Live Oak Bancshares, Inc.

Previous wording

As of March 31, 2025, the Company’s wholly owned material subsidiaries were the Bank, Government Loan Solutions (“GLS”), Live Oak Grove, LLC (“Grove”) and Live Oak Ventures, Inc. (“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.

Current wording

As of June 30, 2025, the Company’s wholly owned material subsidiaries were the Bank, Government Loan Solutions (“GLS”), Live Oak Grove, LLC (“Grove”) and Live Oak Ventures, Inc. (“Live Oak Ventures”). 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. (“Synply”) as a result of its controlling interest in that entity. Synply is a cloud-based technology platform designed to simplify the loan syndication process for financial institutions and discloses the non-controlling interest according to the Company’s consolidation policy.

Previous wording

For the three months ended March 31, 2025, the Company reported net income attributable to Live Oak Bancshares, Inc. of $9.7 million, or $0.21 per diluted share, compared to net income attributable to Live Oak Bancshares, Inc. of $27.6 million, or $0.60 per diluted share, for the first quarter of 2024.

Current wording

For the three months ended June 30, 2025, the Company reported net income attributable to Live Oak Bancshares, Inc. of $23.4 million, or $0.51 per diluted share, compared to net income attributable to Live Oak Bancshares, Inc. of $27.0 million, or $0.59 per diluted share, for the second quarter of 2024.

Previous wording

•Provision for credit losses increased by $12.6 million, or 77.0%, to $29.0 million, compared to $16.4 million for the first quarter of 2024;

Current wording

•Provision for credit losses increased by $11.5 million, or 97.6%, to $23.3 million, compared to $11.8 million for the second quarter of 2024;

Previous wording

Key factors largely offsetting the decrease in net income are increased levels of net interest income of $10.4 million, combined with increased net gains on sales of loans of $7.1 million.

Current wording

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

Previous wording

•Other noninterest income decreased by $5.7 million, or 58.6%, largely related to a gain arising from increased fair value of equity warrant assets in the first quarter of 2024;

Current wording

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

Previous wording

•Net income tax expense increased by $8.9 million, from a $5.5 million benefit in the first quarter of 2024, to an expense of $3.5 million for the first quarter of 2025. This increase was largely the result of an additional $10.6 million in investment tax credits related to the Company's fourth quarter of 2023 renewable energy investment that became eligible for an extra 10% in tax credits in the first quarter of 2024.

Current wording

•Net income tax expense increased by $7.7 million, from $3.6 million in the first half of 2024, to $11.3 million for the first half of 2025. This increase was largely the result of an additional $10.6 million in investment tax credits related to the Company's fourth quarter of 2023 renewable energy investment that became eligible for an extra 10% in tax credits in the first quarter of 2024.

Previous wording

For the three months ended March 31, 2025, net interest income increased $10.4 million, or 11.6%, to $100.5 million compared to $90.1 million for the three months ended March 31, 2024. This increase was principally due to the growth in the held for investment loan and lease portfolio outpacing growth in interest-bearing liabilities offset by the decrease in average yield on interest-earning assets exceeding the decrease in average cost of funds. Average interest-earning assets increased by $1.87 billion, or 17.2%, to $12.76 billion for the first quarter of 2025, compared to $10.89 billion for the first quarter of 2024, while the yield on average interest-earning assets decreased 34 basis points to 6.77%. The cost of funds on interest-bearing liabilities for the first quarter of 2025 decreased 17 basis points to 3.90% and the average balance of interest-bearing liabilities increased by $1.59 billion, or 15.8%, over the first quarter of 2024.

Current wording

For the three months ended June 30, 2025, net interest income increased $17.9 million, or 19.6%, to $109.2 million compared to $91.3 million for the three months ended June 30, 2024. This increase was principally due to the growth in the held for investment loan and lease portfolio outpacing growth in interest-bearing liabilities, offset by the decrease in average yield on interest-earning assets outpacing the decrease in average cost of funds. Average interest-earning assets increased by $2.16 billion, or 19.3%, to $13.36 billion for the second quarter of 2025, compared to $11.20 billion for the second quarter of 2024, while the yield on average interest-earning assets decreased 39 basis points to 6.73%. The cost of funds on interest-bearing liabilities for the second quarter of 2025 decreased 37 basis points to 3.78% and the average balance of interest-bearing liabilities increased by $1.83 billion, or 17.6%, over the second quarter of 2024.

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 $20.7 million outpacing growth in interest expense of $10.3 million for the first quarter of 2025 compared to the first quarter of 2024. The net interest margin decreased from 3.33% for the first quarter of 2024 to 3.20% for the first quarter of 2025.

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 $46.5 million outpacing growth in interest expense of $18.2 million for the six months ended June 30, 2025 compared to the six months ended June 30, 2024. The net interest margin decreased from 3.30% for the six months ended June 30, 2024 to 3.24% for the six months ended June 30, 2025.

Previous wording

In March 2025, the Federal Reserve decided to maintain the federal funds upper target rate at 4.5%. The Federal Reserve released its most current federal funds target rate midpoint projections which implied a decrease of the median Federal Funds rate to 3.9% by the end of 2025. 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.

Current wording

In June and July 2025, the Federal Reserve decided to maintain the federal funds upper target rate at 4.5%. In June 2025, the Federal Reserve released its most current federal funds target rate midpoint projections which implied a decrease of the median Federal Funds rate to 3.9% by the end of 2025. There can be no assurance that any further decreases or increases in the Federal Funds rate will occur, and if they do, the amount and timing of actual adjustments are subject to change. See Item 3. Quantitative and Qualitative Disclosures About Market Risk for information about the Company’s sensitivity to interest rates.

Previous wording

For the first quarter of 2025, there was a provision for credit losses of $29.0 million compared to $16.4 million for the same period in 2024, an increase of $12.6 million. The increase in provision was principally driven by loan growth amid a challenging macroeconomic environment including heightened levels of specific reserves on individually evaluated loans, where elevated interest rates and inflationary pressures placed financial strain on some small business borrowers.

Current wording

For the second quarter of 2025, there was a provision for credit losses of $23.3 million compared to $11.8 million for the same period in 2024, an increase of $11.5 million. For the six months ended June 30, 2025, there was a provision for credit losses of $52.2 million compared to $28.1 million for the same period in 2024, an increase of $24.1 million. The increase in provision was principally driven by loan growth and elevated specific reserves on individually evaluated loans amid a challenging macroeconomic environment, where elevated interest rates and inflationary pressures placed financial strain on some small business and commercial borrowers.

Previous wording

Loans and leases held for investment at historical cost were $10.4 billion as of March 31, 2025, increasing by $1.84 billion, or 21.6%, compared to March 31, 2024.

Current wording

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

Previous wording

Net charge-offs for loans and leases carried at historical cost were $6.8 million, or 0.27% of average quarterly loans and leases held for investment, carried at historical cost, on an annualized basis, for the three months ended March 31, 2025, compared tonet charge-offsof $3.2 million, or 0.15%, for the three months ended March 31, 2024. 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 $31.4 million, or 1.19% of average quarterly loans and leases held for investment, carried at historical cost, on an annualized basis, for the three months ended June 30, 2025, compared tonet charge-offsof $8.3 million, or 0.38%, for the three months ended June 30, 2024, an increase of $23.2 million, or 281.0%. The increase in net charge-offs compared to the second quarter of 2024 was largely concentrated to individually evaluated loans with specific reserves recorded in prior periods. For the six months ended June 30, 2025, net charge-offs totaled $38.2 million compared to$11.4 million for thesix months ended June 30, 2024, anincrease of$26.8 million, or 234.8%. Net charge-offs are a key element of historical experience in the Company's estimation of the allowance for credit losses on loans and leases.

Previous wording

In addition, nonperforming loans and leases not guaranteed by the SBA or USDA, excluding $9.9 million and $7.9 million accounted for under the fair value option at March 31, 2025 and 2024, respectively, totaled $99.9 million, which was 0.96% of the held for investment loan and lease portfolio carried at historical cost at March 31, 2025, compared to $43.1 million, or 0.51% of loans and leases held for investment carried at historical cost at March 31, 2024.

Current wording

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

Previous wording

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

Current wording

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

Previous wording

For the three months ended March 31, 2025, noninterest income decreased by $516 thousand, or 2.0%, compared to the three months ended March 31, 2024. The decrease over the first quarter of 2024 is primarily a result of a $2.0 million increase in loss related to the servicing asset revaluation, a $3.3 million decrease in management fee income due to the restructuring of the Canapi Funds in the third quarter of 2024 and decreased other noninterest income of $5.7 million, largely related to the first quarter of 2024 gain arising from increased fair value of equity warrant assets associated with the Company’s wine & craft beverage vertical. Largely offsetting the decrease over the first quarter of 2024 was higher net gains on sales of loans of $7.1 million combined with decreased equity method investment losses of $2.8 million, principally related to heightened levels of underlying losses in the first quarter of 2024.

Current wording

For the three months ended June 30, 2025, noninterest income increased by $367 thousand, or 1.1%, compared to the three months ended June 30, 2024. Principal changes when compared with the second quarter of 2024 are higher net gains on sales of loans of $7.2 million combined with a $3.3 million decrease in management fee income due to the restructuring of the Canapi Funds in the third quarter of 2024 and a $6.1 million decrease in other noninterest income largely related to a $6.7 million gain arising from the sale of one of the Company’s aircraft in the second quarter of 2024.

Previous wording

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

Current wording

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

Previous wording

Loan Servicing Asset Revaluation: The Company revalues its serviced loan portfolio at least quarterly. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as adequate compensation for servicing, the discount rate, the custodial earnings rate, ancillary income, prepayment speeds and default rates and losses, with prepayment speed and discount rate being the most sensitive assumptions. For the three months ended March 31, 2025, there was a net loss on loan servicing asset revaluation of $4.7 million, compared to a net loss of $2.7 million for the three months ended March 31, 2024, resulting in a negative comparative quarter change of $2.0 million. The decrease in the valuation of the servicing asset compared to the three months ended March 31, 2024 was principally the result of principal paydowns or runoff as well as an increase in the prepayment assumption in the first quarter of 2025.

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 June 30, 2025, there was a net loss on loan servicing asset revaluation of $3.1 million, compared to a net loss of $2.9 million for the three months ended June 30, 2024. For the six months ended June 30, 2025, there was a net loss on loan servicing asset revaluation of $7.8 million compared to a net loss of $5.6 million for the six months ended June 30, 2024, resulting in a negative comparative year-to-date change of $2.2 million. The decrease in the valuation of the servicing asset compared to the first half of 2024 was principally the result of principal paydowns or runoff as well as less favorable market conditions in 2025.

Previous wording

Net Gains on Sales of Loans: For the three months ended March 31, 2025, net gains on sales of loans increased $7.1 million, or 62.1%, compared to the three months ended March 31, 2024. The volume of guaranteed loans sold increased $79.6 million, or 42.7%, for the three months ended March 31, 2025 to $266.3 million from $186.7 million for the three months ended March 31, 2024. The average net gain on loan sale premium remained relatively stable at 107% in the first quarters of 2025 and 2024, respectively. The increase in net gains on sales of loans over the first quarter of 2024 was principally related to a higher loan sale volume.

Current wording

Net Gains on Sales of Loans: For the three months ended June 30, 2025, net gains on sales of loans increased $7.2 million, or 50.3%, compared to the three months ended June 30, 2024. The volume of guaranteed loans sold increased $71.9 million, or 28.7%, for the three months ended June 30, 2025 to $322.3 million from $250.5 million for the three months ended June 30, 2024. For the six months ended June 30, 2025, net gains on sales of loans increased $14.4 million, or 55.6%, compared to the six months ended June 30, 2024. For the six months ended June 30, 2025, the volume of guaranteed loans sold increased $151.5 million, or 34.7%, to $588.6 million from $437.1 million for the six months ended June 30, 2024. The average net gain on loan sale premium increased from 106% to 107% in the second quarters of 2024 and 2025, respectively, and for the six months ended June 30, 2024 and 2025. The increase in net gains on sales of loans over the second quarter of 2024 and six months ended June 30, 2024 was principally related to a higher loan sale volume combined with improving premiums.

Previous wording

For the three months ended March 31, 2025, income tax expense was $3.5 million compared to an income tax benefit of $5.5 million in the first quarter of 2024, and the Company’s effective tax rates were 26.4% and (24.8%), respectively. The higher level of income tax expense for the first quarter of 2025 as compared to the first quarter of 2024 was largely the result of an additional $10.6 million in investment tax credits related to the Company's fourth quarter of 2023 renewable energy investment that became eligible for an extra 10% in tax credits in the first quarter of 2024. Partially offsetting the comparative increase in income tax expense was decreased pretax income during the current period.

Current wording

For the three months ended June 30, 2025, income tax expense was $7.8 million compared to income tax expense of $9.1 million in the second quarter of 2024, and the Company’s effective tax rates were 25.0% and 25.2%, respectively. For the six months ended June 30, 2025, income tax expense was $11.3 million compared to $3.6 million for the six months ended June 30, 2024, and the Company’s effective tax rates were 25.4% and 6.2%, respectively. The lower level of income tax expense for the second quarter of 2025 as compared to the second quarter of 2024 was largely the result of decreased pretax income during the current period. The higher level of income tax expense for the first half of 2025 as compared to the first half of 2024 was largely the result of an additional $10.6 million in tax credits related to the Company's fourth quarter of 2023 renewable energy investment that became eligible for an extra 10% in tax credits in the first quarter of 2024. Partially offsetting the comparative increase in income tax expense in the first half of 2025 was decreased pretax income during the current period.

Previous wording

Total assets at March 31, 2025 were $13.60 billion, an increase of $652.3 million, or 5.0%, compared to total assets of $12.94 billion at December 31, 2024. The growth in total assets was principally driven by the following:

Current wording

Total assets at June 30, 2025 were $13.83 billion, an increase of $887.8 million, or 6.9%, compared to total assets of $12.94 billion at December 31, 2024. The growth in total assets was principally driven by the following:

Previous wording

•Cash and cash equivalents, comprised of cash and due from banks, combined with investment securities available-for-sale was $2.06 billion at March 31, 2025, an increase of $199.9 million, or 10.8%, compared to $1.86 billion at December 31, 2024. This increase reflects growing deposit levels combined with maintenance of the Company's targeted liquidity profile.

Current wording

•Cash and cash equivalents, comprised of cash and due from banks, combined with investment securities available-for-sale was $1.99 billion at June 30, 2025, an increase of $131.0 million, or 7.1%, compared to $1.86 billion at December 31, 2024. This increase reflects growing deposit levels combined with maintenance of the Company's targeted liquidity profile.

Previous wording

•Growth in total loans and leases held for investment and held for sale of $482.5 million, or 4.6%, during the first three months of 2025, from $10.58 billion at December 31, 2024, to $11.06 billion at March 31, 2025. This growth was a result of strong origination activity during the first three months of 2025 of $1.40 billion.

Current wording

•Growth in total loans and leases held for investment and held for sale of $785.5 million, or 7.4%, during the first half of 2025, from $10.58 billion at December 31, 2024, to $11.36 billion at June 30, 2025. This growth was a result of strong origination activity during the first half of 2025 of $2.92 billion.

Previous wording

Total deposits were $12.40 billion at March 31, 2025, an increase of $635.5 million, or 5.4%, from $11.76 billion at December 31, 2024. The increase in total deposits from the prior period was to support growth in the loan and lease portfolio as well as the Company's targeted liquidity levels. At March 31, 2025, the Bank’s total uninsured deposits were approximately $1.87 billion, or 15.0%, of total deposits.

Current wording

Total deposits were $12.59 billion at June 30, 2025, an increase of $834.3 million, or 7.1%, from $11.76 billion at December 31, 2024. The increase in total deposits from the prior period was to support growth in the loan and lease portfolio as well as the Company's targeted liquidity levels. At June 30, 2025, the Bank’s total uninsured deposits were approximately $1.95 billion, or 15.4%, of total deposits.

Previous wording

Total nonperforming assets, including loans measured at fair value, at March 31, 2025 were $494.7 million, which represented a $123.0 million, or 33.1%, increase from December 31, 2024. These nonperforming assets at March 31, 2025 were comprised of $492.6 million in nonaccrual loans and leases and $2.1 million in foreclosed assets. Of the $492.6 million of nonperforming assets, $383.6 million carried a government guarantee, leaving an unguaranteed exposure of $111.1 million in total nonperforming assets at March 31, 2025. This represents an increase of $19.5 million, or 21.3%, from an unguaranteed exposure of $91.6 million at December 31, 2024.

Current wording

Nonperforming assets, including loans measured at fair value, at June 30, 2025 were $473.5 million, which represented a $101.7 million, or 27.4%, increase from December 31, 2024. These nonperforming assets at June 30, 2025 were comprised of $467.1 million in nonaccrual loans and leases and $6.3 million in foreclosed assets. Of the $473.5 million of nonperforming assets, $402.8 million carried a government guarantee, leaving an unguaranteed exposure of $70.6 million in total nonperforming assets at June 30, 2025. This represents a decrease of $20.9 million, or 22.9%, from an unguaranteed exposure of $91.6 million at December 31, 2024.

Previous wording

Nonperforming assets, excluding loans measured at fair value, at March 31, 2025 were $425.0 million, which represented a $118.8 million, or 38.8%, increase from December 31, 2024. These nonperforming assets at March 31, 2025 were comprised of $422.9 million in nonaccrual loans and leases and $2.1 million in foreclosed assets. Of the $425.0 million of nonperforming assets, $324.7 million carried a government guarantee, leaving an unguaranteed exposure of $100.3 million in total nonperforming assets at March 31, 2025. This represents an increase of $18.7 million, or 22.9%, from an unguaranteed exposure of $81.6 million at December 31, 2024.

Current wording

Nonperforming assets, excluding loans measured at fair value, at June 30, 2025 were $402.7 million, which represented a $96.4 million, or 31.5%, increase from December 31, 2024. These nonperforming assets at June 30, 2025 were comprised of $396.3 million in nonaccrual loans and leases and $6.3 million in foreclosed assets. Of the $402.7 million of nonperforming assets, $341.9 million carried a government guarantee, leaving an unguaranteed exposure of $60.7 million in total nonperforming assets at June 30, 2025. This represents a decrease of $20.9 million, or 25.6%, from an unguaranteed exposure of $81.6 million at December 31, 2024.

Previous wording

See the below discussion related to the change in potential problem and impaired loans and leases for management’s overall observations regarding growth in total nonperforming loans and leases.

Current wording

See the below discussion related to the change in potential problem and individually evaluated loans and leases for management’s overall observations regarding growth in total nonperforming loans and leases.

Previous wording

As a percentage of the Bank’s total capital, nonperforming loans and leases, excluding loans measured at fair value, represented 36.5% at March 31, 2025, compared to 26.7% at December 31, 2024. Adjusting the ratio to include only the unguaranteed portion of nonperforming loans and leases at historical cost to reflect management’s belief that the greater magnitude of risk resides in this portion, the ratios at both March 31, 2025 and December 31, 2024 were 8.6% and 7.2%, respectively.

Current wording

As a percentage of the Bank’s total capital, nonperforming loans and leases, excluding loans measured at fair value, represented 33.2% at June 30, 2025, compared to 26.7% at December 31, 2024. Adjusting the ratio to include only the unguaranteed portion of nonperforming loans and leases at historical cost to reflect management’s belief that the greater magnitude of risk resides in this portion, the ratios at both June 30, 2025 and December 31, 2024 were 5.0% and 7.2%, respectively.

Previous wording

As of March 31, 2025, and December 31, 2024, potential problem (also referred to as criticized) and classified loans and leases, excluding loans measured at fair value, totaled $1.14 billion and $1.04 billion, respectively. The following is a discussion of these loans and leases. Risk Grades 50 through 80 represent the spectrum of criticized and classified loans and leases. For a complete description of the risk grading system, see “Credit Quality Indicators” in Note 3 in the notes to consolidated financial statements in the Company’s 2024 Form 10-K. At March 31, 2025, the portion of criticized and classified loans and leases guaranteed by the SBA or USDA totaled$570.7 million and total portfolio unguaranteed exposure risk was$567.4 million, or 7.9% of total held for investment unguaranteed exposure carried at historical cost. This compares to the December 31, 2024 portion of criticized and classified loans and leases guaranteed by the SBA or USDA which totaled$518.7 million and total portfolio unguaranteed exposure risk was$523.3 million, or 7.8% of total held for investment unguaranteed exposure carried at historical cost.

Current wording

As of June 30, 2025, and December 31, 2024, potential problem (also referred to as criticized) and classified loans and leases, excluding loans measured at fair value, totaled $1.14 billion and $1.04 billion, respectively. The following is a discussion of these loans and leases. Risk Grades 50 through 80 represent the spectrum of criticized and classified loans and leases. For a complete description of the risk grading system, see “Credit Quality Indicators” in Note 3 in the notes to consolidated financial statements in the Company’s 2024 Form 10-K. At June 30, 2025, the portion of criticized and classified loans and leases guaranteed by the SBA or USDA totaled$578.8 million and total portfolio unguaranteed exposure risk was$561.0 million, or 7.5% of total held for investment unguaranteed exposure carried at historical cost. This compares to the December 31, 2024 portion of criticized and classified loans and leases guaranteed by the SBA or USDA which totaled$518.7 million and total portfolio unguaranteed exposure risk was$523.3 million, or 7.8% of total held for investment unguaranteed exposure carried at historical cost.

Previous wording

Of the above listed verticals, Senior Housing, Sponsor Finance, Bioenergy and Community Facilitiesare within the Company’s Commercial Banking division, the remainder of the above listed verticals are within the Small Business Banking division. The total $96.1 million increase in potential problem and classified loans and leases in the first three months of 2025 was comprised of $36.7 million in increased levels of Risk Grade 50 loans and leases, as discussed below and $59.4 million in classified loans. The overall increase in criticized and classified loans in the first quarter of 2025 was primarily driven by higher levels of small business borrowers affected by challenging economic conditions. The Company believes that its underwriting and credit quality standards have remained high and continues to consider changing economic conditions as well as the current interest rate environment.

Current wording

Of the above listed verticals, Senior Housing, Sponsor Finance, Bioenergy and Community Facilitiesare within the Company’s Commercial Banking division, the remainder of the above listed verticals are within the Small Business Banking division. The total $97.8 million increase in potential problem and classified loans and leases in the first six months of 2025 was comprised of $59.9 million in increased levels of Risk Grade 50 loans and leases, as discussed below and $38.0 million in classified loans. The overall increase in criticized and classified loans in the first half of 2025 was primarily driven by higher levels of commercial borrowers impacted by the challenging macroeconomic environment. The Company believes that its underwriting and credit quality standards have remained high and continues to consider changing economic conditions as well as the current interest rate environment.

Previous wording

Loans and leases that experience insignificant payment delays and payment shortfalls are generally not individually evaluated for the purpose of estimating the allowance for credit losses. The Bank generally considers an “insignificant period of time” from payment delays to be a period of 90 days or less. The Bank would consider a modification for a customer experiencing what is expected to be a short-term event that has temporarily impacted cash flow. This could be due, among other reasons, to illness, weather, impact from a one-time expense, slower than expected start-up, construction issues or other short-term issues. Credit personnel will review the request to determine if the customer is experiencing financial stress and how the event has impacted the ability of the customer to repay the loan or lease long term. At March 31, 2025, the Company had a total of $12.1 million in loans modified in the first quarter of 2025 to borrowers experiencing financial difficulty, excluding loans measured at fair value, $5.3 million of which remained current and $6.8 million of which are on principal payment deferral.

Current wording

Loans and leases that experience insignificant payment delays and payment shortfalls are generally not individually evaluated for the purpose of estimating the allowance for credit losses. The Bank generally considers an “insignificant period of time” from payment delays to be a period of 90 days or less. The Bank would consider a modification for a customer experiencing what is expected to be a short-term event that has temporarily impacted cash flow. This could be due, among other reasons, to illness, weather, impact from a one-time expense, slower than expected start-up, construction issues or other short-term issues. Credit personnel will review the request to determine if the customer is experiencing financial stress and how the event has impacted the ability of the customer to repay the loan or lease long term. At June 30, 2025, the Company had a total of $45.9 million in loans modified in 2025 to borrowers experiencing financial difficulty, excluding loans measured at fair value, $43.7 million of which remained current and $36.0 million of which are for an other-than-insignificant payment delay or term extension.

Previous wording

Management endeavors to be proactive in its approach to identify and resolve problem loans and leases and is focused on working with the borrowers and guarantors of these loans and leases to provide loan and lease modifications when warranted. Management implements a proactive approach to identifying and classifying loans and leases as special mention (also referred to as criticized), Risk Grade 50. At March 31, 2025, and December 31, 2024, Risk Grade 50 loans and leases, excluding loans measured at fair value, totaled $566.6 million and $529.9 million, respectively, for a three month increase of $36.7 million. Relative to total held for investment unguaranteed exposure carried at historical cost at December 31, 2024 and March 31, 2025, unguaranteed Risk Grade 50 loans and leases increased from $357.9 million, or 5.3%, to $389.7 million, or 5.4%, respectively.

Current wording

Management endeavors to be proactive in its approach to identify and resolve problem loans and leases and is focused on working with the borrowers and guarantors of these loans and leases to provide loan and lease modifications when warranted. Management implements a proactive approach to identifying and classifying loans and leases as special mention (also referred to as criticized), Risk Grade 50. At June 30, 2025, and December 31, 2024, Risk Grade 50 loans and leases, excluding loans measured at fair value, totaled $589.8 million and $529.9 million, respectively, for an increase of $59.9 million. Relative to total held for investment unguaranteed exposure carried at historical cost at December 31, 2024 and June 30, 2025, unguaranteed Risk Grade 50 loans and leases increased from $357.9 million, or 5.3%, to $413.3 million, or 5.5%, respectively.

Previous wording

The increase in Risk Grade 50 loans and leases, exclusive of loans measured at fair value, during the first three months of 2025 was principally confined to 13 verticals, as reflected above. Of the above listed verticals, Senior Housing, Hotels and Commercial Real Estate Financing are within the Company’s Commercial Banking division and the remainder of the above listed verticals are within the Small Business Banking division.

Current wording

The increase in Risk Grade 50 loans and leases, exclusive of loans measured at fair value, during the first six months of 2025 was principally confined to 13 verticals, as reflected above. Of the above listed verticals, Government Contractors, Sponsor Finance, Hospitality, Senior Housing, and Commercial Real Estate Financing are within the Company’s Commercial Banking division and the remainder of the above listed verticals are within the Small Business Banking division.

Previous wording

At March 31, 2025, approximately 98.8% of loans and leases classified as Risk Grade 50 are performing with no relationships having payments past due more than 30 days. While the level of nonperforming assets fluctuates in response to changing economic and market conditions, in light of the relative size and composition of the loan and lease portfolio and management’s degree of success in resolving problem assets, management believes that a proactive approach to early identification and intervention is critical to successfully managing a small business loan portfolio.

Current wording

At June 30, 2025, approximately 97.8% of loans and leases classified as Risk Grade 50 are performing with no relationships having payments past due more than 30 days. While the level of nonperforming assets fluctuates in response to changing economic and market conditions, in light of the relative size and composition of the loan and lease portfolio and management’s degree of success in resolving problem assets, management believes that a proactive approach to early identification and intervention is critical to successfully managing a small business loan portfolio.

Previous wording

The ACL of $167.5 million at December 31, 2024, increased by $22.7 million, or 13.5%, to $190.2 million at March 31, 2025. The ACL as a percentage of loans and leases held for investment at historical cost amounted to 1.7% at December 31, 2024 and 1.8% at March 31, 2025, respectively. The increase in the ACL during the first three months of 2025 was primarily the result of loan growth amid a challenging macroeconomic environment. See also the above section captioned “Provision for Credit Losses” in “Results of Operations” for related information.

Current wording

The ACL of $167.5 million at December 31, 2024, increased by $14.7 million, or 8.8%, to $182.2 million at June 30, 2025. The ACL as a percentage of loans and leases held for investment at historical cost amounted to 1.7% at both December 31, 2024 and June 30, 2025, respectively. The increase in the ACL during the first six months of 2025 was primarily the result of specific reserve changes on individually evaluated loans and continued growth of the loan and lease portfolio. See also the above section captioned “Provision for Credit Losses” in “Results of Operations” for related information.

Previous wording

Actual past due held for investment loans and leases, inclusive of loans measured at fair value, have increased by $19.0 million since December 31, 2024. Total loans and leases 90 or more days past due increased $60.6 million, or 23.7%, compared to December 31, 2024. This increase was comprised of a $27.1 million increase in unguaranteed exposure combined with a $33.5 million increase in the guaranteed portion of past due loans compared to December 31, 2024. Total held for investment unguaranteed loans and leases past due as a percentage of total held for investment unguaranteed loans and leases, inclusive of loans measured at fair value, was 1.3%, at March 31, 2025 and December 31, 2024, respectively. Total unguaranteed loans and leases past due were comprised of $86.9 million carried at historical cost, an increase of $9.4 million, and $10.4 million measured at fair value, an increase of $560 thousand, as of March 31, 2025 compared to December 31, 2024. Management continues to actively monitor and work to improve asset quality. Management believes the ACL of $190.2 million at March 31, 2025 is appropriate in light of the risk inherent in the loan and lease portfolio. Management’s judgments are based on numerous assumptions about current and expected events that it believes to be reasonable, but which may or may not prove to be valid. Accordingly, no assurance can be given that management’s ongoing evaluation of the loan and lease portfolio in light of changing economic conditions and other relevant circumstances will not require significant future additions to the ACL, thus adversely affecting the Company’s operating results. Additional information on the ACL is presented in Note 5. Loans and Leases Held for Investment and Credit Quality of the Unaudited Condensed Consolidated Financial Statements in this report.

Current wording

Actual past due held for investment loans and leases, inclusive of loans measured at fair value, have decreased by$12.0 million since December 31, 2024. Total loans and leases 90 or more days past due increased $46.3 million, or 18.1%, compared to December 31, 2024. This increase was comprised of a$1.8 million increase in unguaranteed exposure combined with a$44.5 million increase in the guaranteed portion of past due loans compared to December 31, 2024. At June 30, 2025 and December 31, 2024, total held for investment unguaranteed loans and leases past due as a percentage of total held for investment unguaranteed loans and leases, inclusive of loans measured at fair value, was 0.7% and 1.3%, respectively. Total unguaranteed loans and leases past due were comprised of $48.5 million carried at historical cost, a decrease of$28.9 million, and $8.5 million measured at fair value, a decrease of$1.8 million, as of June 30, 2025 compared to December 31, 2024. Management continues to actively monitor and work to improve asset quality. Management believes the ACL of $182.2 million at June 30, 2025 is appropriate in light of the risk inherent in the loan and lease portfolio. Management’s judgments are based on numerous assumptions about current and expected events that it believes to be reasonable, but which may or may not be valid. Accordingly, no assurance can be given that management’s ongoing evaluation of the loan and lease portfolio in light of changing economic conditions and other relevant circumstances will not require significant future additions to the ACL, thus adversely affecting the Company’s operating results. Additional information on the ACL is presented in Note 5. Loans and Leases Held for Investment and Credit Quality of the Unaudited Condensed Consolidated Financial Statements in this report.

Previous wording

Liquidity management refers to the ability to meet day-to-day cash flow requirements based primarily on activity in loan and deposit accounts of the Company’s customers. Liquidity is immediately available from four major sources: (a) cash on hand and on deposit at other banks; (b) the outstanding balance of federal funds sold; (c) the market value of unpledged investment securities; and (d) availability under lines of credit, FHLB advances and the Federal Reserve Discount Window. A primary tool in the Company's liquidity management process is the utilization of an Outflow Coverage Ratio (“OCR”) model to stress outflows in various scenarios with targeted days of liquidity coverage. The OCR model output is then used by management to ensure adequate liquidity sources are available during those future periods. At March 31, 2025, the total amount of these four liquidity source items was $4.58 billion, or 33.7% of total assets, an increase of 1.3% of total assets from $4.20 billion, or 32.4% of total assets, at December 31, 2024.

Current wording

Liquidity management refers to the ability to meet day-to-day cash flow requirements based primarily on activity in loan and deposit accounts of the Company’s customers. Liquidity is immediately available from four major sources: (a) cash on hand and on deposit at other banks; (b) the outstanding balance of federal funds sold; (c) the fair value of unpledged investment securities; and (d) availability under lines of credit, FHLB advances and the Federal Reserve Discount Window. A primary tool in the Company's liquidity management process is the utilization of an Outflow Coverage Ratio (“OCR”) model to stress outflows in various scenarios with targeted days of liquidity coverage. The OCR model output is then used by management to ensure adequate liquidity sources are available during those future periods. At June 30, 2025, the total amount of these four liquidity source items was $4.49 billion, or 32.5% of total assets, an increase of 0.1% of total assets from $4.20 billion, or 32.4% of total assets, at December 31, 2024.

Previous wording

At March 31, 2025, $611.3 million of the investment securities portfolio were pledged for unused borrowing capacity, leaving $701.4 million available to be pledged as collateral.

Current wording

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

Previous wording

One of the primary objectives of asset/liability management is to maximize the net interest margin while minimizing the earnings risk associated with changes in interest rates. One method used to manage interest rate sensitivity is to measure the repricing differences, or interest rate gaps, between interest-earning assets and interest-bearing liabilities, across various time periods. As of March 31, 2025, the balance sheet’s total cumulative gap position was 5.1%, meaning that over the entire life of the Company's assets and liabilities, more assets will reprice than liabilities. For further information, see Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Current wording

One of the primary objectives of asset/liability management is to maximize the net interest margin while minimizing the earnings risk associated with changes in interest rates. One method used to manage interest rate sensitivity is to measure the repricing differences, or interest rate gaps, between interest-earning assets and interest-bearing liabilities, across various time periods. As of June 30, 2025, the balance sheet’s total cumulative gap position was 5.3%, meaning that over the entire life of the Company's assets and liabilities, more assets will reprice than liabilities. For further information, see Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Previous wording

The interest rate gap method, however, addresses only the magnitude of asset and liability repricing timing differences as of the report date and does not address earnings, market value, changes in account behaviors based on the interest rate environment, or growth. Therefore, management also uses an earnings simulation model to prepare, on a regular basis, earnings projections based on a range of instantaneous parallel interest rate shocks applied to a static balance sheet and non-parallel interest rate shocks applied to a dynamic balance sheet to measure interest rate risk. As of March 31, 2025, the Company’s interest rate risk profile under the instantaneous parallel interest rate shock scenarios applied to a static balance sheet is slightly asset-sensitive. For more information, see Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Current wording

The interest rate gap method, however, addresses only the magnitude of asset and liability repricing timing differences as of the report date and does not address earnings, market value, changes in account behaviors based on the interest rate environment, or growth. Therefore, management also uses an earnings simulation model to prepare, on a regular basis, earnings projections based on a range of instantaneous parallel interest rate shocks applied to a static balance sheet and non-parallel interest rate shocks applied to a dynamic balance sheet to measure interest rate risk. As of June 30, 2025, the Company’s interest rate risk profile under the instantaneous parallel interest rate shock scenarios applied to a static balance sheet is moderately asset-sensitive. For more information, see Item 3. Quantitative and Qualitative Disclosures About Market Risk.