second quarter of 2024 combined with the $5.7 million first quarter of 2024 gain arising from the increased fair value of a certain equity warrant asset.

Current wording

•Increased other noninterest income of $16.5 million, largely related to the combination of a $2.4 million gain from the sale of a building in the third quarter of 2024, $6.7 million gain arising from the sale of one of the Company’s aircraft in the second quarter of 2024 and a $5.7 million gain in the first quarter of 2024 arising from the increased fair value of a certain equity warrant asset.

Previous 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.

Current wording

For the three months ended September 30, 2024, net interest income increased $7.6 million, or 8.5%, to $97.0 million compared to $89.4 million for the three months ended September 30, 2023. This increase was principally due to the growth in the held for investment loan and lease portfolio outpacing growth in interest-bearing liabilities, offset by an increase in average cost of funds, which exceeded the increase in average yield on interest-earning assets. Average interest-earning assets increased by $1.05 billion, or 10.0%, to $11.57 billion for the third quarter of 2024, compared to $10.52 billion for the third quarter of 2023, while the yield on average interest-earning assets increased 37 basis points to 7.18%. The cost of funds on interest-bearing liabilities for the third quarter of 2024 increased 45 basis points to 4.17% and the average balance of interest-bearing liabilities increased by $946.9 million, or 9.7%, over the third quarter of 2023. The increase in cost of funds was largely influenced by repricing of short-term certificates of deposits.

Previous 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.

Current wording

As indicated in the rate/volume analysis below, the overall increase discussed above is reflected in increased interest income of $28.3 million outpacing growth in interest expense of $20.7 million for the third quarter of 2024 compared to the third quarter of 2023. The net interest margin decreased from 3.37% for the third quarter of 2023 to 3.33% for the third quarter of 2024.

Previous wording

For the six months ended June 30, 2024, net interest income increased $15.1 million, or 9.1%, to $181.4 million compared to $166.3 million for the six 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 $1.05 billion, or 10.5%, to $11.05 billion for the first half of 2024, compared to $9.99 billion for the first half of 2023, while the yield on average interest-earning assets increased 63 basis points to 7.11%. The cost of funds on interest-bearing liabilities for the first half of 2024 increased 75 basis points to 4.11%, and the average balance of interest-bearing liabilities increased by $959.6 million, or 10.3%, over the first half of 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 3.02% for the first half of 2023 to 4.12% for the first half of 2024.

Current wording

For the nine months ended September 30, 2024, net interest income increased $22.7 million, or 8.9%, to $278.4 million compared to $255.7 million for the nine months ended September 30, 2023. This increase was principally due to the growth in the held for investment loan and lease portfolio outpacing growth in interest-bearing liabilities offset by an increase in average cost of funds which exceeded the increase in average yield on interest-earning assets. Average interest-earning assets increased by $1.05 billion, or 10.4%, to $11.22 billion for the nine months ended September 30, 2024, compared to $10.17 billion for the nine months ended September 30, 2023, while the yield on average interest-earning assets increased 54 basis points to 7.14%. The cost of funds on interest-bearing liabilities for the nine months ended September 30, 2024 increased 64 basis points to 4.13%, and the average balance of interest-bearing liabilities increased by $954.8 million, or 10.1%, over the nine months ended September 30, 2023. The increase in cost of funds was largely influenced by repricing of short-term certificates of deposit with the average cost of funds increasing from 3.49% for the nine months ended September 30, 2023 to 4.13% for the nine months ended September 30, 2024.

Previous wording

The increase in average interest-bearing liabilities was largely driven by funding for significant loan originations and growth as well as maintenance of the Company's target liquidity profile. As indicated in the rate/volume analysis below, the overall increase discussed above is reflected in increased interest income of $69.7 million outpacing growth in interest expense of $54.6 million for the first half of 2024 compared to the first half of 2023. The net interest margin decreased from 3.36% for the first half of 2023 to 3.30% for the first half of 2024.

Current wording

The increase in average interest-bearing liabilities was largely driven by funding for significant loan originations and growth as well as maintenance of the Company's target liquidity profile. As indicated in the rate/volume analysis below, the overall increase discussed above is reflected in increased interest income of $98.1 million outpacing growth in interest expense of $75.4 million for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. The net interest margin decreased from 3.36% for the nine months ended September 30, 2023 to 3.31% for the nine months ended September 30, 2024.

Previous 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.

Current wording

In September 2024, the Federal Reserve lowered the federal funds upper target rate by 50 basis points to 5.0%. The Federal Reserve released its most current federal funds target rate midpoint projections which implied a decrease of the median Federal Funds rate to 4.4% by the end of 2024 and a decrease of approximately 100 basis points to 3.4% by the end of 2025. There can be no assurance that any further decreases or increases in the Federal Funds rate will occur, and if they do, the amount and timing of actual adjustments are subject to change. See Item 3. Quantitative and Qualitative Disclosures About Market Risk for information about the Company’s sensitivity to interest rates.

Previous 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.

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 expected losses in the loan and lease portfolio.

Previous 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.

Current wording

Loans and leases held for investment at historical cost were $9.49 billion as of September 30, 2024, increasing by $1.70 billion, or 21.8%, compared to September 30, 2023.

Previous 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.

Current wording

Net charge-offs for loans and leases carried at historical cost were $1.7 million, or 0.08% of average quarterly loans and leases held for investment, carried at historical cost, on an annualized basis, for the three months ended September 30, 2024, compared tonet charge-offsof $9.1 million, or 0.48%, for the three months ended September 30, 2023, a decrease of $7.4 million, or 81.3%. Thedecrease in net charge-offs compared to the third quarter of 2023 was primarily related to one significant charge-off that occurred in the third quarter of 2023. For thenine months ended September 30, 2024, net charge-offs totaled$13.1 million compared to$16.9 million for thenine months ended September 30, 2023, adecrease of$3.8 million, or 22.5%. 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 $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.

Current wording

In addition, nonperforming loans and leases not guaranteed by the SBA or USDA, excluding $8.7 million and $6.5 million accounted for under the fair value option at September 30, 2024 and 2023, respectively, totaled $49.4 million, which was 0.52% of the held for investment loan and lease portfolio carried at historical cost at September 30, 2024, compared to $33.3 million, or 0.43% of loans and leases held for investment carried at historical cost at September 30, 2023.

Previous wording

For the six months ended June 30, 2024, noninterest income increased by $16.5 million, or 37.8%, compared to the six months ended June 30, 2023. The increase over the prior year is primarily a result of of higher net gains on sales of loans of $4.9 million combined with a $2.8 million decrease in the net loss on loans accounted for under the fair value option and increased other noninterest income of $12.8 million. The increase in other noninterest income was largely related to the above mentioned gain arising from the sale of one of the Company’s aircraft combined with the $5.7 million first quarter of 2024 gain arising from the increased fair value of a certain equity warrant asset. Partially offsetting the increase over the prior year to date period was higher losses of $3.1 million related to the servicing asset revaluation.

Current wording

For the nine months ended September 30, 2024, noninterest income increased by $11.6 million, or 14.2%, compared to the nine months ended September 30, 2023. The increase over the prior year is primarily a result of higher net gains on sales of loans of $8.9 million, a $5.6 million increase in the net gain on loans accounted for under the fair value option and increased other noninterest income of $16.5 million. The increase in other noninterest income was largely related to the above mentioned $2.4 million gain from the sale of a building in the third quarter of 2024 combined with a $6.7 million gain arising from the sale of one of the Company’s aircraft in the second quarter of 2024 and a $5.7 million gain in the first quarter of 2024 arising from the increased fair value of a certain equity warrant asset. Partially offsetting the increase in total noninterest income over the prior year to date period was higher losses of $18.7 million related to the servicing asset revaluation.

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 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.

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 prepayment speed and discount rate being the most sensitive assumptions. For the three months ended September 30, 2024, there was a net loss on loan servicing asset revaluation of $4.2 million, compared to a net gain of $11.3 million for the three months ended September 30, 2023, resulting in a negative change of $15.5 million. For the nine months ended September 30, 2024, there was a net loss on loan servicing asset revaluation of $9.8 million compared to a net gain of $8.9 million for the nine months ended September 30, 2023, resulting in a negative change of $18.7 million. The negative change in valuation of the servicing asset compared to the third quarter of 2023 and nine months ended September 30, 2023 was principally the result of the third quarter of 2023 change in valuation techniques used to estimate the fair value of servicing rights.

Previous wording

Net Gains on Sales of Loans: For the three months ended June 30, 2024, net gains on sales of loans increased $3.6 million, or 33.2%, compared to the three months ended June 30, 2023. The volume of guaranteed loans sold increased $5.4 million, or 2.2%, for the three months ended June 30, 2024 to $250.5 million from $245.1 million in the three months ended June 30, 2023. For the six months ended June 30, 2024, net gains on sales of loans increased $4.9 million, or 23.4%, compared to the six months ended June 30, 2023. For the six months ended June 30, 2024, the volume of guaranteed loans sold increased $24.2 million, or 5.9%, to $437.1 million from $412.9 million for the six months ended June 30, 2023. The average net gain on loan sale premium increased from 105% to 106% in the second quarters of 2023 and 2024, respectively, and remained relatively stable at 106% in the first half of both 2023 and 2024. The increase in net gains on sales of loans over the second quarter of 2023 was principally the result of higher premiums while the increase over the first half of 2023 was principally related to a higher loan sale volume combined with, to a lesser extent, improving premiums in the first half of 2024 .

Current wording

Net Gains on Sales of Loans: For the three months ended September 30, 2024, net gains on sales of loans increased $4.0 million, or 31.3%, compared to the three months ended September 30, 2023. The volume of guaranteed loans sold increased $40.7 million, or 18.1%, for the three months ended September 30, 2024 to $266.3 million from $225.6 million for the three months ended September 30, 2023. For the nine months ended September 30, 2024, net gains on sales of loans increased $8.9 million, or 26.4%, compared to the nine months ended September 30, 2023. For the nine months ended September 30, 2024, the volume of guaranteed loans sold increased $64.9 million, or 10.2%, to $703.4 million from $638.5 million for the nine months ended September 30, 2023. The average net gain on loan sale premium increased from 105% to 107% in the third quarters of 2023 and 2024, respectively, and remained relatively stable at 106% for the nine months ended September 30, 2023 and 2024. The increase in net gains on sales of loans over the third quarter of 2023 and nine months ended September 30, 2023 was principally related to a higher loan sale volume combined with improving premiums.

Previous 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.

Current wording

Net Gain (Loss) on Loans Accounted for Under the Fair Value Option: For the three months ended September 30, 2024, the Company had a net gain on loans accounted for under the fair value option of $2.3 million compared to a net loss of $568 thousand for the third quarter of 2023, a positive change of $2.8 million, or 497.0%. For the nine months ended September 30, 2024, the Company had a net gain on loans accounted for under the fair value option of $2.2 million compared to a net loss of $3.4 million for the same period of 2023, a positive change of $5.6 million, or 165.5%. The carrying amount of loans accounted for under the fair value option at September 30, 2024 and 2023 was $343.4 million (all classified as held for investment) and $410.1 million (all classified as held for investment), respectively, a decrease of $66.8 million, or 16.3%. The increased levels of net gains arising from the valuation of loans accounted for under the fair value option for both comparative periods was principally due to the third quarter of 2023 change in valuation techniques used to estimate the fair value of loans.

Previous 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.

Current wording

Total noninterest expense for the three and nine months ended September 30, 2024, increased $3.3 million, or 4.5%, and increased $3.3 million, or 1.4%, respectively, compared to the same periods in 2023. The changes within noninterest expense for the comparable three and nine month periods was largely driven by various components, as discussed below.

Previous 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.

Current wording

Salaries and employee benefits: Total personnel expense for the three and nine months ended September 30, 2024 increased by $1.6 million, or 3.7%, and increased by $7.3 million, or 5.6%, respectively, compared to the same periods in 2023. The increase over both comparative periods of 2023 is principally related to continued investment in human resources to support strategic and growth initiatives. Total full-time equivalent employees increased from 956 at September 30, 2023, to 999 at September 30, 2024. Salaries and employee benefits expense included $6.7 million and $19.9 million of stock-based compensation for the three and nine months ended September 30, 2024, respectively, compared to $217 thousand and $12.7 million for the three and nine months ended September 30, 2023, respectively. Expenses related to the employee stock purchase program, stock grants, stock option compensation and restricted stock expense are all considered stock-based compensation.

Previous wording

Professional services expense: For the three and six months ended June 30, 2024, professional services expense increased $1.1 million, or 53.4%, and $2.0 million, or 69.0%, respectively, compared to the same periods in 2023. The increase compared to the prior periods was due to higher levels of legal fees partially offset by an insurance recovery of $1.3 million in the first quarter of 2023.

Current wording

Professional services expense: For the nine months ended September 30, 2024, professional services expense increased $3.5 million, or 75.6%, compared to the same period in 2023. The increase compared to the prior year was due to higher levels of legal fees partially offset by an insurance recovery of $1.3 million in the first quarter of 2023.

Previous wording

FDIC insurance: For the three and six months ended June 30, 2024, FDIC insurance decreased $2.4 million, or 47.7%, and $2.6 million, or 30.9%, respectively, compared to the same periods in 2023. This decrease is largely the the product of favorable changes in the Company’s FDIC assessment rates.

Current wording

FDIC insurance: For the three and nine months ended September 30, 2024, FDIC insurance decreased $2.2 million, or 53.0%, and $4.8 million, or 38.1%, respectively, compared to the same periods in 2023. This decrease is largely the product of favorable changes in the Company’s FDIC assessment rates.

Previous wording

Other expense: For the six months ended June 30, 2024, other expense decreased $3.4 million, or 36.7%, compared to the same period in 2023. This decrease was largely related to reserves for unfunded commitments, historically being recorded in other expense. Beginning in the second quarter of 2024, this expense was classified in the provision for credit losses. See above section captioned “Provision for Credit Losses” for more information related to this change.

Current wording

Other expense: For the nine months ended September 30, 2024, other expense decreased $3.5 million, or 29.0%, compared to the same period in 2023. This decrease was largely related to reserves for unfunded commitments, historically being presented in other expense. Beginning in the second quarter of 2024, this expense was classified in the provision for credit losses.

Previous 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.

Current wording

For the three months ended September 30, 2024, income tax expense was $4.8 million compared to income tax expense of $3.0 million in the third quarter of 2023, and the Company’s effective tax rates were 27.0% and 6.9%, respectively. For the nine months ended September 30, 2024, income tax expense was $8.4 million compared to $7.6 million for the nine months ended September 30, 2023, and the Company’s effective tax rates were 11.1% and 11.6%, respectively. The higher level of income tax expense for the third quarter of 2024 as compared to the third quarter of 2023 was primarily the result of lower levels of anticipated investment tax credits in 2024 as compared to the prior year.

Previous 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.

Current wording

For the three and nine months ended September 30, 2024, net income decreased $26.2 million and increased $11.7 million, respectively, compared to the same periods of 2023. Key factors influencing these changes are discussed below.

Previous 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.

Current wording

For the three and nine months ended September 30, 2024, net interest income increased $9.2 million, or 10.3%, and $25.8 million, or 10.1%, respectively, compared to the same periods of 2023. See above section captioned “Net Interest Income and Margin” as it is principally related to the Banking segment.

Previous 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.

Current wording

The provision for credit losses for the three and nine months ended September 30, 2024, increased $24.2 million, or 235.7%, and $20.3 million, or 48.0%, respectively. See the analysis of provision for credit losses included in the above section captioned “Provision for Credit Losses” as it is entirely related to the Banking segment.

Previous 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.

Current wording

For the three and nine months ended September 30, 2024, noninterest income decreased $4.5 million, or 12.7%, and increased $14.3 million, or 19.3%, respectively, compared to the same periods of 2023. The primary driver for lower noninterest income in the third quarter of 2024 was the net loss on the valuation of the loan servicing asset. Alternatively, the increase in noninterest income in the nine months ended September 30, 2024 was principally driven by higher net gains on sales of loans combined with increased levels of net gains on loans accounted for at fair value and heightened levels of other noninterest income. Partially offsetting the increase over the nine months ended September 30, 2023 was higher levels of net losses on the loan servicing asset revaluation. See the analysis of these categories of noninterest income included in the above section captioned “Noninterest Income” for additional discussion.

Previous 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.

Current wording

For the three and nine months ended September 30, 2024, income tax expense increased $2.7 million and $4.5 million, respectively, compared to the same periods of 2023. The increase compared to the three months ended September 30, 2023 was largely the result of lower levels of anticipated investment tax credits in 2024 as compared to the prior year. See the above section captioned “Income Tax Expense” for further discussion.

Previous 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.

Current wording

Total assets at September 30, 2024 were $12.61 billion, an increase of $1.34 billion, or 11.9%, compared to total assets of $11.27 billion at December 31, 2023. The growth in total assets was principally driven by the growth in total loans and leases held for investment of $1.20 billion, or 13.9%, during the first nine months of 2024, from $8.63 billion at December 31, 2023, to $9.83 billion at September 30, 2024. This growth was a result of record level origination activity during the nine months ended September 30, 2024 of $3.73 billion.

Previous 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.

Current wording

Total deposits were $11.40 billion at September 30, 2024, an increase of $1.13 billion, or 11.0%, from $10.28 billion at December 31, 2023. The increase in total deposits from the prior period was to support growth in the loan and lease portfolio as well as the Company's targeted liquidity levels. At September 30, 2024, the Bank’s total uninsured deposits were approximately $1.65 billion, or 14.4%, of total deposits.

Previous 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.

Current wording

Borrowings increased to $115.4 million at September 30, 2024, from $23.4 million at December 31, 2023. This increase was principally due to entering into a new loan agreement in the first quarter of 2024 to strategically enhance Bank capital levels in order to accommodate future growth expectations. 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 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.

Current wording

General. In the first quarter of 2023, the Company and the Bank each first exceeded $10 billion in total assets. As of September 30, 2024, the Company and the Bank each had total assets of $12.61 billion and $12.53 billion, respectively. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and its implementing regulations impose various additional requirements on bank holding companies and banks with $10 billion or more in total consolidated assets. As a general matter, the Company and the Bank are not immediately subject to these additional requirements when they exceed $10 billion in assets; instead, the Company and the Bank will be subject to these various requirements over various dates, as described below.

Previous 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.

Current wording

Nonperforming assets, including loans measured at fair value, at September 30, 2024 were $283.6 million, which represented a $91.4 million, or 47.6%, increase from December 31, 2023. These nonperforming assets at September 30, 2024 were comprised of $275.6 million in nonaccrual loans and leases and $8.0 million in foreclosed assets. Of the $275.6 million of nonperforming assets, $221.5 million carried a government guarantee, leaving an unguaranteed exposure of $62.1 million in total nonperforming assets at September 30, 2024. This represents an increase of $10.9 million, or 21.4%, from an unguaranteed exposure of $51.2 million at December 31, 2023.

Previous 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.

Current wording

Nonperforming assets, excluding loans measured at fair value, at September 30, 2024 were $223.6 million, which represented a $82.1 million, or 58.1%, increase from December 31, 2023. These nonperforming assets at September 30, 2024 were comprised of $215.6 million in nonaccrual loans and leases and $8.0 million in foreclosed assets. Of the $223.6 million of nonperforming assets, $171.0 million carried a government guarantee, leaving an unguaranteed exposure of $52.6 million in total nonperforming assets at September 30, 2024. This represents an increase of $10.5 million, or 24.8%, 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 14.6% 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.

Current wording

As a percentage of the Bank’s total capital, nonperforming loans and leases, excluding loans measured at fair value, represented 19.2% and 14.6% September 30, 2024 and December 31, 2023, respectively. Adjusting the ratio to include only the unguaranteed portion of nonperforming loans and leases at historical cost to reflect management’s belief that the greater magnitude of risk resides in this portion, the ratios at both September 30, 2024 and December 31, 2023 were 4.4% and 4.3%, respectively.

Previous 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.

Current wording

As of September 30, 2024, and December 31, 2023, potential problem (also referred to as criticized) and classified loans and leases, excluding loans measured at fair value, totaled $951.5 million and $785.2 million, respectively. The following is a discussion of these loans and leases. Risk Grades 50 through 80 represent the spectrum of criticized and classified loans and leases. For a complete description of the risk grading system, see Note 5. Loans and Leases Held for Investment and Credit Quality. At September 30, 2024, the portion of criticized and classified loans and leases guaranteed by the SBA or USDA totaled$448.8 million and total portfolio unguaranteed exposure risk was$502.7 million, or 7.9% of total held for investment unguaranteed exposure carried at historical cost. 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, 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.

Current wording

Of the above listed verticals, Senior Housing and Sponsor Financeare within the Company’s Specialty Lending division, Bioenergy, Community Facilities and Hotels arewithin the Energy & Infrastructure division, and the remainder of the above listed verticals are within the Small Business Banking division. Total criticized and classified loans and leases increased $166.3 million in the first nine months of 2024. This increase by loan and lease risk grade categories was comprised of a decrease of $73.2 million for those identified as criticized offset by an increase of $239.5 for those identified as classified, of which $169.4 million is guaranteed and $70.1 million is unguaranteed. There were five large loan relationships that were added to classified loans in the third quarter of 2024 which comprised 78.7% of the change in unguaranteed classified loans. The Company continues its focus on underwriting standards and credit quality in a high interest rate environment. Additionally, the Company actively considers changing economic conditions related to portfolio management.