Live Oak(LOB) - 2025 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements and related disclosures for the reporting period Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements, including balance sheets, income statements, comprehensive income statements, statements of changes in shareholders' equity, and cash flow statements, along with detailed notes on accounting policies, investments, credit quality, leases, servicing assets, borrowings, fair value measurements, commitments, and a subsequent event Condensed Consolidated Balance Sheets This statement provides a snapshot of the company's assets, liabilities, and equity at the end of the reporting periods | Metric | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | Change (in thousands) | % Change | | :-------------------------------- | :----------------------------- | :----------------------------- | :-------------------- | :------- | | Total Assets | $13,831,208 | $12,943,380 | $887,828 | 6.86% | | Loans and leases held for investment, net | $10,831,824 | $10,065,858 | $765,966 | 7.61% | | Total Deposits | $12,594,790 | $11,760,494 | $834,296 | 7.09% | | Total Shareholders' Equity | $1,067,265 | $1003,496 | $63,769 | 6.35% | Condensed Consolidated Statements of Income This statement outlines the company's financial performance, including revenues, expenses, and net income, for the reported periods | Metric (in thousands, except EPS) | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | Change | % Change | | :-------------------------------- | :--------------------------- | :--------------------------- | :------- | :------- | | Total Interest Income | $224,284 | $198,448 | $25,836 | 13.02% | | Total Interest Expense | $115,063 | $107,128 | $7,935 | 7.41% | | Net Interest Income | $109,221 | $91,320 | $17,901 | 19.60% | | Provision for Credit Losses | $23,252 | $11,765 | $11,487 | 97.64% | | Total Noninterest Income | $34,526 | $34,159 | $367 | 1.07% | | Total Noninterest Expense | $89,293 | $77,656 | $11,637 | 14.98% | | Net Income Attributable to Live Oak Bancshares, Inc. | $23,428 | $26,963 | ($3,535) | (13.11)% | | Basic Earnings Per Share | $0.51 | $0.60 | ($0.09) | (15.00)% | | Diluted Earnings Per Share | $0.51 | $0.59 | ($0.08) | (13.56)% | | Metric (in thousands, except EPS) | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | Change | % Change | | :-------------------------------- | :--------------------------- | :--------------------------- | :------- | :------- | | Total Interest Income | $437,389 | $390,868 | $46,521 | 11.90% | | Total Interest Expense | $227,636 | $209,437 | $18,199 | 8.69% | | Net Interest Income | $209,753 | $181,431 | $28,322 | 15.61% | | Provision for Credit Losses | $52,216 | $28,129 | $24,087 | 85.63% | | Total Noninterest Income | $60,107 | $60,256 | ($149) | (0.25)% | | Total Noninterest Expense | $173,310 | $155,393 | $17,917 | 11.53% | | Net Income Attributable to Live Oak Bancshares, Inc. | $33,145 | $54,549 | ($21,404) | (39.24)% | | Basic Earnings Per Share | $0.72 | $1.22 | ($0.50) | (40.98)% | | Diluted Earnings Per Share | $0.72 | $1.20 | ($0.48) | (40.00)% | Condensed Consolidated Statements of Comprehensive Income This statement reports net income and other comprehensive income components, reflecting changes in equity from non-owner sources | Metric (in thousands) | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | | :-------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net income | $23,387 | $26,963 | $33,055 | $54,549 | | Other comprehensive income (loss), net of tax | $6,184 | $733 | $20,830 | ($5,785) | | Total comprehensive income attributable to Live Oak Bancshares, Inc. | $29,612 | $27,696 | $53,975 | $48,764 | Condensed Consolidated Statements of Changes in Shareholders' Equity This statement details the changes in the company's equity accounts, including net income, other comprehensive income, and dividends, over the reporting period | Metric (in thousands) | Balance at Dec 31, 2024 | Net Income (6M 2025) | Other Comprehensive Income (6M 2025) | Cash Dividends (6M 2025) | Balance at June 30, 2025 | | :-------------------- | :---------------------- | :------------------- | :----------------------------------- | :----------------------- | :----------------------- | | Class A Common Stock Amount | $365,607 | - | - | - | $377,953 | | Retained Earnings | $715,767 | $33,145 | - | ($2,736) | $746,450 | | Accumulated other comprehensive loss | ($82,344) | - | $20,830 | - | ($61,514) | | Total Shareholders' Equity | $1,003,496 | $33,055 | $20,830 | ($2,736) | $1,067,265 | Condensed Consolidated Statements of Cash Flows This statement summarizes the cash inflows and outflows from operating, investing, and financing activities for the reported periods | Cash Flow Activity (in thousands) | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | Change | | :------------------------------ | :--------------------------- | :--------------------------- | :------- | | Net cash provided by operating activities | $313,146 | $174,769 | $138,377 | | Net cash used by investing activities | ($1,084,324) | ($664,282) | ($420,042) | | Net cash provided by financing activities | $825,133 | $522,422 | $302,711 | | Net increase in cash and cash equivalents | $53,955 | $32,909 | $21,046 | | Cash and cash equivalents, ending | $662,755 | $615,449 | $47,306 | Notes to Unaudited Condensed Consolidated Financial Statements This section provides detailed disclosures on the company's accounting policies, recent accounting pronouncements, earnings per share calculations, investment portfolio, loan and lease credit quality, lease arrangements, servicing assets, borrowings, fair value measurements, and commitments and contingencies. It also includes a subsequent event regarding preferred stock issuance Note 1. Basis of Presentation This note outlines the company's primary business activities, operational structure, and significant accounting policies - Live Oak Bancshares, Inc. operates primarily through Live Oak Banking Company, specializing in lending and deposit services to small businesses nationwide, with a significant portion of loans guaranteed by the SBA and USDA[18] - The Company generates revenue mainly from net interest income and the origination and sale of government-guaranteed loans, with additional gains/losses from financial technology investments[21] - During Q2 2024, the Company enhanced its qualitative framework for allowance for credit losses, leveraging quantifiable credit risk metrics and economic conditions, which was accounted for prospectively and deemed not material[30][31] Note 2. Recent Accounting Pronouncements This note details recently issued accounting pronouncements and their anticipated effects on the company's financial statements - ASU 2023-09, effective January 1, 2025, requires enhanced income tax disclosures, particularly for rate reconciliation and disaggregation of income taxes paid by jurisdiction[36] - ASU 2024-03, effective January 1, 2027, requires disaggregation of certain income statement expense captions within footnotes, and the Company is currently evaluating its impact[39] - The OBBB Act, signed July 4, 2025, implements tax and other provisions, but the Company does not currently believe its impacts will be material to financial statements[40] Note 3. Earnings Per Share This note presents the calculation of basic and diluted earnings per share for the reported periods | EPS Metric | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | | :------------------------------------------ | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net income attributable to Live Oak Bancshares, Inc. (in thousands) | $23,428 | $26,963 | $33,145 | $54,549 | | Weighted-average basic shares outstanding | 45,634,741 | 44,974,942 | 45,556,842 | 44,868,625 | | Basic earnings per share | $0.51 | $0.60 | $0.72 | $1.22 | | Total weighted-average diluted shares outstanding | 45,795,608 | 45,525,082 | 45,825,543 | 45,583,146 | | Diluted earnings per share | $0.51 | $0.59 | $0.72 | $1.20 | Note 4. Investments This note provides a breakdown of the company's investment portfolio, including available-for-sale securities and equity method investments Available-for-Sale This section details the company's available-for-sale investment securities, including fair values and unrealized gains or losses | Investment Category | June 30, 2025 Fair Value (in thousands) | December 31, 2024 Fair Value (in thousands) | | :------------------ | :------------------------------------ | :------------------------------------ | | U.S. government agencies | $13,958 | $17,897 | | Mortgage-backed securities | $1,308,173 | $1,227,333 | | Municipal bonds | $3,075 | $2,973 | | Total | $1,325,206 | $1,248,203 | | Unrealized Losses (in thousands) | June 30, 2025 Fair Value | June 30, 2025 Unrealized Losses | Dec 31, 2024 Fair Value | Dec 31, 2024 Unrealized Losses | | :------------------------------- | :----------------------- | :------------------------------ | :---------------------- | :------------------------------ | | Less Than 12 Months | $203,402 | $1,959 | $273,970 | $4,362 | | 12 Months or More | $823,263 | $82,555 | $872,653 | $105,067 | | Total | $1,026,665 | $84,514 | $1,146,623 | $109,429 | - Unrealized losses are primarily due to non-credit-related market volatility and interest rates, with no intention to sell or expectation of being required to sell before recovery of amortized cost[48] Equity Method Accounting This section outlines investments where the company exercises significant influence, accounted for using the equity method | Equity Method Investment | June 30, 2025 Amount (in thousands) | December 31, 2024 Amount (in thousands) | | :----------------------- | :---------------------------------- | :---------------------------------- | | Apiture, Inc. | $49,673 | $53,108 | | Canapi Ventures SBIC Fund, LP | $11,421 | $11,504 | | Canapi Ventures Fund, LP | $1,391 | $1,438 | | Canapi Ventures Fund II, LP | $2,858 | $2,193 | | Canapi Ventures SBIC Fund II, LP | $1,596 | $1,238 | | Affordable housing | $14,032 | $14,724 | | Solar tax credit investments | $4,340 | $5,309 | | Other | $943 | $1,489 | | Total | $86,254 | $91,003 | Equity Security Accounting This section provides information on equity securities, including carrying values and changes in fair value | Metric (in thousands) | June 30, 2025 | June 30, 2024 | | :-------------------- | :------------ | :------------ | | Carrying value | $84,864 | $80,467 | | Net upward (downward) change (6 months) | $955 | ($313) | - For the three months ended June 30, 2025, the Company recognized $959 thousand in unrealized gains on equity securities, compared to $31 thousand in unrealized gains for the same period in 2024[57] Variable Interest Entities ("VIE"s) This section describes the company's involvement with variable interest entities and its maximum exposure to loss | VIE Category | June 30, 2025 Investment Carrying Amount (in thousands) | June 30, 2025 Maximum Exposure to Loss (in thousands) | Dec 31, 2024 Investment Carrying Amount (in thousands) | Dec 31, 2024 Maximum Exposure to Loss (in thousands) | | :----------------------------- | :------------------------------------------- | :------------------------------------------ | :------------------------------------------- | :------------------------------------------ | | Solar tax credit investments | $4,340 | $27,781 | $5,309 | $38,107 | | Affordable housing | $14,032 | $14,973 | $12,940 | $15,463 | | Canapi Funds | $17,699 | $33,504 | $17,104 | $34,269 | | Non-marketable and other equity investments | $5,175 | $10,505 | $5,290 | $9,591 | - The Company is not the primary beneficiary of these VIEs, as it lacks the power to direct activities significantly impacting economic performance[64] Note 5. Loans and Leases Held for Investment and Credit Quality This note provides a detailed analysis of the company's loan and lease portfolio, including credit quality indicators and delinquency status Loans and Leases Held for Investment This section presents the composition of the loan and lease portfolio and its delinquency status at the reporting dates | Loan Category (in thousands) | June 30, 2025 Total Loans and Leases | December 31, 2024 Total Loans and Leases | | :--------------------------- | :----------------------------------- | :----------------------------------- | | Commercial & Industrial | $5,156,024 | $4,953,789 | | Construction & Development | $728,005 | $604,409 | | Commercial Real Estate | $4,476,940 | $4,055,879 | | Commercial Land | $686,755 | $649,278 | | Total | $11,047,724 | $10,263,355 | | Delinquency Status (in thousands) | June 30, 2025 Total Past Due | December 31, 2024 Total Past Due | | :-------------------------------- | :--------------------------- | :--------------------------- | | 30-89 Days Past Due | $55,049 | $104,003 | | 90 Days or More Past Due | $240,550 | $202,827 | | Total Past Due | $295,599 | $306,830 | Credit Quality Indicators This section presents key indicators of the loan and lease portfolio's credit quality, including risk grades and guaranteed balances | Asset Quality Indicator (in thousands) | June 30, 2025 Loan and Lease Balance | December 31, 2024 Loan and Lease Balance | | :----------------------------------- | :----------------------------------- | :----------------------------------- | | Pass | $9,604,064 | $8,892,619 | | Special Mention | $589,778 | $529,918 | | Substandard | $550,064 | $512,072 | | Total | $10,743,906 | $9,934,609 | | Guaranteed Balance (in thousands) | June 30, 2025 | December 31, 2024 | | :-------------------------------- | :------------ | :---------------- | | Pass | $2,699,594 | $2,644,310 | | Special Mention | $176,523 | $172,015 | | Substandard | $402,307 | $346,669 | | Total | $3,278,424 | $3,162,994 | Nonaccrual Loans and Leases This section provides details on loans and leases that are no longer accruing interest, categorized by loan type | Nonaccrual Category (in thousands) | June 30, 2025 Loan and Lease Balance | December 31, 2024 Loan and Lease Balance | | :--------------------------------- | :----------------------------------- | :----------------------------------- | | Commercial & Industrial | $280,589 | $180,956 | | Construction & Development | $1,816 | $3,955 | | Commercial Real Estate | $105,570 | $108,735 | | Commercial Land | $8,357 | $10,651 | | Total Nonaccrual Loans and Leases | $396,332 | $304,297 | - No interest income was recognized on nonaccrual loans and leases for the three and six months ended June 30, 2025 and 2024[76] Allowance for Credit Losses - Loans and Leases This section outlines the changes in the allowance for credit losses on loans and leases, including provisions and charge-offs | Metric (in thousands) | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | | :-------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Beginning Balance | $190,184 | $139,041 | $167,516 | $125,840 | | Charge offs, net | ($31,445) | ($8,253) | ($38,219) | ($11,416) | | Provision (Recovery) | $23,492 | $7,079 | $52,934 | $23,443 | | Ending Balance | $182,231 | $137,867 | $182,231 | $137,867 | - The ACL decreased in Q2 2025 due to moderating credit trends and net charge-offs of individually evaluated loans, but increased for the six months ended June 30, 2025, driven by loan growth and macroeconomic impact on borrowers[80] Loan Modifications for Borrowers Experiencing Financial Difficulty This section reports on modifications made to loans for borrowers experiencing financial difficulty, categorized by modification type | Modification Type (in thousands) | 3 Months Ended June 30, 2025 | 6 Months Ended June 30, 2025 | | :------------------------------- | :--------------------------- | :--------------------------- | | Other-Than-Insignificant Payment Delay | $5,527 | $5,527 | | Term Extension | $10,893 | $14,448 | | Combination - Term Extension & Interest Rate Reduction | $9,820 | $10,010 | | Combination - Term Extension, Other-Than-Insignificant Payment Delay & Interest Rate Reduction | - | $9,862 | | Combination - Term Extension & Other-Than-Insignificant Payment Delay | - | $3,020 | | Combination - Interest Rate Reduction | - | $3,009 | | Total | $26,240 | $45,876 | - As of June 30, 2025, $45.9 million in loans were modified for borrowers experiencing financial difficulty, with $43.7 million of these remaining current[201] Note 6. Leases This note provides details on the company's direct financing and operating lease arrangements, including net investments and income Direct Financing Leases This section presents the net investment and interest income generated from direct financing leases | Metric (in thousands) | June 30, 2025 | December 31, 2024 | | :-------------------- | :------------ | :---------------- | | Net investment in direct financing leases | $464 | $922 | - Interest income from direct financing leases was $12 thousand for the three months ended June 30, 2025, and $29 thousand for the six months ended June 30, 2025[90] Operating Leases This section presents the net investment in assets subject to operating leases and the corresponding lease income | Metric (in thousands) | June 30, 2025 | December 31, 2024 | | :-------------------- | :------------ | :---------------- | | Net investment in assets subject to operating leases | $81,200 | $93,400 | - Lease income from operating leases was $3.0 million for the three months ended June 30, 2025, and $5.5 million for the six months ended June 30, 2025[95] Note 7. Servicing Assets This note provides an analysis of servicing assets, including additions, fair value changes, and decay due to principal paydowns | Metric (in thousands) | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | | :-------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Balance at beginning of period | $56,684 | $48,962 | $55,788 | $48,186 | | Additions, net | $6,458 | $5,218 | $12,082 | $8,739 | | Fair value changes (due to valuation inputs/assumptions) | ($125) | $701 | ($1,220) | $922 | | Decay (due to principal paydowns/runoff) | ($2,932) | ($3,578) | ($6,565) | ($6,544) | | Balance at end of period | $60,085 | $51,303 | $60,085 | $51,303 | - The fair value of servicing rights was determined using a weighted average discount rate of 13.5% (June 30, 2025) and 14.5% (June 30, 2024), and a weighted average prepayment speed of 16.0% (June 30, 2025) and 15.7% (June 30, 2024)[99] Note 8. Borrowings This note outlines the company's various borrowing arrangements, including term loans and other long-term debt | Borrowing Type (in thousands) | June 30, 2025 | December 31, 2024 | | :---------------------------- | :------------ | :---------------- | | March 2021 term loan (2.95% fixed) | $7,973 | $13,184 | | March 2024 term loan (5.95% fixed) | $99,575 | $99,505 | | Other long term debt | $111 | $131 | | Total borrowings | $107,659 | $112,820 | - Unused borrowing capacity was $3.78 billion at June 30, 2025, an increase from $3.55 billion at December 31, 2024[103] Note 9. Fair Value of Financial Instruments This note provides detailed fair value measurements for financial instruments, categorized by recurring, non-recurring, and Level 3 inputs Recurring Fair Value This section presents financial instruments measured at fair value on a recurring basis, including investment securities and servicing assets | Asset (in thousands) | June 30, 2025 Total Fair Value | December 31, 2024 Total Fair Value | | :------------------- | :----------------------------- | :----------------------------- | | Investment securities available-for-sale | $1,325,206 | $1,248,203 | | Loans held for investment | $303,818 | $328,746 | | Servicing assets | $60,085 | $55,788 | | Equity warrant assets | $6,745 | $7,162 | | Total assets at fair value | $1,696,199 | $1,640,357 | Fair Value Option This section discusses financial instruments for which the fair value option has been elected, including net gains or losses | Metric (in thousands) | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | | :---------------------------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net gains (losses) on loans accounted for under the Fair Value Option | $1,082 | $172 | $48 | ($47) | - The Company changed its election for accounting for retained participating interests of government guaranteed loans from fair value option to reduce volatility and drive more predictable revenue, effective Q1 2021[108] Non-Recurring Fair Value This section presents financial instruments measured at fair value on a non-recurring basis, such as collateral-dependent loans and foreclosed assets | Asset (in thousands) | June 30, 2025 Total Fair Value | December 31, 2024 Total Fair Value | | :------------------- | :----------------------------- | :----------------------------- | | Collateral-dependent loans | $14,750 | $17,085 | | Foreclosed assets | $4,210 | $1,944 | | Total assets at fair value | $18,960 | $19,029 | Level 3 Analysis This section provides a detailed analysis of significant unobservable inputs used in Level 3 fair value measurements for various assets | Level 3 Asset | Significant Unobservable Inputs (June 30, 2025) | Range | Weighted Average | | :------------ | :-------------------------------------------- | :---- | :--------------- | | Municipal bond | Discount rate | 7.2% | N/A | | | Prepayment speed | 5.0% | N/A | | Loans held for investment | Loss rate | 0.0% - 4.7% | 1.0% | | | Discount rate | 7.0% - 18.0% | 9.0% | | | Prepayment speed | 15.1% - 30.2% | 16.9% | | Servicing assets | Discount rate | 13.5% | 13.5% | | | Prepayment speed | 11.9% - 18.7% | 16.0% | | Equity warrant assets | Volatility | 13.1% - 90.0% | 33.3% | | | Risk-free interest rate | 3.8% - 4.3% | 4.2% | | | Marketability discount | 20.0% - 52.0% | 21.0% | | | Remaining life | 2.4 - 11.2 years | 7.7 years | | Collateral-dependent loans | Appraisal adjustments | 11.3% - 76.7% | 36.1% | | Foreclosed assets | Appraisal adjustments | 10.0% | 10.0% | Note 10. Commitments and Contingencies This note discloses the company's off-balance-sheet commitments and contingencies, including credit extensions and geographic loan concentrations Financial Instruments with Off-Balance-Sheet Risk This section outlines the company's off-balance-sheet financial instruments, such as commitments to extend credit and standby letters of credit | Off-Balance-Sheet Item (in thousands) | June 30, 2025 | December 31, 2024 | | :------------------------------------ | :------------ | :---------------- | | Commitments to extend credit | $4,276,758 | $3,597,937 | | Standby letters of credit | $8,141 | $7,365 | | Total unfunded off-balance-sheet credit risk | $4,284,899 | $3,605,302 | - The allowance for off-balance-sheet credit exposures was $12.9 million at June 30, 2025, compared to $13.6 million at December 31, 2024[127] Geographic Concentrations This section provides a breakdown of the geographic concentration of the company's unguaranteed loans held for investment | Geographic Region | % of Total Unguaranteed Loans Held for Investment (June 30, 2025) | | :---------------- | :-------------------------------------------------------------- | | Midwest | 12.8% | | Northeast | 17.1% | | Southeast | 32.2% | | Southwest | 13.2% | | West | 24.3% | | Non-U.S. | 0.4% | | Total | 100.0% | Note 11. Subsequent Event This note discloses a significant event that occurred after the reporting period, specifically the issuance of preferred stock - On August 4, 2025, the Company issued and sold 4,000,000 depositary shares, representing a 1/40th interest in 8.375% Fixed Rate Series A Non-Cumulative Perpetual Preferred Stock, raising approximately $96.2 million in net proceeds[132] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial performance and condition for the three and six months ended June 30, 2025, compared to 2024. It discusses key drivers of net income, net interest income, credit quality, noninterest income and expense, and capital, alongside forward-looking statements and critical accounting policies Important Note Regarding Forward-Looking Statements This section highlights that the report contains forward-looking statements subject to various risks and uncertainties - The report contains forward-looking statements subject to risks and uncertainties, including deterioration in borrower financial condition, changes in SBA/USDA rules, interest rate fluctuations, and technological risks[134][135] - Management undertakes no obligation to update publicly any forward-looking statements[135][137] Nature of Operations This section describes the company's core business model, focusing on small business lending and government-guaranteed loans - Live Oak Bancshares, Inc. operates primarily through Live Oak Banking Company, specializing in lending and deposit services to small businesses nationwide, with a significant portion of loans guaranteed by the SBA and USDA[139] - The Company generates revenue mainly from net interest income and the origination and sale of government-guaranteed loans, with additional gains/losses from financial technology investments[143] Results of Operations This section provides an analysis of the company's financial performance, including net income, net interest income, and noninterest income and expense Performance Summary This section summarizes the company's key financial performance metrics, including net income and diluted earnings per share | Metric (in thousands, except EPS) | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | Change | % Change | | :-------------------------------- | :--------------------------- | :--------------------------- | :------- | :------- | | Net income attributable to Live Oak Bancshares, Inc. | $23,428 | $26,963 | ($3,535) | (13.11)% | | Diluted earnings per share | $0.51 | $0.59 | ($0.08) | (13.56)% | | Metric (in thousands, except EPS) | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | Change | % Change | | :-------------------------------- | :--------------------------- | :--------------------------- | :------- | :------- | | Net income attributable to Live Oak Bancshares, Inc. | $33,145 | $54,549 | ($21,404) | (39.24)% | | Diluted earnings per share | $0.72 | $1.20 | ($0.48) | (40.00)% | - The decrease in net income for the three months ended June 30, 2025, was primarily due to a $11.5 million increase in provision for credit losses, a $3.3 million decrease in management fee income, a $6.1 million decrease in other noninterest income (due to aircraft sale gain in prior year), and a $3.5 million increase in other noninterest expense (due to bioenergy lease buyout)[147] - For the six months ended June 30, 2025, net income decreased due to a $24.1 million increase in provision for credit losses, a $6.5 million decrease in management fee income, an $11.8 million decrease in other noninterest income, and a $17.9 million increase in noninterest expense (including $3.6 million in salaries, $3.6 million in technology, and $3.0 million in other expense)[148] Net Interest Income and Margin This section analyzes the company's net interest income and net interest margin, including yields on assets and costs of liabilities | Metric (in thousands) | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | Change | % Change | | :-------------------- | :--------------------------- | :--------------------------- | :------- | :------- | | Net Interest Income | $109,221 | $91,320 | $17,901 | 19.6% | | Net Interest Margin | 3.28% | 3.28% | 0.00% | 0.0% | | Average Interest-Earning Assets | $13,361,491 | $11,204,233 | $2,157,258 | 19.3% | | Yield on Average Interest-Earning Assets | 6.73% | 7.12% | (0.39)% | (5.48)% | | Average Interest-Bearing Liabilities | $12,222,745 | $10,389,344 | $1,833,401 | 17.6% | | Cost of Funds on Interest-Bearing Liabilities | 3.78% | 4.15% | (0.37)% | (8.92)% | | Metric (in thousands) | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | Change | % Change | | :-------------------- | :--------------------------- | :--------------------------- | :------- | :------- | | Net Interest Income | $209,753 | $181,431 | $28,322 | 15.6% | | Net Interest Margin | 3.24% | 3.30% | (0.06)% | (1.82)% | | Average Interest-Earning Assets | $13,061,358 | $11,048,724 | $2,012,634 | 18.2% | | Yield on Average Interest-Earning Assets | 6.75% | 7.11% | (0.36)% | (5.06)% | | Average Interest-Bearing Liabilities | $11,959,569 | $10,244,221 | $1,715,348 | 16.7% | | Cost of Funds on Interest-Bearing Liabilities | 3.84% | 4.11% | (0.27)% | (6.57)% | - The increase in net interest income was primarily due to growth in the held-for-investment loan and lease portfolio outpacing interest-bearing liabilities, despite a decrease in average yield on interest-earning assets outpacing the decrease in average cost of funds[151][153] Provision for Credit Losses This section discusses the provision for credit losses and net charge-offs, highlighting factors influencing these changes | Metric (in thousands) | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | Change | % Change | | :-------------------- | :--------------------------- | :--------------------------- | :------- | :------- | | Provision for Credit Losses | $23,252 | $11,765 | $11,487 | 97.6% | | Net Charge-offs | $31,400 | $8,300 | $23,100 | 278.3% | | Metric (in thousands) | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | Change | % Change | | :-------------------- | :--------------------------- | :--------------------------- | :------- | :------- | | Provision for Credit Losses | $52,216 | $28,129 | $24,087 | 85.6% | | Net Charge-offs | $38,200 | $11,400 | $26,800 | 235.1% | - The increase in provision for credit losses was primarily driven by loan growth and elevated specific reserves on individually evaluated loans amidst a challenging macroeconomic environment with high interest rates and inflationary pressures[164] Noninterest Income This section analyzes the various components of noninterest income, including gains on loan sales and management fees | Metric (in thousands) | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | Change | % Change | | :-------------------- | :--------------------------- | :--------------------------- | :------- | :------- | | Total Noninterest Income | $34,526 | $34,159 | $367 | 1.1% | | Net gains on sales of loans | $21,641 | $14,395 | $7,246 | 50.3% | | Management fee income | $0 | $3,271 | ($3,271) | (100.0)% | | Other noninterest income | $4,904 | $11,035 | ($6,131) | (55.6)% | | Metric (in thousands) | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | Change | % Change | | :-------------------- | :--------------------------- | :--------------------------- | :------- | :------- | | Total Noninterest Income | $60,107 | $60,256 | ($149) | (0.2)% | | Net gains on sales of loans | $40,289 | $25,897 | $14,392 | 55.6% | | Management fee income | $0 | $6,542 | ($6,542) | (100.0)% | | Other noninterest income | $8,947 | $20,796 | ($11,849) | (57.0)% | - The increase in net gains on sales of loans was driven by higher loan sale volume and improving premiums[177] - Management fee income decreased by 100% due to the restructuring of the Canapi Funds in Q3 2024[171] - Other noninterest income decreased significantly due to a $6.7 million gain from an aircraft sale in Q2 2024 and a gain from increased fair value of equity warrant assets in Q1 2024, which did not recur in 2025[171] Noninterest Expense This section analyzes the various components of noninterest expense, including salaries, technology, and other operating costs | Metric (in thousands) | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | Change | % Change | | :-------------------- | :--------------------------- | :--------------------------- | :------- | :------- | | Total Noninterest Expense | $89,293 | $77,656 | $11,637 | 15.0% | | Salaries and employee benefits | $49,137 | $46,255 | $2,882 | 6.2% | | Technology expense | $10,066 | $7,996 | $2,070 | 25.9% | | Other expense | $6,161 | $2,635 | $3,526 | 133.8% | | Metric (in thousands) | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | Change | % Change | | :-------------------- | :--------------------------- | :--------------------------- | :------- | :------- | | Total Noninterest Expense | $173,310 | $155,393 | $17,917 | 11.5% | | Salaries and employee benefits | $97,145 | $93,530 | $3,615 | 3.9% | | Technology expense | $19,317 | $15,719 | $3,598 | 22.9% | | Other expense | $8,817 | $5,861 | $2,956 | 50.4% | - The increase in salaries and employee benefits reflects investment in human resources to support strategic and growth initiatives, with full-time equivalent employees increasing from 987 to 1,056 YoY[181] - Technology expense increased due to enhanced investments in the Company's technology resources[182] - Other expense increased significantly due to a $2.8 million loss from the early buyout of the Company's sole bioenergy lease in Q2 2025[183] Income Tax Expense This section discusses the company's income tax expense and effective tax rate, highlighting factors influencing period-over-period changes | Metric | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | | :----- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Income Tax Expense (in thousands) | $7,815 | $9,095 | $11,279 | $3,616 | | Effective Tax Rate | 25.0% | 25.2% | 25.4% | 6.2% | - The higher income tax expense for the first half of 2025 compared to 2024 was largely due to an additional $10.6 million in tax credits related to a renewable energy investment in Q1 2024, which lowered the effective tax rate in the prior year[184] Discussion and Analysis of Financial Condition This section provides an in-depth analysis of the company's financial position, including assets, deposits, asset quality, and capital Total Assets and Deposits This section analyzes the changes in total assets and deposits, highlighting drivers of growth and the composition of uninsured deposits | Metric (in thousands) | June 30, 2025 | December 31, 2024 | Change | % Change | | :-------------------- | :------------ | :---------------- | :------- | :------- | | Total Assets | $13,831,208 | $12,943,380 | $887,828 | 6.9% | | Total Deposits | $12,594,790 | $11,760,494 | $834,296 | 7.1% | | Total Loans and Leases (Held for Investment and Sale) | $11,364,846 | $10,579,376 | $785,470 | 7.4% | - Growth in total assets was driven by increased cash and cash equivalents, investment securities, and strong loan origination activity ($2.92 billion in H1 2025)[188] - Total uninsured deposits were approximately $1.95 billion, or 15.4% of total deposits, at June 30, 2025[185] Commercial Real Estate This section provides a breakdown of the commercial real estate loan portfolio, distinguishing between guaranteed and unguaranteed exposures | Commercial Real Estate Loans (in thousands) | Guaranteed | Unguaranteed | Total | % of Total | | :---------------------------------------- | :--------- | :----------- | :---- | :--------- | | Held for Investment Loans | $1,810,605 | $3,217,055 | $5,027,660 | 95.6% | | Held for Sale Loans | $233,979 | $0 | $233,979 | 4.4% | | Total Commercial Real Estate Loans | $2,044,584 | $3,217,055 | $5,261,639 | 100.0% | Asset Quality This section analyzes the quality of the company's assets, focusing on nonperforming assets and criticized and classified loans Nonperforming Assets This section details the company's nonperforming assets, including nonaccrual loans and foreclosed assets, and their changes | Nonperforming Asset (in thousands) | June 30, 2025 | December 31, 2024 | Change | % Change | | :--------------------------------- | :------------ | :---------------- | :------- | :------- | | Total Nonperforming Assets (incl. fair value loans) | $473,500 | $371,800 | $101,700 | 27.4% | | Nonaccrual loans and leases (excl. fair value loans) | $396,332 | $304,297 | $92,035 | 30.2% | | Foreclosed assets | $6,318 | $1,944 | $4,374 | 225.0% | | Unguaranteed exposure in total nonperforming assets | $70,600 | $91,600 | ($21,000) | (22.9)% | - Nonperforming assets increased by $101.7 million, or 27.4%, to $473.5 million at June 30, 2025, primarily due to increases in nonaccrual loans and foreclosed assets[191] - The unguaranteed exposure in total nonperforming assets decreased by $20.9 million, or 22.9%, to $70.6 million at June 30, 2025[191] Potential Problem and Classified Loans and Leases This section discusses potential problem and classified loans and leases, including their risk grades and unguaranteed exposures | Metric (in thousands) | June 30, 2025 | December 31, 2024 | Change | % Change | | :-------------------- | :------------ | :---------------- | :------- | :------- | | Risk Grade 50 loans and leases (Special Mention) | $589,800 | $529,900 | $59,900 | 11.3% | | Total criticized and classified loans and leases | $1,140,000 | $1,040,000 | $100,000 | 9.6% | | Unguaranteed exposure risk of criticized and classified loans | $561,000 | $523,300 | $37,700 | 7.2% | - The overall increase in criticized and classified loans in the first half of 2025 was primarily driven by higher levels of commercial borrowers impacted by the challenging macroeconomic environment[200] Allowance for Credit Losses on Loans and Leases This section analyzes the allowance for credit losses on loans and leases, including its ratio to held-for-investment loans | Metric (in thousands) | June 30, 2025 | December 31, 2024 | Change | % Change | | :-------------------- | :------------ | :---------------- | :------- | :------- | | ACL | $182,200 | $167,500 | $14,700 | 8.8% | | ACL as % of loans and leases held for investment (historical cost) | 1.7% | 1.7% | 0.0% | 0.0% | - The increase in ACL was primarily due to specific reserve changes on individually evaluated loans and continued growth of the loan and lease portfolio[207] Liquidity Management This section discusses the company's liquidity position, including total liquidity sources and the use of an Outflow Coverage Ratio model - Total liquidity sources (cash, unpledged securities, credit lines) were $4.49 billion at June 30, 2025, representing 32.5% of total assets, a slight increase from 32.4% at December 31, 2024[210] - The Company maintains an Outflow Coverage Ratio (OCR) model to stress outflows and ensure adequate liquidity[210] Contractual Obligations This section confirms that there have been no significant changes in contractual obligations since the last reporting period - There have been no significant changes in the types or amounts of contractual obligations since December 31, 2024, other than normal changes in the ordinary course of operations[213] Off-Balance Sheet Arrangements This section describes the company's off-balance-sheet financial transactions and the associated credit, interest rate, and liquidity risks - The Company engages in off-balance-sheet financial transactions, such as commitments to extend credit and standby letters of credit, to meet customer financing needs, which involve credit, interest rate, and liquidity risk[214] Asset/Liability Management and Interest Rate Sensitivity This section discusses the company's asset/liability management strategies and its interest rate sensitivity profile, including gap and EVE analysis - As of June 30, 2025, the balance sheet's total cumulative gap position was 5.3%, indicating more assets will reprice than liabilities over their expected life[215] - The Company's interest rate risk profile is moderately asset-sensitive under instantaneous parallel interest rate shock scenarios, meaning net interest income generally moves in the same direction as interest rates[216][217] - The EVE analysis shows a theoretical loss in market value in a rising rate environment due to longer asset duration versus shorter funding duration[234] Capital This section presents the company's capital ratios, comparing them against minimum regulatory requirements and "well capitalized" levels | Capital Ratio | June 30, 2025 | December 31, 2024 | Minimum Capital Requirement | Minimum To Be Well Capitalized | | :------------------------------------ | :------------ | :---------------- | :-------------------------- | :----------------------------- | | Common Equity Tier 1 (Consolidated) | 10.67% | 11.04% | 4.50% | N/A | | Total Capital (Consolidated) | 11.93% | 12.29% | 8.00% | N/A | | Tier 1 Capital (Consolidated) | 10.67% | 11.04% | 6.00% | N/A | | Tier 1 Capital (to Average Assets) (Consolidated) | 7.90% | 8.21% | 4.00% | N/A | | Common Equity Tier 1 (Bank) | 10.65% | 10.96% | 4.50% | 6.50% | | Total Capital (Bank) | 11.91% | 12.22% | 8.00% | 10.00% | | Tier 1 Capital (Bank) | 10.65% | 10.96% | 6.00% | 8.00% | | Tier 1 Capital (to Average Assets) (Bank) | 7.79% | 8.04% | 4.00% | 5.00% | - The Company's goal is to maintain capital levels in excess of the regulatory "well capitalized" levels[218] Critical Accounting Policies and Estimates This section identifies the most critical accounting policies and estimates, emphasizing the significant judgment required for the Allowance for Credit Losses - The Allowance for Credit Losses is identified as the most critical accounting policy and estimate, requiring significant management judgment and susceptible to material change[223] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section discusses the Company's management of interest rate risk through its Asset/Liability Committee, using interest rate gap analysis and simulation models (EVE and NII). It highlights the Company's moderately asset-sensitive position and the theoretical impact of interest rate changes on net interest income and economic value of equity - The Company's total cumulative gap position was 5.3% at June 30, 2025, indicating more assets will reprice than liabilities over their expected life[227] - The Company is moderately asset-sensitive in the initial year under instantaneous parallel interest rate shock NII simulation, with net interest income generally moving in the same direction as interest rates[233] - EVE analysis suggests a theoretical loss in market value in a rising rate environment due to the longer duration of assets (investments and loans) compared to the shorter duration of funding (retail savings and short-term CDs)[234] - The Company regularly models various forecasted rate projections with non-parallel shifts to assess and manage potential risks from different rate changes[235] Item 4. Controls and Procedures This section reports that the Company's disclosure controls and procedures were not effective as of June 30, 2025, due to a material weakness in internal control over financial reporting. It outlines ongoing remediation efforts focused on enhancing control environment, strengthening communication protocols in the loan review process, and increasing reporting to the Risk Committee Evaluation of Disclosure Controls and Procedures This section reports that the company's disclosure controls and procedures were not effective due to a material weakness in internal control over financial reporting - The Company's disclosure controls and procedures were not effective as of June 30, 2025, due to a material weakness in internal control over financial reporting[236] Remediation Plan for Material Weakness in Internal Control Over Financial Reporting This section outlines the company's remediation plan to address the material weakness, focusing on enhanced training and reporting - Remediation efforts include enhanced internal control trainings for individuals responsible for risk assessment, design, monitoring, and documentation of the loan review process, and increased reporting to the Risk Committee[237] - The material weakness has not yet been fully remediated and will require controls to operate effectively for a sufficient period, confirmed by testing[238] Changes in Internal Control Over Financial Reporting This section confirms no other material changes in internal control over financial reporting occurred during the quarter, apart from remediation measures - No other changes in internal control over financial reporting occurred during the quarter ended June 30, 2025, that materially affected or are reasonably likely to materially affect the Company's internal control over financial reporting, other than the remediation plan measures[239] PART II. OTHER INFORMATION This section provides additional information, including legal proceedings, risk factors, equity sales, defaults, and exhibits Item 1. Legal Proceedings This section states that management believes there are no material pending legal proceedings against the Company or its subsidiaries as of June 30, 2025 - As of June 30, 2025, management believes there are no material pending legal proceedings to which the Company or its subsidiaries are a party[241] Item 1A. Risk Factors This section indicates that there have been no material changes to the Company's risk factors since the 2024 Form 10-K, apart from an additional risk factor disclosed in the previous quarterly report - There have been no material changes in the Company's risk factors from those disclosed in the 2024 Form 10-K, except for an additional risk factor disclosed in the Q1 2025 10-Q[242] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports that there were no unregistered sales of equity securities or use of proceeds during the period - None[243] Item 3. Defaults Upon Senior Securities This section confirms that there were no defaults upon senior securities during the reporting period - None[244] Item 4. Mine Safety Disclosures This section states that mine safety disclosures are not applicable to the Company - Not applicable[245] Item 5. Other Information This section provides information regarding insider trading arrangements, noting that no directors or officers adopted, modified, or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the quarter - During the quarter ended June 30, 2025, none of the Company's directors or officers adopted, modified, or terminated a "Rule 10b5-1 trading arrangement" or a "non-Rule 10b5-1 trading arrangement"[246] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including corporate governance documents, stock-related agreements, certifications, and interactive data files - The report includes various exhibits such as Amended and Restated Articles of Incorporation, Articles of Amendment for Preferred Stock, Amended Bylaws, Form of Common Stock Certificate, Deposit Agreement, Form of Depositary Receipt, RSU Award Agreement, Certifications of Principal Executive and Financial Officers, and Interactive Data Files (Inline XBRL)[248] Signatures This section contains the official signatures for the Form 10-Q, confirming its submission - The report was signed on August 5, 2025, by Walter J. Phifer, Chief Financial Officer of Live Oak Bancshares, Inc.[251]