Live Oak Bancshares, Inc.

•Our deployment and use of artificial intelligence presents risks and challenges that may adversely impact our business.

The deployment and use of artificial intelligence presents risks and challenges that may adversely impact our business.

Similar wording appears in 4 other banks' reports.

We continually evaluate and selectively deploy emerging technologies like artificial intelligence (“AI”), sometimes referred to as AI, and machine learning for incorporation in our business. AI refers to a field of computer science that enables computers to perform tasks that typically require human intelligence, such as reasoning, problem-solving, decision-making, and understanding of language. Machine learning is a subset of AI that uses statistical and computational methods to train algorithms so they can learn patterns from data and improve their performance without explicit programming. Generative AI is a subset of AI that uses generative models to create novel content.

The failure to strategically embrace these technologies or to achieve the expected effectiveness, productivity, or cost-reduction from our adoption of these technologies may put us at a competitive disadvantage. If we cannot integrate these technologies into our business as effectively as our competitors, if our competitors develop more cost-effective solutions or other product offerings, or if our employees do not adopt such technologies expediently and prudently, we could experience a material adverse effect on our operating results, customer relationships, and growth opportunities. Our use and deployment of AI solutions may introduce operational and control risks, including the risk of potential errors in automated decision-making, challenges in oversight and accountability, increased vulnerability to system failures or cyber incidents, and the risk that these technologies may not perform as intended under complex or unforeseen circumstances, which could materially disrupt our business operations and adversely affect our financial condition and reputation.

Regulation of AI is rapidly evolving as legislatures and regulators are increasingly focused on these powerful emerging technologies. The technologies underlying AI and its uses are subject to a variety of laws and regulations, including intellectual property, data privacy and cybersecurity, consumer protection, competition, equal opportunity, and fair lending laws, and are expected to be subject to increased regulation and new laws or new applications of existing laws and regulations. AI is the subject of ongoing review by various U.S. governmental and regulatory agencies, and various U.S. states are applying, or are considering applying, existing laws and regulations to AI or are considering general legal frameworks for AI. We may not be able to anticipate how to respond to these rapidly evolving frameworks, and we may need to expend resources to adjust our operations or offerings in certain jurisdictions if the legal frameworks are inconsistent across jurisdictions.

Similar wording appears in 8 other banks' reports.

In addition, the use and development of AI technologies by the us and our third-party vendors, clients, and counterparties may expose us to risks and potential liabilities. These risks may occur as a result of enhanced governmental or regulatory scrutiny, litigation, ethical concerns, confidentiality or other security risks, intellectual property concerns over data rights and protection, heightened susceptibility to cyberattacks, inaccurate or biased algorithms or underlying datasets, privacy concerns or compliance issues, as well as other factors that could adversely affect our business, reputation, and financial results.

Additionally, we may not be able to control how third-party AI solutions that we choose to use are developed or maintained, including the source and quality of the data on which such models are trained or the frequency and nature of model updates. We may also be unable to govern or protect the integrity of the data we input into such tools, with respect to how such data is retained, reused, co-mingled with other data or disclosed.

Increased adoption of AI technologies also has the potential to alter competitive dynamics and demand in certain verticals that make up part of our small-business borrower base, including, for example, certified public accountants and investment advisory firms. If these technologies reduce demand for, or compress margins within, these or other verticals, affected borrowers may experience revenue volatility, fee compression, or client attrition, which could negatively affect their creditworthiness, increase our credit losses, and reduce the demand for our services.

We also rely on vendors and third parties to provide software and other services that are important to the operation of our banking platform. These services may include or utilize AI and related technologies. Our future strategy and success depend on our ability to access to these technology services and successfully implement them. If this technology is not successfully developed and implemented at our Bank, if we were to lose access to any of this technology, or if we were only able to access the technology on less favorable terms, we would not be able to offer our customers the banking services that we intend to offer, and our business, financial condition, results of operations and prospects could be materially and adversely affected.

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, including with respect to cyberthreats posed by emerging technologies, such as AI and quantum computing. In addition, federal regulators and many federal and state laws and regulations require companies to notify individuals of security breaches and other data incidents involving their personal information. Certain security breaches and other data incidents also require notice to regulators, the media, and/or other parties. These mandatory disclosures 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. 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.

We invest, directly and indirectly, in early to growth-stage companies that may include companies that utilize advanced science, technology, engineering and/or mathematics, including AI technologies, to innovate in the financial technology market. Investments in these companies involve a high degree of business and financial risk that can result in substantial losses. 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. Less established companies tend to have lower capitalization and fewer resources and, therefore, are often more vulnerable to financial failure. 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. Such companies may face intense competition, including competition from companies with greater financial resources, more extensive development, AI, manufacturing, marketing and service capabilities, and a larger number of qualified managerial and technical personnel.

We compete with these institutions both in attracting deposits and in making loans, primarily on the basis of the interest rates we pay and yield on these products. We also compete with these institutions in our other business lines, including wealth management. Many of our competitors are well-established, much larger financial institutions. While we believe we can successfully compete with these other lenders in our industry verticals, we may face a competitive disadvantage as a result of our smaller size. Furthermore, nothing would prevent our competitors from developing or licensing a technology-based platform similar to the technology-based platform we currently use in our business. In addition, many of our non-bank competitors have fewer regulatory constraints and may have lower cost structures. We expect competition to continue to intensify due to financial institution consolidation, legislative, regulatory and technological changes, including advances in AI and automation, and the emergence of alternative banking sources.

Our competitors may have greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. In addition, our implementation of certain new technologies, such as those related to AI, automation and algorithms, in our business processes may have unintended consequences due to their limitations or our failure to use them effectively.

Similar wording appears in 13 other banks' reports.

We have implemented a risk management framework to manage our risk exposure. This framework is comprised of various processes, systems and strategies, and is designed to manage the types of risk to which we are subject, including, among others, credit, market, liquidity, interest rate and compliance risks. Our framework also includes financial and other modeling methodologies which involve management assumptions and judgment. We are also making efforts to evolve our risk management framework to manage the novel and amplified risks arising from the deployment and use of AI and related technologies. Our risk management framework may not be effective under all circumstances and it may fail to adequately identify or mitigate risk or loss to us. If our framework is not effective, we could suffer unexpected losses and be subject to potentially adverse regulatory consequences, and our business, results of operations and financial condition could be materially and adversely affected.

Our competitors may have greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. In addition, our implementation of certain new technologies, such as those related to artificial intelligence, automation and algorithms, in our business processes may have unintended consequences due to their limitations or our failure to use them effectively.

Similar wording appears in 12 other banks' reports.

Our competitors may have greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. In addition, our implementation of certain new technologies, such as those related to artificial intelligence, automation and algorithms, in our business processes may have unintended consequences due to their limitations or our failure to use them effectively.

Similar wording appears in 12 other banks' reports.

Our competitors may have greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. In addition, our implementation of certain new technologies, such as those related to artificial intelligence, automation and algorithms, in our business processes may have unintended consequences due to their limitations or our failure to use them effectively.

Similar wording appears in 7 other banks' reports.