NORTHPOINTE BANCSHARES INC (NPB) FY 2024 MD&A

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risk, uncertainties and assumptions. Certain risks, uncertainties and other factors, including but not limited to those set forth under “Cautionary Note Regarding Forward-Looking Statements,” “Risk Factors,” and elsewhere in this Annual Report on Form 10-K, may cause actual results to differ materially from those projected in the forward looking statements. We assume no obligation to update any of these forward-looking statements.

Unless otherwise stated, all information in this document gives effect to a ten-for-one stock split, whereby each holder of our common stock received nine additional shares of common stock for each share owned as of the record date of December 19, 2024, which was distributed on December 30, 2024. The effect of the stock dividend on outstanding shares and per share figures has been retroactively applied to all periods presented in this document.

Business Overview

The Company is a bank holding company that is headquartered in Grand Rapids, Michigan. Through our wholly-owned subsidiary, Northpointe Bank, we focus on providing independent mortgage banking platforms nationwide with an alternative to traditional mortgage warehouse lending (we refer to this business as our Mortgage Purchase Program, or “MPP”, as well as residential mortgage and digital banking services to retail customers nationwide. Our residential lending business provides a comprehensive range of financing options nationwide through two main channels: consumer direct and traditional retail. These channels combine the convenience of on-line, self-service platforms with the personalized service of an experienced residential mortgage loan officer. Both residential mortgage loan origination channels are supported by our proprietary POS digital platform that streamlines the loan application and closing processes. Our consumer direct and traditional retail channels primarily originate mortgage loans which are saleable through an end investor. In addition, our traditional retail channel selectively originates first-lien home equity lines which are tied seamlessly to a demand deposit sweep account (we refer to the loans we originate as “All-in-One” or “AIO” loans). We have one bank branch located in Grand Rapids, Michigan and loan production offices located in 23 cities in 15 states across the country, which are supported by our centralized operations and back-office support teams based in Grand Rapids, Michigan.

Our results of operations are driven by a combination of net interest income, which is the difference between interest income from interest-earning assets and interest expense on interest-bearing liabilities, as well as fee income from a variety of sources. Key components of noninterest income include gains from the sale of newly originated loans, loan servicing fees, and service charges from our deposit services and our MPP and residential lending businesses. Our principal operating expense, aside from interest expense, consists of salaries and employee benefits, including commissions paid to loan originators, occupancy and equipment costs, data processing expense, professional fees, and provisions for credit losses. Our income is affected by regulatory, economic, and competitive factors that influence interest rates, residential loan demand and deposits costs. In addition, we are subject to interest rate risk to the degree that our interest-earnings assets mature or reprice at different times or at different speeds than our interest-bearing liabilities.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with United States generally accepted accounting principles (“GAAP”) and follow general practices within the banking industry. Application of these principles requires management to make estimates, assumptions and complex judgements that affect amounts presented in our consolidated financial statements. These estimates, assumptions and judgements are based on information available as of the date of the financial statements; accordingly, as this information changes, the consolidated financial statements could reflect different estimates, assumptions, and judgements.

Our accounting and reporting policies are in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. Accounting and reporting policies for the allowance for credit losses (“ACL”), lender risk account and capitalized mortgage loan servicing rights are deemed critical since they involve the use of estimates and require significant management judgments. Application of assumptions different than those that we have used could result in material changes in our financial position or results of operations.

Our methodology for determining the ACL and related provision for credit losses is described later in this section under “Provision for Credit Losses” and “Loan Portfolio”. In particular, this area of accounting requires a significant amount of

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judgment because a multitude of factors can influence the ultimate collection of a loan or other type of credit. It is extremely difficult to precisely measure the amount of expected credit losses in our loan portfolio. We use a rigorous process to attempt to accurately quantify the necessary ACL and related provision for credit losses, but there can be no assurance that our modeling process will successfully identify all of the expected credit losses in our loan portfolio. The assumptions around establishing reasonable and supportable economic forecasts are particularly subjective. As a result, we could record future provisions for credit losses that may be significantly different than the levels that we recorded in prior periods. See also Note 2 and Note 3 to the Consolidated Financial Statements included within this report for further discussion on ACL.

A Lender Risk Account (“LRA”) has been established for loans we have sold to the Federal Home Loan Bank of Indianapolis (“FHLB”). The LRA is funded and maintained by the FHLB at 1.20% of the loan balance and is used to offset credit losses over the life of the loans sold to the FHLB. If the LRA has not been depleted by losses, funds are returned to the Company over time, beginning after five years and continuing through 25 years. We carry the asset at estimated fair value. Fair value is determined using an income approach with various assumptions including expected cash flows, market discount rates, prepayment speeds, and other factors. These assumptions are particularly subjective and can have a material effect on the estimated LRA balance and income. We believe the assumptions that we utilize in estimating fair value are reasonable based upon accepted industry practices and represent neither the most conservative or aggressive assumptions. See also Note 2 and Note 18 for further discussion of the LRA and the methods used to determine fair value of the LRA.

We establish mortgage servicing right assets when we sell loans with servicing retained and when we purchase mortgage servicing. The fair value of our mortgage loan servicing rights has been determined based on a valuation model used by an independent third party. There are several critical assumptions involved in establishing the value of this asset including estimated future prepayment speeds on the underlying mortgage loans, the interest rate used to discount the net cash flows from the mortgage loan servicing, the estimated amount of ancillary income that will be received in the future (such as late fees) and the estimated cost to service the mortgage loans. We believe the assumptions that we utilize in our valuation are reasonable based upon accepted industry practices for valuing mortgage loan servicing rights and represent neither the most conservative or aggressive assumptions. See also Note 2, Note 5 and Note 18 for further discussion of MSR activity and fair value estimation.

Emerging Growth Company

Pursuant to the JOBS Act, as an emerging growth company, we can elect to opt out of the extended transition period for adopting any new or revised accounting standards. We have elected to take advantage of the extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we may adopt the standard on the application date for private companies. We have elected to take advantage of the scaled disclosures and other relief under the JOBS Act, and we may take advantage of some or all of the reduced regulatory and reporting requirements that will be available to us under the JOBS Act, so long as we qualify as an emerging growth company.

Primary Factors Used to Evaluate our Business

In addition to net income, the primary factors we use to evaluate and manage our results of operations include net interest income, noninterest income and noninterest expense.

Net Interest Income

Net interest income is generally the most significant contributor to our net income. Net interest income represents interest income from interest earning assets, primarily our loan portfolio, including MPP, residential mortgage loans, and our first lien home equity product AIO Loans, as well as interest earned on our liquid assets primarily invested at the Federal Reserve and FHLB dividends, less interest expense on interest-bearing liabilities, such as deposits, FHLB advances, and other borrowings, which are used to fund those assets. The amount of our net income is affected by overall loan demand, economic conditions, the slope of the yield curve, and changes in the absolute level of interest rates, the amounts and composition of our loan portfolio and interest-bearing liabilities.

For 2024 and 2023, net interest income accounted for more than half of our total revenue. During periods when market conditions are such that industry residential loan originations are significantly higher, such as in 2020 and 2021, it is expected that noninterest income will grow substantially, driven primarily by gain on sale of mortgage loans, resulting in net interest income dropping to under half of total revenue.

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Noninterest Income

Noninterest income consists of service charges on deposits and related fees, loan servicing fees, MPP related fees, and net gains on the sale of loans. Noninterest income is a key contributor to our net income and is expected to account for more than half of our revenue in market conditions when industry residential mortgage loan origination volumes are significantly higher, such as in 2020 and 2021.

Noninterest Expense

Noninterest expense includes salaries and employee benefits, occupancy and equipment costs, data processing expense, professional fees, and other taxes and insurance and other noninterest expense. In evaluating our level of noninterest expense, we also monitor our efficiency ratio. As a residential real estate mortgage-focused bank, our efficiency ratio will typically be higher than other non-mortgage focused banks and will tend to decrease significantly with any meaningful increase in industry mortgage originations. The efficiency ratio represents non-interest expense divided by the sum of net interest income and noninterest income.

We continually seek to identify ways to streamline our business and operate more efficiently, which has enabled us to reduce our noninterest expense in both absolute terms and as a percentage of our revenue while continuing to achieve growth in total loans and assets. A large component of our expense base is mortgage- related commissions, which are variable in nature and increase or decrease in line with residential mortgage originations. We also proactively manage our production-related back-office expenses and will right size those expenses based on the anticipated level of production.

Over the past several years, we have continued to invest in growth strategies and resources, including personnel, technology and infrastructure. We believe we are well positioned to continue our growth trajectory without meaningful additions to our current cost structure.

Public Company Costs

We completed our initial public offering in February 2025. As a result, we expect to incur additional costs associated with operating as a public company. We expect that these costs will include additional personnel, legal, consulting, regulatory, insurance, accounting, investor relations and other expenses that we did not incur as a private company.

The Sarbanes-Oxley Act, as well as rules adopted by the SEC, the FDIC, and NYSE, requires public companies to implement specified corporate governance practices that were previously inapplicable to us as a private company. These additional rules and regulations will increase our legal, regulatory and financial compliance costs and will make some activities more time-consuming and costly.

Financial Condition

The primary factors we use to evaluate and manage our financial condition include asset quality, liquidity and capital.

Asset Quality

We manage the quality of our loans based upon trends at the overall loan portfolio level as well as within specific product types. We measure and monitor key factors that include the level and trend of classified, delinquent, nonaccrual and nonperforming assets, collateral coverage and credit scores and debt service coverage, where applicable. These metrics directly impact our evaluation of the adequacy of our allowance for credit losses.

Liquidity

We manage liquidity based upon factors that include the level of diversification of our funding sources, the composition and duration of our deposits, the availability of unused funding sources, off-balance sheet obligations, the amount of cash we hold and the availability of assets to be readily converted into cash without undue loss. Our liquidity position benefits significantly from the fact that approximately one-third of the loan portfolio is in MPP, in which loans typically have a dwell time on the client’s facility for less than 30 days after the loan is funded, and which we have the unilateral right not to fund. We maintain appropriate funding capacity through our diversified and nimble funding structure, which includes a scalable digital banking platform, non-brokered rate board time deposits, brokered CDs, and access to funding from the FHLB and other smaller facilities. The FDIC evaluates the liquidity of our Bank on a stand-alone basis pursuant to applicable guidance and policies.

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Capital

We manage our capital by tracking the level and quality of capital with consideration given to our overall financial condition, our asset quality, our level of allowance for credit losses, our geographic and industry concentrations, and other risk factors in our balance sheet, including interest rate sensitivity and off-balance-sheet commitments. Bank holding companies and banks are subject to various regulatory capital requirements administered by federal bank and state regulatory agencies. Our Bank is subject to minimum risk-based and leverage capital requirements under federal regulations implementing the Basel III framework, and to regulatory thresholds that must be met for an insured depository institution to be classified as “well-capitalized” under the prompt corrective action framework. Our capital ratios and the capital ratios of our Bank at December 31, 2024 exceeded all applicable minimum capital requirements and the regulatory standards for our Bank to be “well- capitalized.”

Highlights of 2024 Financial Results (compared to 2023)

Our net income for the year ended December 31, 2024 compared to December 31, 2023 demonstrates our success in strategic repositioning over the past several years.

•Net income available to common stockholders for 2024 was $47.2 million, an increase of $23.1 million, nearly double our net income of $24.1 million in 2023.

•Despite lower residential mortgage originations over the same period, net income available to common stockholders increased by 95.6% compared to year-end 2023, attributable to higher net interest income and lower noninterest expense, which more than offset the decrease in noninterest income.

•We did not incur any material one-time costs associated with strategic repositioning in 2024.

•Net interest income before provision increased by $13.0 million in 2024 compared to 2023, reflecting strong growth in MPP and AIO loans and a 4 basis point improvement in net interest margin.

•Noninterest expense decreased by $38.5 million, or 25.1%, in 2024, compared to 2023, primarily driven by lower variable compensation and our proactive measures to manage mortgage-related back-office expenses.

•We continued to thoughtfully change the mix of our HFI loan portfolio.

•MPP loans increased to 36.8% of total gross loans at December 31, 2024, from 27.7% at December 31, 2023.

•Residential mortgage loans decreased to 41.9% of total gross loans at December 31, 2024 from 45.1% at December 31, 2023.

•AIO Loans were 13.2% of total gross loans at December 31, 2024, up from 12.2% at December 31, 2023.

•MPP facilities increased by $564.0 million, or 49.2%, at December 31, 2024 compared to December 31, 2023, reflecting strong new customer acquisition and market share gains, as well as a slight increase in overall industry mortgage originations.

•Liquidity remained stable, with total cash and cash equivalents of $376.3 million at December 31, 2024, compared to $351.9 million at December 31, 2023.

•As of December 31, 2024, our capital ratios were above all regulatory requirements to be considered well-capitalized.

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Results of Operations

Net Interest Income

The following table presents average balance sheet information, interest income, interest expense and the corresponding average yield earned and rates paid for the years ended December 31, 2024 and 2023:

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(1)Loan balance includes loans held for investment and held for sale. Nonaccrual loans are included in total loan balances and no adjustment has been made for these loans in the yield calculation. Interest income on loans includes amortization of deferred loan fees, net of deferred loan costs.

(2)Loan fees of $303,000 and $241,000 for 2024 and 2023, respectively, are included in interest income.

(3)Average yield based on carrying value and there are no tax-exempt securities in the portfolio.

(4)Noninterest-earning assets includes the allowance for credit losses.

(5)Net interest spread is the average yield on total interest-earning assets minus the average rate on total interest-bearing liabilities.

(6)Net interest margin is net interest income divided by total interest-earning assets.

For the year ended December 31, 2024, net interest income increased to $114.2 million, an increase of $13.0 million, or 12.8%, from $101.2 million for the year ended December 31, 2023. This increase was due to the combined impact of a 10.7%

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increase in earning assets to $4.98 billion from $4.50 billion, and an increase in net interest margin from 2.25% in 2023 to 2.29% in 2024. The increase in net interest margin was driven primarily by a higher mix of MPP facilities and AIO loans.

Yield and Volume Impact on Net Interest Income

Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest rates. The following table shows the effect that these factors had on the interest earned from our interest-earning assets and interest incurred on our interest-bearing liabilities. The effect of changes in volume is determined by multiplying the change in volume by the current period’s average rate. The effect of rate changes is calculated by multiplying the change in average rate by the previous period’s volume. The change in interest due to both rate and volume has been allocated to rate and volume changes in proportion to the relationship of the absolute dollar amounts of the changes in each.

The yield and volume table above shows that the $13.0 million increase in net interest margin for 2024, compared to 2023, was due to a $9.5 million benefit from increased earnings asset volume as well as a $3.5 million increase in net interest margin as yields on assets grew more than our cost of funds in 2024. The primary driver of our growth in net interest income in 2024 was our loan portfolio. Total interest income on our loan portfolio grew $48.1 million in 2024, with $29.9 million coming from growth in average portfolio balances and $18.2 million from higher loan portfolio yields. Offsetting this interest income growth was higher funding costs, primarily time deposits and borrowings. Total funding costs increased by $37.2 million in 2024, with $19.5 million of the increase in interest expense coming from higher average balances and $17.6 million from higher funding rates. Overall, these dynamics allowed for an increase of 4 basis points in our net interest margin from 2.25% in 2023 to 2.29% in 2024.

Provision for Credit Losses

The provision for credit losses represents a charge to earnings necessary to establish an allowance for credit losses that, in management’s evaluation, is adequate to provide coverage for all expected future credit losses. The provision for credit losses is impacted by inherent risk characteristics in our loan portfolio, the level of nonperforming loans and net charge-offs, both current and historic, recent historical and projected future economic conditions, loan growth, the direction of the change in collateral values, and the level of actual net charge-offs incurred. Our provision for credit losses reflect risks in the HFI loan portfolio, which is comprised predominately of collateralized single-family mortgage loans, with very low historical loss experience.

In 2024, our total provision for credit losses was a benefit of $328,000 compared to a total benefit of $1.5 million in 2023. Our provision for credit losses reflects both our held for investment loan portfolio and the unfunded commitments on that

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portfolio. The provision for credit losses related to loans was an expense of $881,000 for 2024, reflecting net charge-offs of $2.0 million and an ending allowance for credit losses of $11.2 million. For 2023, the provision for credit losses related to loans was a benefit of $2.6 million, reflecting $808,000 in net charge-offs and an ending allowance for credit losses of $12.3 million. Provision for credit losses also includes provision for unfunded loan commitments on the Consolidated Statements of Income. We recorded a provision for unfunded loan commitments benefit of $1.2 million for 2024 and an expense of $1.1 million for 2023, which impacted the change in allowance for each year.

On January 1, 2023, we adopted ASU 2016-13, Financial Instruments — Credit Losses: Measurement of Credit Losses on Financial Instruments, which replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”). The impact of our adoption of CECL on January 1, 2023 increased our allowance for credit losses on portfolio loans by $9.3 million and allowance on unfunded loan commitments by $508,000.

Noninterest income

The following table presents the major components of our noninterest income for the years ended December 31, 2024 and 2023:

Noninterest income declined by $22.1 million between 2024 and 2023, driven primarily by lower net gains on sales of loans and lower loan servicing fees, partially offset by higher MPP fees. During 2024, total residential mortgage volume decreased by $1.1 billion from the 2023 level. This was primarily attributable to a significant reduction in retail loan production offices as part of the Company’s strategic repositioning efforts. Over the same time period, we scaled our operating expenses accordingly such that the decrease in our noninterest income has been more than offset by lower noninterest expense.

The following tables present the major components of our loan servicing fees and net gain on sale of loans for the years ended December 31, 2024 and 2023:

(1) - Includes the change in fair value of interest rate locks, loans held for sale, and held for investment.

(2) - Includes (a) net gain on sale of loans, (b) loan origination fees, points and costs, (c) provision from investor reserves, (d) gain or loss from forward commitments from hedging, and (e) fair value of lender risk account.

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Loan servicing fees decreased by $1.4 million in 2024 compared to 2023 due largely to our bulk sale of mortgage servicing assets in the first quarter of 2024 totaling $80.8 million as we made the strategic decision to scale back that part of our business.

MPP fees increased by $1.8 million in 2024 compared to 2023 due to the increase in volume of our MPP program business in 2024.

Gain on sale of loans decreased by $21.3 million in 2024 compared to 2023. As shown in the table above, we had a favorable change in fair value adjustments on loans of $13.2 million during 2024. This was more than offset by the $34.7 million decrease in gain on sale of loans, which is primarily attributable to the decrease in saleable residential mortgage originations in 2024. We also recorded a $9.6 million loss in 2024 on the sale of a portion of our managed loan portfolio, which is reflected above in gain on sale of loans, net. The loss was offset by a similar dollar fair value gain, which was recorded in change in fair value of loans above.

Other noninterest income decreased by $405,000 in 2024 compared to 2023. The 2024 sale of mortgage servicing assets discussed above was made at fair value, so no initial gain or loss was recognized on the sale. However, terms of the sale required us to refund MSR premium on certain loans (delinquency, underwriting deficiencies, etc.). In 2024 we recognized a $1.7 million gain on debt extinguishment of $50.0 million in FHLB advances. We did not have any such debt extinguishment gain or loss in 2023. Offsetting this was the $1.1 million loss from MSR premium refund discussed above. Overall, we recognized $1.6 million in net losses on sale of other assets in 2024 compared with net gains of $292,000 in 2023. Other sources of noninterest income were relatively unchanged from 2023 to 2024.

Noninterest expense

The following table presents the major components of our noninterest expense for the years ended December 31, 2024 and 2023:

For 2024, noninterest expense declined by $38.5 million, or 25.1%, to $114.6 million, from $153.1 million in 2023. The largest driver of this decline was from a $26.5 million decline in salaries and employee benefits expense, driven primarily by lower variable commissions, along with other staff reductions, both consistent with lower residential mortgage origination volume and our ability to quickly and proactively manage our expense base. The table below identifies the primary components of salaries and benefits:

Of the $26.5 million decrease in salaries and employee benefits from 2023 to 2024, $23.6 million was from reductions in variable commission compensation associated with lower mortgage volume. Additionally, base salaries and other compensation decreased by $6.7 million in 2024 as we right-sized the Bank to align with lower loan production volume. Due

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to our lower employee base, we also experienced reductions in our 401(k) matching contributions (down $992,000) and medical insurance costs (down $3.7 million). Partially offsetting these reductions were an increase in bonus and non-equity incentive compensation expense of $4.3 million and lower salary cost deferrals from lower production (down $4.2 million). Our average full time equivalent employees (FTE) for 2024 was 491 compared to 610 for 2023.

Occupancy and equipment expense decreased $2.5 million from 2023 to 2024 primarily due to lower building lease expense (down $1.4 million) as we downsized our facilities and personnel to align with lower production volume environment. Data processing fees also decreased in 2024 by $2.1 million from 2023 to 2024 consistent with lower overall production volume as much of our data processing costs are unit based, so these costs decrease with mortgage volume. Professional fees and other taxes and insurance expenses were relatively unchanged year over year, while other expenses decreased $6.7 million from 2023 to 2024. Other expenses include several categories of expenses which are typically more tied to mortgage volumes, including marketing and credit reporting fees and the loan repurchase reserve expense.

Income tax expense

Total income tax expense was $17.7 million for 2024, compared to $10.9 million for 2023. The effective tax rate was 24.31% for 2024 compared to 24.45% for 2023.

Operating Segment Analysis

We have two reporting segments, Retail Banking and MPP. As discussed in Note 22 of our Consolidated Financial Statements, our reportable segments have been determined based on management’s focus and internal reporting structure.

The MPP segment provides collateralized mortgage purchase facilities to independent mortgage bankers nationwide. The Retail Banking segment provides a vast array of financial products and services to consumers nationwide. These include residential mortgages, AIO Loans, other consumer loans, and loan servicing, as well as various types of deposit products, including checking, savings and time deposit accounts. It also includes general and administrative expenses for the enterprise-wide support functions, which are allocated among the segments, internal funds transfer pricing offsets resulting from allocations to or from the other segments, and certain elimination entries.

Our reported segments and the financial information disclosed in the reported segments are not necessarily comparable with similar information reported by other financial institutions. Furthermore, changes in management structure or allocation methodologies and procedures may result in future changes to previously reported operating segment financial information.

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The following tables present our reported segment results for the years ended December 31, 2024 and 2023:

(1) Noninterest income for MPP only includes MPP related fees. All other noninterest income revenues are reflected in Retail Banking.

(2) Includes data processing, professional services, office supplies and other miscellaneous expenses.

(3) Reflects corporate overhead expense allocations used by both business segments; primarily consisting of corporate admin, finance, technology, human resources, risk, marketing and occupancy related allocations.

MPP

For 2024, our MPP segment reported net income before preferred dividends of $25.9 million, an increase of $8.5 million, or 48.6%, over the $17.4 million reported in 2023. The increase was driven primarily by a 45.1% increase in average balances reflecting strong new customer acquisition and market share gains.

Retail Banking

For 2024, our Retail Banking segment reported net income before preferred dividends of $29.2 million, an increase of $12.9 million, or 79.2%, over the $16.3 million reported in 2023. The increase was driven primarily by lower noninterest expense, which outpaced the decrease in noninterest income and net interest income. The decrease in noninterest expense reflects lower variable mortgage commissions and proactive expense management across the channel.

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Discussion and Analysis of Financial Condition

The following table summarizes selected components of our balance sheets as of December 31, 2024 and 2023:

Total Assets

Total assets were $5.22 billion at December 31, 2024, a 9.8% increase from $4.76 billion at December 31, 2023. The $465.5 million increase in total assets from year end 2023 was primarily driven by higher net loans and loans held for sale, which increased by $512.3 million during 2024.

Loan Portfolio

The following table presents the balance and associated percentage of each major loan type within our portfolio, including net deferred fees and costs, as of the dates indicated:

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(1)AIO and Other Consumer / Home Equity are aggregated into Home equity lines of credit loans within the tables in our consolidated financial statements.

(2)Residential Mortgage loans consist of Closed end first liens, Closed end second liens, and Land development loans.

Our loan portfolio includes both loans held for investment and loans held for sale. Our loans held for investment portfolio comprises over 95% of our total loans and provides higher yields than other categories of earnings assets. As evidence of our strong underwriting and diligent risk controls, our largest loan category, residential mortgages, has experienced very low net

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charge-offs throughout our history, and our second largest loan category, MPP, has not experienced any charge-offs since we began this lending program in 2010.

Our MPP business offers facilities to independent mortgage banking companies located around the country. These are floating rate, short term loans that are collateralized by single-family mortgage loans that these mortgage banks are preparing to be delivered to the secondary mortgage market. In most cases, mortgage loans sit in the mortgage banking company’s facility for less than 30 days after the loan is funded.

Residential mortgage loans include fixed or adjustable-rate residential real estate loans collateralized by one-to-four family properties. Our portfolio is geographically diversified across the United States. To mitigate interest rate risk, most of the loans we choose to hold in our portfolio are floating rate loans. The majority of our residential mortgage loans at December 31, 2024 are first liens.

AIO loans are floating rate, first mortgage revolving equity loans that include a checking account linked to the revolving equity loan.

We also have a smaller portfolio of construction loans, home equity lines of credit, and commercial loans, which combined represented less than 4% of the overall loan portfolio as of December 31, 2024.

As of December 31, 2024, our total loans net of allowance for credit losses including loans held for sale was $4.63 billion compared to $4.12 billion on December 31, 2023. This loan growth was primarily attributable to the strong growth in MPP, which grew by 49.2% since December 31, 2023, reflecting the strength of scalable technology, long-standing strong relationships built by account executives since inception, as well as our ability to capitalize on recent market disruption within the business line. Another key driver of our overall loan growth is growth in our AIO loans, which grew by 21.0% to $612.1 million as of December 31, 2024, from $506.0 million at December 31, 2023. Prudently growing this portfolio and the associated loan customer relationships remains a key strategic priority for us.

As of December 31, 2024, residential mortgage comprised 41.9% of our total loan portfolio compared to 36.8% for MPP and 13.2% for AIO loans. As of December 31, 2023, residential mortgage comprised 45.1% of our total loan portfolio compared to 27.7% for MPP and 12.2% for AIO loans. The reduction in residential mortgages reflects normal amortization and pay-offs, as we are not strategically growing this portfolio.

Contractual Maturities and Rate Structures of Loan Portfolio

The following table sets forth the contractual maturities and rate structures at December 31, 2024 and 2023:

Contractual Loan Maturities as of December 31, 2024

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(1)AIO and Other Consumer / Home Equity are aggregated into Home equity lines of credit loans within the tables in our consolidated financial statements.

(2)Residential Mortgage loans consist of Closed end first liens, Closed end second liens, and Land development loans.

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Contractual Loan Maturities as of December 31, 2023

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(1)AIO and Other Consumer / Home Equity are aggregated into Home equity lines of credit loans within the tables in our consolidated financial statements.

(2)Residential Mortgage loans consist of Closed end first liens, Closed end second liens, and Land development loans.

Our mortgage loan portfolio has ARMs which reset annually after the initial fixed rate period, which ranges from one to 10 years. AIO adjustable rate loans reset monthly. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

As of December 31, 2024, 37.3% of our total loan portfolio had a contractual maturity of less than one year, up from 28.8% at December 31, 2023. The increase was primarily due to growth in our MPP business over this period. Our MPP facilities are floating rate and generally have terms of 30 days or less given that is the time period that a funded mortgage stays in our mortgage banking clients facility prior to the sale of the mortgage in the secondary market. Very few of our loans have intermediate contractual maturities of between one and fifteen years. As of December 31, 2024, 62.1% of total loans had contractual maturities of longer than 15 years, compared to 70.3% at December 31, 2023. For our two largest categories of long duration loans as of December 31, 2024, 80.5% of residential mortgage and 100% of our AIO Loans were floating rate.

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Nonperforming Assets

The following table provides details of our nonperforming and restructured assets as of the dates presented and certain other related information:

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(1)Includes loans which are reported at fair value (see Note 18 of our consolidated financial statements).

At December 31, 2024, nonperforming assets were $82.0 million compared to $62.2 million at December 31, 2023. The increase in nonperforming assets was primarily driven by higher levels of loans that are wholly or partially guaranteed by the U.S. Government along with normal aging in the residential mortgage portfolio which contributed to higher nonperforming first liens and HELOCs. Nonperforming assets as a percent of total assets was 1.57% at December 31, 2024 compared to 1.31% at December 31, 2023.

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Excluding the portion of our loans that are wholly or partially guaranteed by the U.S. Government, nonperforming assets to total assets increased to 0.95% at December 31, 2024, compared to 0.52% at December 31, 2023. At December 31, 2024, approximately 41% of our nonperforming loans have a form of government guarantee.

The Company uses a risk grading system for our loans to aid us in evaluating the overall credit of our loan portfolio and assessing the adequacy of our allowance for credit losses. All loans are categorized into a risk category at the time of origination. Loans are re-evaluated for proper risk grading as new information such as payment patterns, collateral condition and other relevant information comes to our attention.

The Company categorized each loan into credit risk categories based on current financial information, overall debt service coverage, comparison against industry averages, collateral coverage, historical payment experience, and current economic trends. The Company uses the following definitions for credit risk ratings:

A)Performing. Residential real estate credits not covered by the non-performing definition below.

B)Non-performing. Residential real estate loans classified as non-performing are generally loans on nonaccrual status.

C)Pass. Commercial credits not covered by the definitions below are pass credits, which are not considered to be adversely rated.

D)Special Mention (Watch). Loans classified as special mention, or watch credits, have a potential weakness or weaknesses that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

E)Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution may sustain some loss if the deficiencies are not corrected.

F)Doubtful. These are loans in which the collection or liquidation of the entire debt is highly questionable or improbable. Typically, the possibility of loss is extremely high. The losses on these loans are deferred until all pending factors have been addressed.

Our classified assets are described in more detail in Note 3 of the Notes to Consolidated Financial Statements.

Allowance for Credit Losses and Net Charge-Offs

The allowance for credit losses is established through a provision for credit losses charged to operations. Loans are charged against the allowance for credit losses when management believes that the collectability of the principal is unlikely. Subsequent recoveries of previously charged off amounts, if any, are credited to the allowance for credit losses. The allowance for credit losses is evaluated on a regular basis by management and is based on management’s periodic review of the collectability of the loans considering historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. While the entire allowance for credit losses is available to absorb losses from all loans, the following table represents management’s allocation of our allowance for credit losses by loan category, and the percentage of allowance for credit losses in each category, for the periods indicated:

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The following table provides an analysis of the activity in our allowance for the periods indicated:

The allowance for credit losses was 0.25% of total loans as of December 31, 2024 compared to 0.33% as of December 31, 2023. Management estimates the allowance by using relevant available information from internal and external sources related to historical loss experience, current borrower risk characteristics, current economic conditions, reasonable and supportable forecasts, and other relevant factors. The allowance is measured on a collective or pool basis when similar risk characteristics exist or on an individual basis when loans have unique risk characteristics which differentiate them from other loans within the loan segment. The process for estimating credit losses incorporates methodologies and procedures specific to the residential and

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commercial loan portfolios, each of which has unique risk characteristics. Our allowance for credit losses methodology is described in more detail in Note 2 of the Notes to Consolidated Financial Statements.

Our allowance for credit losses, and associated percentage of total loans, reflect the relative credit risk of our loan portfolio. These include the seasoning of the portfolio, LTV, FICO score, debt to income ratio (“DTI”) and collateral coverage. Given these risk characteristics, and the stark contrast to other financial institutions with a commercial heavy loan portfolio, our allowance and associated ratios will be much lower than those of bank peers with similar asset size. This nuance is also evidenced by the low level of charge-offs we have incurred. Additionally, as discussed above, our MPP portfolio makes up an increasing portion of our total loan portfolio and we have yet to experience any loss on that portfolio, so the allowance allocations are minimal for the residential mortgage portfolio. We also have purchased mortgage insurance on certain high loan to value loans, further minimizing our loss potential on those loans. Since 2019, our cumulative charge-offs, net of recoveries, totaled $3.1 million. Our annualized net charge-off rate was 0.04% for 2024 and 0.02% for 2023.

Mortgage Servicing Rights

Mortgage servicing rights are the contractual agreement to service existing mortgage loans held by other investors. Mortgage servicing rights were most typically created on mortgages that were originated by the Company but sold to third parties. Additionally, a small portion of our mortgage servicing rights were acquired from other mortgage originators. The mortgage servicing asset represents future cash flows the Company expects to receive from the mortgage for which it has the contractual right to service. Mortgage servicing rights totaled $15.1 million at December 31, 2024, a substantial decrease from $95.3 million at December 31, 2023. The decrease in 2024 was due to the Company’s strategic decision to sell the majority of its mortgage servicing rights portfolio. During 2024, we performed one bulk sale of mortgage servicing rights. The associated fair value of the assets and proceeds from the sale was $81.9 million.

Investment Portfolio

The Company has historically maintained a very small debt securities portfolio relative to other banking institutions preferring to invest in highly liquid loans or hold its liquidity in cash or cash equivalents. At December 31, 2024, debt securities totaled $8.6 million, or 0.16%, of total assets compared to $14.7 million, or 0.31% at December 31, 2023.

The following table presents the carrying value of our investment portfolio as of the dates indicated:

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The following table presents the par value of our debt securities by their stated maturities, as well as the weighted average yields for each maturity range as of the dates indicated:

______________________

(1)Weighted-average yields on investment securities are computed based on par value and exclude any premiums or discounts recorded. There are no tax-exempt securities in the portfolio.

Deposits

Deposits are the primary source of funding our business operations. As of December 31, 2024, total deposits were $3.42 billion compared to $2.93 billion at December 31, 2023. The $497.0 million, or 17.0%, increase in our deposits from year end 2023 reflects higher time deposits and demonstrates our ability to quickly scale up our deposit base to respond to market opportunities through interest bearing demand, brokered, rate board and retail CDs.

The following table summarizes our deposit composition by average deposits and average rates paid for the periods indicated:

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The following tables set forth the maturity of time deposits for the periods indicated (dollars in thousands):

Total uninsured deposits were $309.9 million at December 31, 2024 and $269.7 million at December 31, 2023.

The following table shows the portion of time deposits that are uninsured, by remaining time until maturity, at December 31, 2024:

Borrowings

Another key source of funding for the Company are collateralized borrowings from the FHLB. At December 31, 2024, our total FHLB borrowings were $1.26 billion, up $16.3 million from $1.28 billion at December 31, 2023. At December 31, 2024, we had $1.10 billion in additional borrowing capacity at the FHLB. During the fourth quarter of 2024, we paid off a $50.0 million FHLB advance, recognizing a $1.7 million gain on debt extinguishment. We executed another early payoff of $102.5 million in FHLB advances in January 2025, recognizing a gain of $2.0 million. These extinguishments were funded through our receipt of new contractual interest bearing deposits with a similar duration.

The following table is a summary of our outstanding FHLB Advances for the periods indicated:

Subordinated Debentures and Subordinated Debentures Issued through Trusts

At December 31, 2024, we had $40.0 million in outstanding subordinated debenture notes. These notes were issued to investors in two separate private placements, one in 2018 and one in 2024. The two outstanding subordinated notes totaling $40.0 million qualified as Tier 2 capital at our Bank entity.

At December 31, 2023, we had $35.0 million in outstanding subordinated debenture notes. These notes were issued to investors in two separate private placements, one in 2018 and one in 2019. The 2019 note placement for $20.0 million was called on September 30, 2024 and we replaced it with a $25.0 million note on August 22, 2024. The two outstanding subordinated notes totaling $35.0 million at December 31, 2023 qualified as Tier 2 capital at our Bank entity.

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At December 31, 2024, and 2023 we had $5.0 million in subordinated debentures issued through trusts due on March 17, 2034, but callable on March 17, 2025, which qualified as Tier 1 capital at our Bank entity.

The following tables provide a summary of our outstanding subordinated notes and subordinated debentures issued through trusts for the periods indicated:

Impact of Inflation and Changing Prices

The Company’s financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). GAAP presently requires the Company to measure financial position and operating results primarily in terms of historic dollars. Changes in the relative value of money due to inflation or recession are generally not considered. The primary effect of inflation on the operations of the Company is reflected in increased operating costs, and the Company has experienced material effects of inflation during the last four fiscal years due to the government's monetary policies and the current economic climate. In management’s opinion, changes in interest rates affect the financial condition of a financial institution to a far greater degree than changes in the inflation rate. While interest rates are greatly influenced by changes in the inflation rate, they do not necessarily change at the same rate or in the same magnitude as the inflation rate. Interest rates are highly sensitive to many factors that are beyond the control of the Company, including changes in the expected rate of inflation, the influence of general and local economic conditions and the monetary and fiscal policies of the United States government, its agencies and various other governmental regulatory authorities, among other things, as further discussed in the next section.

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Liquidity

Liquidity refers to our capacity to meet our cash obligations at a reasonable cost. Our cash obligations require us to have cash flow that is adequate to fund loan growth and maintain on-balance sheet liquidity while meeting present and future obligations of deposit withdrawals, borrowing maturities and other contractual cash obligations. In managing our cash flows, management regularly confronts situations that can give rise to increased liquidity risk. These include funding mismatches, market constraints in accessing sources of funds and the ability to convert assets into cash. Changes in economic conditions or exposure to credit, market, operational, legal and reputational risks also could affect our Bank’s liquidity risk profile and are considered in the assessment of liquidity management. The Company is a corporation separate and apart from our Bank and, therefore, must provide for its own liquidity, including liquidity required to meet its debt service requirements on its senior notes and junior subordinated debentures. The Company’s main source of cash flow is dividends declared and paid to it by the Bank.

There are statutory and regulatory limitations that affect the ability of our Bank to pay dividends to the Company. See the section entitled “Supervision and Regulation” and our forward looking statements elsewhere in this Form 10-K for more information. We believe that these limitations will not impact our ability to meet our ongoing short-term cash obligations. For contingency purposes, the Company typically maintains a minimum level of cash to fund two year’s projected operating cash flow needs and debt service. We continually monitor our liquidity position to ensure that our assets and liabilities are managed in a manner to meet all reasonably foreseeable short-term, long-term and strategic liquidity demands. Management has established a comprehensive management process for identifying, measuring, monitoring and controlling liquidity risk.

Because of its critical importance to the viability of our Bank, liquidity risk management is fully integrated into our risk management processes. Critical elements of our liquidity risk management include: effective corporate governance consisting of oversight by the board of directors and active involvement by management; appropriate strategies, policies, procedures and limits used to manage and mitigate liquidity risk; comprehensive liquidity risk measurement and monitoring systems including stress tests that are commensurate with the complexity of our business activities; active management of intraday liquidity and collateral; an appropriately diverse mix of existing and potential future funding sources; adequate levels of highly liquid marketable securities free of legal, regulatory, or operational impediments, that can be used to meet liquidity needs in stressful situations; comprehensive contingency funding plans that sufficiently address potential adverse liquidity events and emergency cash flow requirements; and internal controls and internal audit processes sufficient to determine the adequacy of our Bank’s liquidity risk management process.

The Company considers the maintenance of adequate liquidity to be an important part of managing risk. Consistent with our balance sheet strategy, we have intentionally kept our liquidity primarily in cash and interest-bearing deposits rather than investing heavily in investment securities, which typically includes significant unrealized gains or losses.

Our liquidity position is supported by management of our liquid assets and liabilities and access to alternative sources of funds. Our liquidity requirements are met primarily through our deposits, FHLB advances and the principal and interest payments we receive on loans and investment securities. Cash on hand, cash at third-party banks, and maturing or prepaying balances in our loan portfolios are our most liquid assets. Additionally, the Company has a unilateral right not to fund its MPP facilities, it could exercise within 30 days, if needed or as necessary, to generate additional liquidity. Other sources of liquidity that are routinely available to us include funds from retail and wholesale deposits, advances from the FHLB and proceeds from the sale of loans. See “FHLB Advances” above for more information regarding FHLB advances that are available to us. Less commonly used sources of funding include other borrowings and lines of credit. We believe we have ample liquidity resources to fund future growth and meet other cash needs as necessary.

Capital Adequacy

We and our Bank are subject to various regulatory capital requirements administered by the federal and state banking regulators. Our capital management consists of providing equity to support our current operations and future growth. Failure to meet minimum regulatory capital requirements may result in mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, our Bank must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and off-balance sheet items as calculated under regulatory accounting policies. As of December 31, 2024, we and our Bank exceeded all applicable minimum regulatory capital requirements, including the capital conservation buffer applicable to our Bank, and our Bank qualified as “well-capitalized” for purposes of the FDIC’s prompt corrective action regulations.

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The following table presents our regulatory capital ratios as of the dates presented, as well as the regulatory capital ratios that are required by FDIC regulations for our Bank to maintain “well-capitalized” status:

Regulatory Capital Ratios

Off-balance Sheet Arrangements

In the normal course of business, we enter into lending commitments that are not on our consolidated balance sheet. The largest component is lending commitments to our MPP customers, which the Company has a unilateral right not to fund. The remainder are undrawn revolving loan commitments on our AIO Loans and undrawn commitments on home equity lines of credit. While these commitments represent contractual cash requirements, a portion of these commitments to extend credit are expected to expire without being drawn upon. Therefore, future commitments do not necessarily represent future cash requirements.

The following is a summary of our off-balance commitments outstanding as of the dates presented.

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