Live Oak Bancshares, Inc.

Previous wording

The following presents management’s discussion and analysis (“MD&A”) of the more significant factors that affected the Company's financial condition and results of operations for the year ended December 31, 2023 as compared to December 31, 2022. For a comparison of 2022 results to 2021 and other 2021 information not included herein, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Part II, Item 7 of the 2022 Form 10-K filed with the SEC on February 23,2023. This discussion should be read in conjunction with the financial statements and related notes included elsewhere in this Report on Form 10-K. Results of operations for the periods included in this review are not necessarily indicative of results to be obtained during any future period.

Current wording

The following presents management’s discussion and analysis (“MD&A”) of the more significant factors that affected the Company's financial condition and results of operations for the year ended December 31, 2024 as compared to December 31, 2023. For a comparison of 2023 results to 2022 and other 2022 information not included herein, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Part II, Item 7 of the 2023 Form 10-K filed with the SEC on February 22,2024. This discussion should be read in conjunction with the financial statements and related notes included elsewhere in this Annual Report on Form 10-K. Results of operations for the periods included in this review are not necessarily indicative of results to be obtained during any future period.

Previous wording

As of December 31, 2023, the Company’s wholly owned material subsidiaries were 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

As of December 31, 2024, the Company’s wholly owned material subsidiaries were the Bank, Government Loan Solutions (“GLS”), Live Oak Grove, LLC (“Grove”) and Live Oak Ventures, Inc. (“Live Oak Ventures”). GLS is a management and technology consulting firm that advises and offers solutions and services to participants in the government guaranteed lending sector. GLS primarily provides services in connection with the settlement, accounting, and securitization processes for government guaranteed loans, including loans originated under the SBA 7(a) loan programs and USDA guaranteed loans. The Grove provides Company employees and business visitors with on-site dining at the Company’s Wilmington, North Carolina headquarters. Live Oak Ventures’ purpose is investing in businesses that align with the Company's strategic initiative to be a leader in financial technology. Canapi Advisors, LLC (“Canapi Advisors”) was a wholly owned subsidiary providing investment advisory services to a series of funds (the “Canapi Funds”) focused on providing venture capital to new and emerging financial technology companies. During the third quarter of 2024, the Canapi Funds were restructured and Canapi Advisors voluntarily withdrew as an investment advisor to the funds. Canapi Advisors was subsequently dissolved in the fourth quarter of 2024. As of December 31, 2024, Live Oak Ventures consolidated its investment in Synply, Inc. as a result of its controlling interest in that entity. Synply is a cloud-based technology platform designed to simplify the loan syndication process for financial institutions and discloses the non-controlling interest according to the Company’s consolidation policy.

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

Previous wording

•Loans and leases held for sale and investment increased by $1.12 billion, or 14.2%. Total loan originations in 2023 were $3.95 billion compared to $4.01 billion in 2022, a decrease of 1.5%. Substantial loan production in 2023 was the primary driver of growth in total assets which increased to $11.27 billion at December 31, 2023 as compared to $9.86 billion at December 31,2022, for an increase of $1.42 billion, or 14.4%.

Current wording

•Record year of loan production with total loans and leases held for sale and investment increasing by $1.56 billion, or 17.3%. Total loan originations in 2024 were $5.16 billion compared to $3.95 billion in 2023, an increase of 30.6%. Substantial loan production in 2024 was the primary driver of growth in total assets which increased to $12.94 billion at December 31, 2024 as compared to $11.27 billion at December 31,2023, for an increase of $1.67 billion, or 14.8%.

Previous wording

•Supporting loan growth, total deposits increased by $1.39 billion, or 15.6%, to $10.28 billion at the end of 2023.

Current wording

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

Previous wording

•The provision for loan and lease credit losses increased $10.4 million, largely the result of significant held for investment loan growth combined with charge-off experience impacts. Total nonperforming unguaranteed loans and leases as a percentage of total loans and leases held for investment, both excluding loans measured at fair value, increased from 0.27% at the end of 2022 to 0.48% at the end of 2023. Net charge-offs as a percentage of average held for investment loans and leases carried at historical cost, for the years ended December 31, 2023 and 2022, were 0.28% and 0.14%, respectively.

Current wording

•The provision for credit losses increased $44.9 million, or 87.5%, driven by record loan growth combined with the impacts of the current macroeconomic environment. Total nonperforming unguaranteed loans and leases as a percentage of total loans and leases held for investment, excluding loans measured at fair value, increased from 0.48% at the end of 2023 to 0.82% at the end of 2024. Net charge-offs as a percentage of average held for investment loans and leases carried at historical cost, for the years ended December 31, 2024 and 2023, were 0.52% and 0.28%, respectively.

Previous wording

•Net income decreased $102.3 million, or 58.1%, from $176.2 million, or $3.92 per diluted share, to $73.9 million, or $1.64 per diluted share. This decrease was primarily the result of significant one-time gains in 2022 from the sale of two equity method investments. A detailed overview of key drivers of year over year changes in reported net income is outlined more fully in the opening to the section titled “Results of Operations.”

Current wording

•Increased total noninterest income of $12.0 million, or 10.8%, and decreased total noninterest expense of $8.6 million, or 2.7%. A detailed overview of key drivers of year-over-year changes in reported net income is outlined more fully in the opening to the section titled “Results of Operations.”

Previous wording

The Company reported net income of $73.9 million, or $1.64 per diluted share, for 2023 compared to $176.2 million, or $3.92 per diluted share, for 2022.

Current wording

The Company reported net income attributable to Live Oak Bancshares, Inc. of $77.5 million, or $1.69 per diluted share, for 2024 compared to $73.9 million, or $1.64 per diluted share, for 2023.

Previous wording

Key factors partially offsetting the year-over-year decrease in net income were:

Current wording

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

Previous wording

Net interest income represents the difference between the income that the Company earns on interest-earning assets and the cost of interest-bearing liabilities. The Company’s net interest income depends upon the volume of interest-earning assets and interest-bearing liabilities and the interest rates that the Company earns or pays on them, respectively. Net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as “volume changes.” It is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds, referred to as “rate changes.” As a bank without a branch network, the Bank gathers deposits over the Internet and in the community in which it is headquartered. Due to the nature of a branchless bank and the relatively low overhead required for deposit gathering, the rates the Bank offers are generally competitive with other digital deposit product offerings.

Current wording

Net interest income represents the difference between the income that the Company earns on interest-earning assets and the cost of interest-bearing liabilities. The Company’s net interest income depends upon the volume of interest-earning assets and interest-bearing liabilities and the interest rates that the Company earns or pays on them, respectively. Net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as “volume changes.” It is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds, referred to as “rate changes.” As a bank without a branch network, the Bank gathers deposits over the Internet and in the community in which it is headquartered. Due to the nature of a branchless bank and the relatively low overhead required for deposit gathering, the rates the Bank offers are generally above the industry average.

Previous wording

For 2023, net interest income increased $17.8 million, or 5.4%, to $345.3 million compared to $327.5 million for 2022. This increase was principally due to the significant 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. Excluding PPP loan impacts, comprised of amortization of net deferred fees combined with a 1% annualized interest rate less the related interest expense from funding activity, net interest income increased by $24.3 million. Average interest-earning assets increased by $1.84 billion, or 21.8%, to $10.30 billion for 2023, compared to $8.46 billion for 2022, while the yield on average interest-earning assets increased 143 basis points to 6.68%. The cost of funds on interest-bearing liabilities for 2023 increased 212 basis points to 3.59%, and the average balance of interest-bearing liabilities increased by $1.57 billion, or 19.6%, over 2022.

Current wording

For 2024, net interest income increased $30.6 million, or 8.9%, to $375.9 million compared to $345.3 million for 2023. This increase was principally due to thegrowth in the held for investment loan and lease portfolio outpacing growth in interest-bearing liabilities offset by an increase in average cost of funds which exceeded the increase in average yield on interest-earning assets. Average interest-earning assets increased by $1.20 billion, or 11.6%, to $11.50 billion for 2024, compared to $10.30 billion for 2023, while the yield on average interest-earning assets increased 39 basis points to 7.07%. The cost of funds on interest-bearing liabilities for 2024 increased 52 basis points to 4.11%, and the average balance of interest-bearing liabilities increased by $1.08 billion, or 11.3%, over 2023. The increase in cost of funds was largely influenced by repricing of short-term certificates of deposit with the average cost of funds increasing from 3.31% in 2023 to 4.17% for in 2024.

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 table below, the overall increase discussed above is reflected in increased interest income of $243.8 million outpacing growth in interest expense of $226.0 million for 2023 compared to 2022. The net interest margin decreased from 3.87% for 2022 to 3.35% for 2023.

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 table below, the overall increase discussed above is reflected in increased interest income of $124.1 million outpacing growth in interest expense of $93.5 million for 2024 compared to 2023. The net interest margin decreased from 3.35% for 2023 to 3.27% for 2024.

Previous wording

During 2023, the Federal Reserve increased the federal funds upper target rate by 100 basis points to 5.5%. In December 2023, the Federal Reserve released its most current federal funds target rate midpoint projections which implied a decrease of the median Federal Funds rate to 4.6% by the end of 2024 and a decrease of approximately 100 basis points to 3.6% 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.

Current wording

In January 2025, the Federal Reserve decided to maintain the federal funds upper target rate at 4.5%. The Federal Reserve released its most current federal funds target rate midpoint projections at its previous meeting in December 2024 which implied a decrease of approximately 50 basis points to 3.9% by the end of 2025. There can be no assurance that any further decreases or increases in the Federal Funds rate will occur, and if they do, the amount and timing of actual adjustments are subject to change. See Item 7A. 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. Beginning in the second quarter of 2024, expense related to off-balance sheet credit exposures was also included in the provision for credit losses in response to growth in the amount of loans with applicable off-balance sheet credit risk. See Note 1 under the subheading Allowance for Off-Balance Sheet Credit Exposures for additional information.

Previous wording

For 2023, the provision for loan and lease credit losses was $51.3 million compared to $40.9 million in 2022, an increase of $10.4 million. The 2023 increase in provision was primarily the result of loan growth and charge-off related impacts.

Current wording

For 2024, the provision for credit losses was $96.2 million compared to $51.3 million in 2023, an increase of $44.9 million. The 2024 increase in provision was primarily the result of record loan growth combined with the impacts of the current macroeconomic environment, which adversely affected some borrowers’ performance.

Previous wording

Loans and leases held for investment at historical cost were $8.25 billion as of December 31, 2023, an increase of $1.40 billion, or 20.4%, compared to December 31, 2022.

Current wording

Loans and leases held for investment at historical cost were $9.90 billion as of December 31, 2024, an increase of $1.66 billion, or 20.1%, compared to December 31, 2023.

Previous wording

Net charge-offs for loans and leases carried at historical cost were $21.4 million, or 0.28% of average loans and leases held for investment at amortized cost, excluding loans measured at fair value, for 2023, compared to net charge-offs of $8.0 million, or 0.14%, for 2022, an increase of $13.4 million, or 168.5%. The increase in net charge-offs for 2023 was primarily isolated to six relationships. 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 $46.7 million, or 0.52% of average loans and leases held for investment at amortized cost, excluding loans measured at fair value, for 2024, compared to net charge-offs of $21.4 million, or 0.28%, for 2023, an increase of $25.3 million, or 118.5%. The increase in net charge-offs for 2024 was primarily related to an increase in activity within five verticals, Search Fund Lending, General Lending, Government Contracting, Community Facilities and Wine & Craft Beverage. The increase was largely due to the high interest rate environment and inflationary pressures, which increased financial strain on borrowers. 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 $7.2 million and $6.7 million accounted for under the fair value option at December 31, 2023 and 2022, respectively, totaled $39.3 million, which was 0.48% of the held for investment loan and lease portfolio carried at historical cost at December 31, 2023, compared to $18.8 million, or 0.27% of loans and leases held for investment carried at historical cost at December 31, 2022.

Current wording

In addition, nonperforming loans and leases not guaranteed by the SBA or USDA, excluding $9.1 million and $7.2 million accounted for under the fair value option at December 31, 2024 and 2023, respectively, totaled $81.4 million, which was 0.82% of the held for investment loan and lease portfolio carried at historical cost at December 31, 2024, compared to $39.3 million, or 0.48% of loans and leases held for investment carried at historical cost at December 31, 2023.

Previous wording

Noninterest income is principally comprised of net gains from the sale of SBA and USDA-guaranteed loans along with servicing revenue and related revaluationof 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 asset 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 servicing revenue and related revaluationof 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 asset revaluation is significantly impacted by changes in market rates and other underlying assumptions such as prepayment speeds. 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

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 speed and discount rate being the most sensitive assumptions. For 2023, there was a net gain on loan servicing asset revaluation of $4.9 million compared to a net loss of $16.6 million for 2022, resulting in a positive change of $21.5 million, or 129.5%. The increase in the valuation of the servicing asset compared to 2022 was principally the result of the third quarter of 2023 change in valuation techniques used to estimate the fair value of servicing rights with a one-time positive adjustment of $13.7 million as a result of rising interest rates and their impacts on market conditions.

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 2024, there was a net loss on loan servicing asset revaluation of $12.2 million compared to a net gain of $4.9 million for 2023, resulting in a negative change of $17.0 million. The negative change in valuation of the servicing asset compared to 2023 was principally the result of the third quarter of 2023 change in valuation techniques used to estimate the fair value of servicing rights.

Previous wording

At December 31, 2023, the key assumptions used to determine the fair value of the Company’s servicing rights included a weighted average prepayment speed equal to 15.3% and a weighted average discount rate equal to 14.5%. The table below reflects the sensitivity of the current fair value of servicing assets to immediate changes in the above key assumptions with all other assumptions remaining static:

Current wording

At December 31, 2024, the key assumptions used to determine the fair value of the Company’s servicing rights included a weighted average prepayment speed equal to 15.6% and a weighted average discount rate equal to 13.5%. The table below reflects the sensitivity of the current fair value of servicing assets to immediate adverse changes in the above key assumptions with all other assumptions remaining static:

Previous wording

Net Gains on Sales of Loans: For 2023, net gains on sales of loans increased $3.3 million, or 7.6%, compared to 2022. The volume of guaranteed loans sold increased $296.7 million, or 51.1%, over 2022 while the average net gain on loan sale premium decreased from 108% to 105% in 2022 and 2023, respectively. The increase in net gains on sales of loans over 2022 was principally the result of higher loan sale volume.

Current wording

Net Gains on Sales of Loans: For 2024, net gains on sales of loans increased $14.4 million, or 30.8%, compared to 2023. The volume of guaranteed loans sold increased $103.4 million, or 11.8%, over 2023 while the average net gain on loan sale premium increased from 105% to 107% in 2023 and 2024, respectively. The increase in net gains on sales of loans over 2023 was principally related to a higher loan sale volume combined with improving premium.

Previous wording

Net (Loss) Gain on Loans Accounted for Under the Fair Value Option: For 2023, the Company had a net loss on loans accounted for under the fair value option of $3.5 million compared to a net gain of $1.0 million for 2022, a negative change of $4.6 million. The carrying amount of loans accounted for under the fair value option at December 31, 2023 and 2022 was $388.0 million (all classified as held for investment) and $494.5 million (all classified as held for investment), respectively, a decrease of $106.4 million, or 21.5%. The incremental net loss on loans accounted for under the fair value option compared to both prior periods was largely the result of negative market trends between the comparative periods.

Current wording

Net Gain (Loss) on Loans Accounted for Under the Fair Value Option: For 2024, the Company had a net gain on loans accounted for under the fair value option of $2.4 million compared to a net loss of $3.5 million for 2023, a positive change of $5.9 million. The carrying amount of loans accounted for under the fair value option at December 31, 2024 and 2023 was $328.7 million (all classified as held for investment) and $388.0 million (all classified as held for investment), respectively, a decrease of $59.3 million, or 15.3%. The increased levels of net gains arising from the valuation of loans accounted for under the fair value option was principally due to the third quarter of 2023 change in valuation techniques used to estimate the fair value of loans.

Previous wording

Total noninterest expense for 2023 increased $8.7 million, or 2.8%, compared to 2022. The increase in noninterest expense was predominately driven by the following items.

Current wording

Total noninterest expense for 2024 decreased $8.6 million, or 2.7%, compared to 2023. The decrease in noninterest expense was predominately driven by the following items.

Previous wording

Salaries and employee benefits: Total personnel expense for 2023 increased by $4.2 million, or 2.5%, compared to 2022. The increase in salaries and employee benefits was principally related to continued investment in human resources to support strategic and growth initiatives. Total full-time equivalent employees decreased from 970 at December 31,2022 to 952 at December 31,2023, however, average full-time equivalent employees for 2023 was 966 as compared to 887 for 2022. Salaries and employee benefits expense included $17.9 million of stock-based compensation for 2023, compared to $20.3 million for 2022. 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 2024 increased by $8.2 million, or 4.7%, compared to 2023. The increase in salaries and employee benefits was principally related to continued investment in human resources to support strategic and growth initiatives. Total full-time equivalent employees increased from 952 at December 31,2023 to 1,014 at December 31,2024. Salaries and employee benefits expense included $26.4 million of stock-based compensation for 2024, compared to $17.9 million for 2023. 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

Total assets at December 31,2023 were $11.27 billion, an increase of $1.42 billion, or 14.4%, compared to total assets of $9.86 billion at December 31,2022. The growth in total assets was principally driven by the following:

Current wording

Total assets at December 31,2024 were $12.94 billion, an increase of $1.67 billion, or 14.8%, 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 $1.60 billion, or 18.5%, from $8.63 billion at December 31, 2023, to $10.23 billion at December 31, 2024.

Previous wording

Total deposits were $10.28 billion at December 31,2023, an increase of $1.39 billion, or 15.6%, from $8.88 billion at December 31,2022. The increase in total deposits from the prior period was to support growth in the loan and lease portfolio combined with strong deposit inflows.

Current wording

Total deposits were $11.76 billion at December 31,2024, an increase of $1.49 billion, or 14.5%, 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 December 31, 2024, the Bank’s total uninsured deposits were approximately $1.71 billion, or 14.5%, of total deposits.

Previous wording

Borrowings decreased to $23.4 million at December 31,2023 from $83.2 million at December 31,2022. This decrease was principally due to paying off the Company’s Fed Funds line of credit in the first quarter of 2023. See Note 8. Borrowings in the accompanying notes to the consolidated financial statements for a discussion of current sources of available debt capacity.

Current wording

Borrowings increased to $112.8 million at December 31,2024 from $23.4 million at December 31,2023. This increase was principally due to entering into a new loan agreement in the first quarter of 2024 to strategically enhance Bank capital levels in order to accommodate future growth expectations. See Note 8. Borrowings in the accompanying Notes to Consolidated Financial Statements for a discussion of current sources of available debt capacity.

Previous wording

Shareholders’ equity at December 31,2023 was $902.7 million as compared to $811.0 million at December 31,2022. The book value per share was $20.23 at December 31,2023 compared to $18.41 at December 31,2022. Average equity to average assets was 8.0% for the year ended December 31,2023 compared to 9.0% for the year ended December 31,2022. The increase in shareholders’ equity for 2023 was principally the result of $73.9 million in net income and stock-based compensation expense of $17.9 million and other comprehensive income associated with positive market impacts on the Company’s available-for-sale investment portfolio of $7.6 million.

Current wording

Shareholders’ equity at December 31,2024 was $1.00 billion as compared to $902.7 million at December 31,2023. The book value per share was $22.12 at December 31,2024 compared to $20.23 at December 31,2023. Average equity to average assets was 8.2% for the year ended December 31,2024 compared to 8.0% for the year ended December 31,2023. The increase in shareholders’ equity for 2024 was principally the result of $77.5 million in net income and stock-based compensation expense of $26.4 million.

Previous wording

General. In the first quarter of 2023, the Company and the Bank each first exceeded $10 billion in total assets. As of December 31, 2023, the Company and the Bank each had total assets of $11.27 billion and$11.21 billion, respectively, ending their first four consecutive quarters of reported assets in excess of $10 billion. The Dodd-Frank Act and its implementing regulations impose various additional requirements on bank holding companies and banks with $10 billion or more in total consolidated assets.

Current wording

General. In the first quarter of 2023, the Company and the Bank each first exceeded $10 billion in total assets. As of December 31,2024, the Company and the Bank each had total assets of $12.94 billion and$12.86 billion. The Dodd-Frank Act and its implementing regulations impose various additional requirements on bank holding companies and banks with $10 billion or more in total consolidated asset

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 expected to be 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

Deposit Insurance Assessments. Also under the Dodd-Frank Act, the DIF reserve ratio was increased from 1.15 percent to 1.35 percent and the FDIC is required, in setting deposit insurance assessments, to offset the effect of the increase on institutions with assets of less than $10 billion, which results in institutions with assets greater than $10 billion paying higher assessments. In addition, following the fourth consecutive quarter where the total assets of a bank exceeds $10 billion, as reported in its quarterly Call Report, the FDIC utilizes a different method for determining deposit insurance assessments. This large bank method is based on a bank’s ability to withstand asset- and funding-related stress, its regulatory ratings, and potential losses to the FDIC in the event of the bank’s failure, subject to discretionary adjustments by the FDIC. The Bank expects to become subject to the large bank method for determining its deposit insurance assessments in 2024.

Current wording

Deposit Insurance Assessments. Also under the Dodd-Frank Act, the DIF reserve ratio was increased from 1.15 percent to 1.35 percent and the FDIC is required, in setting deposit insurance assessments, to offset the effect of the increase on institutions with assets of less than $10 billion, which results in institutions with assets greater than $10 billion paying higher assessments. In addition, following the fourth consecutive quarter where the total assets of a bank exceeds $10 billion, as reported in its quarterly Call Report, the FDIC utilizes a different method for determining deposit insurance assessments. This large bank method is based on a bank’s ability to withstand asset- and funding-related stress, its regulatory ratings, and potential losses to the FDIC in the event of the bank’s failure, subject to discretionary adjustments by the FDIC. The Bank became subject to the large bank method for determining its deposit insurance assessments in 2024.

Previous wording

Limits on Interchange Fees. The Durbin Amendment to the Dodd-Frank Act gave the Federal Reserve Board the authority to establish rules regarding interchange fees charged for electronic debit transactions by a payment card issuer that, together with its affiliates, has assets of $10 billion or more, as of December 31 of the preceding calendar year, and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer. The Federal Reserve Board has adopted rules under this provision that limit the swipe fees that a debit card issuer can charge a merchant for a transaction to the sum of 21 cents and five basis points times the value of the transaction, plus up to one cent for fraud prevention costs. The Bank exceeded $10 billion in assets at December 31, 2023. This will trigger a reduction of annual pre-tax income from debit card interchange fees beginning July 1, 2024. Additional information regarding the Durbin Amendment is presented in Item 1A. Risk Factors.

Current wording

Limits on Interchange Fees. The Durbin Amendment to the Dodd-Frank Act gave the Federal Reserve Board the authority to establish rules regarding interchange fees charged for electronic debit transactions by a payment card issuer that, together with its affiliates, has assets of $10 billion or more, as of December 31 of the preceding calendar year, and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer. The Federal Reserve Board has adopted rules under this provision that limit the swipe fees that a debit card issuer can charge a merchant for a transaction to the sum of 21 cents and five basis points times the value of the transaction, plus up to one cent for fraud prevention costs. The Bank exceeded $10 billion in assets at December 31, 2023. This triggered a reduction of annual pre-tax income from debit card interchange fees beginning July 1, 2024. Additional information regarding the Durbin Amendment is presented in Item 1A. Risk Factors.

Previous wording

Any loan or portion of a loan that the Company has the intent and ability to sell is classified as held for sale. The average age of the held for sale portfolio as of December 31, 2023 was 10.9 months from origination date. Approximately 12.1% of the current held for sale portfolio is older than two years. The majority of held for sale loans over one year old are composed of construction loans or other loans that have yet to fully fund. Construction loans typically have extended build out periods that inherently result in longer lead times between origination and the ultimate sale date. Approximately 19.8% of the held for sale portfolio is aged between one and two years.

Current wording

Any loan or portion of a loan that the Company has the intent and ability to sell is classified as held for sale. The average age of the held for sale portfolio as of December 31, 2024 was 6.9 months from origination date. Approximately 3.3% of the current held for sale portfolio is older than two years. The majority of held for sale loans over one year old are composed of construction loans or other loans that have yet to fully fund. Construction loans typically have extended build out periods that inherently result in longer lead times between origination and the ultimate sale date. Approximately 27.0% of the held for sale portfolio is aged between one and two years.

Previous wording

As of December 31, 2023 and 2022, the cumulative total outstanding balance of loans sold since May 2007 totaled $4.24 billion and $3.48 billion, respectively. The Company generally continues to service loans after the date of sale. As of December 31, 2023 and 2022, the total outstanding balance of loans and leases, including those serviced for others, was $13.28 billion and $11.38 billion, respectively.

Current wording

As of December 31, 2024 and 2023, the cumulative total outstanding balance of loans sold since May 2007 totaled $4.72 billion and $4.24 billion, respectively. The Company generally continues to service loans after the date of sale. As of December 31, 2024 and 2023, the total outstanding balance of loans and leases, including those serviced for others, was $15.32 billion and $13.28 billion, respectively.

Previous wording

As of December 31, 2023, $10.60 billion, or 79.8%, of the total outstanding balance of loans and leases, including those at fair value and those serviced for others, were variable rate loans that adjust at specified dates based on the prime lending rate or other variable indices. As of December 31, 2023, $5.97 billion, or 45.0%, of total outstanding balance of loans and leases, including those at fair value and those serviced for others, were variable rate loans that adjust on either a calendar monthly or calendar quarterly basis using the prime lending rate or other variable indices.

Current wording

As of December 31, 2024, $13.10 billion, or 85.5%, of the total outstanding balance of loans and leases, including those at fair value and those serviced for others, were variable rate loans that adjust at specified dates based on the prime lending rate or other variable indices. As of December 31, 2024, $9.05 billion, or 59.1%, of total outstanding balance of loans and leases, including those at fair value and those serviced for others, were variable rate loans that adjust on either a calendar monthly or calendar quarterly basis using the prime lending rate or other variable indices.

Previous wording

At December 31, 2023, 81.5%, or $7.38 billion, of the combined held for sale and held for investment loan and lease portfolio, including those at fair value, were composed of variable rate loans.

Current wording

At December 31, 2024, 88.1%, or $9.36 billion, of the combined held for sale and held for investment loan and lease portfolio, including those at fair value, were composed of variable rate loans.

Previous wording

At December 31, 2023, $2.70 billion, or 31.2%, of loans held for investment, including those at fair value, matures in less than five years. Loans and leases maturing in greater than five years total $5.96 billion of the total $8.66 billion. The variable rate portion of the total held for investment loans and leases, excluding PPP loans, is 81.4%, which reflects the Company’s strategy to minimize interest rate risk through the use of variable rate products.

Current wording

At December 31, 2024, $3.75 billion, or 36.6%, of loans held for investment, including those at fair value, matures in less than five years. Loans and leases maturing in greater than five years total $6.51 billion of the total $10.26 billion. The variable rate portion of the total held for investment loans and leases is 87.9%, which reflects the Company’s strategy to minimize interest rate risk through the use of variable rate products.

Previous wording

Management considers asset quality to be of primary importance. A formal loan review function, independent of loan origination, is used to identify and monitor problem loans. This function reports directly to the Audit Committee of the Board of Directors.

Current wording

Management considers asset quality to be of primary importance. A formal loan review function, independent of loan origination, is used to identify and monitor problem loans. This function reports directly to the Risk Committee of the Board of Directors.

Previous wording

The Bank places loans and leases on nonaccrual status when they become 90 days past due as to principal or interest payments, or prior to that if management has determined based upon current information available to them that the timely collection of principal or interest is not probable. When a loan or lease is placed on nonaccrual status, any interest previously accrued as income but not actually collected is reversed and recorded as a reduction of loan or lease interest and fee income. Typically, collections of interest and principal received on a nonaccrual loan or lease are applied to the outstanding principal as determined at the time of collection of the loan or lease. The Company adopted ASU 2022-02 on January 1, 2023. Accordingly, the prior period discussed below has been adjusted to exclude previously disclosed troubled debt restructurings for comparative purposes. See Note 1. Organization and Summary of Significant Accounting Policies in the accompanying notes to the consolidated financial statementsfor additional information about the adoption of ASU 2022-02.

Current wording

The Bank places loans and leases on nonaccrual status when they become 90 days past due as to principal or interest payments, or prior to that if management has determined based upon current information available to them that the timely collection of principal or interest is not probable. When a loan or lease is placed on nonaccrual status, any interest previously accrued as income but not actually collected is reversed and recorded as a reduction of loan or lease interest and fee income. Typically, collections of interest and principal received on a nonaccrual loan or lease are applied to the outstanding principal as determined at the time of collection of the loan or lease.