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What changed in Live Oak Bancshares, Inc.'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of Live Oak Bancshares, Inc.'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+431 added−419 removedSource: 10-K (2024-02-22) vs 10-K (2023-02-23)

Top changes in Live Oak Bancshares, Inc.'s 2023 10-K

431 paragraphs added · 419 removed · 321 edited across 8 sections

Item 1. Business

Business — how the company describes what it does

54 edited+12 added−19 removed152 unchanged
Biggest changeManagement continues to explore investments which generate investment tax credits and as a result there can be no assurance as to the actual effective rate because it will be dependent upon the nature and amount of future income and expenses as well as actual investments generating investment tax credits and transactions with discrete tax effects. 15 Table of Contents Economic Growth, Regulatory Relief, and Consumer Protection Act In 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRCPA”) was signed into law, which amended provisions of the Dodd-Frank Act and was intended to ease, and better tailor, regulation, particularly with respect to smaller-sized institutions such as the Company.
Biggest changeManagement continues to explore investments which generate investment tax credits and as a result there can be no assurance as to the actual effective rate because it will be dependent upon the nature and amount of future income and expenses as well as actual investments generating investment tax credits and transactions with discrete tax effects.
The Company intends to continue to identify, monitor and measure meaningful diversity and inclusion goals, to continue to foster a welcoming environment through education, communication and recruiting efforts, and to provide support so that diverse employees have the resources and relationships they need to be successful and thrive.
The Company intends to continue to identify, monitor and measure meaningful diversity and inclusion goals, to foster a welcoming environment through education, communication and recruiting efforts, and to provide support so that diverse employees have the resources and relationships they need to be successful and thrive.
The regulatory capital framework under which Bancshares and Live Oak Bank operate changed in significant respects as a result of the Dodd-Frank Act and other regulations, including the separate regulatory capital requirements put forth by the Basel Committee on Banking Supervision, commonly known “Basel III.” 9 Table of Contents The Federal Reserve, FDIC and Office of the Comptroller of the Currency approved final rules that established an integrated regulatory capital framework that implements the Basel III regulatory capital requirements and certain provisions of the Dodd-Frank Act.
The regulatory capital framework under which Bancshares and Live Oak Bank operate changed in significant respects as a result of the Dodd-Frank Act and other regulations, including the separate regulatory capital requirements put forth by the Basel Committee on Banking Supervision, commonly known “Basel III.” The Federal Reserve, FDIC and Office of the Comptroller of the Currency approved final rules that established an integrated regulatory capital framework that implements the Basel III regulatory capital requirements and certain provisions of the Dodd-Frank Act.
Operating Segments The Company’s operations are managed along two reportable operating segments consisting of Banking and Fintech. See the sections captioned “Results of Segment Operations” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 16. Segments in the notes to consolidated financial statements included in Item 8.
Operating Segments The Company’s operations are managed along two reportable operating segments consisting of Banking and Fintech. See the sections captioned “Results of Segment Operations” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 15. Segments in the notes to consolidated financial statements included in Item 8.
Live Oak Bank’s respective loan policies establish limits on loan to value ratios that are equal to or less than those established in such regulations. 13 Table of Contents Commercial Real Estate Concentrations Lending operations of commercial banks may be subject to enhanced scrutiny by federal banking regulators based on a bank’s concentration of commercial real estate (“CRE”) loans.
Live Oak Bank’s respective loan policies establish limits on loan to value ratios that are equal to or less than those established in such regulations. Commercial Real Estate Concentrations Lending operations of commercial banks may be subject to enhanced scrutiny by federal banking regulators based on a bank’s concentration of commercial real estate (“CRE”) loans.
Our Code of Ethics and Conflict of Interest Policy reflects our commitment to operating in a fair, honest, responsible, and ethical manner and also provide direction for reporting complaints in the event of alleged violations of our policies.
Our Code of Ethics and Conflict of Interest Policy reflects our commitment to operating in a fair, honest, responsible, and ethical manner and also provides direction for reporting complaints in the event of alleged violations of our policies.
Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Report. For a discussion of the Company’s reportable segments see Note 16. Segments in Part II, Item 8. Financial Statements and Supplementary Data of this report.
Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Report. For a discussion of the Company’s reportable segments see Note 15. Segments in Part II, Item 8. Financial Statements and Supplementary Data of this report.
Violations of these laws and regulations can give rise to enforcement actions by governmental agencies and to private lawsuits for damages and other forms of relief. Federal Home Loan Bank System The Federal Home Loan Bank (the “FHLB”) System consists of 12 district FHLBs subject to supervision and regulation by the Federal Housing Finance Agency (the “FHFA”).
Violations of these laws and regulations can give rise to enforcement actions by governmental agencies and to private lawsuits for damages and other forms of relief. 11 Table of Contents Federal Home Loan Bank System The Federal Home Loan Bank (the “FHLB”) System consists of 12 district FHLBs subject to supervision and regulation by the Federal Housing Finance Agency (the “FHFA”).
Subsidiaries In addition to the Bank, Bancshares directly or indirectly held the following wholly owned material subsidiaries as of December 31, 2022: • Canapi Advisors, LLC (“Canapi Advisors”), formed in September 2018 for the purpose of providing investment advisory services to a series of funds focused on investing venture capital in new and emerging financial technology companies; • Live Oak Ventures, Inc., formed in August 2016 for the purpose of investing in businesses that align with the Company's strategic initiative to be a leader in financial technology; • Live Oak Grove, LLC, formed in February 2015 for the purpose of providing Company employees and business visitors an on-site restaurant location at the Company’s Wilmington, North Carolina headquarters; and • Government Loan Solutions, Inc.
Subsidiaries In addition to the Bank, Bancshares directly or indirectly held the following wholly owned material subsidiaries as of December 31, 2023: • Canapi Advisors, LLC (“Canapi Advisors”), formed in September 2018 for the purpose of providing investment advisory services to a series of funds focused on investing venture capital in new and emerging financial technology companies; • Live Oak Ventures, Inc., formed in August 2016 for the purpose of investing in businesses that align with the Company's strategic initiative to be a leader in financial technology; • Live Oak Grove, LLC, formed in February 2015 for the purpose of providing Company employees and business visitors with on-site dining at the Company’s Wilmington, North Carolina headquarters; and • Government Loan Solutions, Inc.
At December 31, 2022, Live Oak Bank was “well capitalized” and therefore not subject to any limitations with respect to its brokered deposits. Basel III.
At December 31, 2023, Live Oak Bank was “well capitalized” and therefore not subject to any limitations with respect to its brokered deposits. Basel III.
The Company's voting common stock trades on the New York Stock Exchange LLC (the “NYSE”) under the symbol “LOB.” As of January 31, 2023, there were 226 holders of record of the Company's voting common stock. The Company's principal executive office is located at 1741 Tiburon Drive, Wilmington, North Carolina 28403, telephone number (910) 790-5867.
The Company's voting common stock trades on the New York Stock Exchange LLC (the “NYSE”) under the symbol “LOB.” As of January 31, 2024, there were 210 holders of record of the Company's voting common stock. The Company's principal executive office is located at 1741 Tiburon Drive, Wilmington, North Carolina 28403, telephone number (910) 790-5867.
Bancshares’s voting common stock is registered under Section 12 of the Exchange Act. The regulations provide a procedure for challenging rebuttable presumptions of control.
Bancshares’ voting common stock is registered under Section 12 of the Exchange Act. The regulations provide a procedure for challenging rebuttable presumptions of control.
Changes in these laws or regulations could have a material adverse impact on the profitability and mode of operations of LOPW and JAM. 14 Table of Contents Economic Environment The policies of regulatory authorities, including the monetary policy of the Federal Reserve, have a significant effect on the operating results of bank holding companies and their subsidiaries.
Changes in these laws or regulations could have a material adverse impact on the profitability and mode of operations of LOPW. Economic Environment The policies of regulatory authorities, including the monetary policy of the Federal Reserve, have a significant effect on the operating results of bank holding companies and their subsidiaries.
These guidelines provide for a minimum ratio of Tier 1 capital to average total on-balance sheet assets, less goodwill and certain other intangible assets, of 4% for bank holding companies. Bancshares’ ratio at December 31, 2022 was 9.26% compared to 8.87% at December 31, 2021.
These guidelines provide for a minimum ratio of Tier 1 capital to average total on-balance sheet assets, less goodwill and certain other intangible assets, of 4% for bank holding companies. Bancshares’ ratio at December 31, 2023 was 8.58% compared to 9.26% at December 31, 2022.
As of December 31, 2022, Live Oak Bank had capital levels that qualify as “well capitalized” under the applicable regulations.
As of December 31, 2023, Live Oak Bank had capital levels that qualify as “well capitalized” under the applicable regulations.
Evolving Legislation and Regulatory Action New laws or regulations or changes to existing laws and regulations, including changes in interpretation or enforcement, could materially adversely affect the Company's financial condition or results of operations. 16 Table of Contents
Evolving Legislation and Regulatory Action New laws or regulations or changes to existing laws and regulations, including changes in interpretation or enforcement, could materially adversely affect the Company's financial condition or results of operations.
Many of the CARES Act’s programs are dependent upon the direct involvement of U.S. financial institutions, such as the Company and the Bank, and have been implemented through rules and guidance adopted by federal departments and agencies, including the U.S.
Many of the CARES Act’s programs were dependent upon the direct involvement of U.S. financial institutions, such as the Company and the Bank, and were implemented through rules and guidance adopted by federal departments and agencies, including the U.S.
The FHLBs provide a central credit facility primarily for member institutions. As a member of the FHLB of Atlanta, the Bank is required to acquire and hold shares of capital stock in the FHLB of Atlanta. The Bank was in compliance with this requirement with investment in FHLB of Atlanta stock of $4.1 million at December 31, 2022.
The FHLBs provide a central credit facility primarily for member institutions. As a member of the FHLB of Atlanta, the Bank is required to acquire and hold shares of capital stock in the FHLB of Atlanta. The Bank was in compliance with this requirement with investment in FHLB of Atlanta stock of $6.8 million at December 31, 2023.
In October 2022, the SEC adopted a final rule directing national securities exchanges and associations, including the NYSE, to implement listing standards that require listed companies to adopt policies mandating the recovery or “clawback” of excess incentive-based compensation earned by a current or former executive officer during the three fiscal years preceding the date the listed company is required to prepare an accounting restatement, including to correct an error that would result in a material restatement if the error were corrected in the current period of left uncorrected in the current period.
Pursuant to SEC rules, the national securities exchanges and associations, including the NYSE, have implemented listing standards that require listed companies to adopt policies mandating the recovery or “clawback” of excess incentive-based compensation earned by a current or former executive officer during the three fiscal years preceding the date the listed company is required to prepare an accounting restatement, including to correct an error that would result in a material restatement if the error were corrected in the current period of left uncorrected in the current period.
We believe our people provide significant value to our Company and its shareholders. Demographics As of December 31, 2022, the Company had 955 full-time employees, 19 part-time employees and 30 independent contractors. None of the Company’s employees are covered by a collective bargaining agreement, and management considers relations with employees to be good.
We believe our people provide significant value to our Company and its shareholders. Demographics As of December 31, 2023, the Company had 943 full-time employees, 18 part-time employees and 37 independent contractors. None of the Company’s employees are covered by a collective bargaining agreement, and management considers relations with employees to be good.
Under the Dodd-Frank Act, restrictions on transactions with affiliates are enhanced by (i) including among “covered transactions” transactions between bank and affiliate-advised investment funds; (ii) including among “covered transactions” transactions between a bank and an affiliate with respect to securities repurchase agreements and derivatives transactions; (iii) adopting stricter collateral rules; and (iv) imposing tighter restrictions on transactions between banks and their financial subsidiaries. 10 Table of Contents FDIC Insurance Assessments The Bank’s deposits are insured by the FDIC.
Under the Dodd-Frank Act, restrictions on transactions with affiliates are enhanced by (i) including among “covered transactions” transactions between bank and affiliate-advised investment funds; (ii) including among “covered transactions” transactions between a bank and an affiliate with respect to securities repurchase agreements and derivatives transactions; (iii) adopting stricter collateral rules; and (iv) imposing tighter restrictions on transactions between banks and their financial subsidiaries.
Bancshares and Live Oak Bank are currently below these thresholds and thus exempt from the Volcker Rule. 12 Table of Contents USA PATRIOT Act The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”) required each financial institution: (i) to establish an anti-money laundering program; (ii) to establish due diligence policies, procedures and controls with respect to its private banking accounts involving foreign individuals and certain foreign banks; and (iii) to avoid establishing, maintaining, administering or managing correspondent accounts in the United States for, or on behalf of, foreign banks that do not have a physical presence in any country.
USA PATRIOT Act The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”) required each financial institution: (i) to establish an anti-money laundering program; (ii) to establish due diligence policies, procedures and controls with respect to its private banking accounts involving foreign individuals and certain foreign banks; and (iii) to avoid establishing, maintaining, administering or managing correspondent accounts in the United States for, or on behalf of, foreign banks that do not have a physical presence in any country.
At December 31, 2022, the Company's risk-based capital ratios, as calculated under applicable capital standards were 12.47% common equity Tier 1 capital to risk weighted assets, 12.47% Tier 1 capital to risk weighted assets, and 13.73% total capital to risk weighted assets. 8 Table of Contents In addition, the Federal Reserve has established minimum leverage ratio guidelines for bank holding companies.
At December 31, 2023, the Company's risk-based capital ratios, as calculated under applicable capital standards were 11.73% common equity Tier 1 capital to risk weighted assets, 11.73% Tier 1 capital to risk weighted assets, and 12.98% total capital to risk weighted assets. In addition, the Federal Reserve has established minimum leverage ratio guidelines for bank holding companies.
Among other things, the IRA imposes a new 1% excise tax on the fair market value of stock repurchased after December 31, 2022, by publicly traded U.S. corporations. With certain exceptions, the value of stock repurchased is determined net of stock issued in the year, including shares issues pursuant to compensatory arrangements. Capital Adequacy General.
Under the Inflation Reduction Act of 2022, there is a 1% excise tax on the fair market value of stock repurchased after December 31, 2022, by publicly traded U.S. corporations. With certain exceptions, the value of stock repurchased is determined net of stock issued in the year, including shares issued pursuant to compensatory arrangements. Capital Adequacy General.
The Federal Reserve may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, Federal Reserve order or any condition imposed by, or written agreement with, the Federal Reserve. In August 2022, the Inflation Reduction Act of 2022 (the “IRA”) was enacted.
The Federal Reserve may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, Federal Reserve order or any condition imposed by, or written agreement with, the Federal Reserve.
Dodd-Frank Act The Dodd-Frank Act was signed into law in 2010 and implemented many changes in the way financial and banking operations are regulated in the United States, including through the creation of a new resolution authority, mandating higher capital and liquidity requirements, requiring banks to pay increased fees to regulatory agencies and numerous other provisions intended to strengthen the financial services sector.
The nature of future monetary policies and the effect of these policies on the Company's business and earnings cannot be predicted. 14 Table of Contents Dodd-Frank Act The Dodd-Frank Act was signed into law in 2010 and implemented many changes in the way financial and banking operations are regulated in the United States, including through the creation of a new resolution authority, mandating higher capital and liquidity requirements, requiring banks to pay increased fees to regulatory agencies and numerous other provisions intended to strengthen the financial services sector.
As of December 31, 2022, the Bank's C&D concentration as a percentage of bank capital totaled 80.8% and the Bank's CRE concentration, excluding owner-occupied loans, as a percentage of capital totaled 178.1%. Limitations on Incentive Compensation The Federal Reserve reviews incentive compensation arrangements of bank holding companies such as Bancshares as part of its regular, risk-focused supervisory process.
As of December 31, 2023, the Bank's C&D concentration as a percentage of bank capital totaled 61.5% and the Bank's CRE concentration, excluding owner-occupied loans, as a percentage of capital totaled 164.0%. 13 Table of Contents Limitations on Incentive Compensation The Federal Reserve reviews incentive compensation arrangements of bank holding companies such as Bancshares as part of its regular, risk-focused supervisory process.
For example, a notification incident may include a major computer-system failure; a cyber-related interruption, such as a distributed denial of service or ransomware attack; or another type of significant operational interruption. 11 Table of Contents In March 2022, the SEC proposed rules that would require disclosure of material cybersecurity incidents, as well as cybersecurity risk management, strategy, and governance.
For example, a notification incident may include a major computer-system failure; a cyber-related interruption, such as a distributed denial of service or ransomware attack; or another type of significant operational interruption. SEC rules also require disclosure of material cybersecurity incidents, as well as cybersecurity risk management, strategy, and governance. See Item 1C. Cybersecurity.
In 2019, Live Oak Clean Energy Financing LLC (“LOCEF”) became a subsidiary of the Bank. LOCEF was formed in November 2016 as a subsidiary of Bancshares for the purpose of providing financing to entities for renewable energy applications.
LOCEF was formed in November 2016 as a subsidiary of Bancshares for the purpose of providing financing to entities for renewable energy applications.
The Company maintains a website at www.liveoakbank.com. Documents available on the website include: (i) the Company's Code of Ethics and Conflict of Interest Policy; and (ii) charters for the Audit and Risk, Compensation, and Nominating and Corporate Governance Committees of the Board of Directors. These documents also are available in print to any shareholder who requests a copy.
The Company maintains a website at www.liveoakbank.com. Documents available on the website include: (i) the Company's Code of Ethics and Conflict of Interest Policy; (ii) charters for the Audit, Risk, Compensation, and Nominating and Corporate Governance Committees of the Board of Directors, and (iii) the Company’s Corporate Governance Guidelines.
A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Company and the Bank. Management cannot predict what insurance assessment rates will be in the future.
A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Company and the Bank.
The Federal Reserve’s monetary policies have materially affected the operating results of commercial banks in the past and are expected to continue to do so in the future. The nature of future monetary policies and the effect of these policies on the Company's business and earnings cannot be predicted.
The Federal Reserve’s monetary policies have materially affected the operating results of commercial banks in the past and are expected to continue to do so in the future.
Our 100% cloud-based operations allow our people to transition freely between remote working and in-person as personal circumstances require with no material effect on our operations or customer experience.
While 2023 brought a return-to-campus initiative for our Wilmington headquarters, our 100% cloud-based operations allow our people to transition nimbly between remote working and in-person as personal circumstances require with no material effect on our operations or customer experience.
Federal and State Taxation Bancshares and its subsidiaries file a consolidated federal income tax return and separate state income tax returns in North Carolina. All the returns are filed on a calendar year basis.
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Regulatory Impact of Asset Growth. Federal and State Taxation Bancshares and its subsidiaries file a consolidated federal income tax return and separate state income tax returns in North Carolina. All the returns are filed on a calendar year basis.
Consequently, in addition to the rules promulgated by the SEC, Bancshares must also comply with the listing standards applicable to NYSE-listed companies. The NYSE listing standards applicable to Bancshares include corporate governance standards related to director independence; requirements for audit, nominating and compensation committee charters, membership qualifications and procedures; and shareholder approval of equity compensation arrangements, among others.
The NYSE listing standards applicable to Bancshares include corporate governance standards related to director independence; requirements for audit, nominating and compensation committee charters, membership qualifications and procedures; incentive compensation recovery policy requirements; and shareholder approval of equity compensation arrangements, among others.
The standard FDIC insurance coverage amount is $250,000 per depositor. The FDIC maintains its Deposit Insurance Fund (the “DIF”) for the purposes of (1) insuring the deposits and protecting the depositors of insured banks and (2) resolving failed banks. The DIF is funded mainly through quarterly assessments on insured banks, but also receives interest income on securities.
FDIC Insurance Assessments The Bank’s deposits are insured by the FDIC. The standard FDIC insurance coverage amount is $250,000 per depositor, per institution. The FDIC maintains its Deposit Insurance Fund (the “DIF”) for the purposes of (1) insuring the deposits and protecting the depositors of insured banks and (2) resolving failed banks.
To this end, we communicate with our workforce through a variety of channels and encourage open and direct communication, including: • An annual company-wide “all hands” meeting; • Regularly scheduled town hall meetings that are led by our key executives and held quarterly or more often as needed; • Periodic posts from the Bank’s president via our internal enterprise social media network; and • An open-door environment that encourages communication, collaboration and the free-flow of information.
To this end, we communicate with our workforce through a variety of channels and encourage open and direct communication, including: • A biennial company-wide “all hands” meeting; • Regularly scheduled town hall-style meetings that are led by our key executives and held quarterly, or more often as needed, with a focus on our people, culture, strategy, and performance; • Periodic posts from Company leadership via our internal enterprise social media network and intranet; and • An open-door environment that encourages communication, collaboration and the free-flow of information and ideas. 3 Table of Contents Collaboration, both within and between business units, is a hallmark of our approach to service delivery and value creation for our customers and stakeholders.
Diversity and Inclusion The Company strives to foster a welcoming, supportive, and equitable environment for diverse employees. To accomplish this, the Company focuses on engagement, awareness, training, accountability, education, and communication. During 2022, the Company launched six Employee Resource Groups and nine interest groups to create community and connection through shared interests and experiences.
Diversity and Inclusion The Company strives to foster a welcoming, supportive, and equitable environment for diverse employees. To accomplish this, the Company focuses on engagement, awareness, training, accountability, education, and communication. During 2023, the Company supported programming through its six Employee Resource Groups (“ERG”) and saw the number of interest groups grow from nine to eleven.
The Company competes with national banking organizations, including the largest commercial banks headquartered in the country, all of which have small business lending divisions. The Company also competes with other federally and state-chartered financial institutions such as community banks and credit unions, finance and business development companies, peer-to-peer and marketplace lenders and other non-bank lenders.
The Company also competes with other federally and state-chartered financial institutions such as community banks and credit unions, finance and business development companies, peer-to-peer and marketplace lenders and other non-bank lenders.
The DIF is reduced by loss provisions associated with failed banks and by FDIC operating expenses. The FDIC imposes a risk-based deposit insurance premium assessment on member institutions in order to maintain the DIF. Assessments are based on the average consolidated total assets less tangible equity of a financial institution.
The DIF is funded mainly through quarterly assessments on insured banks, but also receives interest income on securities. The DIF is reduced by loss provisions associated with failed banks and by FDIC operating expenses. The FDIC imposes a risk-based deposit insurance premium assessment on member institutions in order to maintain the DIF.
Sarbanes-Oxley Act of 2002 The Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) mandated for public companies, such as Bancshares, a variety of reforms intended to address corporate and accounting fraud and provided for the establishment of the Public Company Accounting Oversight Board (“PCAOB”), which enforces auditing, quality control and independence standards for firms that audit SEC-reporting companies.
In addition, the USA PATRIOT Act encouraged cooperation among financial institutions, regulatory authorities and law enforcement authorities with respect to individuals, entities and organizations engaged in, or reasonably suspected of engaging in, terrorist acts or money laundering activities. 12 Table of Contents Sarbanes-Oxley Act of 2002 The Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) mandated for public companies, such as Bancshares, a variety of reforms intended to address corporate and accounting fraud and provided for the establishment of the Public Company Accounting Oversight Board (“PCAOB”), which enforces auditing, quality control and independence standards for firms that audit SEC-reporting companies.
In 2018, the Bank formed Live Oak Private Wealth, LLC (“LOPW”), a registered investment advisor that provides high-net-worth individuals and families with strategic wealth and investment management services. During the first quarter of 2022, Jolley Asset Management, LLC (“JAM”) was merged into LOPW. JAM was previously a wholly owned subsidiary of LOPW.
In 2018, the Bank formed Live Oak Private Wealth, LLC (“LOPW”), a registered investment advisor that provides high-net-worth individuals and families with strategic wealth and investment management services. In 2019, Live Oak Clean Energy Financing LLC (“LOCEF”) became a subsidiary of the Bank.
A qualifying community banking organization may elect to use the CBLR framework if its CBLR is greater than 9 percent. A qualifying community banking organization that has chosen the proposed framework is not required to calculate the existing risk-based and leverage capital requirements.
A qualifying community banking organization that has chosen the proposed framework is not required to calculate the existing risk-based and leverage capital requirements. A bank is also considered to have met the capital ratio requirements to be well capitalized for the agencies’ prompt corrective action rules provided it has a CBLR greater than 9 percent.
Failure to meet capital guidelines could subject a bank to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on taking brokered deposits and certain other restrictions on its business.
Furthermore, the Federal Reserve has indicated that it will consider a “tangible Tier 1 Capital leverage ratio” and other indications of capital strength in evaluating proposals for expansion or new activities. 8 Table of Contents Failure to meet capital guidelines could subject a bank to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on taking brokered deposits and certain other restrictions on its business.
The Investment Advisers Act imposes numerous obligations on registered investment advisers, including fiduciary, recordkeeping, operational, and disclosure obligations. Supervisory agencies have the power to limit or restrict LOPW and JAM from conducting their business in the event they fail to comply with such laws and regulations.
Supervisory agencies have the power to limit or restrict LOPW from conducting its business in the event it fails to comply with such laws and regulations.
Compliance by Bancshares and the Bank with these capital requirements affects their respective operations by increasing the amount of capital required to conduct operations. Community Bank Leverage Ratio .
Compliance by Bancshares and the Bank with these capital requirements affects their respective operations by increasing the amount of capital required to conduct operations. The FDIC has set the minimum required Community Bank Leverage Ratio (“CBLR”) at 9 percent. A qualifying community banking organization may elect to use the CBLR framework if its CBLR is greater than 9 percent.
The Company’s main campus in Wilmington also offers two on-site restaurants that provide healthy options and which can cater to specific dietary needs. We continue to lean on lessons learned while navigating the COVID-19 pandemic. Flexibility remains an important component of our commitment to overall employee well-being.
The Company’s main campus in Wilmington also offers two on-site dining locations that provide healthy options and which can cater to specific dietary needs. Flexibility is an important contributor to employee engagement and job satisfaction.
A bank is also considered to have met the capital ratio requirements to be well capitalized for the agencies’ prompt corrective action rules provided it has a CBLR greater than 9 percent. The Company has not elected to implement the CBLR framework at this time. Acquisitions The Company must comply with numerous laws related to any potential acquisition activity.
The Company has not elected to implement the CBLR framework at this time. 9 Table of Contents Acquisitions The Company must comply with numerous laws related to any potential acquisition activity.
The U.S. federal bank regulatory agencies have established computer-security incident notification requirements for banking organizations and bank service providers.
When unauthorized access to and/or acquisition of personal information occurs, the Interagency Guidance on Response Programs for Unauthorized Access to Customer Information and Customer Notice may require us to notify affected individuals and regulator The U.S. federal bank regulatory agencies have established computer-security incident notification requirements for banking organizations and bank service providers.
Privacy and Cybersecurity We are subject to complex and evolving laws and regulations governing the privacy and security of personal information associated with consumers, prospective, current and former customers, employees and contractors, and other individuals. For example, financial institutions are required by the Gramm-Leach-Bliley Financial Services Modernization Act of 1999 to disclose their policies for collecting and protecting consumer information.
For example, financial institutions are required by the Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (the “GLBA”) to disclose their policies for collecting and protecting consumer information. The Bank has established a privacy policy that it believes promotes compliance with these federal requirements.
Juneteenth National Independence Day and Veterans Day were expanded with sponsored, on-campus events to celebrate and support local, diversely owned small businesses. The Company’s diversity, equity and inclusion initiatives are both internally and externally focused. Its commitment to providing and enhancing a support infrastructure for people with underrepresented backgrounds remains a strategic initiative in 2023 and beyond.
The Company and ERG leadership, membership, and allies remain committed to celebrating and supporting local, diversity-owned small business through on-campus events that showcase diverse entrepreneurs in the surrounding communities. Its commitment to providing and enhancing a support infrastructure for people with underrepresented backgrounds remains a strategic initiative.
Department of Treasury, the Federal Reserve and other federal banking agencies, including those with direct supervisory jurisdiction over the Company and the Bank. Furthermore, as the COVID-19 pandemic evolved, federal regulatory authorities continue to issue additional guidance with respect to the implementation, lifecycle, and eligibility requirements for the various CARES Act programs as well as industry-specific recovery procedures for COVID-19.
Department of Treasury, the Federal Reserve and other federal banking agencies, including those with direct supervisory jurisdiction over the Company and the Bank. 15 Table of Contents Paycheck Protection Program.
The final rule requires us to adopt a clawback policy within 60 days after such listing standard becomes effective. Registered Investment Adviser Regulation LOPW and JAM are registered investment advisers under the Investment Advisers Act of 1940 and the SEC’s regulations promulgated thereunder.
The Company has adopted a clawback policy, a copy of which is included as an exhibit to this Report. Registered Investment Adviser Regulation LOPW is a registered investment adviser under the Investment Advisers Act of 1940 and the SEC’s regulations promulgated thereunder. The Investment Advisers Act imposes numerous obligations on registered investment advisers, including fiduciary, recordkeeping, operational, and disclosure obligations.
The increased assessment is expected to improve the likelihood that the DIF reserve ratio would reach the statutory minimum of 1.35% by the statutory deadline prescribed under the FDIC’s amended restoration plan. Live Oak Bank’s insurance assessments during 2022 and 2021 were $9.8 million and $7.1 million, respectively.
Live Oak Bank’s insurance assessments during 2023 and 2022 were $16.7 million and $9.8 million, respectively. In conjunction with the Amended Restoration Plan, the FDIC Board increased deposit insurance assessment rates by two basis points for all insured depository institutions, effective in 2023.
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In addition, leaders engaged in development opportunities such as bias, advocacy, and systemic inclusion training, with 100% of Company recruiters completing DEI and hiring bias training. The Company also updated its maternity/paternity leave policy to offer more time for new parents.
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These documents also are available in print to any shareholder who requests a copy.
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Collaboration, both within and between business units, is a hallmark of our approach to service delivery and value creation for our customers and stakeholders. 3 Table of Contents Competition Commercial banking in the United States is extremely competitive.
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These employee-led networks provide community and connection through shared interests and experiences. In addition, hiring managers across the Company participated in interview and bias trainings. The Company’s diversity, equity and inclusion initiatives are both internally and externally focused.
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Furthermore, the Federal Reserve has indicated that it will consider a “tangible Tier 1 Capital leverage ratio” and other indications of capital strength in evaluating proposals for expansion or new activities.
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Competition Commercial banking in the United States is extremely competitive. The Company competes with national banking organizations, including the largest commercial banks headquartered in the country, all of which have small business lending divisions.
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As discussed below, in 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRCPA”) became law, which directed the federal banking agencies to develop a community bank leverage ratio (“CBLR”) of not less than 8 percent and not more than 10 percent for qualifying community banking organizations.
Added
Consequently, in addition to the rules promulgated by the SEC, Bancshares must also comply with the listing standards applicable to NYSE-listed companies.
Removed
EGRRCPA defines a qualifying community banking organization as a depository institution or depository institution holding company with total consolidated assets of less than $10 billion, which would include Bancshares and the Bank.
Added
Assessments are based on the average consolidated total assets less tangible equity of a financial institution. The assessment rates for an insured depository institution vary according to the level of risk incurred in its activities. The assessment rate schedule can change from time to time, at the discretion of the FDIC, subject to certain limits.
Removed
A qualifying community banking organization that exceeds the CBLR level established by the agencies is considered to have met: (i) the generally applicable leverage and risk-based capital requirements under the agencies’ capital rule; (ii) the capital ratio requirements in order to be considered well capitalized under the agencies’ prompt corrective action framework (in the case of insured depository institutions); and (iii) any other applicable capital or leverage requirements.
Added
Management cannot predict what insurance assessment rates will be in the future. 10 Table of Contents Privacy and Data Security We are subject to complex and evolving laws and regulations governing the privacy and security of personal information associated with consumers, prospective, current and former customers, employees and contractors, and other individuals.
Removed
Section 201 of EGRRCPA defines the CBLR as the ratio of a banking organization’s CBLR tangible equity to its average total consolidated assets, both as reported on the banking organization’s applicable regulatory filing. The FDIC has set the minimum required CBLR at 9 percent.
Added
The GLBA also imposes restrictions on when and to which entities financial institutions may disclose personal information and how personal information can be used, as well as data security requirements. In addition, we are subject to federal requirements related to unauthorized access to and/or acquisition of personal information, cybersecurity incidents, and similar matters.
Removed
The assessment rates for an insured depository institution vary according to the level of risk incurred in its activities, which for established small institutions like the Bank (i.e., those institutions with less than $10 billion in assets and insured for five years or more), is generally determined by reference to the institution’s supervisory ratings.
Added
In addition to federal privacy laws and regulations, numerous state laws and regulations govern the collection, retention, use, and disclosure of personal information, and state legislatures have been actively considering and enacting new laws addressing data security, data breach notification, and privacy.
Removed
The assessment rate schedule can change from time to time, at the discretion of the FDIC, subject to certain limits. In October 2022, the FDIC adopted a final rule to increase the initial base deposit insurance assessment rate schedules uniformly by 2 basis points beginning with the first quarterly assessment period of 2023.
Added
For example, some states have enacted financial privacy laws and regulations that are similar to the GLBA’s privacy requirements. All fifty states have enacted data breach notification laws, and many states have enacted or are considering comprehensive privacy laws.
Removed
Consumers generally may prevent financial institutions from sharing personal financial information with nonaffiliated third parties except for service providers. Additionally, financial institutions generally may not disclose consumer account numbers to any nonaffiliated third party for use in telemarketing, direct mail marketing or other marketing through electronic mail to consumers.
Added
To the extent applicable, many of these laws and regulations impose additional and/or different requirements than federal law, may present implementation challenges, could be an enforcement priority for the state regulators, and could generate increased lawsuits by consumers and other individuals.
Removed
The Bank has established a privacy policy that it believes promotes compliance with these federal requirements. In addition, certain state laws could potentially impact the Bank’s operations, including those related to the privacy and security of consumer information and notification requirements when unauthorized access to customers’ nonpublic personal information has occurred.
Added
The Bank received an “Outstanding” rating in its last Community Reinvestment Act examination, which was conducted as of June 1, 2022.
Removed
Community banks are excluded from the restrictions of the Volcker Rule if (i) the community bank, and every entity that controls it, has total consolidated assets equal to or less than $10 billion and (ii) trading assets and liabilities of the community bank, and every entity that controls it, are equal to or less than five percent of its total consolidated assets.
Added
The Dodd-Frank Act and its implementing regulations impose various additional requirements on bank holding companies and banks with $10 billion or more in total consolidated assets. As of December 31, 2023, the Company and the Bank each had total assets of $11.27 billion and $11.21 billion, respectively. See Item 7.
Removed
In addition, the USA PATRIOT Act encouraged cooperation among financial institutions, regulatory authorities and law enforcement authorities with respect to individuals, entities and organizations engaged in, or reasonably suspected of engaging in, terrorist acts or money laundering activities.
Removed
EGRRCPA’s highlights included, among other things: (i) exempting banks with less than $10 billion in assets from the ability-to-repay requirements for certain qualified residential mortgage loans held in portfolio; (ii) not requiring appraisals for certain transactions valued at less than $400,000 in rural areas; (iii) clarifying that, subject to various conditions, reciprocal deposits of another depository institution obtained using a deposit broker through a deposit placement network for purposes of obtaining maximum deposit insurance would not be considered brokered deposits subject to the FDIC’s brokered-deposit regulations; (iv) raising eligibility for the 18-month exam cycle from $1 billion to banks with $3 billion in assets; and (v) simplifying capital calculations by requiring regulators to establish for institutions under $10 billion in assets a CBLR (tangible equity to average consolidated assets) at a percentage not less than 8% and not greater than 10% that such institutions may elect to replace the general applicable risk-based capital requirements for determining well capitalized status.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeRisks Related to Our Business • Increased delinquencies and credit losses could have a material adverse effect on our business, results of operations, and financial condition. • Changes to the SBA or other government-guaranteed lending programs by the federal government, or the loss of our status as an SBA Preferred Lender, could have a material adverse effect on our business. • Global health crises and pandemics, such as the COVID-19 pandemic, could have a material adverse effect on our business, results of operations, and financial condition. • We face risks, including credit risk and litigation risk, in connection with our participation in government programs enacted in response to the COVID-19 pandemic. • Changes in our ability to use, or the terms of our use of, intellectual property owned by other third parties could have a material adverse effect on our business. • We must effectively manage risks in connection with our information systems and those of our third-party service providers, which may experience disruption, failure, or security breaches, including those caused by cyber-attacks. • The valuation of our investment securities, loans, and servicing rights is subject to change based on market conditions and various factors that are beyond our control. • We must maintain an appropriate allowance for credit losses. • We must effectively manage our liquidity risk. • We must effectively manage our interest rate risks. • We are subject to environmental liability risk associated with our lending activities. • We must effectively manage our counterparty risk. • Our expansion strategy, including new lines of business, new products, acquisitions, and investments, exposes us to risks. • Our investments in tax-advantaged projects may not generate returns as anticipated and may have an adverse effect on our financial results. • We are less able to diversify our lending risks than larger financial institutions. 17 Table of Contents • Our directors and executive officers own a significant amount of our outstanding common stock, which could limit other shareholders’ ability to influence corporate matters and may hinder a third party from acquiring control of the Company.
Biggest changeRisks Related to Our Business • Increased delinquencies and credit losses could have a material adverse effect on our business, financial condition or results of operations. • Changes to the SBA or other government-guaranteed lending programs by the federal government, or the loss of our status as an SBA Preferred Lender, could have a material adverse effect on our business. • A prolonged U.S. government shutdown or default by the U.S. on government obligations would harm our results of operations. • Pandemics, natural disasters, global climate change, acts of terrorism and global conflicts may have a negative impact on our business operations. • We face risks, including credit risk and litigation risk, in connection with our participation in government programs enacted in response to the COVID-19 pandemic. • Changes in our ability to use, or the terms of our use of, intellectual property owned by other third parties could have a material adverse effect on our business. 16 Table of Contents • We must effectively manage risks in connection with our information systems and those of our third-party service providers, which may experience disruption, failure, or security breaches, including those caused by cyber-attacks. • The valuation of our investment securities, loans, and servicing rights is subject to change based on market conditions and various factors that are beyond our control. • We must maintain an appropriate allowance for credit losses. • Errors in the assumptions used to compute gains on sale of loans could result in material revenue misstatements. • We must effectively manage our liquidity risk. • We must effectively manage our interest rate risks. • Increases in the amount of other real estate owned could result in additional losses, costs and expenses. • We are subject to environmental liability risk associated with our lending activities. • Real property appraisals may not accurately reflect the net value of the collateral that we can realize. • We must effectively manage our counterparty risk. • Our expansion strategy, including new lines of business, new products, acquisitions, and investments, exposes us to risks. • Our investments in tax-advantaged projects may not generate returns as anticipated and may have an adverse effect on our financial results. • Our investments in other companies may be illiquid and may subject us to material financial, reputational and strategic risks. • We are less able to diversify our lending risks than larger financial institutions. • Our directors and executive officers own a significant amount of our outstanding common stock, which could limit other shareholders’ ability to influence corporate matters and may hinder a third party from acquiring control of the Company.
As a financial institution, our earnings depend in part on our net interest income, which is the difference between the interest income that we earn on interest-earning assets, such as investment securities and loans, and the interest expense that we pay on interest-bearing liabilities, such as deposits and borrowings.
As a financial institution, our earnings depend in part on our net interest income, which is the difference between the interest income that we earn on interest-earning assets, such as loans and investment securities, and the interest expense that we pay on interest-bearing liabilities, such as deposits and borrowings.
If the SBA establishes that a loss on an SBA guaranteed loan is attributable to significant technical deficiencies in the manner in which the loan was originated, funded or serviced by us, the SBA may seek recovery of the principal loss related to the deficiency from us, which could materially adversely affect our business, results of operations and financial condition.
However, if the SBA establishes that a loss on an SBA guaranteed loan is attributable to significant technical deficiencies in the manner in which the loan was originated, funded or serviced by us, the SBA may seek recovery of the principal loss related to the deficiency from us, which could materially adversely affect our business, results of operations and financial condition.
There can be no assurance that Apiture will be able to develop and support the implementation of our new banking platform in a timely and cost-effective manner or that Apiture will continue to provide any services on which we rely at appropriate service levels or at prices that would be market competitive.
There can be no assurance that Apiture will be able to develop and support the implementation of our banking platform in a timely and cost-effective manner or that Apiture will continue to provide any services on which we rely at appropriate service levels or at prices that would be market competitive.
Furthermore, we intend to increase our deposit product offerings and grow our customer deposit portfolio in the future and, as a result, we are, and will continue to be, subject to heightened compliance and operating costs that could adversely affect our business, results of operations and financial condition.
Furthermore, we intend to further increase our deposit product offerings and grow our customer deposit portfolio in the future and, as a result, we are, and will continue to be, subject to heightened compliance and operating costs that could adversely affect our business, results of operations and financial condition.
In addition, these shareholders will be able to exercise influence over all matters requiring shareholder approval, including the election of directors and approval of corporate transactions, such as a merger or other sale of our company or its assets.
In addition, these shareholders will be able to exercise influence over all matters requiring shareholder approval, including the election of directors and approval of corporate transactions, such as a merger or other sale of the Company or its assets.
In addition, federal regulators and many federal and state laws and regulations require companies to notify individuals of data security breaches involving their personal information. Certain security breaches also require notice to regulators, the media, and/or other parties.
In addition, federal regulators and many federal and state laws and regulations require companies to notify individuals of data security breaches involving their personal information. Certain security breaches and other data incidents also require notice to regulators, the media, and/or other parties.
If we lose our status as a Preferred Lender, we may lose some or all of our customers to lenders who are SBA Preferred Lenders, and as a result we could experience a material adverse effect to our financial results.
If we lose our status as a Preferred Lender, we may lose some or all of our customers to lenders who are SBA Preferred Lenders, and as a result we could experience a material adverse effect on our financial results.
Future payment of cash dividends, if any, will be at the discretion of our board of directors and will be dependent upon our financial condition, results of operations, capital requirements, economic conditions, and such other factors as the board may deem relevant. 33 Table of Contents Live Oak Bancshares, Inc. is subject to extensive regulation, and ownership of our common stock may have regulatory implications for its holders.
Future payment of cash dividends, if any, will be at the discretion of our board of directors and will be dependent upon our financial condition, results of operations, capital requirements, economic conditions, and such other factors as the board may deem relevant. 32 Table of Contents Live Oak Bancshares, Inc. is subject to extensive regulation, and ownership of our common stock may have regulatory implications for its holders.
Any damage to our reputation, whether arising from legal, regulatory, supervisory or enforcement actions, matters affecting our financial reporting or compliance with SEC and exchange listing requirements, negative publicity, the conduct of our business or otherwise could have a material adverse effect on our business, results of operations and financial condition.
Any damage to our reputation, whether arising from legal, regulatory, supervisory or enforcement actions, matters affecting our financial reporting or compliance with SEC and exchange listing requirements, negative publicity, the conduct of our business or otherwise could have a material adverse effect on our business, results of operations and financial condition. Item 1B.
We also rely on numerous other vendors and third parties to provide software and solutions comprising our new banking platform.
We also rely on numerous other vendors and third parties to provide software and solutions comprising our banking platform.
These mandatory disclosures regarding a security breach are costly to implement and often lead to widespread negative publicity, which may cause customers, borrowers, employees, vendors, partners or investors to lose confidence in the effectiveness of our data security measures.
These mandatory disclosures regarding a security breach and other data incidents are costly to implement and often lead to widespread negative publicity, which may cause customers, borrowers, employees, vendors, partners or investors to lose confidence in the effectiveness of our data security measures.
We expect that the body of privacy and data security laws and regulations that may apply to us will continue to grow. 32 Table of Contents These laws and regulations are continually evolving and are subject to potentially differing interpretations, including as to their scope and applicability to our business.
We expect that the body of privacy and data security laws and regulations that may apply to us will continue to grow. 31 Table of Contents These laws and regulations are continually evolving and are subject to potentially differing interpretations, including as to their scope and applicability to our business.
While this evaluation process uses historical and other objective information, the classification of loans and the establishment of loan losses is an estimate based on experience, judgment and expectations regarding our borrowers, and the economies in which we and our borrowers operate, as well as the judgment of our regulators.
While this evaluation process uses historical and other objective information, the classification of loans and the establishment of loan losses is an estimate based on experience, judgment and expectations regarding our borrowers, and the markets in which we and our borrowers operate, as well as the judgment of our regulators.
This could have a material adverse effect on our business, financial condition and results of operations, and could subject us to litigation. 35 Table of Contents Changes in accounting standards and management’s selection of accounting methods, including assumptions and estimates, could materially impact our financial statements.
This could have a material adverse effect on our business, financial condition and results of operations, and could subject us to litigation. 34 Table of Contents Changes in accounting standards and management’s selection of accounting methods, including assumptions and estimates, could materially impact our financial statements.
Risks Related to Our Common Stock • The trading volume in our common stock is less than that of larger financial institutions. • There can be no assurance that we will continue to pay cash dividends. • Federal laws and regulations impose restrictions on the ownership of our common stock. • Anti-takeover provisions in our governing documents could adversely affect our shareholders. • An investment in our common stock is not an insured deposit.
Risks Related to Our Common Stock • The trading volume in our common stock is less than that of larger financial institutions. • There can be no assurance that we will continue to pay cash dividends. 17 Table of Contents • Federal laws and regulations impose restrictions on the ownership of our common stock. • Anti-takeover provisions in our governing documents could adversely affect our shareholders. • An investment in our common stock is not an insured deposit.
This is an inherently uncertain process and the value of our servicing rights may be adversely impacted by factors that are beyond our control, which may in turn have a material adverse effect on our business, results of operations and financial condition. 24 Table of Contents The recognition of gains on the sale of loans reflects certain assumptions.
This is an inherently uncertain process and the value of our servicing rights may be adversely impacted by factors that are beyond our control, which may in turn have a material adverse effect on our business, results of operations and financial condition. The recognition of gains on the sale of loans reflects certain assumptions.
Any accidental or willful security breaches or other unauthorized access to our systems could cause confidential customer, borrower, employee, vendor, partner or investor information to be stolen and used for criminal purposes. Security breaches or unauthorized access to confidential information could also expose us to liability related to the loss of the information, time-consuming and expensive litigation, and negative publicity.
Accidental or willful security breaches or other unauthorized access to our systems can cause confidential customer, borrower, employee, vendor, partner or investor information to be stolen and used for criminal purposes. Security breaches or unauthorized access to confidential information can also expose us to liability related to the loss of the information, time-consuming and expensive litigation, and negative publicity.
If conditions are worse than forecast, we could experience higher charge-offs and delinquencies than is provided in the ACL on loans and leases, which could materially adversely affect our business, results of operations and financial condition. Deterioration in the commercial soundness of our counterparties could adversely affect us.
If conditions are worse than forecast, we could experience higher charge-offs and delinquencies than is provided in the ACL on loans and leases, which could materially adversely affect our business, results of operations and financial condition. 28 Table of Contents Deterioration in the commercial soundness of our counterparties could adversely affect us.
There can be no assurance that the value at which we carry these assets will necessarily reflect the amount which could be realized upon a sale or other liquidity event. 29 Table of Contents Our investments and/or financings in certain tax-advantaged projects may not generate returns as anticipated and may have an adverse impact on our financial results.
There can be no assurance that the value at which we carry these assets will necessarily reflect the amount which could be realized upon a sale or other liquidity event. Our investments and/or financings in certain tax-advantaged projects may not generate returns as anticipated and may have an adverse impact on our financial results.
Sales of our used rental equipment at prices that fall significantly below our projections or in lesser quantities than we anticipate will have a negative impact on our results of operations and cash flows. We are subject to liquidity risk in our operations.
Sales of our used rental equipment at prices that fall significantly below our projections or in lesser quantities than we anticipate will have a negative impact on our results of operations and cash flows. 23 Table of Contents We are subject to liquidity risk in our operations.
We expect that federal and state bank regulators will increase their oversight, inspection and investigatory role over our deposit operations and the financial services industry generally.
We expect that federal and state bank regulators will continue to increase their oversight, inspection and investigatory role over our deposit operations and the financial services industry generally.
Elevated levels of loan delinquencies and bankruptcies in our market areas, generally, and among our customers specifically, can be precursors of future charge-offs and may require us to increase our allowance for credit losses, or ACL, on loans and leases.
Elevated levels of loan delinquencies and bankruptcies in our market areas, generally, and among our customers specifically, can be precursors of future charge-offs and may require us to increase our allowance for credit losses (“ACL”) on loans and leases.
Termination of either of these licenses or the reduction or elimination of our licensed rights may result in our having to negotiate new licenses with less favorable terms, or the inability to obtain access to such licensed technology at all. 21 Table of Contents Similarly, Apiture, Inc.
Termination of either of these licenses or the reduction or elimination of our licensed rights may result in our having to negotiate new licenses with less favorable terms, or the inability to obtain access to such licensed technology at all. Similarly, Apiture, Inc.
As of December 31, 2022, the carrying amount of our investment in Apiture was $60.3 million. Apiture's future success will depend on its ability to develop, sell and deliver new or enhanced solutions to financial institution clients; however, these solutions and related services may not be attractive to existing or prospective clients.
As of December 31, 2023, the carrying amount of our investment in Apiture was $60.7 million. Apiture's future success will depend on its ability to develop, sell and deliver new or enhanced solutions to financial institution clients; however, these solutions and related services may not be attractive to existing or prospective clients.
In addition, adjustments to the ACL on available-for-sale investment securities would negatively affect the Company’s earnings and regulatory capital ratios. 23 Table of Contents Our ACL may prove to be insufficient to absorb lifetime losses on loans, leases and off-balance sheet credit exposures. We maintain allowances for credit losses on loans, leases, and off-balance sheet credit exposures.
In addition, adjustments to the ACL on available-for-sale investment securities would negatively affect the Company’s earnings and regulatory capital ratios. Our ACL may prove to be insufficient to absorb lifetime losses on loans, leases and off-balance sheet credit exposures. We maintain allowances for credit losses on loans, leases, and off-balance sheet credit exposures.
Any security breach, whether actual or perceived, would harm our reputation and could cause us to lose customers, borrowers, employees, vendors, partners, or investors, and could adversely affect our business and operations.
Any security breach or other data incident, whether actual or perceived, would harm our reputation and could cause us to lose customers, borrowers, employees, vendors, partners, or investors, and could adversely affect our business and operations.
Any changes to the SBA program, including changes to the level of guarantee provided by the federal government on SBA loans, may also have a material adverse effect on our business. We anticipate that gains on the sale of loans will comprise a meaningful component of our revenue in 2023.
Any changes to the SBA program, including changes to the level of guarantee provided by the federal government on SBA loans, may also have a material adverse effect on our business. 18 Table of Contents We anticipate that gains on the sale of loans will comprise a meaningful component of our revenue in 2024.
Furthermore, it may be difficult for holders to resell their shares at prices they find attractive, or at all. Future sales of shares of our common stock by existing shareholders could depress the market price of our common stock. Live Oak Bancshares, Inc. had 44,066,517 shares of common stock outstanding at January 31, 2023.
Furthermore, it may be difficult for holders to resell their shares at prices they find attractive, or at all. Future sales of shares of our common stock by existing shareholders could depress the market price of our common stock. Live Oak Bancshares, Inc. had 44,648,626 shares of common stock outstanding at January 31, 2024.
Also, as of January 31, 2023, there were 2,400,363 outstanding restricted stock units that vest over time that, when vested, will result in additional shares becoming available for sale. A large portion of these shares, options and restricted stock units are held by a relatively small number of persons.
Also, as of January 31, 2024, there were 2,214,346 outstanding restricted stock units that vest over time that, when vested, will result in additional shares becoming available for sale. A large portion of these shares, options and restricted stock units are held by a relatively small number of persons.
As a financial institution, our operations rely heavily on the secure data processing, storage and transmission of confidential and other information on our computer systems and networks. This may include sensitive business and personal information about our customers. Maintaining the confidentiality of this information is critical to our business.
As a financial institution, our operations rely heavily on the secure data processing, storage and transmission of confidential and other information on our computer systems and networks, as well as those of third-party service providers. This may include sensitive business and personal information about our customers. Maintaining the confidentiality of this information is critical to our business.
We anticipate that gains on the sale of loans will continue to comprise a meaningful component of our revenue in 2023. The determination of noncash gains is based on assumptions regarding the value of unguaranteed loans retained, servicing rights retained and deferred fees and costs.
We anticipate that gains on the sale of loans will continue to comprise a meaningful component of our revenue in 2024. The determination of noncash gains is based on assumptions regarding the value of unguaranteed loans retained, servicing rights retained and deferred fees and costs. The value of retained unguaranteed loans and servicing rights is determined as described above.
Such real estate is referred to as other real estate owned (“OREO”). As the amount of OREO increases, our losses, and the costs and expenses to maintain the real estate, likewise increase. The amount of OREO we hold may increase due to various economic conditions or other factors.
As the amount of OREO increases, our losses, and the costs and expenses to maintain the real estate, likewise increase. The amount of OREO we hold may increase due to various economic conditions or other factors.
The increased use of mobile and cloud technologies, as well as the increase in remote work due to the COVID-19 pandemic, can heighten these and other operational risks. We may fail to promptly identify or adequately address any such failures, interruptions or security breaches if they do occur.
The increased use of mobile and cloud technologies, as well as the increase in remote work, can heighten these and other operational risks. We may fail to promptly identify or adequately address any such failures, interruptions or security breaches when they occur.
Our ability to compete successfully will depend on a number of factors, including, among other things: • our ability to build and maintain long-term customer relationships while ensuring high ethical standards and safe and sound banking practices; • the scope, relevance and pricing of products and services that we offer; • customer satisfaction with our products and services; 34 Table of Contents • industry and general economic trends; and • our ability to keep pace with technological advances and to invest in new technology.
Our ability to compete successfully will depend on a number of factors, including, among other things: • our ability to build and maintain long-term customer relationships while ensuring high ethical standards and safe and sound banking practices; • the scope, relevance and pricing of products and services that we offer; • customer satisfaction with our products and services; 33 Table of Contents • industry and general economic trends; and • our ability to keep pace with technological advances and to invest in new technology to provide products and services that will satisfy customer demands, as well as create additional efficiencies in our operations.
In addition, as of January 31, 2023, there were outstanding options to purchase 821,029 shares of our common stock that, if exercised, will result in these additional shares becoming available for sale.
In addition, as of January 31, 2024, there were outstanding options to purchase 646,161 shares of our common stock that, if exercised, will result in these additional shares becoming available for sale.
It is possible that one or more of such companies will not be able to raise additional financing or may be able to do so only at a price or on terms which are unfavorable. Our investments in other companies may be illiquid.
The circumstances or market conditions under which such companies will seek additional capital is unpredictable. It is possible that one or more of such companies will not be able to raise additional financing or may be able to do so only at a price or on terms which are unfavorable. Our investments in other companies may be illiquid.
If significant, sustained or repeated, a system failure or service denial could compromise our ability to operate effectively, damage our reputation, result in a loss of customer business, and/or subject us to additional regulatory scrutiny and possible financial liability, any of which could materially adversely affect our business, financial condition, results of operations and prospects, as well as the value of our common stock.
If significant, sustained or repeated, a system failure or service denial could compromise our ability to operate effectively, damage our reputation, result in a loss of customer business, and/or subject us to additional regulatory scrutiny and possible financial liability, any of which could materially adversely affect our business, financial condition, results of operations and prospects, as well as the value of our common stock. 21 Table of Contents The fair value of our investment securities can fluctuate due to factors outside of our control.
When we sell the guaranteed portion of our SBA 7(a) loans, we incur credit risk on the non-guaranteed portion of the loans, and if a customer defaults on the non-guaranteed portion of a loan, we share any loss and recovery related to the loan pro-rata with the SBA.
When we sell the guaranteed portion of our SBA 7(a) loans, we incur credit risk on the non-guaranteed portion of the loans, and if a customer defaults on a loan, we recognize a loss and/or recovery related to the non-guaranteed portion.
General Risk Factors • We compete with larger financial institutions and other financial service providers. • We must attract, retain, and develop key personnel. • Our risk management framework may not effectively mitigate risks or losses to us. • Hurricanes or other adverse weather events could disrupt our operations. • Our failure to maintain an effective system of internal control over financial reporting could harm our business. • Damage to our business reputation could adversely impact our business and results of operations. 18 Table of Contents Risks Related to Our Business We may experience increased delinquencies and credit losses, which could have a material adverse effect on our capital, financial condition, and results of operations.
General Risk Factors • We compete with larger financial institutions and other financial service providers. • We must attract, retain, and develop key personnel. • Our risk management framework may not effectively mitigate risks or losses to us. • Hurricanes or other adverse weather events could disrupt our operations. • Our failure to maintain an effective system of internal control over financial reporting could harm our business. • Damage to our business reputation could adversely impact our business and results of operations.
The failure of this one product, service or distribution channel, or the loss or ineffectiveness of a key executive or executives within the management team may have a materially adverse impact on such companies.
These companies may be dependent upon the success of one product or service, a unique distribution channel, or the effectiveness of a manager or management team. The failure of this one product, service or distribution channel, or the loss or ineffectiveness of a key executive or executives within the management team may have a materially adverse impact on such companies.
The nature of our business may make it an attractive target and potentially vulnerable to cyber-attacks, computer viruses, physical or electronic break-ins or similar disruptions. The technology-based platform we use processes sensitive data from our borrowers, depositors and other customers.
We may be required to expend significant additional resources in the future to modify and enhance our protective measures. The nature of our business may make it an attractive target and potentially vulnerable to cyber-attacks, computer viruses, physical or electronic break-ins or similar disruptions. The technology-based platform we use processes sensitive data from our borrowers, depositors and other customers.
New lines of business or new products and services may subject us to additional risks. We are focused on our long-term growth and have undertaken various new business initiatives, many of which involve activities that are new to us, or in some cases, are in the early stages of development.
We are focused on our long-term growth and have undertaken various new business initiatives, many of which involve activities that are new to us, or in some cases, are in the early stages of development. From time to time, we may develop, grow and/or acquire new lines of business or offer new products and services within existing lines of business.
While we have taken steps to protect confidential information that we have access to, our security measures and the security measures employed by the owners of the technology in the platform that we use could be breached.
While we have taken steps to protect confidential and proprietary information that we have access to, our security measures and the security measures employed by the owners of the technology in the platforms and services that we use can be compromised.
We also face credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by the Bank, such as an issue with the eligibility of a borrower to receive a PPP loan.
We also face credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by the Bank.
In addition, one or more of our employees or vendors could cause a significant operational breakdown or failure, either as a result of human error or where an individual purposefully sabotages or fraudulently manipulates our loan documentation, operations or systems. Any of these developments could have a material adverse effect on our business, results of operations and financial condition.
In addition, one or more of our employees or vendors could cause a significant operational breakdown or failure, either as a result of human error or where an individual purposefully sabotages or fraudulently manipulates our loan documentation, operations or systems.
If Canapi Advisors is unable to successfully identify investment opportunities, it will likely lose the capital that it invests on behalf of the fund’s investors, including the capital that we invest, and will not generate any carried interest for the benefit of the Company, which would have a materially adverse effect on our results of operations, our reputation and our ability to raise successive funds for similar purposes.
If Canapi Advisors is unable to successfully identify investment opportunities, it will likely lose the capital that it invests on behalf of the fund’s investors, including the capital that we invest, which would have a materially adverse effect on our results of operations, our reputation and our ability to raise successive funds for similar purposes. 27 Table of Contents Many of the financial technology companies in which we invest directly present risks similar to those in which Canapi Ventures invests.
This is an inherently uncertain process, and the fair value of our loans may be adversely impacted by factors that are beyond our control, which may in turn have a material adverse effect on our business, results of operations and financial condition. See Note 1.
This is an inherently uncertain process, and the fair value of our loans may be adversely impacted by factors that are beyond our control, which may in turn have a material adverse effect on our business, results of operations and financial condition. 22 Table of Contents The valuation of our servicing rights is based on estimates and subject to fluctuation based on market conditions and other factors that are beyond our control.
The resolution of nonperforming assets, including the initiation of foreclosure proceedings, requires significant commitments of time from management, which can be detrimental to the performance of their other responsibilities, and which expose us to additional legal costs.
Our ability to recover on defaulted loans would then be diminished, and we would be more likely to suffer losses on defaulted loans. The resolution of nonperforming assets, including the initiation of foreclosure proceedings, requires significant commitments of time from management, which can be detrimental to the performance of their other responsibilities, and which expose us to additional legal costs.
While we have certain protective policies and procedures in place, the nature and sophistication of the threats continue to evolve. The increasing sophistication of cyber criminals and their evolving attempts to breach networks present increasing risk of a security breach. We may be required to expend significant additional resources in the future to modify and enhance our protective measures.
While we have certain protective policies and procedures in place, the nature and sophistication of the threats continue to evolve. The increasing sophistication of cyber criminals and their evolving attempts to breach networks present increasing risk of a security breach and other data incidents.
Should we fail to comply with these regulatory requirements, federal and state regulators could impose additional restrictions on the activities of the Company and the Bank, which could materially and adversely affect our business, results of operations and financial condition.
Should we fail to comply with these regulatory requirements, federal and state regulators could impose additional restrictions on the activities of the Company and the Bank, which could materially and adversely affect our business, results of operations and financial condition. 29 Table of Contents The laws and regulations applicable to the banking industry change frequently and may continue to change, and we cannot predict the effects of these changes on our business and profitability.
In addition, the CARES Act provided regulatory relief on deferrals offered to certain borrowers and provided six months of payment relief through the first quarter of 2021 from the SBA for certain loans guaranteed by that agency.
We were an active participant in the program originating a substantial number and principal amount of PPP loans. 19 Table of Contents In addition, the CARES Act provided regulatory relief on deferrals offered to certain borrowers and provided six months of payment relief through the first quarter of 2021 from the SBA for certain loans guaranteed by that agency.
As a result, declines in the value of our OREO will have a negative effect on our business, results of operations and financial condition. As of December 31, 2022, we had no OREO properties. We are subject to environmental liability risk associated with our lending activities. A significant portion of our loan portfolio is secured by real property.
As a result, declines in the value of our OREO will have a negative effect on our business, results of operations and financial condition. As of December 31, 2023, we had three OREO properties with an aggregate carrying value of $6.5 million. We are subject to environmental liability risk associated with our lending activities.
During the ordinary course of business, we may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, we may be liable for remediation costs, as well as for personal injury and property damage.
A significant portion of our loan portfolio is secured by real property. During the ordinary course of business, we may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties.
Risks Related to Our Regulatory Environment • We are subject to extensive government regulation and supervision. • We must maintain adequate regulatory capital to support our business. • We will be subject to heightened regulatory requirements if our total assets grow and exceed $10 billion. • We may incur increased costs to comply with privacy and data security laws.
Risks Related to Our Regulatory Environment • We are subject to extensive government regulation and supervision. • We must maintain adequate regulatory capital to support our business. • We are subject to heightened regulatory requirements because our total assets exceed $10 billion. • Negative developments affecting the banking industry may result in additional regulations that could increase our expenses and affect our operations. • We may incur increased costs to comply with privacy and data security laws.
Factors beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair value of these securities.
As of December 31, 2023, the fair value of our available for sale securities portfolio was approximately $1.13 billion. Factors beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair value of these securities.
Many of the financial technology companies in which we invest directly present risks similar to those in which Canapi Ventures invests. The possibility that the companies in which we and Canapi Ventures invest will not be able to commercialize their technology or product concept presents significant risk to our business operations and financial results.
The possibility that the companies in which we and Canapi Ventures invest will not be able to commercialize their technology or product concept presents significant risk to our business operations and financial results. These companies tend to lack management depth, to have limited or no history of operations and to not have attained profitability.
States legislatures have also been actively debating and passing new privacy laws, such as the California Privacy Rights Act.
States legislatures have also been actively debating and passing new comprehensive privacy laws.
We also maintain important internal company data such as personal information about our employees and information regarding our operations. Our collection of such customer and company data is subject to extensive regulation and oversight. Cloud technologies, including third-party cloud infrastructure, are also critical to the operation of our systems, and our reliance on cloud technologies is growing.
Our collection of such customer and company data is subject to extensive regulation and oversight. 20 Table of Contents Cloud technologies, including third-party cloud infrastructure, are also critical to the operation of our systems, and our reliance on cloud technologies continues to grow.
Defects in Apiture’s software offerings or delays in the development of such software could result in unforeseen costs, diversion of technical and other resources, loss of credibility with existing and potential clients or reputational harm, any of which could materially adversely affect our business, results of operations and financial condition. 28 Table of Contents Our subsidiary Canapi Advisors is an investment advisor to Canapi Ventures, a series of funds focused on providing venture capital to new and emerging financial technology companies.
Defects in Apiture’s software offerings or delays in the development of such software could result in unforeseen costs, diversion of technical and other resources, loss of credibility with existing and potential clients or reputational harm, any of which could materially adversely affect our business, results of operations and financial condition.
These companies tend to lack management depth, to have limited or no history of operations and to not have attained profitability. Additionally, although some of these companies may already have a commercially successful product or product line at the time of investment, technology products and services often have a more limited market or life span than products in other industries.
Additionally, although some of these companies may already have a commercially successful product or product line at the time of investment, technology products and services often have a more limited market or life span than products in other industries. Thus, the ultimate success of these companies may depend on their ability to continually innovate in increasingly competitive markets.
We also could not accept brokered deposits without FDIC approval. See “Capital Adequacy” under the heading “Supervision and Regulation” above for more details on these restrictions.
We also could not accept brokered deposits without FDIC approval. See “Capital Adequacy” under the heading “Supervision and Regulation” above for more details on these restrictions. If we became subject to these restrictions, they could have a material adverse effect on our liquidity, results of operations and financial condition.
The ACL on loans and leases are contra-asset valuation accounts that are deducted from the amortized cost basis of these assets to present the net amount expected to be collected. In the case of off-balance-sheet credit exposures, the ACL is a liability account reported as an other liability in our consolidated balance sheets.
The ACL on loans and leases are contra-asset valuation accounts that are deducted from the amortized cost basis of these assets to present the net amount expected to be collected.
Liquidity risk includes the possibility of being unable, at a reasonable cost and within acceptable risk tolerances, to pay obligations as they come due, to capitalize on growth opportunities as they arise, or to pay regular dividends because of an inability to liquidate assets or obtain adequate funding on a timely basis.
Liquidity risk refers to the risks arising from the inability to pay obligations when they come due without incurring unacceptable losses to earnings and/or capital, to capitalize on growth opportunities as they arise, or to pay regular dividends because of an inability to liquidate assets or obtain adequate funding on a timely basis.
If security measures are breached because of third-party action, employee error, malfeasance or otherwise, or if design flaws in the technology-based platform that we use are exposed and exploited, our relationships with customers, borrowers, employees, vendors, partners and investors could be severely damaged, and we could incur significant liability. 22 Table of Contents Because techniques used to sabotage or obtain unauthorized access to systems change frequently and generally are not recognized until they are launched against a target, we and our partners and collaborators may be unable to anticipate these techniques or to implement adequate preventative measures.
When security measures are breached because of third-party action, employee error, malfeasance or otherwise, or if design flaws in the technology-based platform that we use are exposed and exploited, our relationships with customers, borrowers, employees, vendors, partners and investors could be severely damaged, and we could incur significant liability.
Significant errors in assumptions used to compute gains on sale of loans could result in material revenue misstatements, which may have a material adverse effect on our business, results of operations and profitability. We believe that the valuations provided by GLS are at arm’s length and reflect fair value.
Deferred fees and costs are determined using internal analysis of the cost to originate loans. Significant errors in the assumptions used to compute gains on sale of loans could result in material revenue misstatements, which may have a material adverse effect on our business, results of operations and profitability.
Changes in interest rates may also present additional challenges to our business that we have not anticipated. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions, inflationary trends, changes in government spending and debt issuance and policies of various governmental and regulatory agencies and, in particular, the Federal Open Market Committee.
Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions, inflationary trends, changes in government spending and debt issuance and policies of various governmental and regulatory agencies and, in particular, the Federal Open Market Committee. 24 Table of Contents The amount of other real estate owned, or OREO, may increase significantly, resulting in additional losses, and costs and expenses that will negatively affect our operations.
If we fail to meet these capital and other regulatory requirements, our financial condition, liquidity and results of operations could be materially and adversely affected. 31 Table of Contents Although we comply with all current applicable capital requirements, we may be subject to more stringent regulatory capital requirements in the future, and we may need additional capital in order to meet those requirements.
Although we comply with all current applicable capital requirements, we may be subject to more stringent regulatory capital requirements in the future, and we may need additional capital in order to meet those requirements.
If we became subject to these restrictions, they could have a material adverse effect on our liquidity, results of operations and financial condition. 25 Table of Contents Our access to funding sources in amounts adequate to finance our activities or at a reasonable cost could be impaired by factors that affect us specifically or the financial services industry in general.
Our access to funding sources in amounts adequate to finance our activities or at a reasonable cost could be impaired by factors that affect us specifically or the financial services industry in general.
From time to time, we may develop, grow and/or acquire new lines of business or offer new products and services within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets for these products and services are not fully developed.
There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets for these products and services are not fully developed.
As of January 31, 2023, our directors and executive officers and their related entities own, in the aggregate, approximately 24.7% of our outstanding common stock. The significant concentration of stock ownership may adversely affect the trading price of our common stock due to investors’ perception that conflicts of interest may exist or arise.
The significant concentration of stock ownership may adversely affect the trading price of our common stock due to investors’ perception that conflicts of interest may exist or arise.
We are engaged, and may in the future engage, in strategic activities, including acquisitions, joint ventures, partnerships, investments or other business growth initiatives or undertakings.
We are engaged, and may in the future engage, in strategic activities, including acquisitions, joint ventures, partnerships, investments or other business growth initiatives or undertakings. There can be no assurance that we will successfully identify appropriate opportunities, that we will be able to negotiate or finance such activities or that such activities, if undertaken, will be successful.
This is an inherently uncertain process, and our loan loss reserves may not be sufficient to absorb future loan losses or prevent a material adverse effect on our business, results of operations and financial condition. 30 Table of Contents Insiders have substantial control over us, and this control may limit our shareholders’ ability to influence corporate matters and may delay or prevent a third party from acquiring control over us.
This is an inherently uncertain process, and our allowance for credit losses may not be sufficient to absorb future loan losses or prevent a material adverse effect on our business, results of operations and financial condition.
The amount of other real estate owned, or OREO, may increase significantly, resulting in additional losses, and costs and expenses that will negatively affect our operations. In connection with our banking business, we take title to real estate collateral from time to time through foreclosure or otherwise in connection with efforts to collect debts previously contracted.
In connection with our banking business, we take title to real estate collateral from time to time through foreclosure or otherwise in connection with efforts to collect debts previously contracted. Such real estate is referred to as other real estate owned (“OREO”).
The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our business, results of operations and financial condition. 26 Table of Contents Our use of appraisals in deciding whether to make a loan secured by real property or how to value the loan in the future may not accurately reflect the net value of the collateral that we can realize.
Our use of appraisals in deciding whether to make a loan secured by real property or how to value the loan in the future may not accurately reflect the net value of the collateral that we can realize. In considering whether to make a loan secured by real property, we generally require an appraisal of the property.
Any deterioration or downturn in real estate values in the markets we serve could have a material adverse effect on the value of the real property securing those loans. Our ability to recover on defaulted loans would then be diminished, and we would be more likely to suffer losses on defaulted loans.
However, the value of the collateral might not equal the amount of the unpaid loan, and we may be unsuccessful in recovering the remaining balance from our customer. Any deterioration or downturn in real estate values in the markets we serve could have a material adverse effect on the value of the real property securing those loans.
Because government regulation greatly affects the business and financial results of our organization, changes in the laws, regulations and procedures applicable to SBA and USDA loans could adversely affect our ability to operate profitably. 19 Table of Contents A prolonged U.S. government shutdown or default by the U.S. on government obligations would harm our results of operations.
The laws, regulations and standard operating procedures that are applicable to SBA and USDA loan products may change at any time. Because government regulation greatly affects the business and financial results of our organization, changes in the laws, regulations and procedures applicable to SBA and USDA loans could adversely affect our ability to operate profitably.
We cannot assure you that we will be able to raise additional capital if needed or raise additional capital on terms acceptable to us.
We cannot assure you that we will be able to raise additional capital if needed or raise additional capital on terms acceptable to us. If we fail to meet these capital and other regulatory requirements, our financial condition, liquidity and results of operations could be materially and adversely affected.
These companies may be unseasoned, unprofitable or have no established operating histories or earnings and may lack technical, marketing, financial and other resources. These companies often have the need for substantial additional capital to support expansion or to achieve or maintain a competitive position.
These companies often have the need for substantial additional capital to support expansion or to achieve or maintain a competitive position. Less established companies tend to have lower capitalization and fewer resources and, therefore, are often more vulnerable to financial failure.
In addition, in order to finance future strategic undertakings, we might require additional financing, which might not be available on terms favorable to us, or at all. If obtained, equity financing could be dilutive and the incurrence of debt and contingent liabilities could have a material adverse effect on our business, results of operations or financial condition.
In addition, in order to finance future strategic undertakings, we might require additional financing, which might not be available on terms favorable to us, or at all.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeDallas Parkway, Ste. 525 2022 5,241 Leased Banking Charlotte, NC Office 1018 Jay Street, Ste. 300 2023 7,645 Leased Banking The Company believes that its properties are maintained in good operating condition and are suitable and adequate for its operational needs. 37 Table of Contents
Biggest changeDallas Parkway, Ste. 525 2022 5,241 Leased Banking Charlotte, NC Office 1018 Jay Street, Ste. 300 2023 7,645 Leased Banking The Company believes that its properties are maintained in good operating condition and are suitable and adequate for its operational needs.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeIn addition, the Company is not aware of any threatened litigation, unasserted claims or assessments that could have a material adverse effect on its business, operating results or financial condition.
Biggest changeIn addition, the Company is not aware of any threatened litigation, unasserted claims or assessments that could have a material adverse effect on its business, operating results or financial condition. Item 4. MINE SAFETY DISCLOSURES Not applicable. 38 Table of Contents PART II
Item 3. LEGAL PROCEEDINGS In the ordinary course of operations, the Company is at times involved in legal proceedings. In the opinion of management, as of December 31, 2022, there are no material pending legal proceedings to which the Company or any of its subsidiaries is a party or of which any of their property is the subject.
Item 3. LEGAL PROCEEDINGS In the ordinary course of operations, the Company is at times involved in legal proceedings. In the opinion of management, as of December 31, 2023, there are no material pending legal proceedings to which the Company or any of its subsidiaries is a party or of which any of their property is the subject.
Removed
On March 12, 2021, a purported class action was filed against the Company in the United States District Court for the Eastern District of North Carolina, Joseph McAlear, individually and on behalf of all others similarly situated v. Live Oak Bancshares, Inc. et al.
Removed
The complaint alleged the existence of an agreement between the Company, nCino, Inc. and Apiture, LLC in which those companies purportedly sought to restrain the mobility of employees in violation of antitrust laws by agreeing not to solicit or hire each other’s employees.
Removed
The complaint alleged violations of Section 1 of the federal Sherman Act (15 U.S.C. § 1) and violations of Sections 75-1 and 75-2 of the North Carolina General Statutes. The plaintiff sought monetary damages, including treble damages, entitlement to restitution, disgorgement, attorneys’ fees, and pre- and post-judgment interest.
Removed
On October 12, 2021, the Company reached an agreement to settle the case with a proposed class of all persons (with certain exclusions) employed by the Company or its wholly-owned subsidiary, Live Oak Banking Company, Apiture, Inc. or nCino, Inc. in North Carolina at any time from January 27, 2017, through March 31, 2021.
Removed
In the agreement, the Company agreed to pay $3.9 million. On October 13, 2021, the plaintiff filed a motion for preliminary approval of the settlement, which the court granted by order entered on November 23, 2021.
Removed
After class-wide noticing, the plaintiff filed a motion for final approval on March 28, 2022, which the court granted by order entered on April 28, 2022. Pursuant to the terms of the settlement, the settlement became effective on June 11, 2022. Item 4. MINE SAFETY DISCLOSURES Not applicable. 38 Table of Contents PART II

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeThe stock performance graph shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, nor shall it be deemed to be “soliciting material” subject to Regulation 14A or incorporated by reference in any filing under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
Biggest changeThe stock performance graph shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, nor shall it be deemed to be “soliciting material” subject to Regulation 14A or incorporated by reference in any filing under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing. 39 Table of Contents Item 6. [RESERVED] 40 Table of Contents
Downturns in domestic and global economies and other factors could cause Bancshares board of directors to consider, among other things, the elimination of or reduction in the amount and/or frequency of cash dividends paid on Bancshares’ common stock.
Downturns in domestic and global economies and other factors could cause the Bancshares board of directors to consider, among other things, the elimination of or reduction in the amount and/or frequency of cash dividends paid on Bancshares’ common stock.
Stock Performance Graph The stock performance graph required by Item 201(e) of Regulation S-K is incorporated into this Report by reference from Bancshares annual report to shareholders for the year ended December 31, 2022, which will be posted on the Company’s website subsequent to the date of this Report.
Stock Performance Graph The stock performance graph required by Item 201(e) of Regulation S-K is incorporated into this Report by reference from Bancshares annual report to shareholders for the year ended December 31, 2023, which will be posted on the Company’s website and furnished to the SEC subsequent to the date of this Report.
Bancshares’ non-voting common stock is not listed for trading on any exchange. Holders As of January 31, 2023, there were 44,066,517 voting shares outstanding and 226 holders of record for Bancshares’ common stock. Dividend Policy The timing and amount of cash dividends paid depends on Bancshares’ earnings, capital requirements, financial condition and other relevant factors.
Bancshares’ non-voting common stock is not listed for trading on any exchange. Holders As of January 31, 2024, there were 44,648,626 voting shares outstanding and 210 holders of record for Bancshares’ common stock. Dividend Policy The timing and amount of cash dividends paid depends on Bancshares’ earnings, capital requirements, financial condition and other relevant factors.
Securities Authorized for Issuance under Equity Compensation Plans See Item 12 of this Report for disclosure regarding securities authorized for issuance under equity compensation plans required by Item 201(d) of Regulation S-K. Purchases of Equity Securities by the Issuer and Affiliated Purchasers None.
Securities Authorized for Issuance under Equity Compensation Plans See Item 12 of this Report for disclosure regarding securities authorized for issuance under equity compensation plans required by Item 201(d) of Regulation S-K.
Added
Purchases of Equity Securities by the Issuer and Affiliated Purchasers On May 17, 2022, the Board of Directors of the Company authorized the repurchase of up to $50,000,000 in shares of the Company’s voting common stock from time to time through December 31, 2023 (the “Repurchase Program”).
Added
The Repurchase Program enabled the Company to acquire shares through open market purchases or privately negotiated transactions, including through a Rule 10b5-1 plan, at the discretion of management and on terms (including quantity, timing, and price) that management determined to be advisable.
Added
Actions in connection with the repurchase program were subject to various factors, including the Company’s capital and liquidity positions, regulatory and accounting considerations, the Company’s financial and operational performance, alternative uses of capital, the trading price of the Company’s common stock, and market conditions.
Added
The repurchase program did not obligate the Company to acquire a specific dollar amount or number of shares and was subject to extension, modification, or discontinuance at any time. As of December 31, 2023, the Company had not made any purchases of shares under the Repurchase Program.

Item 6. [Reserved]

Selected Financial Data — reserved (removed by SEC in 2021)

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Biggest changeFinancial Statements and Supplementary Data 71 Report of Independent Registered Public Accounting Firm 72 Consolidated Balance Sheets as of December 31, 2022 and 2021 77 Consolidated Statements of Income for the Years Ended December 31, 2022, 2021 and 2020 78 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2022, 2021 and 2020 79 Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2022, 2021 and 2020 80 Consolidated Statements of Cash Flows for the Years Ended December 31, 2022, 2021 and 2020 81 Notes to Consolidated Financial Statements 83
Biggest changeFinancial Statements and Supplementary Data 73 Report of Independent Registered Public Accounting Firm 74 Consolidated Balance Sheets as of December 31, 2023 and 2022 79 Consolidated Statements of Income for the Years Ended December 31, 2023, 2022 and 2021 80 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2023, 2022 and 202 1 81 Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2023, 2022 and 202 1 82 Consolidated Statements of Cash Flows for the Years Ended December 31, 2023, 2022, and 2021 83 Notes to Consolidated Financial Statements 85
Item 6. [Reserved] 39 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 40 Item 7A. Quantitative and Qualitative Disclosures about Market Risk 69 Item 8.
Item 6. [Reserved] 40 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 41 Item 7A. Quantitative and Qualitative Disclosures about Market Risk 71 Item 8.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

152 edited+63 added−51 removed55 unchanged
Biggest changeThe following table provides information with respect to nonperforming assets and troubled debt restructurings, excluding loans measured at fair value, at the dates indicated. 2022 (1) 2021 (1) Nonaccrual loans and leases: Total nonperforming loans and leases (all on nonaccrual) $ 73,392 $ 42,533 Total accruing loans and leases past due 90 days or more — — Foreclosed assets — 620 Total troubled debt restructurings 80,604 55,273 Less nonaccrual troubled debt restructurings (19,054) (18,210) Total performing troubled debt restructuring 61,550 37,063 Total nonperforming assets and troubled debt restructurings $ 134,942 $ 80,216 Allowance for credit losses on loans and leases $ 96,566 $ 63,584 Total nonperforming loans and leases to total loans and leases held for investment 1.07 % 0.87 % Total nonperforming loans and leases to total assets 0.78 % 0.56 % Total nonperforming assets and troubled debt restructurings to total assets 1.44 % 1.06 % Allowance for credit losses on loans and leases to loans and leases held for investment 1.41 % 1.30 % Allowance for credit losses on loans and leases to total nonperforming loans and leases 131.58 % 149.49 % (1) Excludes loans measured at fair value. 54 Table of Contents 2022 (1) 2021 (1) Nonaccrual loans and leases guaranteed by U.S. government: Total nonperforming loans and leases guaranteed by the U.S. government (all on nonaccrual) $ 54,608 $ 26,546 Total accruing loans and leases past due 90 days or more guaranteed by the U.S. government — — Foreclosed assets guaranteed by the U.S. government — 490 Total troubled debt restructurings guaranteed by the U.S. government 35,465 26,954 Less nonaccrual troubled debt restructurings guaranteed by the U.S. government (14,944) (10,770) Total performing troubled debt restructurings guaranteed by U.S. government 20,521 16,184 Total nonperforming assets and troubled debt restructurings guaranteed by the U.S. government $ 75,129 $ 43,220 Allowance for credit losses on loans and leases $ 96,566 $ 63,584 Total nonperforming loans and leases not guaranteed by the U.S. government to total held for investment loans and leases 0.27 % 0.33 % Total nonperforming loans and leases not guaranteed by the U.S. government to total assets 0.20 % 0.21 % Total nonperforming assets and troubled debt restructurings not guaranteed by the U.S. government to total assets 0.64 % 0.49 % Allowance for credit losses on loans and leases to total nonperforming loans and leases not guaranteed by the U.S government 514.09 % 397.73 % (1) Excludes loans measured at fair value.
Biggest changeThe following table provides information with respect to nonperforming assets, excluding loans measured at fair value, at the dates indicated. 2023 (1) 2022 (1) Nonaccrual loans and leases: Total nonperforming loans and leases (all on nonaccrual) $ 134,963 $ 73,392 Foreclosed assets 6,481 — Total nonperforming assets $ 141,444 $ 73,392 Allowance for credit losses on loans and leases $ 125,840 $ 96,566 Total nonperforming loans and leases to total loans and leases held for investment 1.64 % 1.07 % Total nonperforming loans and leases to total assets 1.24 % 0.78 % Allowance for credit losses on loans and leases to loans and leases held for investment 1.53 % 1.41 % Allowance for credit losses on loans and leases to total nonperforming loans and leases 93.24 % 131.58 % (1) Excludes loans measured at fair value. 2023 (1) 2022 (1) Nonaccrual loans and leases guaranteed by U.S. government: Total nonperforming loans and leases guaranteed by the U.S. government (all on nonaccrual) $ 95,678 $ 54,608 Foreclosed assets guaranteed by the U.S. government 3,670 — Total nonperforming assets guaranteed by the U.S. government $ 99,348 $ 54,608 Allowance for credit losses on loans and leases $ 125,840 $ 96,566 Total nonperforming loans and leases not guaranteed by the U.S. government to total held for investment loans and leases 0.48 % 0.27 % Total nonperforming loans and leases not guaranteed by the U.S. government to total assets 0.36 % 0.20 % Allowance for credit losses on loans and leases to total nonperforming loans and leases not guaranteed by the U.S government 320.33 % 514.09 % (1) Excludes loans measured at fair value.
These qualitative adjustments include risk grades, delinquency levels, pool age, portfolio mix & growth rates and the status of servicing efforts that may be impacted by natural disasters or health pandemics. As indicated above, the loan risk grading process generally has the most significant impact on the ACL.
These qualitative adjustments include risk grades, delinquency levels, pool age, portfolio mix and growth rates and the status of servicing efforts that may be impacted by natural disasters or health pandemics. As indicated above, the loan risk grading process generally has the most significant impact on the ACL.
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.
In addition, the loan servicing asset revaluation is significantly impacted by changes in market rates and other underlying assumptions such as prepayment speeds and default rates. Net (loss) gain on loans accounted for under the fair value option is also significantly impacted by changes in market rates, prepayment speeds and inherent credit risk.
The following table presents information regarding average balances for assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amount of interest expense on average interest-bearing liabilities, and the resulting average yields and costs.
The following table presents information regarding average balances for assets and liabilities, the total dollar amounts of interest income from average interest-earning assets, the total dollar amount of interest expense on average interest-bearing liabilities, and the resulting average yields and costs.
While the efficiency ratio is a measure of productivity, its value reflects the unique attributes of the “high-touch business model” the Company employs. 67 Table of Contents The Company believes these non-GAAP financial measures provide useful information to management and investors that is supplementary to the financial condition, results of operations and cash flows computed in accordance with GAAP; however, the Company acknowledges that non-GAAP financial measures have a number of limitations.
While the efficiency ratio is a measure of productivity, its value reflects the unique attributes of the “high-touch business model” the Company employs. 69 Table of Contents The Company believes these non-GAAP financial measures provide useful information to management and investors that is supplementary to the financial condition, results of operations and cash flows computed in accordance with GAAP; however, the Company acknowledges that non-GAAP financial measures have a number of limitations.
The Company paid down this balance in full on May 20, 2022 and there is $100.0 million of available credit remaining at December 31, 2022 .
The Company paid down this balance in full on May 20, 2022 and there is $100.0 million of available credit remaining at December 31, 2023 .
The Company also has less routinely generated gains and losses arising from its financial technology investments predominantly in its fintech segment, as discussed more fully later in this section under the caption “Results of Segment Operations.” 40 Table of Contents Executive Summary The table below sets forth selected consolidated financial data as of the dates or for the periods indicated.
The Company also has less routinely generated gains and losses arising from its financial technology investments predominantly in its fintech segment, as discussed more fully later in this section under the caption “Results of Segment Operations.” 41 Table of Contents Executive Summary The table below sets forth selected consolidated financial data as of the dates or for the periods indicated.
Non-GAAP financial measures have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for analysis of the Company's results or financial condition as reported under GAAP. Management’s non-GAAP measures are not necessarily comparable to similar named measures represented by other companies, as they may be calculated differently.
Non-GAAP financial measures have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for analysis of the Company's results or financial condition as reported under GAAP. Management’s non-GAAP measures are not necessarily comparable to similarly named measures represented by other companies, as they may be calculated differently.
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.
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 3.
Contractual Obligations The Company has entered into significant fixed and determinable contractual obligations for future payments. See the accompanying notes to the consolidated financial statements for expected timing of payments as of December 31, 2022. These include operating leases (Note 4. Leases), time deposits with stated maturity dates (Note 7. Deposits) and borrowings (Note 8. Borrowings).
Contractual Obligations The Company has entered into significant fixed and determinable contractual obligations for future payments. See the accompanying notes to the consolidated financial statements for expected timing of payments as of December 31, 2023. These include operating leases (Note 4. Leases), time deposits with stated maturity dates (Note 7. Deposits) and borrowings (Note 8. Borrowings).
At December 31, 2022, the Company utilized economic assumptions that management believed were the most likely to occur during the duration of the forecast period which had current unemployment levels remaining relatively stable during the one-year forecast period. Selecting a different forecast in the current environment could result in a significantly different ACL.
At December 31, 2023, the Company utilized economic assumptions that management believed were the most likely to occur during the duration of the forecast period which had current unemployment levels remaining relatively stable during the one-year forecast period. Selecting a different forecast in the current environment could result in a significantly different ACL.
Noninterest Expense Noninterest expense comprises all operating costs of the Company, such as employee-related costs, travel, professional services, advertising and marketing expenses, exclusive of interest and income tax expense. The following table shows the components of noninterest expense and the related dollar and percentage changes for the periods presented.
Noninterest Expense Noninterest expense comprises all operating costs of the Company, such as employee-related costs, travel, professional services, advertising and marketing expenses, exclusive of interest and income tax expense. 49 Table of Contents The following table shows the components of noninterest expense and the related dollar and percentage changes for the periods presented.
At the end of the forecast period adjusted loss rates revert back to a historical rate over a one-year period. $2.6 million 2.7 % If facts and circumstances supported the Company’s utilization of more severe unemployment scenario other impacts to the model would also be factored in which could result in a materially different estimate than that provided above.
At the end of the forecast period adjusted loss rates revert back to a historical rate over a one-year period. 6.2 million 4.9 If facts and circumstances supported the Company’s utilization of more severe unemployment scenario other impacts to the model would also be factored in which could result in a materially different estimate than that provided above.
This increase was primarily due to the growth of the Company’s customer base in the savings and time deposit products, enhanced by a nationwide marketing campaign with attractive rates and additional wholesale funding, to support the significant loan growth in 2022.
This increase was primarily due to the growth of the Company’s customer base in the savings and time deposit products, enhanced by a nationwide marketing campaign with attractive rates and additional wholesale funding, to support the significant loan growth in 2023.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview The following presents management’s discussion and analysis (“MD&A”) of the more significant factors that affected the Company's financial condition and results of operations for the year ended December 31, 2022 as compared to December 31, 2021.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview The following presents management’s discussion and analysis (“MD&A”) of the more significant factors that affected the Company's financial condition and results of operations for the year ended December 31, 2023 as compared to December 31, 2022.
The increase in the investment portfolio for 2022 was to support earnings through additional yield compared to cash alternatives, continue to provide a contingent funding source, and act as a mechanism to manage the Company’s interest rate risk.
The increase in the investment portfolio for 2023 was to support earnings through additional yield compared to cash alternatives, continue to provide a contingent funding source and act as a mechanism to manage the Company’s interest rate risk.
On December 30, 2022, the Company made an advance of $50.0 million on an overnight Fed Funds line of credit that is unsecured with an interest rate of 4.65% with $50.0 million of available credit remaining at December 31, 2022.
On December 30, 2022, the Company made an advance of $50.0 million on an overnight Fed Funds line of credit that was unsecured with an interest rate of 4.65% with $50.0 million of available credit remaining at December 31, 2022.
Additionally, the Company maintains a guaranteed loan portfolio that is also a contingent liquidity source, whether via pledging to the Federal Reserve Discount Window or through liquidation. At December 31, 2022, none of the investment securities portfolio was pledged to secure public deposits or pledged to retail repurchase agreements, leaving $1.01 billion available to be pledged as collateral.
Additionally, the Company maintains a guaranteed loan portfolio that is also a contingent liquidity source, whether via pledging to the Federal Reserve Discount Window or through liquidation. At December 31, 2023, none of the investment securities portfolio was pledged to secure public deposits or pledged to retail repurchase agreements, leaving $1.13 billion available to be pledged as collateral.
The following table summarizes the impact of more severe unemployment forecast scenarios if they had been selected at December 31, 2022. 64 Table of Contents Approximate increase to ACL Scenario Forecasted Unemployment $ % Severe Current unemployment levels increase to 5.6% in the first quarter of 2023 and increase to 9.2% by the end of a one-year forecast period.
The following table summarizes the impact of more severe unemployment forecast scenarios if they had been selected at December 31, 2023. 65 Table of Contents Approximate increase to ACL Scenario Forecasted Unemployment $ % Severe Current unemployment levels increase to 5.6% in the first quarter of 2024 and increase to 9.2% by the end of a one-year forecast period.
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.
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, Federal Reserve Bank Term Funding Program and the Federal Reserve Discount Window.
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, an inflation rate, ancillary income, prepayment speeds and default rates and losses, with the prepayment speed being one of the most sensitive assumptions.
The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as adequate compensation for servicing, the discount rate, the custodial earnings rate, ancillary income, prepayment speeds and default rates and losses, with the prepayment speed and discount rate being the most sensitive assumptions.
At December 31, 2022, the portion of criticized and classified loans and leases guaranteed by the SBA or USDA totaled $195.8 million and total portfolio unguaranteed exposure risk was $228.9 million, or 5.5% of total held for investment unguaranteed exposure carried at historical cost.
This compares to the December 31, 2022 portion of criticized and classified loans and leases guaranteed by the SBA or USDA which totaled $195.8 million and total portfolio unguaranteed exposure risk was $228.9 million, or 5.5% of total held for investment unguaranteed exposure carried at historical cost.
For a comparison of 2021 results to 2020 and other 2020 information not included herein, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Part II, Item 7 of the 2021 Form 10-K filed with the SEC on February 24, 2022.
For a comparison of 2022 results to 2021 and other 2021 information not included herein, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Part II, Item 7 of the 2022 Form 10-K filed with the SEC on February 23, 2023 .
Risk-based capital ratios, which include Tier 1 Capital, Total Capital and Common Equity Tier 1 Capital, are calculated based on regulatory guidance related to the measurement of capital and risk-weighted assets. 62 Table of Contents Capital amounts and ratios as of December 31, 2022, 2021 and 2020 are presented in the table below.
Risk-based capital ratios, which include Tier 1 Capital, Total Capital and Common Equity Tier 1 Capital, are calculated based on regulatory guidance related to the measurement of capital and risk-weighted assets. Capital amounts and ratios as of December 31, 2023, 2022 and 2021 are presented in the table below.
Construction loans typically have extended build out periods that inherently result in longer lead times between origination and the ultimate sale date. Approximately 34.7% of the held for sale portfolio is aged between one and two years.
Construction loans typically have extended build out periods that inherently result in longer lead times between origination and the ultimate sale date. Approximately 19.8% of the held for sale portfolio is aged between one and two years.
The Company paid the Lender a non-refundable $750 thousand loan origination fee upon signing of the Note that will be amortized into interest expense over the life of the loan. The Company made an advance of $8.0 million on December 20, 2021 and $12.0 million on March 16, 2022.
The Company paid the Lender a non-refundable $750 thousand loan origination fee upon signing of the Note and a non-refundable $250 thousand renewal fee in September 2023 that will be amortized into interest expense over the life of the loan. The Company made an advance of $8.0 million on December 20, 2021 and $12.0 million on March 16, 2022.
At December 31, 2022, the modified duration of the overall available-for-sale securities portfolio was approximately 6.8 years. 59 Table of Contents The following table sets forth the stated maturities and weighted average yields of investment securities at December 31, 2022. Certain mortgage related securities have adjustable interest rates and will reprice annually within the various maturity ranges.
At December 31, 2023, the modified duration of the overall available-for-sale securities portfolio was approximately 6.45 years. 60 Table of Contents The following table sets forth the stated maturities and weighted average yields of investment securities at December 31, 2023. Certain mortgage related securities have adjustable interest rates and will reprice annually within the various maturity ranges.
Income from the retention of loans is comprised principally of interest income. Income from the sale of loans is comprised of loan servicing revenue and revaluation of related servicing assets along with net gains on sales of loans.
Income from the sale of loans is comprised of loan servicing revenue and revaluation of related servicing assets along with net gains on sales of loans.
This method, however, addresses only the magnitude of timing differences and does not address earnings or market value. Therefore, management uses an earnings simulation model to prepare, on a regular basis, earnings projections based on a range of interest rate scenarios to more accurately measure interest rate risk. For more information, see Item 7A of this Report.
This method, however, addresses only the magnitude of timing differences and does not address earnings or market value. Therefore, management uses an earnings simulation model to prepare, on a regular basis, earnings projections based on a range of interest rate scenarios to more accurately measure interest rate risk.
At December 31, 2022 and December 31, 2021, 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 0.6%, respectively.
At December 31, 2023 and December 31, 2022, 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 0.8% and 0.7%, respectively.
This increase was principally due to the significant growth in the held for investment loan and lease portfolio outpacing moderate growth in interest-bearing liabilities combined with an increase in average cost of funds which exceeded the increase in average yield on interest-earning assets.
This increase was principally due to the significant growth in the held for investment loan and lease portfolio outpacing growth in interest-bearing liabilities offset by an increase in average cost of funds which exceeded the increase in average yield on interest-earning assets.
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 ratio at both December 31, 2022 and December 31, 2021 was 2.3%. 55 Table of Contents As of December 31, 2022, and December 31, 2021, potential problem (also referred to as criticized) and classified loans and leases, excluding loans measured at fair value, totaled $424.7 million and $372.7 million, respectively.
Adjusting the ratio to include only the unguaranteed portion of nonperforming loans and leases at historical cost to reflect management’s belief that the greater magnitude of risk resides in this portion, the ratio at December 31, 2023 and 2022 was 4.3% and 2.3%, respectively. 56 Table of Contents As of December 31, 2023 , and December 31, 2022 , potential problem (also referred to as criticized) and classified loans and leases, excluding loans measured at fair value, totaled $785.2 million and $424.7 million, respectively.
Actual results may differ from these estimates under different assumptions or conditions. 63 Table of Contents The Company’s accounting policies, including those for the Company’s critical accounting estimates are described in detail in Note 1. Organization and Summary of Significant Accounting Policies in the consolidated financial statements and are an integral part of the Company’s consolidated financial statements.
Actual results may differ from these estimates under different assumptions or conditions. The Company’s accounting policies, including those for the Company’s critical accounting estimates are described in detail in Note 1. Organization and Summary of Significant Accounting Policies in the accompanying notes to the consolidated financial statements and are an integral part of the Company’s consolidated financial statements.
As government payment assistance began to expire toward the end of 2020, borrowers with continuing difficulties arising from the pandemic were provided additional relief through payment deferrals. At December 31, 2022, the Company had $14.8 million in unguaranteed loans on SBA payment assistance.
As government payment assistance began to expire toward the end of 2020, borrowers with continuing difficulties arising from the pandemic were provided additional relief through payment deferrals. At December 31, 2023, the Company had $11.0 million in unguaranteed loans on SBA payment assistance.
Live Oak Ventures’ purpose is investing in businesses that align with the Company's strategic initiative to be a leader in financial technology. Canapi Advisors provides investment advisory services to a series of funds (the “Canapi Funds”) focused on providing venture capital to new and emerging financial technology companies.
The Grove provides Company employees and business visitors with on-site dining. Live Oak Ventures’ purpose is investing in businesses that align with the Company's strategic initiative to be a leader in financial technology. Canapi Advisors provides investment advisory services to a series of funds (the “Canapi Funds”) focused on providing venture capital to new and emerging financial technology companies.
As of December 31, 2022 and 2021, the cumulative total outstanding balance of loans sold since May 2007 totaled $3.48 billion and $3.30 billion, respectively. The Company generally continues to service loans after the date of sale.
As of December 31, 2023 and 2022, the cumulative total outstanding balance of loans sold since May 2007 totaled $4.24 billion and $3.48 billion, respectively. The Company generally continues to service loans after the date of sale.
Excluding PPP loan impacts of $7.0 million, comprised of amortization of net deferred fees combined with a 1% annualized interest rate less the related interest expense from funding activity, net interest income increased by $75.1 million.
Excluding PPP loan impacts, comprised of amortization of net deferred fees combined with a 1% annualized interest rate less the related interest expense from funding activity, net interest income increased by $24.3 million.
The Bank’s wholly owned subsidiaries are Live Oak Number One, Inc., Live Oak Clean Energy Financing LLC (“LOCEF”), Live Oak Private Wealth, LLC (“Live Oak Private Wealth”) and Tiburon Land Holdings, LLC (“TLH”). Live Oak Number One, Inc. holds properties foreclosed on by the Bank. LOCEF provides financing to entities for renewable energy applications.
As of December 31, 2023, the Bank’s wholly owned subsidiaries were Live Oak Number One, Inc., Live Oak Clean Energy Financing LLC (“LOCEF”), Live Oak Private Wealth, LLC (“Live Oak Private Wealth”) and Tiburon Land Holdings, LLC (“TLH”). Live Oak Number One, Inc. holds properties foreclosed on by the Bank. LOCEF provides financing to entities for renewable energy applications.
To illustrate, if the weighted average prepayment assumption were decreased by 25%, the ACL as of December 31, 2022 would increase by approximately $5.4 million or 5.6%.
To illustrate, if the weighted average prepayment assumption were decreased by 25%, the ACL as of December 31, 2023 would increase by approximately $6.0 million or 4.7%.
Loan and Lease Maturity As of December 31, 2022, $9.06 billion, or 79.6%, of the total outstanding balance of loans and leases, including those at fair value and those serviced for others, were variable rate loans that adjust at specified dates based on the prime lending rate or other variable indices.
Loan and Lease Maturity As of December 31, 2023, $10.60 billion, or 79.8%, of the total outstanding balance of loans and leases, including those at fair value and those serviced for others, were variable rate loans that adjust at specified dates based on the prime lending rate or other variable indices.
At the end of the forecast period adjusted loss rates revert back to a historical rate over a one-year period. $26.7 million 27.6 % Moderate Current unemployment levels increase to 4.6% in the first quarter of 2023 and increase to 7.2% by the end of a one-year forecast period.
At the end of the forecast period adjusted loss rates revert back to a historical rate over a one-year period. $30.9 million 24.6 % Moderate Current unemployment levels increase to 4.6% in the first quarter of 2024 and increase to 7.2% by the end of a one-year forecast period.
A primary tool in the Company’s liquidity management process is the utilization of a Volatile Liability Coverage Ratio (“VLCR”) model to stress outflows in various scenarios with targeted days of liquidity coverage. The VLCR model output is then used by management to ensure adequate liquidity sources are available during those future periods.
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.
To illustrate, if all loans in the Company’s five largest industry verticals ($1.7 billion or 40.9% of unguaranteed held for investment loans not accounted for under the fair value option) were adjusted down by one risk grade (e.g., RG 4 to RG 5) across all pools, the ACL as of December 31, 2022 would increase by approximately $10.0 million, or 10.4%.
To illustrate, if all loans in the Company’s five largest industry verticals ($2.17 billion or 41.0% of unguaranteed held for investment loans not accounted for under the fair value option) were adjusted down by one risk grade (e.g., RG 4 to RG 5) across all pools, the ACL as of December 31, 2023 would increase by approximately $13.9 million, or 11.0%.
Loans and leases maturing in greater than five years total $5.48 billion of the total $7.35 billion. The variable rate portion of the total held for investment loans and leases, excluding PPP loans, is 80.4%, which reflects the Company’s strategy to minimize interest rate risk through the use of variable rate products.
Loans and leases maturing in greater than five years total $5.96 billion of the total $8.66 billion. The variable rate portion of the total held for investment loans and leases, excluding PPP loans, is 81.4%, which reflects the Company’s strategy to minimize interest rate risk through the use of variable rate products.
At December 31, 2022, approximately 91.4% of loans and leases classified as Risk Grade 5 are performing with no relationships having payments past due more than 30 days.
At December 31, 2023 , approximately 99.3% of loans and leases classified as Risk Grade 5 are performing with no relationships having payments past due more than 30 days.
At the end of the forecast period adjusted loss rates revert back to a historical rate over a one-year period. $11.5 million 11.9 % Mild Current unemployment levels decrease to 4.1% in the first quarter of 2023 before increasing to 5.2% by the end of a one-year forecast period.
At the end of the forecast period adjusted loss rates revert back to a historical rate over a one-year period. 17.6 million 14.0 Mild Current unemployment levels decrease to 4.1% in the first quarter of 2024 before increasing to 5.2% by the end of a one-year forecast period.
As a percentage of the Bank’s total capital, nonperforming loans and leases, excluding loans measured at fair value, represented 9.0% at December 31, 2022 , compared to 6.0% at December 31, 2021 .
As a percentage of the Bank’s total capital, nonperforming loans and leases, excluding loans measured at fair value, repres ented 14.6% at December 31, 2023, compared to 9.0% at December 31, 2022.
In December 2022, the Federal Reserve released its most current federal funds target rate midpoint projections which implied an increase of the median Federal Funds rate to 5.1% by the end of 2023 and a decrease of approximately 100 basis points to 4.1% by the end of 2024.
In December 2023, the Federal Reserve released its most current federal funds target rate midpoint projections which implied a decrease of the median Federal Funds rate to 4.6% by the end of 2024 and a decrease of approximately 100 basis points to 3.6% by the end of 2025.
The Company believes that its focus on compliance with regulations and guidance from the SBA and USDA are key factors to managing this risk. For 2022, the provision for loan and lease credit losses was $40.9 million compared to $15.2 million in 2021, an increase of $25.7 million.
The Company believes that its focus on compliance with regulations and guidance from the SBA and USDA are key factors to managing this risk. For 2023, the provision for loan and lease credit losses was $51.3 million compared to $40.9 million in 2022, an increase of $10.4 million.
As of December 31, 2022, $4.82 billion, or 42.3%, of total outstanding balance of loans and leases, including those at fair value and those serviced for others, were variable rate loans that adjust on either a calendar monthly or calendar quarterly basis using the prime lending rate or other variable indices.
As of December 31, 2023, $5.97 billion, or 45.0%, of total outstanding balance of loans and leases, including those at fair value and those serviced for others, were variable rate loans that adjust on either a calendar monthly or calendar quarterly basis using the prime lending rate or other variable indices.
The increase in noninterest expense was predominately driven by the following items. Salaries and employee benefits : Total personnel expense for 2022 increased by $45.9 million, or 36.7%, compared to 2021. The increase in salaries and employee benefits was principally related to continued investment in human resources to support strategic and growth initiatives.
The increase in noninterest expense was predominately driven by the following items. Salaries and employee benefits : Total personnel expense for 2023 increased by $4.2 million, or 2.5%, compared to 2022 . The increase in salaries and employee benefits was principally related to continued investment in human resources to support strategic and growth initiatives.
Average equity to average assets was 9.0% for the year ended December 31, 2022 compared to 7.9% for the year ended December 31, 2021 .
Average equity to average assets was 8.0% for the year ended December 31, 2023 compared to 9.0% for the year ended December 31, 2022 .
Organization and Summary of Significant Accounting Policies and Note 3. Loans and Leases Held for Investment and Credit Quality in the notes to consolidated financial statements for further details of the factors considered by the Company in estimating the necessary level of the ACL.
Loans and Leases Held for Investment and Credit Quality in the notes to consolidated financial statements for further details of the factors considered by the Company in estimating the necessary level of the ACL.
As of and for the Year Ended December 31, 2022 2021 2020 Income Statement Data Net income $ 176,208 $ 166,995 $ 59,543 Per Common Share Net income, diluted $ 3.92 $ 3.71 $ 1.43 Dividends declared 0.12 0.12 0.12 Book value 18.41 16.39 13.38 Tangible book value (1) 18.32 16.31 13.28 Performance Ratios Return on average assets 1.96 % 2.03 % 0.85 % Return on average equity 21.92 25.58 10.49 Net interest margin 3.87 3.86 3.03 Efficiency ratio (1) 55.57 50.55 69.10 Noninterest income to total revenue 42.09 35.06 30.17 Dividend payout ratio 2.99 3.10 8.20 Selected Loan Metrics Loans and leases originated $ 4,007,621 $ 4,480,725 $ 4,450,198 Outstanding balance of sold loans serviced 3,481,885 3,298,828 3,205,623 Asset Quality Ratios Allowance for credit losses to loans and leases held for investment (2) 1.41 % 1.30 % 1.21 % Net charge-offs (2) $ 7,961 $ 3,932 $ 15,265 Net charge-offs to average loans and leases held for investment (2) (3) 0.14 % 0.08 % 0.44 % Nonperforming loans and leases at historical cost (2) (4) Unguaranteed $ 18,784 $ 15,987 $ 20,078 Guaranteed 54,608 26,546 26,032 Total 73,392 42,533 46,110 Unguaranteed nonperforming historical cost loans and leases, to loans and leases held for investment (2) (4) 0.27 % 0.33 % 0.46 % Nonperforming loans at fair value (5) Unguaranteed $ 6,678 $ 4,791 $ 5,387 Guaranteed 38,212 33,471 30,112 Total 44,890 38,262 35,499 Unguaranteed nonperforming fair value loans to loans held for investment (5) 1.35 % 0.74 % 0.66 % Consolidated Capital Ratios Common equity tier 1 capital (to risk-weighted assets) 12.47 % 12.38 % 12.15 % Tier 1 leverage capital (to average assets) 9.26 8.87 8.40 (1) See "Non-GAAP Measures" presented at the conclusion of this Item 7 for more information and a reconciliation to the most closely related GAAP measure.
As of and for the Year Ended December 31, 2023 2022 2021 Income Statement Data Net income $ 73,898 $ 176,208 $ 166,995 Per Common Share Net income, diluted $ 1.64 $ 3.92 $ 3.71 Dividends declared 0.12 0.12 0.12 Book value 20.23 18.41 16.39 Tangible book value (1) 20.15 18.32 16.31 Performance Ratios Return on average assets 0.69 % 1.96 % 2.03 % Return on average equity 8.66 21.92 25.58 Net interest margin 3.35 3.87 3.86 Efficiency ratio (1) 70.65 55.57 50.55 Noninterest income to total revenue 24.45 42.09 35.06 Dividend payout ratio 7.20 2.99 3.10 Selected Loan Metrics Loans and leases originated $ 3,946,873 $ 4,007,621 $ 4,480,725 Outstanding balance of sold loans serviced 4,238,328 3,481,885 3,298,828 Asset Quality Ratios Allowance for credit losses to loans and leases held for investment (2) 1.53 % 1.41 % 1.30 % Net charge-offs (2) $ 21,373 $ 7,961 $ 3,932 Net charge-offs to average loans and leases held for investment (2) (3) 0.28 % 0.14 % 0.08 % Nonperforming loans and leases at historical cost (2) Unguaranteed $ 39,285 $ 18,784 $ 15,987 Guaranteed 95,678 54,608 26,546 Total 134,963 73,392 42,533 Unguaranteed nonperforming historical cost loans and leases, to loans and leases held for investment (2) 0.48 % 0.27 % 0.33 % Nonperforming loans at fair value (4) Unguaranteed $ 7,230 $ 6,678 $ 4,791 Guaranteed 41,244 38,212 33,471 Total 48,474 44,890 38,262 Unguaranteed nonperforming fair value loans to loans held for investment (4) 1.86 % 1.35 % 0.74 % Consolidated Capital Ratios Common equity tier 1 capital (to risk-weighted assets) 11.73 % 12.47 % 12.38 % Tier 1 leverage capital (to average assets) 8.58 9.26 8.87 (1) See "Non-GAAP Measures" presented at the conclusion of this Item 7 for more information and a reconciliation to the most closely related GAAP measure.
As of December 31, 2022 and 2021, the total outstanding balance of loans and leases, including those serviced for others, was $11.38 billion and $9.96 billion, respectively.
As of December 31, 2023 and 2022, the total outstanding balance of loans and leases, including those serviced for others, was $13.28 billion and $11.38 billion, respectively.
The growth in total assets was principally driven by the following: • Cash and cash equivalents, comprised of cash and due from banks and federal funds sold, combined with investment securities available-for-sale was $1.43 billion at December 31, 2022, an increase of $321.6 million, or 29.0%, compared to $1.11 billion at December 31 , 2021.
The growth in total assets was principally driven by the following: • Cash and cash equivalents, comprised of cash and due from banks and federal funds sold, combined with investment securities available-for-sale was $1.71 billion at December 31, 2023 , an increase of $277.3 million, or 19.4%, compared to $1.43 billion at December 31 , 2022.
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, an inflation rate, ancillary income, prepayment speeds and default rates and losses.
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, an inflation rate, ancillary income, prepayment speeds and default rates and losses. The fair value of servicing rights is highly sensitive to changes in underlying assumptions.
Management believes that non-GAAP financial measures provide additional useful information that allows readers to evaluate the ongoing performance of the Company without regard to certain transactional activities.
The reconciliation of non-GAAP measures is presented at the conclusion of this Item 7. Management believes that non-GAAP financial measures provide additional useful information that allows readers to evaluate the ongoing performance of the Company without regard to certain transactional activities.
A formal loan review function, independent of loan origination, is used to identify and monitor problem loans. This function reports directly to the Audit & Risk Committee of the Board of Directors.
Asset Quality Management considers asset quality to be of primary importance. A formal loan review function, independent of loan origination, is used to identify and monitor problem loans. This function reports directly to the Audit Committee of the Board of Directors.
Other Considerations While management utilizes its best judgment and information available, the ultimate adequacy of our ACL is dependent upon a variety of factors beyond our control, including the performance of our portfolios, the economy, changes in interest rates and the view of the regulatory authorities toward classification of assets. See Note 1.
Other Considerations While management utilizes its best judgment and information available, the ultimate adequacy of our ACL is dependent upon a variety of factors beyond our control, including the performance of our portfolios, the economy, and changes in interest rates. See Note 1. Organization and Summary of Significant Accounting Policies and Note 3.
TLH was formed in the third quarter of 2022 to hold land adjacent to the Bank's headquarters consisting of wetlands and other protected property for the use and enjoyment of the Bank's employees and customers. The Company generates revenue primarily from net interest income and secondarily through origination and sale of government guaranteed loans.
TLH holds land adjacent to the Bank's headquarters consisting of wetlands and other protected property for the use and enjoyment of the Bank's employees and customers. The Company generates revenue primarily from net interest income and secondarily through the origination and sale of government guaranteed loans. Income from the retention of loans is comprised principally of interest income.
Of the above listed verticals, Senior Housing and Sponsor Finance is within the Company’s Specialty Lending division while Hotels are within the Energy & Infrastructure division, the remainder of the above listed verticals are within the Small Business Banking division.
Of the above listed verticals, Senior Housing, Asset-Based Lending and Government Contracting are within the Company’s Specialty Lending division while Hotels and Bioenergy are within the Energy & Infrastructure division, the remainder of the above listed verticals are within the Small Business Banking division.
See “Important Note Regarding Forward-Looking Statements” in this Report for more information on forward-looking statements. 42 Table of Contents The Company's results for 2022 demonstrated a continuation of solid growth momentum in building predictable long-term earnings, proactive credit risk management and continued investment into growth initiatives.
See “Important Note Regarding Forward-Looking Statements” in this Report for more information on forward-looking statements. The Company's results for 2023 demonstrated a continuation of solid growth momentum in building predictable long-term core earnings, proactive credit risk management and a resilient business model.
At December 31, 2022, 81.6%, or $6.44 billion, of the combined held for sale and held for investment loan and lease portfolio, including those at fair value, were composed of variable rate loans. 52 Table of Contents At December 31, 2022, $1.87 billion, or 25.5%, of loans held for investment, including those at fair value, matures in less than five years.
At December 31, 2023, 81.5%, or $7.38 billion, of the combined held for sale and held for investment loan and lease portfolio, including those at fair value, were composed of variable rate loans. 53 Table of Contents At December 31, 2023, $2.70 billion, or 31.2%, of loans held for investment, including those at fair value, matures in less than five years.
This also included purchases of $367.5 million in mortgage-backed securities, including $49.0 million for purposes of complying with the Community Reinvestment Act, and purchases of $23.2 million in collateralized mortgage obligations to increase yield and duration. The investment securities portfolio consists entirely of available-for-sale securities.
This also included purchases of $206.9 million in mortgage-backed securities, including $14.7 million for purposes of complying with the Community Reinvestment Act and purchases of $32.1 million in collateralized mortgage obligations to increase yield and duration. The investment securities portfolio consists entirely of available-for-sale securities.
At December 31, 2022, the total amount of these four liquidity source items was $4.01 billion, or 40.7% of total assets, a decrease of 0.9% of total assets from $3.42 billion, or 41.6% of total assets, at December 31, 2021. 61 Table of Contents Loans and other assets are funded primarily by loan sales, wholesale deposits and core deposits.
At December 31, 2023, the total amount of these four liquidity source items was $4.26 billion, or 37.8% of total assets, a decrease of 2.9% of total assets from $4.01 billion, or 40.7% of total assets, at December 31, 2022. Loans and other assets are funded primarily by loan sales, wholesale deposits and core deposits.
The maturity profile of uninsured time deposits at December 31, 2022 is as follows: Maturity Period Three months or less More than three months to six months More than six months to twelve months More than twelve months Amount of time deposits in uninsured accounts $ 17,510 $ 5,062 $ 9,391 $ 7,120 Borrowings Total borrowings decreased $235.1 million at December 31, 2022 from December 31, 2021 as a result of the following: In March 2021, the Company entered into a 60-month term loan agreement of $50.0 million with a third party correspondent bank.
The maturity profile of uninsured time deposits at December 31, 2023 is as follows: Maturity Period Three months or less More than three months to six months More than six months to twelve months More than twelve months Amount of time deposits in uninsured accounts $ 67,828 $ 97,527 $ 84,245 $ 6,204 Borrowings Total borrowings decreased $59.8 million at December 31, 2023 from December 31, 2022 as a result of the following: In March 2021, the Company entered into a 60-month term loan agreement of $50.0 million with a third party correspondent bank.
Management implements a proactive approach to identifying and classifying loans and leases as special mention (also referred to as criticized), Risk Grade 5. At December 31, 2022, and December 31, 2021, Risk Grade 5 loans and leases, excluding loans measured at fair value, totaled $286.5 million and $267.4 million, respectively.
Management implements a proactive approach to identifying and classifying loans and leases as special mention (also referred to as criticized), Risk Grade 5. At December 31, 2023, and December 31, 2022, Risk Grade 5 loans and leases, excluding loans measured at fair value, totaled $599.2 million and $286.5 million, respectively, for a year-over-year increase of $312.7 million.
The increase in the ACL during 2022 was primarily due to significant loan growth, charge-off experience impacts, increased levels of loans classified as held for investment and changes in the macroeconomic outlook, as addressed more fully in the above section captioned “Provision for Loan and Lease Credit Losses” in “Results of Operations.” Actual past due held for investment loans and l eases, inclusive of loans measured at fair value, have increased by $24.2 million since December 31, 2021.
The increase in the ACL during 2023 was primarily due to significant loan growth combined with charge-off related impacts, as addressed more fully in the above section captioned “Provision for Loan and Lease Credit Losses” in “Results of Operations.” 58 Table of Contents Actual past due held for investment loans and leases, inclusive of loans measured at fair value, have increased by $65.7 million since December 31, 2022.
Results of Operations The Company reported net income of $176.2 million, or $3.92 per diluted share, for 2022 compared to $167.0 million, or $3.71 per diluted share, for 2021.
Results of Operations The Company reported net income of $73.9 million, or $1.64 per diluted share, for 2023 compared to $176.2 million, or $3.92 per diluted share, for 2022.
Valuation of servicing assets The fair value of servicing assets is based on market prices for comparable servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income.
See Note 10. Fair Value of Financial Instruments in the notes to consolidated financial statements for further details. Valuation of servicing assets The fair value of servicing assets is based on market prices for comparable servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income.
Loan fees are included in interest income on loans. 2022 2021 2020 Average Balance Interest Average Yield/Rate Average Balance Interest Average Yield/Rate Average Balance Interest Average Yield/Rate Interest-earning assets: Interest-earning balances in other banks $ 228,866 $ 3,465 1.51 % $ 407,474 $ 920 0.23 % $ 453,260 $ 2,346 0.52 % Federal funds sold 109,473 2,796 2.55 18,714 22 0.12 68,873 276 0.40 Investment securities 995,481 19,667 1.98 797,426 12,533 1.57 643,023 15,016 2.34 Loans held for sale 952,606 58,943 6.19 1,111,216 60,044 5.40 1,064,731 58,793 5.52 Loans and leases held for investment (1) 6,174,763 359,602 5.82 5,350,055 287,694 5.38 4,206,539 211,977 5.04 Total interest-earning assets 8,461,189 444,473 5.25 7,684,885 361,213 4.70 6,436,426 288,408 4.48 Less: Allowance for credit losses on loans and leases (67,234) (54,975) (37,839) Noninterest-earning assets 576,524 592,237 615,455 Total assets $ 8,970,479 $ 8,222,147 $ 7,014,042 Interest-bearing liabilities: Interest-bearing checking $ — $ — — % $ 76,714 $ 442 0.58 % $ 318,667 $ 1,853 0.58 % Savings 3,903,151 57,740 1.48 3,077,933 16,667 0.54 1,531,680 16,558 1.08 Money market accounts 100,684 303 0.30 103,078 300 0.29 87,050 345 0.40 Certificates of deposit 3,849,203 56,992 1.48 3,181,591 42,331 1.33 3,373,012 70,970 2.10 Total deposits 7,853,038 115,035 1.46 6,439,316 59,740 0.92 5,310,409 89,726 1.67 Other borrowings 122,946 1,937 1.58 1,007,596 4,688 0.47 1,033,744 3,959 0.38 Total interest-bearing liabilities 7,975,984 116,972 1.47 7,446,912 64,428 0.87 6,344,153 93,685 1.48 Noninterest-bearing deposits 125,062 77,104 47,655 Noninterest-bearing liabilities 65,619 45,424 54,604 Shareholders' equity 803,814 652,707 567,630 Total liabilities and shareholders' equity $ 8,970,479 $ 8,222,147 $ 7,014,042 Net interest income and interest rate spread $ 327,501 3.78 % $ 296,785 3.83 % $ 194,723 3.00 % Net interest margin 3.87 % 3.86 % 3.03 % Ratio of average interest-earning assets to average interest-bearing liabilities 106.08 % 103.20 % 101.45 % (1) Average loan and lease balances include non-accruing loans and leases. 45 Table of Contents Rate/Volume Analysis.
Loan fees are included in interest income on loans. 2023 2022 2021 Average Balance Interest Average Yield/Rate Average Balance Interest Average Yield/Rate Average Balance Interest Average Yield/Rate Interest-earning assets: Interest-earning balances in other banks $ 584,691 $ 29,487 5.04 % $ 228,866 $ 3,465 1.51 % $ 407,474 $ 920 0.23 % Federal funds sold 34,529 1,624 4.70 109,473 2,796 2.55 18,714 22 0.12 Investment securities 1,237,458 33,497 2.71 995,481 19,667 1.98 797,426 12,533 1.57 Loans held for sale 539,197 48,235 8.95 952,606 58,943 6.19 1,111,216 60,044 5.40 Loans and leases held for investment (1) 7,905,875 575,432 7.28 6,174,763 359,602 5.82 5,350,055 287,694 5.38 Total interest-earning assets 10,301,750 688,275 6.68 8,461,189 444,473 5.25 7,684,885 361,213 4.70 Less: Allowance for credit losses on loans and leases (110,855) (67,234) (54,975) Noninterest-earning assets 493,968 576,524 592,237 Total assets $ 10,684,863 $ 8,970,479 $ 8,222,147 Interest-bearing liabilities: Interest-bearing checking $ 231,413 $ 12,718 5.50 % $ — $ — — % $ 76,714 $ 442 0.58 % Savings 4,428,306 171,151 3.86 3,903,151 57,740 1.48 3,077,933 16,667 0.54 Money market accounts 125,279 721 0.58 100,684 303 0.30 103,078 300 0.29 Certificates of deposit 4,695,161 155,617 3.31 3,849,203 56,992 1.48 3,181,591 42,331 1.33 Total deposits 9,480,159 340,207 3.59 7,853,038 115,035 1.46 6,439,316 59,740 0.92 Other borrowings 61,743 2,763 4.48 122,946 1,937 1.58 1,007,596 4,688 0.47 Total interest-bearing liabilities 9,541,902 342,970 3.59 7,975,984 116,972 1.47 7,446,912 64,428 0.87 Noninterest-bearing deposits 215,327 125,062 77,104 Noninterest-bearing liabilities 74,046 65,619 45,424 Shareholders' equity 853,588 803,814 652,707 Total liabilities and shareholders' equity $ 10,684,863 $ 8,970,479 $ 8,222,147 Net interest income and interest rate spread $ 345,305 3.09 % $ 327,501 3.78 % $ 296,785 3.83 % Net interest margin 3.35 % 3.87 % 3.86 % Ratio of average interest-earning assets to average interest-bearing liabilities 107.96 % 106.08 % 103.20 % (1) Average loan and lease balances include non-accruing loans and leases. 46 Table of Contents Rate/Volume Analysis.
Years Ended December 31, 2022 2021 2020 Total shareholders' equity $ 811,033 $ 715,133 $ 567,850 Less: Goodwill 1,797 1,797 1,797 Other intangible assets 1,873 2,026 2,179 Tangible shareholders' equity (a) $ 807,363 $ 711,310 $ 563,874 Shares outstanding (c) 44,061,244 43,619,070 42,452,446 Total assets $ 9,855,498 $ 8,213,393 $ 7,872,303 Less: Goodwill 1,797 1,797 1,797 Other intangible assets 1,873 2,026 2,179 Tangible assets (b) $ 9,851,828 $ 8,209,570 $ 7,868,327 Tangible shareholders' equity to tangible assets (a/b) 8.20% 8.66% 7.17% Tangible book value per share (a/c) $ 18.32 $ 16.31 $ 13.28 Efficiency ratio: Noninterest expense (d) $ 314,226 $ 230,987 $ 192,676 Net interest income 327,501 296,785 194,723 Noninterest income 237,992 160,200 86,000 Adjusted operating revenue (e) $ 565,493 $ 456,985 $ 280,723 Efficiency ratio (d/e) 55.57% 50.55% 68.64% 68 Table of Contents
Years Ended December 31, 2023 2022 2021 Total shareholders' equity $ 902,666 $ 811,033 $ 715,133 Less: Goodwill 1,797 1,797 1,797 Other intangible assets 1,721 1,873 2,026 Tangible shareholders' equity (a) $ 899,148 $ 807,363 $ 711,310 Shares outstanding (c) 44,617,673 44,061,244 43,619,070 Total assets $ 11,271,423 $ 9,855,498 $ 8,213,393 Less: Goodwill 1,797 1,797 1,797 Other intangible assets 1,721 1,873 2,026 Tangible assets (b) $ 11,267,905 $ 9,851,828 $ 8,209,570 Tangible shareholders' equity to tangible assets (a/b) 7.98% 8.20% 8.66% Tangible book value per share (a/c) $ 20.15 $ 18.32 $ 16.31 Efficiency ratio: Noninterest expense (d) $ 322,885 $ 314,226 $ 230,987 Net interest income 345,305 327,501 296,785 Noninterest income 111,733 237,992 160,200 Adjusted operating revenue (e) $ 457,038 $ 565,493 $ 456,985 Efficiency ratio (d/e) 70.65% 55.57% 50.55% 70 Table of Contents
Total nonperforming unguaranteed loans and leases as a percentage of total loans and leases held for investment decreased from 0.33% at the end of 2021 to 0.27% at the end of 2022.
Total nonperforming unguaranteed loans and leases as a percentage of total loans and leases held for investment, both excluding loans measured at fair value, increased from 0.27% at the end of 2022 to 0.48% at the end of 2023.
As indicated in the rate/volume table below, the overall increase discussed above is reflected in increased interest income of $83.2 million as compared to an increase in interest expense of $52.5 million for 2022 compared to 2021. For 2021 compared to 2022, net interest margin increased from 3.86% to 3.87%.
As indicated in the rate/volume table below, the overall increase discussed above is reflected in increased interest income of $243.8 million outpacing growth in interest expense of $226.0 million for 2023 compared to 2022. The net interest margin decreased from 3.87% for 2022 to 3.35% for 2023 .
The carrying amount of loans accounted for under the fair value option at December 31, 2022 and 2021 was $494.5 million (all classified as held for investment) and $670.5 million ($25.3 million classified as held for sale and $645.2 million classified as held for investment), respectively, a decrease of $176.1 million, or 26.3%.
The carrying amount of loans accounted for under the fair value option at December 31, 2023 and 2022 was $388.0 million (all classified as held for investment) and $494.5 million (all classified as held for investment), respectively, a decrease of $106.4 million, or 21.5%.
Net income (loss) by operating segment is presented below: Years ended December 31, 2022 2021 2020 Banking $ 71,937 $ 145,662 $ 57,462 Fintech 109,692 27,667 (1,932) Other (5,421) (6,334) 4,013 Consolidated net income $ 176,208 $ 166,995 $ 59,543 Banking Net income decreased $73.7 million, or 50.6%, compared to 2021. Key factors influencing this decrease are discussed below.
Net income (loss) by operating segment is presented below: Years ended December 31, 2023 2022 2021 Banking $ 82,796 $ 71,937 $ 145,662 Fintech (3,156) 109,692 27,667 Other (5,742) (5,421) (6,334) Consolidated net income $ 73,898 $ 176,208 $ 166,995 Banking Net income increased $10.9 million, or 15.1%, compared to 2022. Key factors influencing these changes are discussed below.
Nonperforming assets and TDRs, excluding loans measured at fair value, at December 31, 2022 were $134.9 million, which represented a $54.7 million, or 68.2%, increase from December 31, 2021 . These nonperforming assets, at December 31, 2022 were comprised of $73.4 million in nonaccrual loans and leases. At December 31, 2022, there were no foreclosed assets.
Nonperforming assets, excluding loans measured at fair value, at December 31, 2023 were $141.4 million, which represented a $68.1 million, or 92.7%, increase from December 31, 2022 . These nonperforming assets, at December 31, 2023 were comprised of $135.0 million in nonaccrual loans and leases and $6.5 million in foreclosed assets.
Net charge-offs as a percentage of average held for investment loans and leases carried at historical cost, for the years ended December 31, 2022 and 2021, were 0.14% and 0.08%, respectively. • Salaries and employee benefits increased by $45.9 million, or 36.7%, during 2022.
Net charge-offs as a percentage of average held for investment loans and leases carried at historical cost, for the years ended December 31, 2023 and 2022 , were 0.28% and 0.14%, respectively.
Total loans and leases 90 or more days past due increased $7.3 million, or 14.8%, compared to December 31, 2021. This increase was comprised of a $4.2 million decrease in unguaranteed exposure combined with an offsetting $11.5 million increase in the guaranteed portion of past due loans compared to December 31, 2021.
Total loans and leases 90 or more days past due increased $68.2 million, or 120.6%, compared to December 31, 2022. This increase was comprised of a $24.0 million increase in unguaranteed exposure combined with a $44.2 million increase in the guaranteed portion of past due loans compared to December 31, 2022.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

13 edited+2 added−1 removed12 unchanged
Biggest changeThe simulations provide an estimate of the impact of changes in interest rates on equity and net interest income under a range of assumptions, under instantaneous parallel interest rate shocks assuming a static balance sheet. The numerous assumptions used in the simulation process are provided to the Asset/Liability Committee on at least an annual basis.
Biggest changeEVE and NII simulations are completed routinely and presented to the Asset/Liability Committee. The simulations provide an estimate of the impact of changes in interest rates on equity and net interest income under a range of assumptions, under instantaneous parallel interest rate shocks assuming a static balance sheet.
The simulation uses projected repricing of assets and liabilities at December 31, 2022 on the basis of contractual maturities, anticipated repayments and scheduled rate adjustments. Critical model assumptions such as loan and investment prepayment rates, deposit decay rates, deposit betas and lags and assumed replacement pricing can have a significant impact on interest income simulation.
The simulation uses projected repricing of assets and liabilities at December 31, 2023 on the basis of contractual maturities, anticipated repayments and scheduled rate adjustments. Critical model assumptions such as loan and investment prepayment rates, deposit decay rates, deposit betas and lags and assumed replacement pricing can have a significant impact on interest income simulation.
Under this instantaneous parallel interest rate shock, static balance sheet NII simulation, the Company is modestly asset sensitive in the initial year, as the Company’s large variable rate loan portfolio reprices the full amount of the assumed change in interest rates, while the large retail savings and short-term retail certificates of deposits portfolio will reprice with an assumed beta.
Under this instantaneous parallel interest rate shock, with a static balance sheet NII simulation, the Company is slightly asset sensitive in the initial year, as the Company’s large variable rate loan portfolio reprices the full amount of the assumed change in interest rates, while the large retail savings and short-term retail certificates of deposits portfolio will reprice with an assumed beta.
The simulation analysis incorporates management’s current assessment of the risk that pricing margins will change adversely over time due to competition or other factors. 69 Table of Contents The table below sets forth an approximation of the Company’s NII sensitivity exposure for the 12-month periods ending December 31, 2023 and 2024 and the Company’s EVE sensitivity at December 31, 2022 under instantaneous parallel interest rate shocks assuming a static balance sheet.
The simulation analysis incorporates management’s current assessment of the risk that pricing margins will change adversely over time due to competition or other factors. 71 Table of Contents The table below sets forth an approximation of the Company’s NII sensitivity exposure for the 12-month periods ending December 31, 2024 and 2025 and the Company’s EVE sensitivity at December 31, 2023 under instantaneous parallel interest rate shocks assuming a static balance sheet.
Regular, robust modeling of various interest rate outcomes allows the Company to properly assess and manage potential risks from various rate shifts . 70 Table of Contents
Regular, robust modeling of various interest rate outcomes allows the Company to properly assess and manage potential risks from various rate shifts . 72 Table of Contents
The Company is also modestly asset sensitive in the second year of the projection due to interest rates increasing or decreasing for the full year, the Company’s loan portfolio continuing to reprice, and also due to the other assumptions used in the analysis as noted previously.
The Company is slightly liability sensitive in the second year of the projection due to interest rates increasing or decreasing for the full year, the Company’s loan portfolio continuing to reprice, and also due to the other assumptions used in the analysis as noted previously.
Adherence to relevant policies is monitored on an ongoing basis by the Asset/Liability Committee. The Company has a total cumulative gap in interest-earning assets and interest-bearing liabilities of 4.8% as of December 31, 2022, indicating that, overall, assets will reprice before liabilities during the expected life of the instruments.
Adherence to relevant policies is monitored on an ongoing basis by the Asset/Liability Committee. The Company has a total cumulative gap in interest-earning assets and interest-bearing liabilities of 5.0% as of December 31, 2023, indicating that, overall, assets will reprice before liabilities during the expected life of the instruments.
As of December 31, 2021, the Company had a cumulative gap in interest-earning assets and interest-bearing liabilities of 4.55%, indicating that, overall, assets will reprice before liabilities during the expected life of the instruments.
As of December 31, 2022, the Company had a cumulative gap in interest-earning assets and interest-bearing liabilities of 4.8%, indicating that, overall, assets will reprice before liabilities during the expected life of the instruments.
Estimated Increase/Decrease in Net Interest Income Estimated Percentage Change in EVE Basis Point ("bp") Change in Interest Rates 12 Months Ending December 31, 2023 12 Months Ending December 31, 2024 As of December 31, 2022 +400 8.6% 0.3% (34.3)% +300 6.6 0.4 (25.8) +200 4.5 0.4 (17.5) +100 2.3 0.1 (7.7) -100 (2.9) (1.5) 9.6 Rates are increased instantaneously at the beginning of the projection.
Estimated Increase/Decrease in Net Interest Income Estimated Percentage Change in EVE Basis Point ("bp") Change in Interest Rates 12 Months Ending December 31, 2024 12 Months Ending December 31, 2025 As of December 31, 2023 +400 0.4% (3.2)% (26.9)% +300 0.5 (2.1) (20.4) +200 0.5 (1.1) (13.7) +100 0.3 (0.4) (6.8) -100 (0.5) 0.2 6.8 Rates are increased instantaneously at the beginning of the projection.
Changes to these assumptions can significantly affect the results of the simulation. The simulation incorporates assumptions regarding the potential timing in the repricing of certain assets and liabilities when market rates change and the changes in spreads between different market rates.
The simulation incorporates assumptions regarding the potential timing in the repricing of certain assets and liabilities when market rates change and the changes in spreads between different market rates.
Annually, the Company’s retail certificate of deposits portfolio has a significant maturity event in the first half of the year.
The Company’s retail certificate of deposits portfolio has a larger maturity event in the first and last quarters of the year.
EVE is defined as the present value of the Company’s assets, less the present value of its liabilities, adjusted for any off-balance sheet items. The results show a theoretical change in the economic value of shareholders’ equity as interest rates change. EVE and NII simulations are completed routinely and presented to the Asset/Liability Committee.
EVE is defined as the present value of the Company’s assets, less the present value of its liabilities, adjusted for any off-balance sheet items. The results show a theoretical change in the economic value of shareholders’ equity as interest rates change. The NII simulation provides a short-term view of interest rate risk over a 12-month and 24-month time horizon.
The Company regularly models various forecasted rate projections with non-parallel shifts that are reflective of potential current rate environment outcomes using the Company’s assumed growth projections.
The NII and EVE simulation analysis shown above is only an estimate of interest rate risk exposure at a particular point in time without growth considerations. The Company regularly models various forecasted rate projections with non-parallel shifts that are reflective of potential current rate environment outcomes using the Company’s assumed growth projections.
Removed
Increased fixed rate loan production since 2020 versus prior years, given the historical low market rate environment, has also been a significant driver in the model results. The NII and EVE simulation analysis shown above is only an estimate of interest rate risk exposure at a particular point in time without growth considerations.
Added
NII simulations are prepared by calculating net interest income in a scenario where interest rates do not change (base case) and then recalculated in scenarios with higher and lower interest rates. The results of each variation are compared against the base case scenario to determine the potential change in earnings.
Added
The numerous assumptions used in the simulation process are provided to the Asset/Liability Committee on at least an annual basis. Changes to these assumptions can significantly affect the results of the simulation.

Other LOB 10-K year-over-year comparisons