How Wilmington’s top bank has navigated the U.S. banking crisis

In March, following the collapse of Silicon Valley Bank and Signature Bank, clients moved billions of dollars out of smaller U.S. banks and into money markets and the handful of giant banks deemed to be “too big to fail.”

For Live Oak Bank, a regional bank based in Wilmington, this meant an exodus of deposits.

In the two weeks after a bank run toppled Silicon Valley Bank, Live Oak customers removed around $250 million in uninsured deposits, the company noted during its latest earnings report. This outflow wiped away the more than 6% growth in deposits the bank had seen over the first two months of the year.

But retreating 2023 gains weren’t the Wilmington bank’s primary concern. Its executives were determined to shield their institution from a burgeoning U.S. banking crisis.

“It was a frightening time,” said Live Oak President Huntley Garriott. “There were a lot of unknowns, and contagion is a scary thing.”

Live Oak’s unique banking approach

With around $10 billion in assets, Live Oak straddles the line between a community bank and a regional bank. It’s the fourth-largest state-chartered bank in North Carolina and leads the nation in providing a specific type of small business loan: According to the U.S. Small Business Administration, Live Oak has approved more SBA-sponsored loans, in terms of total dollars, than any other bank in each of the past six years.

Garriott said community and regional banks like Live Oak often make loans that wouldn’t qualify under the blanket tests used by the largest banks.

“We will go through a lot of work in our underwriting to understand the story, to get to know the borrower, to make sure they’re the right person to take on,” he said. “Small businesses, by nature, have more volatility, so you’ve got to be able to work with them and be along for that journey.”

Even before the current industry upheaval, small and midsize banks have been disappearing in North Carolina, mirroring nationwide sector consolidation. According to the North Carolina Commissioner of Banks, there were 87 state-chartered banks in April 2003, 71 in April 2013, and only 35 last month.

“You’ve seen deposits declining in the smaller bank sector,” said Gerald Cohen, chief economist at the Kenan Institute of Private Enterprise, a think tank affiliated with the UNC Kenan-Flagler Business School. “And that is deleterious to commercial and industrial loan activity.”

Live Oak is branchless, serving clients only online. Its workforce includes around 650 people in Wilmington and another two dozen in both Raleigh and Charlotte. In the Triangle, it has an office on North Carolina State University’s Centennial Campus and a small coworking space at American Underground in downtown Durham.

Founded in 2008 by banking entrepreneur Chip Mahan, Live Oak has grown by focusing on specific industries: first loans to veterinarians, then expanding to other recession-resistant businesses like funeral homes and dentists. Four years ago, Live Oak opened a division serving early-stage startups, a mini-version of Silicon Valley Bank.

But since March, the last thing Live Oak has wanted to be is the next SVB.

‘War gaming’ during a crisis

Located about 15 minutes from the beach, Live Oak’s headquarters was a hive of activity the weekend after SVB’s demise.

Garriott described it as “war gaming.”

“The first thing that we did, that I think everyone did, was really access our balance sheet, our liquidity, and start to run scenarios of what could happen,” he said. “You have to do that really fast and have a really good team around you. Where are there available sources of financing and liquidity? We spent the better part of the weekend doing all of that. Talking to our board. Talking to regulators.”

In late March, Live Oak raised its interest rates on deposits .5% in an attempt to attract new deposits.

As deposits dropped and concerns over systematic bank runs mounted, Live Oak executives also weighed their communication strategy. Should the bank broadcast its underlying financial strength with press releases to assure customers, a step taken by some of its competitors? Or would doing so only raise alarms?

“We, at the end of the day, stayed relatively quiet,” Garriott said. “Our customers are largely insured, and we have a lot of capital. We didn’t see the stress, and so we didn’t need to put out the types of releases that others were trying to stop a crisis of confidence. But we were prepared to do so.”

How Live Oak reversed its deposit decline

Compared to the overall U.S. banking industry, Live Oak had a low percentage of uninsured deposits, a key metric many have used in recent months to assess institutional stability. The Federal Deposit Insurance Corporation (FDIC) guarantees up to $250,000 in each account, and any higher amounts are uninsured.

For the first quarter of 2023, 85% of Live Oak deposits were insured, compared to the sector average of 56%. For context, only 10% of SVB deposits were insured at the end of last year.

“My initial reading tells me Live Oak does not have any of the features which triggered a run on SVB,” said Rahul Vashishtha, a professor of accounting at the Duke University Fuqua School of Business who reviewed the bank’s first-quarter earnings report for The News & Observer.

Vashishtha highlighted Live Oak’s “minimal reliance on uninsured depositors” as well as its little unrealized losses on its loan portfolio.

In its earnings report, released on April 27, Live Oak reported having $4.2 billion in cash and immediate borrowing capacity, enough to cover three times its uninsured deposits.

Live Oak actually finished 2023’s first quarter with higher total customer deposits, up 2.7% — a reversal Vashishtha called “astounding.”

While it hemorrhaged uninsured deposits, Live Oak continued adding new accounts in the weeks after the crisis began. Around March 23, its balances began to bounce back. Elevated savings rates may have drawn in new accounts while business owners like Alex Lassiter, the CEO and founder of the startup Green Places in Raleigh, came to Live Oak after fleeing SVB.

“They’ve been great to work with and good partners,” Lassiter said.

Over the past two months, the branchless Wilmington bank has bucked an industry trend among small U.S. commercial banks, which overall have not seen their post-SVB deposits return, according to data from the Federal Reserve.

But Live Oak wasn’t the only North Carolina bank to end the volatile first quarter with deposits up. First Bank, a commercial bank in Southern Pines, saw its balance rise 3.7%. Asheville’s HomeTrust Bank and Catawba County’s Peoples Bank each reported even deposit change between Jan. 1 and March 31.

“I’m surprised at that,” Cohen at the Kenan Institute said of the absence of deposit losses. “Because the (sectorwide) data I’m looking at is suggesting otherwise.”

Deposits rebounded. Stock price hasn’t

But even as deposits surpassed pre-crisis levels, the value of community and regional banks on the stock market have sunk since Silicon Valley Bank’s downfall.

For the year, Live Oak stock is down 25%. Peoples Bank is down 46%, First Bank down 24%, and HomeTrust down 11%.

Since Jan. 1, the share price of PacWest, a California-based business bank that many speculate is operating on shaky ground, has plummeted 66%. Conversely, banks considered “too big to fail,” have seen modest stock declines (like Wells Fargo) or even increases (like Chase).

“What you want is the market to be a reflection of the performance of the business,” Garriott said. “Not the market to actually drive the performance of the business. When you’re in that position, it’s difficult.”

U.S. banking concerns are certainly not over.

On May 1, First Republic Bank became the third major U.S. bank to fall this year after a bank run. Many believe the question is when, not if, additional banks will fail.

At Live Oak, Garriott said the feeling is “cautiously optimistic.”

“I don’t think anybody is declaring victory,” he said. “But if you didn’t look at the news, and you didn’t look at our stock price, with the exception of the outflows of uninsured deposits for the two weeks at the end of March, you wouldn’t actually know anything happened.”

This story was produced with financial support from a coalition of partners led by Innovate Raleigh as part of an independent journalism fellowship program. The N&O maintains full editorial control of the work.

This story was originally published May 25, 2023, 7:00 AM.