What changed in this filing

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Item 1. Business

2024-02-22 compared with 2023-02-23 · 46 added, 67 removed, 378 unchanged (23% of the section changed)

24 unchanged sentences

(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.

(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.

These documents also are available in print to any shareholder who requests a copy.

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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.

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.

Juneteenth National Independence Day and Veterans Day were expanded with sponsored, on-campus events to celebrate and support local, diversely owned small businesses.

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.

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.

Its commitment to providing and enhancing a support infrastructure for people with underrepresented backgrounds remains a strategic initiative in 2023 and beyond.

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 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.

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.

We believe that creating an unprecedented banking experience for small business owners nationwide through service and technology will build long-term shareholder value.

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The Company provides access to an intranet site focused on physical, mental, emotional, and financial wellness, and at its Wilmington headquarters facility, provides an on-site health clinic for employees, on-site physical therapy appointments, and an on-site wellness facility staffed with certified physical trainers and regularly scheduled live and virtual wellness classes.

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.

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.

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.

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.

Commitment to Values and Ethics

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Our Code of Ethics and Conflict of Interest Policy covers topics such as conflicts of interest, compliance with laws, appropriate use of company assets, protecting confidential information, and reporting of violations.

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.

Professional Development and Training

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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;

• An open-door environment that encourages communication, collaboration and the free-flow of information.

• 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;

• An open-door environment that encourages communication, collaboration and the free-flow of information and ideas.

Collaboration, both within and between business units, is a hallmark of our approach to service delivery and value creation for our customers and stakeholders.

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• 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;

• 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;

• Government Loan Solutions, Inc.

2 unchanged sentences

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 2019, Live Oak Clean Energy Financing LLC (“LOCEF”) became a subsidiary of the Bank.

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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.

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• no other person owns a greater percentage of that class of voting securities immediately after the transaction.

Bancshares’s voting common stock is registered under Section 12 of the Exchange Act.

Bancshares’ voting common stock is registered under Section 12 of the Exchange Act.

The regulations provide a procedure for challenging rebuttable presumptions of control.

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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.

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.

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 issues pursuant to compensatory arrangements.

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

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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 .

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.

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.

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.

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.

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.

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The Bank’s deposits are insured by the FDIC.

The standard FDIC insurance coverage amount is $250,000 per depositor.

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.

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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, 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.

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.

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.

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 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.

The FDIC may terminate insurance of deposits upon a finding that an institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.

2 unchanged sentences

Management cannot predict what insurance assessment rates will be in the future.

Privacy and Cybersecurity

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.

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.

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.

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.

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.

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.

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

federal bank regulatory agencies have established computer-security incident notification requirements for banking organizations and bank service providers.

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or another type of significant operational interruption.

In March 2022, the SEC proposed rules that would require disclosure of material cybersecurity incidents, as well as cybersecurity risk management, strategy, and governance.

SEC rules also require disclosure of material cybersecurity incidents, as well as cybersecurity risk management, strategy, and governance.

Cybersecurity.

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.

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.

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.

The application, interpretation and enforcement of these laws and regulations are often uncertain, particularly in light of new and rapidly evolving data-driven technologies and significant increases in computing power.

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A bank holding company will not be permitted to become a financial holding company and no new activities authorized under the Gramm-Leach-Bliley Act may be commenced by a holding company or by a bank financial subsidiary if any of its bank subsidiaries received less than a satisfactory Community Reinvestment Act rating in its latest Community Reinvestment Act examination.

The Bank received an “Outstanding” rating in its last Community Reinvestment Act examination, which was conducted as of June 1, 2022.

The Volcker Rule

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The Volcker Rule also places restrictions on proprietary trading, which could impact certain hedging activities.

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.

Bancshares and Live Oak Bank are currently below these thresholds and thus exempt from the Volcker Rule.

USA PATRIOT Act

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The guidance provides that enforcement actions may be taken against a banking organization if its incentive compensation arrangements or related risk-management control or governance processes pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.

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.

The final rule requires us to adopt a clawback policy within 60 days after such listing standard becomes effective.

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.

The Company has adopted a clawback policy, a copy of which is included as an exhibit to this Report.

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.

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.

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.

Possible sanctions that may be imposed in the event of such noncompliance include the suspension of individual employees, limitations on business activities for specified periods of time, revocation of registration as an investment adviser and/or other registrations, and other censures and fines.

Changes in these laws or regulations could have a material adverse impact on the profitability and mode of operations of LOPW and JAM.

Changes in these laws or regulations could have a material adverse impact on the profitability and mode of operations of LOPW.

Economic Environment

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The CFPB is authorized to prevent unfair, deceptive and abusive practices and ensure that consumers have access to markets for consumer financial products and services and that such markets are fair, transparent and competitive.

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.

Management’s Discussion and Analysis of Financial Condition and Results of Operations - Regulatory Impact of Asset Growth.

Federal and State Taxation

11 unchanged sentences

Management 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.

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.

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.

In 2019, the FDIC passed a final rule on the CBLR, setting the minimum required CBLR at 9 percent.

The rule went into effect in 2020.

In addition, the Federal Reserve was required to raise the asset threshold under its Small Bank Holding Company Policy Statement from $1 billion to $3 billion for bank or savings and loan holding companies that are exempt from consolidated capital requirements, provided that such companies meet certain other conditions such as not engaging in significant nonbanking activities and not having a material amount of debt or equity securities outstanding (other than trust preferred securities) that are registered with the SEC.

Consistent with EGRRCPA, the Federal Reserve passed an interim final rule that became effective in 2018 to increase the asset threshold to $3 billion for qualifying for such policy statement.

The Coronavirus Aid, Relief, and Economic Security Act

In response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law in March 2020, to provide national emergency economic relief measures.

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.

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.

The Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (the Economic Aid Act) passed on December 27, 2020, allocated additional funding to the PPP, which funds can be used not only by small businesses who have yet to receive a PPP loan but also by some small businesses who may be eligible to receive a second PPP loan.

The Economic Aid Act also significantly revised various aspects of the PPP terms and conditions, including certain aspects of the forgiveness process.

In March 2021, the American Rescue Plan Act was enabled to provide additional financial relief and economic stimulus.

Paycheck Protection Program.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business