Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ýQuarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended SeptemberJune 30, 20172018
or
¨Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from             to             .
Commission file number: 001-37497
liveoakbancshareslogo.jpg
LIVE OAK BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
North Carolina26-4596286
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
  
1741 Tiburon Drive
Wilmington, North Carolina
28403
(Address of principal executive offices)(Zip Code)
(910) 790-5867
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  ý    NO  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  ý    NO  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ Accelerated filer x
    
Non-accelerated filer 
¨ (Do not check if smaller reporting company)
 Smaller reporting company ¨
       
    Emerging growth company x
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     ¨
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  ý
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of November 4, 2017,August 6, 2018, there were 35,233,24135,473,289 shares of the registrant’s voting common stock outstanding and 4,643,530 shares of the registrant’s non-voting common stock outstanding.




Table of Contents

Live Oak Bancshares, Inc. and Subsidiaries
Form 10-Q
For the Quarterly Period Ended SeptemberJune 30, 20172018
TABLE OF CONTENTS

  Page
PART I. FINANCIAL INFORMATION
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
PART II. OTHER INFORMATION
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 




Table of Contents

PART I. FINANCIAL INFORMATION
Item 1.        Financial Statements
Live Oak Bancshares, Inc.
Consolidated Balance Sheets
As of SeptemberJune 30, 20172018 (unaudited) and December 31, 2016*2017*
(Dollars in thousands)
September 30,
2017
 December 31,
2016*
June 30,
2018
 December 31,
2017*
Assets      
Cash and due from banks$260,907
 $238,008
$392,941
 $295,271
Certificates of deposit with other banks3,250
 7,250
2,250
 3,000
Investment securities available-for-sale76,575
 71,056
384,943
 93,355
Loans held for sale692,586
 394,278
757,494
 680,454
Loans and leases held for investment1,169,887
 907,566
1,534,368
 1,343,973
Allowance for loan and lease losses(21,027) (18,209)(29,350) (24,190)
Net loans and leases1,148,860
 889,357
1,505,018
 1,319,783
Premises and equipment, net129,233
 64,661
234,817
 178,790
Foreclosed assets2,231
 1,648
1,725
 1,281
Servicing assets53,392
 51,994
52,689
 52,298
Other assets65,155
 37,009
141,092
 134,242
Total assets$2,432,189
 $1,755,261
$3,472,969
 $2,758,474
Liabilities and Shareholders’ Equity      
Liabilities      
Deposits:      
Noninterest-bearing$55,260
 $27,990
$46,192
 $57,868
Interest-bearing1,957,631
 1,457,086
2,923,044
 2,202,395
Total deposits2,012,891
 1,485,076
2,969,236
 2,260,263
Long term borrowings26,872
 27,843
3,385
 26,564
Other liabilities27,835
 19,495
37,362
 34,714
Total liabilities2,067,598
 1,532,414
3,009,983
 2,321,541
Shareholders’ equity      
Preferred stock, no par value, 1,000,000 authorized, none issued or outstanding at September 30, 2017 and December 31, 2016
 
Class A common stock, no par value, 100,000,000 shares authorized, 35,218,617 and 29,530,072 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively266,336
 149,966
Class B common stock, no par value, 10,000,000 shares authorized, 4,643,530 and 4,723,530 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively49,168
 50,015
Preferred stock, no par value, 1,000,000 authorized, none issued or outstanding at June 30, 2018 and December 31, 2017
 
Class A common stock, no par value, 100,000,000 shares authorized, 35,442,879 and 35,252,053 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively274,043
 268,557
Class B common stock, no par value, 10,000,000 shares authorized, 4,643,530 shares issued and outstanding at June 30, 2018 and December 31, 201749,168
 49,168
Retained earnings49,707
 23,518
144,791
 120,241
Accumulated other comprehensive loss(620) (652)(5,016) (1,033)
Total equity364,591
 222,847
462,986
 436,933
Total liabilities and shareholders’ equity$2,432,189
 $1,755,261
$3,472,969
 $2,758,474
*    Derived from audited consolidated financial statements.
See Notes to Unaudited Consolidated Financial Statements

Table of Contents

Live Oak Bancshares, Inc.
Consolidated Statements of Income
For the three and ninesix months ended SeptemberJune 30, 20172018 and 20162017 (unaudited)
(Dollars in thousands, except per share data)
 Three Months Ended
September 30,
 Nine Months Ended
September 30,
 2017 2016 2017 2016
Interest income       
Loans and fees on loans$26,977
 $14,961
 $70,290
 $38,868
Investment securities, taxable325
 337
 964
 840
Other interest earning assets870
 264
 1,682
 650
Total interest income28,172
 15,562
 72,936
 40,358
Interest expense       
Deposits6,758
 3,689
 16,893
 9,376
Borrowings389
 242
 985
 725
Total interest expense7,147
 3,931
 17,878
 10,101
Net interest income21,025
 11,631
 55,058
 30,257
Provision for loan and lease losses2,426
 3,806
 5,481
 8,692
Net interest income after provision for loan and lease losses18,599
 7,825
 49,577
 21,565
Noninterest income       
Loan servicing revenue6,490
 5,860
 18,587
 15,725
Loan servicing asset revaluation(3,691) (3,421) (6,864) (5,051)
Net gains on sales of loans18,148
 21,833
 55,276
 52,813
Gain on sale of investment securities available-for-sale
 1
 
 1
Construction supervision fee income362
 502
 1,077
 1,799
Title insurance income1,968
 
 5,803
 
Other noninterest income1,783
 657
 3,601
 1,925
Total noninterest income25,060
 25,432
 77,480
 67,212
Noninterest expense       
Salaries and employee benefits19,037
 17,471
 55,687
 45,875
Travel expense2,289
 2,218
 6,035
 6,394
Professional services expense1,068
 907
 4,228
 2,345
Advertising and marketing expense1,516
 1,097
 4,977
 3,425
Occupancy expense1,473
 1,058
 4,018
 3,306
Data processing expense1,982
 1,252
 5,536
 3,864
Equipment expense2,228
 611
 5,005
 1,696
Other loan origination and maintenance expense1,601
 806
 3,587
 2,001
FDIC insurance858
 210
 2,308
 507
Title insurance closing services expense687
 
 1,877
 
Other expense3,117
 1,588
 8,883
 4,648
Total noninterest expense35,856
 27,218
 102,141
 74,061
Income before taxes7,803
 6,039
 24,916
 14,716
Income tax (benefit) expense(5,059) 2,561
 (3,853) 6,432
Net income12,862
 3,478
 28,769
 8,284
Net loss attributable to noncontrolling interest
 1
 
 9
Net income attributable to Live Oak Bancshares, Inc.$12,862
 $3,479
 $28,769
 $8,293
Basic earnings per share$0.34
 $0.10
 $0.81
 $0.24
Diluted earnings per share$0.33
 $0.10
 $0.78
 $0.24

Table of Contents

 Three Months Ended
June 30,
 Six Months Ended
June 30,
 2018 2017 2018 2017
Interest income       
Loans and fees on loans$36,267
 $23,559
 $68,958
 $43,313
Investment securities, taxable2,530
 316
 3,647
 639
Other interest earning assets2,179
 470
 3,394
 812
Total interest income40,976
 24,345
 75,999
 44,764
Interest expense       
Deposits13,927
 5,592
 24,345
 10,135
Borrowings1
 361
 130
 596
Total interest expense13,928
 5,953
 24,475
 10,731
Net interest income27,048
 18,392
 51,524
 34,033
Provision for loan and lease losses2,087
 1,556
 6,479
 3,055
Net interest income after provision for loan and lease losses24,961
 16,836
 45,045
 30,978
Noninterest income       
Loan servicing revenue6,965
 6,174
 13,863
 12,097
Loan servicing asset revaluation(3,670) (1,164) (8,758) (3,173)
Net gains on sales of loans23,061
 18,176
 47,479
 37,128
Lease income1,920
 9
 3,528
 9
Construction supervision fee income597
 286
 1,376
 715
Title insurance income996
 2,397
 2,296
 3,835
Other noninterest income744
 789
 1,585
 1,809
Total noninterest income30,613
 26,667
 61,369
 52,420
Noninterest expense       
Salaries and employee benefits22,146
 17,968
 42,355
 36,650
Travel expense2,041
 2,148
 3,884
 3,746
Professional services expense1,119
 1,424
 2,417
 3,160
Advertising and marketing expense1,868
 1,976
 3,530
 3,461
Occupancy expense1,882
 1,350
 3,739
 2,545
Data processing expense2,906
 1,858
 5,743
 3,554
Equipment expense3,368
 1,703
 6,445
 2,777
Other loan origination and maintenance expense1,414
 981
 2,743
 1,986
FDIC insurance1,010
 724
 1,582
 1,450
Title insurance closing services expense372
 785
 798
 1,190
Other expense2,704
 2,383
 5,666
 5,766
Total noninterest expense40,830
 33,300
 78,902
 66,285
Income before taxes14,744
 10,203
 27,512
 17,113
Income tax expense491
 408
 806
 1,206
Net income$14,253
 $9,795
 $26,706
 $15,907
Basic earnings per share$0.36
 $0.28
 $0.67
 $0.46
Diluted earnings per share$0.34
 $0.27
 $0.64
 $0.44
See Notes to Unaudited Consolidated Financial Statements

Table of Contents

Live Oak Bancshares, Inc.
Consolidated Statements of Comprehensive Income
For the three and ninesix months ended SeptemberJune 30, 20172018 and 20162017 (unaudited)
(Dollars in thousands)
Three Months Ended
September 30,
 Nine Months Ended
September 30,
Three Months Ended
June 30,
 Six Months Ended
June 30,
2017 2016 2017 20162018 2017 2018 2017
Net income$12,862
 $3,478
 $28,769
 $8,284
$14,253
 $9,795
 $26,706
 $15,907
Other comprehensive income before tax:       
Other comprehensive (loss) income before tax:       
Net unrealized (loss) gain on investment securities arising during the period(168) (115) 52
 525
(1,965) 293
 (4,920) 220
Reclassification adjustment for (gain) loss on sale of securities available-for-sale included in net income
 (1) 
 (1)
 
 
 
Other comprehensive income before tax(168) (116) 52
 524
Other comprehensive (loss) income before tax(1,965) 293
 (4,920) 220
Income tax benefit (expense)65
 45
 (20) (202)471
 (113) 1,181
 (85)
Other comprehensive (loss) income, net of tax(103) (71) 32
 322
(1,494) 180
 (3,739) 135
Total comprehensive income$12,759
 $3,407
 $28,801
 $8,606
$12,759
 $9,975
 $22,967
 $16,042
See Notes to Unaudited Consolidated Financial Statements

Table of Contents

Live Oak Bancshares, Inc.
Consolidated Statements of Changes in Shareholders’ Equity
For the ninesix months ended SeptemberJune 30, 20172018 and 20162017 (unaudited)
(Dollars in thousands)
Common stock 
Retained
earnings
 
Accumulated
other
comprehensive
income (loss)
 
Non-
controlling
interest
 
Total
equity
Common stock 
Retained
earnings
 
Accumulated
other
comprehensive
loss
 
Total
equity
Shares   Shares   
Class A Class B Amount Class A Class B Amount 
Balance at December 31, 201529,449,369
 4,723,530
 $187,507
 $12,140
 $(192) $33
 $199,488
Net income (loss)
 
 
 8,293
 
 (9) 8,284
Other comprehensive income
 
 
 
 322
 
 322
Issuance of restricted stock16,745
 
 
 
 
 
 
Stock option exercises25,406
 
 147
 
 
 
 147
Stock option based compensation expense
 
 1,752
 
 
 
 1,752
Restricted stock expense
 
 5,893
 
 
 
 5,893
Acquisition of non-controlling interest
 
 
 
 
 (24) (24)
Dividends (distributions to shareholders)
 
 
 (1,710) 
 
 (1,710)
Balance at September 30, 201629,491,520
 4,723,530
 $195,299
 $18,723
 $130
 $
 $214,152
Balance at December 31, 201629,530,072
 4,723,530
 $199,981
 $23,518
 $(652) $
 $222,847
29,530,072
 4,723,530
 $199,981
 $23,518
 $(652) $222,847
Net income
 
 
 28,769
 
 
 28,769

 
 
 15,907
 
 15,907
Other comprehensive income
 
 
 
 32
 
 32

 
 
 
 135
 135
Issuance of restricted stock306,902
 
 
 
 
 
 
287,190
 
 
 
 
 
Withholding cash issued in lieu of restricted stock issuance
 
 (4,891) 
 
 
 (4,891)
 
 (4,828) 
 
 (4,828)
Employee stock purchase program22,634
 
 445
 
 
 
 445
12,411
 
 241
 
 
 241
Stock option exercises76,285
 
 602
 
 
 
 602
58,921
 
 456
 
 
 456
Stock option based compensation expense
 
 1,496
 
 
 
 1,496

 
 924
 
 
 924
Restricted stock expense
 
 4,210
 
 
 
 4,210

 
 2,768
 
 
 2,768
Stock issued in acquisition of Reltco, Inc.27,724
 
 565
 
 
 
 565
27,724
 
 565
 
 
 565
Non-voting common stock converted to voting common stock in private sale80,000
 (80,000) 
 
 
 
 
Issuance of common stock in connection with secondary offering, net of issue costs5,175,000
 
 113,096
 
 
 
 113,096
Non-voting common stock converted to voting common stock-private sale80,000
 (80,000) 
 
 
 
Dividends (distributions to shareholders)
 
 
 (2,580) 
 
 (2,580)
 
 
 (1,384) 
 (1,384)
Balance at September 30, 201735,218,617
 4,643,530
 $315,504
 $49,707
 $(620) $
 $364,591
Balance at June 30, 201729,996,318
 4,643,530
 $200,107
 $38,041
 $(517) $237,631
Balance at December 31, 201735,252,053
 4,643,530
 $317,725
 $120,241
 $(1,033) $436,933
Net income
 
 
 26,706
 
 26,706
Other comprehensive loss
 
 
 
 (3,739) (3,739)
Issuance of restricted stock39,133
 
 
 
 
 
Withholding cash issued in lieu of restricted stock issuance
 
 (495) 
 
 (495)
Employee stock purchase program7,022
 
 165
 
 
 165
Stock option exercises144,671
 
 1,252
 
 
 1,252
Stock option based compensation expense
 
 809
 
 
 809
Restricted stock expense
 
 3,755
 
 
 3,755
Reclassification of accumulated other comprehensive income due to tax rate change
 
 
 244
 (244) 
Dividends (distributions to shareholders)
 
 
 (2,400) 
 (2,400)
Balance at June 30, 201835,442,879
 4,643,530
 $323,211
 $144,791
 $(5,016) $462,986
See Notes to Unaudited Consolidated Financial Statements

Table of Contents

Live Oak Bancshares, Inc.
Consolidated Statements of Cash Flows
For the ninesix months ended SeptemberJune 30, 20172018 and 20162017 (unaudited)
(Dollars in thousands)
Nine Months Ended
September 30,
Six Months Ended
June 30,
2017 20162018 2017
Cash flows from operating activities      
Net income$28,769
 $8,284
$26,706
 $15,907
Adjustments to reconcile net income to net cash used by operating activities:      
Depreciation and amortization7,020
 3,201
7,823
 4,062
Provision for loan losses5,481
 8,692
Provision for loan and lease losses6,479
 3,055
Amortization of premium on securities, net of accretion355
 135
353
 219
Amortization of discount on unguaranteed loans, net1,263
 773
3,501
 1,255
Deferred tax expense (benefit)413
 (510)
Deferred tax expense807
 1,427
Originations of loans held for sale(884,741) (701,415)(621,290) (632,414)
Proceeds from sales of loans held for sale648,300
 555,192
613,911
 466,309
Net gains on sale of loans held for sale(55,276) (52,813)(47,479) (37,128)
Net loss on sale of foreclosed assets30
 61
1
 3
Net increase in servicing assets(1,398) (5,499)(391) (1,681)
Gain on sale of securities available-for-sale
 (1)
Net loss on disposal of premises and equipment213
 

 213
Stock option based compensation expense1,496
 1,752
809
 924
Restricted stock expense4,210
 5,893
3,755
 2,768
Stock based compensation expense excess tax benefits1,073
 
24
 874
Business combination contingent consideration fair value adjustment350
 
(260) 350
Changes in assets and liabilities:      
Other assets(17,661) (858)(7,445) (9,463)
Other liabilities3,875
 2,652
909
 845
Net cash used by operating activities(256,228) (174,461)(11,787) (182,475)
Cash flows from investing activities      
Purchases of securities available-for-sale(13,009) (24,946)(316,588) (6,403)
Proceeds from sales, maturities, calls, and principal paydowns of securities available-for-sale7,187
 8,764
19,727
 4,467
Proceeds from sale/collection of foreclosed assets50
 680
212
 
Business combination, net of cash acquired(7,696) 

 (7,684)
Maturities of certificates of deposit with other banks4,000
 2,750
750
 1,500
Loan and lease originations and principal collections, net(273,501) (154,738)(217,743) (192,018)
Purchases of premises and equipment, net(71,420) (1,194)(61,217) (63,482)
Net cash used in investing activities(354,389) (168,684)
Net cash used by investing activities(574,859) (263,620)
See Notes to Unaudited Consolidated Financial Statements

Table of Contents

Live Oak Bancshares, Inc.
Consolidated Statements of Cash Flows (Continued)
For the ninesix months ended SeptemberJune 30, 20172018 and 20162017 (unaudited)
(Dollars in thousands)
Nine Months Ended
September 30,
Six Months Ended
June 30,
2017 20162018 2017
Cash flows from financing activities      
Net increase in deposits527,815
 598,229
708,973
 386,645
Proceeds from long term borrowings16,900
 
18
 16,900
Repayment of long term borrowings(25,971) (301)(23,197) (670)
Proceeds from short term borrowings23,100
 

 23,100
Repayment of short term borrowings(15,000) 

 (5,000)
Stock option exercises602
 147
1,252
 456
Employee stock purchase program445
 
165
 241
Withholding cash issued in lieu of restricted stock(4,891) 
(495) (4,828)
Sale of common stock, net of issuance costs113,096
 
Shareholder dividend distributions(2,580) (2,052)(2,400) (1,384)
Net cash provided by financing activities633,516
 596,023
684,316
 415,460
Net increase in cash and cash equivalents22,899
 252,878
Net increase (decrease) in cash and cash equivalents97,670
 (30,635)
Cash and cash equivalents, beginning238,008
 102,607
295,271
 238,008
Cash and cash equivalents, ending$260,907
 $355,485
$392,941
 $207,373
      
Supplemental disclosure of cash flow information      
Interest paid$17,927
 $10,120
$24,308
 $10,858
Income tax7,094
 5,739
Income tax (refunds) payments, net(542) 7,876
      
Supplemental disclosures of noncash operating, investing, and financing activities      
Unrealized holding gains on available-for-sale securities, net of taxes$32
 $322
Transfers from loans to foreclosed real estate and other repossessions663
 406
Transfers from foreclosed real estate to SBA receivable
 96
Transfer of loans held for sale to loans held for investment5,713
 339,322
Transfer of loans held for investment to loans held for sale18,990
 2,296
Contingent consideration in acquisition of controlling interest in equity method investment
 24
Unrealized holding (losses) gains on available-for-sale securities, net of taxes$(3,739) $135
Transfers from loans and leases to foreclosed real estate and other repossessions346
 495
Net transfers from SBA receivable to foreclosed real estate311
 
Transfer of loans held for sale to loans and leases held for investment19,774
 4,149
Transfer of loans and leases held for investment to loans held for sale51,614
 18,410
Transfers from short term borrowings to long term borrowings8,100
 

 8,100
Business combination:      
Assets acquired (excluding goodwill)5,766
 

 5,766
Liabilities assumed4,681
 

 4,681
Purchase price8,363
 

 8,351
Goodwill recorded7,278
 

 7,266
See Notes to Unaudited Consolidated Financial Statements

Table of Contents

Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
Note 1. Basis of Presentation
Nature of Operations
Live Oak Bancshares, Inc. (the “Company” or “LOB”) is a bank holding company headquartered in Wilmington, North Carolina incorporated under the laws of North Carolina in December 2008. The Company conducts business operations primarily through its commercial bank subsidiary, Live Oak Banking Company (the “Bank”). The Bank was organized and incorporated under the laws of the State of North Carolina on February 25, 2008 and commenced operations on May 12, 2008. The Bank specializes in providing lending services to small businesses nationwide in targeted industries, which we refer to as verticals.nationwide. The Bank identifies and grows lending to credit-worthy borrowers both within credit-worthyspecific industries, also called verticals, through expertise within those industries, and more broadly to select borrowers outside of those industries. A significant portion of the loans originated by the Bank are guaranteed by the Small Business Administration (“SBA”) under the 7(a) Loan Program and to a lesser extent by the U.S. Department of Agriculture ("USDA") Rural Energy for America Program ("REAP") and Business & Industry ("B&I") loan programs. On July 28, 2015 the Company completed its initial public offering with a secondary offering completed in August of 2017.
In 2010, the Bank formed Live Oak Number One, Inc., a wholly-owned subsidiary, to hold properties foreclosed on by the Bank.
In addition to the Bank, the Company owns Live Oak Grove, LLC, opened in September 2015 for the purpose of providing Company employees and business visitors an on-site restaurant location; Government Loan Solutions, Inc. (“GLS”), a management and technology consulting firm that specializes in the settlement, accounting, and securitization processes for government guaranteed loans, including loans originated under the SBA 7(a) loan program and USDA-guaranteed loans; and 504 Fund Advisors, LLC (“504FA”), formed to serve as the investment adviser to the 504 Fund, a closed-end mutual fund organized to invest in SBA section 504 loans.
The Company acquired control over 504FA, previously carried as an equity method investment, on February 2, 2015 by increasing its ownership from 50.0% to 91.3%. The acquisition of an additional 41.3% of ownership occurred in exchange for contingent consideration estimated to total $170 thousand. Transactions in the third quarter of 2015 and first quarter of 2016 increased the Company’s ownership to 92.9%. On September 1, 2016, the Company acquired the remaining 7.1% ownership from a third party investor in exchange for contingent consideration estimated to total $24 thousand.
In August 2016, the Company formed Live Oak Ventures,Canapi, Inc. for the purpose of investing in businesses that align with the Company's strategic initiative to be a leader in financial technology. Canapi was formerly known as Live Oak Ventures, Inc.
In November 2016, the Company formed Live Oak Clean Energy Financing LLC for the purpose of providing financing to entities for renewable energy applications.
On February 1, 2017, the Company completed its acquisition of Reltco Inc. and National Assurance Title, Inc. (collectively referred to as "Reltco"), two nationwide title agencies under common control based in Tampa, Florida. See Note 4. Business Combination13. Subsequent Event for a further discussiondisposition of this transaction.Reltco on August 1, 2018.
The Company earns revenue primarily from the sale of SBA and USDA-guaranteed loans and net interest income. Income from the sale of loans is comprised of net gains on the sale of loans, revenues on the servicing of sold loans and valuation of loan servicing rights. Offsetting these revenues are the cost of funding sources, provision for loan and lease losses, any costs related to foreclosed assets and other operating costs such as salaries and employee benefits, travel, professional services, occupancy, advertising and marketing and tax expense.
General
In the opinion of management, all adjustments necessary for a fair presentation of the financial position and results of operations for the periods presented have been included, and all intercompany transactions have been eliminated in consolidation. Results of operations for the ninesix months ended SeptemberJune 30, 20172018 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2017.2018. The consolidated balance sheet as of December 31, 20162017 has been derived from the audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2017, filed with the Securities Exchange Commission on March 9, 20178, 2018 (SEC File No. 001-37497) (the "2016"2017 Annual Report"). A summary description of the significant accounting policies followed by the Company is set forth in Note 1 of the Notes to Consolidated Financial Statements in the Company’s 20162017 Annual Report. These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes in the Company's 20162017 Annual Report.

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Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

The preparation of financial statements in conformity with United States generally accepted accounting principles, or GAAP, requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates.
Amounts in all tables in the Notes to Unaudited Consolidated Financial Statements have been presented in thousands, except percentage, time period, stock option, share and per share data or where otherwise indicated.

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Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

Business Segments
Management has determined that the Company has one significant operating segment, which is providing a lending platform for small businesses nationwide. In determining the appropriateness of segment definition, the Company considers the materiality of a potential segment, the components of the business about which financial information is available, and components for which management regularly evaluates relative to resource allocation and performance assessment.
Equipment LeasingUnconsolidated Joint Venture
The Company purchases new equipment for the purpose of leasing such equipment to customers within its verticals. Equipment purchased to fulfill commitments to commercial renewable energy projects is rented out under operating leases while leases of equipment outside of the renewable energy vertical are generally direct financing leases. Accordingly, leased assets under operating leases are included in premises and equipment while leased assets under direct financing leases are included in loans and leases held for investment.
Direct Financing Leases
Interest income on direct financing leases is recognized when earned.  Unearned interest is recognized over the lease term on a basis which results in a constant rate of return on the unrecovered lease investment.  The term of each lease is generally 4-6 years which is consistent with the useful life of the equipment with no residual value.  As of September 30,On October 1, 2017, the Company had net investmentsstarted the digital banking joint venture between Live Oak Banking Company and First Data Corporation ("First Data"). The new company, named Apiture, combines First Data's and the Bank's digital banking platforms, products, services, and certain human resources used in direct financing lease receivablesthe creation and delivery of $1.1 million.
Operating Leases
technology solutions for financial institutions. The termcontributed assets of each operating lease is generally 10 years. Theboth the Company retains ownership ofand First Data are considered businesses in accordance with relevant accounting standards. At closing both the equipmentBank and associated tax benefits such as investment tax credits and accelerated depreciation. At the end of the lease term, the lessee has the option to renew the leaseFirst Data received equal voting interests in Apiture in exchange for two additional terms or purchase the equipment at the then current fair market value.
Rental revenue from operating leases is recognized overtheir respective contributions. As a straight-line basis over the term of the lease. Rental equipmentclosing agreements, First Data is recordedentitled to a preference in Apiture's cash earnings from the date of closing through December 31, 2017 and all of 2018, not to exceed $18.0 million and $18.9 million, respectively.
As a result of the above cash earnings preference, income (loss) is allocated utilizing the hypothetical liquidation at cost and depreciated to an estimated residualbook value on a straight-line basis over("HLBV") method. Under the estimated useful life. The useful lives and residual values are generally 15 years and 30%, respectively; however, they are subject to periodic evaluation. Changes in useful lives or residual values will impact depreciation expense and any gainHLBV method, we allocate income or loss frombased on the salechange in each unitholders’ claim on the net assets of used equipment. The estimated useful lives and residual valuesApiture at period end, after adjusting for any distributions or contributions made during such period. As a result of the Company's leasing equipment are based on industry disposal experience and the Company's expectations for future sale prices.
IfHLBV method there was no net income or loss attributed to the Company decides to sell or otherwise dispose of rental equipment, it is carried atrelated its ownership interest in Apiture during the lower of cost or fair value less costs to sell or dispose.   Repairthree and maintenance costs that do not extend the lives of the rental equipment are charged to direct operating expenses at the time the costs are incurred.six months ended June 30, 2018.
As of SeptemberJune 30, 2018 and December 31, 2017 the Company had a net$68.0 million equity method investment of $47.5 million in assets included in premises and equipmentother assets on the consolidated balance sheet for this investment.
Derivative Financial Instruments
Interest Rate Futures Contracts
During the fourth quarter of 2016, the Company began using exchange-traded interest rate futures contracts to manage interest rate risk that may impact expected gains arising from future secondary market loan sales. Upon entering into a futures contract, the Company is required to pledge to the counterparty an amount of cash equal to a certain percentage of the contract amount, also known as an initial margin deposit. Subsequent payments, known as variation margin, are made or received by the Company each day to settle the daily fluctuations in the fair value of the underlying contract. Investments in these derivative contracts are subject to operating leases.risks that can result in a loss of all or part of an investment. Credit risk is considered low because the counterparties are futures exchanges. The Company has not designated any derivative as a hedging instrument under applicable accounting guidance. Changes in fair value of the derivative contracts is recorded as a component of "net gains on sales of loans" on the consolidated statement of income. The fair value of the derivative contracts on the balance sheet date is zero due to the daily cash settlement of contracts.
A maturity analysisEquity Warrant Assets
In connection with negotiated credit facilities and certain other services, the Company may obtain equity warrant assets giving the Company the right to acquire stock in private companies in certain verticals. These assets are held for prospective investment gains and are not used to hedge any economic risks. Further, the Company does not use other derivative instruments to hedge economic risks stemming from equity warrant assets.
Equity warrant assets in certain private client companies are recorded as derivatives when they contain net settlement terms and other qualifying criteria under Accounting Standards Codification 815. Equity warrant assets entitle the Company to purchase a specific number of shares of stock at a specific price within a specific time period, generally 10 years. Certain equity warrant assets contain contingent provisions, which adjust the underlying number of shares or purchase price upon the occurrence of certain future minimum lease payments under non-cancelable operating leasesevents to prevent dilution of the Company’s implied ownership represented by the warrants. Certain warrant agreements contain net share settlement provisions, which permit the receipt of, upon exercise, a share count equal to the intrinsic value of the warrant divided by the share price (otherwise known as a “cashless” exercise). These equity warrant assets are recorded at fair value and are classified as derivative assets, a component of other assets, on the consolidated balance sheet at the time they are obtained.
The grant date fair values of equity warrant assets classified as derivatives received in connection with the issuance of a credit facility are deemed to be loan fees and recognized as an adjustment of loan yield through loan interest income. Similar to other loan fees, the yield adjustment related to grant date fair value of warrants is as follows:recognized over the life of that credit facility.

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Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

As of September 30, 2017 Amount
2017 $463
2018 3,204
2019 3,214
2020 3,233
2021 3,254
Thereafter 19,625
Total $32,993

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Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

Impairment of Long-Lived Assets
The Company evaluates the carrying value of rental equipment and identifiable definite lived intangible assets for impairment whenever events or circumstances have occurred that would indicate the carrying amount may not be fully recoverable. A key elementAny changes in determining the recoverability of long-lived assets is the Company’s outlook as to the future market conditions for its rental equipment. If the carrying amount is not fully recoverable, an impairment loss is recognized to reduce the carrying amount to fair value. The Company determines fair value based uponfrom the condition of the rental equipment and the projected net cash flows from its rental and sale considering current market conditions. Goodwill and identifiable indefinite lived assets are evaluated for potential impairment annually or when circumstances indicate potential impairment may have occurred. Impairment losses, if any, are determined based upon the excess of carrying value over the estimatedgrant date fair value of equity warrant assets classified as derivatives will be recognized as increases or decreases to other assets on the asset. Thereconsolidated balance sheet and as net gains or losses on derivative instruments, in other noninterest income, a component of consolidated net income. When a portfolio company is acquired, the Company may exercise these equity warrant assets for shares or cash.
The fair value of equity warrant assets classified as derivatives is reviewed quarterly using a Black-Scholes option pricing model.
For those equity warrant assets that do not contain net share settlement provisions, the Company considers these to be equity investments without readily determinable market values and records the asset at cost.
Revenue Recognition
On January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) No. 2014-09 “Revenue from Contracts with Customers” (Topic 606) and all subsequent ASUs that modified Topic 606. The implementation of the new standard did not have been no impairmentsa material impact on the measurement or recognition of long-lived assets.revenue and a cumulative effect adjustment to opening retained earnings was not necessary. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts were not adjusted and continue to be reported in accordance with the Company's historic accounting under Topic 605.
ChangeTopic 606 does not apply to revenue associated with financial instruments, including revenue from loans and lease financings or investment securities. In addition, certain noninterest income streams such as fees associated with servicing rights, financial guarantees, derivatives, title insurance, and equity and cost method investments are also not in Accounting Estimatescope of the new guidance. Therefore, the recognition of these revenue streams did not change upon adoption of Topic 606. Substantially all of the Company’s revenue is generated from contracts with customers. Noninterest revenue streams in-scope of Topic 606 are discussed below.
DuringOther noninterest income
Other noninterest income consists of other recurring revenue streams from administration of trust assets held by the Company's trust department and from services provided by GLS to its clients for settlement, accounting, and valuation for government guaranteed loan sales and holdings. Trust account administration performance obligations are generally satisfied over time and fees are recognized monthly, based on the month-end market value of assets in fiduciary accounts and the applicable fee rate. Payment is generally received after month end through a direct charge to customers' accounts. The Company does not earn performance-based incentives from trust account administration services. GLS provides services when requested by clients. Each requested service represents a specific performance obligation with a transaction price outlined by GLS' fee schedule. Revenue is recognized as the requested services are completed and payment is generally received the following month.
Contract Balances
A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s noninterest revenue streams are largely based on transactional activity, or standard month-end revenue accruals such as trust administration fees based on month-end market values. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of June 30, 2018 and December 31, 2017, the Company assessed its estimatedid not have any significant contract balances.
Contract Acquisition Costs
In connection with the adoption of Topic 606, an entity is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the useful lives of the Company’s aircraft transportation.contract had not been obtained (for example, sales commission). The Company revised its original useful life estimateutilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less. Upon adoption of 20 years and currently estimates that its aircraft transportation will have a useful life of 10 years. The effects of reflecting this change in accounting estimate onTopic 606, the 2017 consolidated financial statements are as follows:
  Three months ended
September 30, 2017
 Nine months ended
September 30, 2017
Decrease in:    
Net income $202
 $692
Basic EPS $0.01
 $0.02
Diluted EPS $0.01
 $0.02
Company did not capitalize any contract acquisition cost.
Reclassifications
Certain reclassifications have been made to the prior period’s consolidated financial statements to place them on a comparable basis with the current year. Net income and shareholders’ equity previously reported were not affected by these reclassifications.

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Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

Note 2. Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). This standard is intended to clarify the principles for recognizing revenue and to develop a common revenue standard for GAAP. The Company's revenue is comprised of loan servicing revenue, net gains on sales of loans and net interest income on financial assets and financial liabilities, all of which are explicitly excluded from the scope of ASU 2014-09, and non-interest income. The Company's revenue streams included in non-interest income that are within the scope of the guidance are primarily related to sales of foreclosed assets, construction supervision fees, title insurance income and trust fiduciary fees. The Company does not expect the adoption of ASU 2014-09 to have a material effect on the consolidated financial statements. The Company expects to adoptadopted the standard in the first quarter of 2018 with a cumulative effect adjustmentno material impact on the consolidated financial statements. Refer to opening retained earnings, if such adjustment is deemedNote 1. Basis of Presentation for additional information.
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”). ASU 2016-01, among other things, (i) requires equity investments, with certain exceptions, to be significant.measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (viii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale. The Company adopted the standard in the first quarter of 2018 with no material impact on the consolidated financial statements. In accordance with (iv) above, the Company measured the fair value of the loan and lease portfolio using an exit price notion. See Note 10. Fair Value of Financial Instruments for additional information.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). The FASB issued this ASU to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet by lessees for those leases classified as operating leases under current GAAP and disclosing key information about leasing arrangements. The amendments in this ASU are effective for the Company on January 1, 2019. The impact of this standard will depend on the Company's lease portfolio at the time of the adoption and the Company is currently assessing the effect that the adoption of this standard will have on the consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 simplifies the accounting for share-based payment transactions for items including income tax consequences, classification of awards as equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 was effective and adopted by the Company on January 1, 2017. Starting in the first quarter of 2017, stock-based compensation excess tax benefits or deficiencies are reflected in the Consolidated Statements of Income as a component of the income tax expense, where as they previously were recognized in equity. Additionally, the Consolidated Statements of Cash
Flows now present excess tax benefits as an operating activity while any cash paid in lieu of shares for tax-withholding being classified as a financing activity. There were no excess tax benefits in the prior period presented for reclassification. Finally, the Company will continue to incorporate actual forfeitures as they occur in the accrual of compensation expense. As a result of the adoption of ASU 2016-09, the Consolidated Statement of Cash Flows for the nine months ended September 30, 2017 was adjusted as follows: a $1.1 million increase to net cash provided by operating activities and a $4.8 million increase to net cash used in financing activities. The adoption of ASU 2016-09 further resulted in a $0.03 increase in basic and diluted EPS for the nine months ended September 30, 2017. See Note 9 for information regarding the additional impact on our consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). This new guidance replaces the incurred loss impairment methodology in current standards with an expected credit loss methodology and requires consideration of a broader range of information to determine credit loss estimates. ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 will be effective for the Company on January 1, 2020. The Company is currently evaluating the potential impact of ASU 2016-13 on the consolidated financial statements. In that regard, a cross-functional working group has been formed, under the direction of the Company's Chief Financial Officer and Chief Credit Officer. The working group is comprised of individuals from various functional areas including credit, risk management, finance and information technology, among others. The Company is currently developing an implementation plan to include assessment of processes, portfolio segmentation, model development, system requirements and the identification of data and resource needs, among other things. The Company ishas also currently evaluating selected a third-party vendor solutionssolution to assist in the application of the ASU 2016-13. While the Company is currently unable to reasonably estimate the impact of adopting ASU 2016-13, the impact of adoption is expected to be significantly influenced by the composition, characteristics and quality of loan and securities portfolios as well as the prevailing economic conditions and forecasts as of the adoption date.

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Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805) - Clarifying the Definition of a Business” (“ASU 2017-01”).  ASU 2017-01 clarifies the definition and provides a more robust framework to use in determining when a set of assets and activities constitutes a business. ASU 2017-01 is intended to provide guidance when evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 will be effective for the Company on January 1, 2018. The Company does not expect this amendment to have a materialadopted the standard in the first quarter of 2018 with no effect on its consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). ASU 2017-04 removes Step 2 from the goodwill impairment test. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 will be effective for the Company on January 1, 2020, with early adoption permitted for interim or annual impairment tests performed after January 1, 2017. ASU 2017-04 is not expected to have a material impact on its consolidated financial statements.
In February 2017, the FASB issued ASU No. 2017-05, “Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20) - Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets” (“ASU 2017-05”). ASU 2017-05 clarifies the scope of Subtopic 610-20 and adds guidance on nonfinancial asset derecognition as well as the accounting for partial sales of nonfinancial assets. The amendments conform the derecognition guidance on nonfinancial assets with the model for transactions in the new revenue standard. ASU 2017-05 will be effective forThe Company adopted the Companystandard in the first quarter of 2018 with no effect on January 1, 2018 and is not expected to have a significant impact on itsthe consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, "Compensation“Compensation - Stock Compensation (Topic 718) - Scope of Modification Accounting" ("Accounting” (“ASU 2017-09"2017-09”). ASU 2017-09 clarifies when changes to the terms or conditions of a share-based payment award should be accounted for as a modification. This guidance indicates modification accounting is required when the fair value, vesting conditions, or classification of the award changes. The Company adopted the standard in the first quarter of 2018 with no effect on the consolidated financial statements.
In February 2018, the FASB issued ASU 2017-09No. 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018-02”). ASU 2018-02 addresses the income tax accounting treatment of the stranded tax effects within other comprehensive income. The ASU allows for an entity to reclassify the stranded tax effects resulting from the Tax Cuts and Jobs Act from accumulated other comprehensive income to retained earnings. ASU 2018-02 will be effective for the Company on January 1, 2019, with early adoption permitted. The Company early adopted ASU 2018-02 in the first quarter of 2018 and isreclassified its stranded tax credit of $244 thousand within accumulated other comprehensive income to retained earnings at March 31, 2018.
In February 2018, the FASB issued ASU No. 2018-03, “Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2018-03”). ASU 2018-03 amendments clarify certain aspects of the guidance issued in ASU 2016-01. The amendments are effective for the Company for fiscal year 2018 with adoption as of July 1, 2018. The Company does not expectedexpect these amendments to have a significant impactmaterial effect on its consolidated financial statements.
In August 2017,March 2018, the FASB issued ASU No. 2017-12, “Derivatives2018-05, “Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin (SAB) No. 118” (“ASU 2018-05”). ASU 2018-05 amends Accounting Standard Codification 740 to include recent SEC guidance pursuant to the issuance of SAB 118. These amendments address situations when a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Tax Cuts and HedgingJobs Act. The amendments were effective upon issuance and do not have a material effect on the Company's consolidated financial statements.
In June 2018, the FASB issued ASU No. 2018-07 “Compensation - Stock Compensation (Topic 815) - Targeted718) Improvements to Accounting for Hedging Activities" ("Nonemployee Share-Based Payment Accounting” (“ASU 2017-12"2018-07”). ASU 2017-122018-07 amends Accounting Standard Codification 718 to largely align accounting for share-based payment awards issued to employees and nonemployees. Under the hedge accounting recognitionnew guidance existing employee guidance will generally apply to nonemployee share-based transactions, except for specific guidance on inputs into option pricing models and presentation requirements in ASC 815the attribution of cost. The amendments are effective for the Company on January 1, 2019 with early adoption permitted. The Company does not expect these amendments to improve the transparency and understandability of information conveyed tohave a material effect on its consolidated financial statement users about an entity’s risk management activities to better align the entity’s financial reporting for hedging relationships with those riskstatements.


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Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

management activities and to reduce the complexity of and simplify the application of hedge accounting. ASU 2017-12 will be effective for the Company on January 1, 2019 and is not expected to have a significant impact on its consolidated financial statements.
Note 3. Earnings Per Share
Basic and diluted earnings per share are computed based on the weighted average number of shares outstanding during each period. Diluted earnings per share reflects the potential dilution that could occur, upon the exercise of stock options or upon the vesting of restricted stock grants, any of which would result in the issuance of common stock that would then be shared in the net income of the Company.
Three Months Ended
September 30,
 Nine Months Ended
September 30,
Three Months Ended
June 30,
 Six Months Ended
June 30,
2017 2016 2017 20162018 2017 2018 2017
Basic earnings per share:              
Net income available to common shareholders$12,862
 $3,479
 $28,769
 $8,293
$14,253
 $9,795
 $26,706
 $15,907
Weighted-average basic shares outstanding37,366,041
 34,206,943
 35,485,371
 34,191,014
40,027,336
 34,618,721
 39,977,336
 34,543,229
Basic earnings per share$0.34
 $0.10
 $0.81
 $0.24
$0.36
 $0.28
 $0.67
 $0.46
Diluted earnings per share:              
Net income available to common shareholders, for diluted earnings per share$12,862
 $3,479
 $28,769
 $8,293
$14,253
 $9,795
 $26,706
 $15,907
Total weighted-average basic shares outstanding37,366,041
 34,206,943
 35,485,371
 34,191,014
40,027,336
 34,618,721
 39,977,336
 34,543,229
Add effect of dilutive stock options and restricted stock grants1,278,636
 794,874
 1,244,683
 812,408
1,592,311
 1,323,320
 1,538,997
 1,228,953
Total weighted-average diluted shares outstanding38,644,677
 35,001,817
 36,730,054
 35,003,422
41,619,647
 35,942,041
 41,516,333
 35,772,182
Diluted earnings per share$0.33
 $0.10
 $0.78
 $0.24
$0.34
 $0.27
 $0.64
 $0.44
Anti-dilutive shares243,199
 1,778,995
 250,698
 1,778,995

 245,583
 9,102
 983,174

Table of Contents

Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

Note 4. Business Combination
On February 1, 2017, the Company completed its acquisition of Reltco Inc. and National Assurance Title, Inc. (collectively referred to as "Reltco"), two nationwide title agencies under common control based in Tampa, Florida. The acquisition continues the Company's growth strategy, including vertically integrating with complementary services to deliver a high-quality customer experience with speed.
On the acquisition date, the fair value of Reltco included $5.8 million in assets and $4.7 million in liabilities. The total acquisition gross consideration at the time of the transaction, including earn-out contingent consideration was approximately $15.8 million. The acquisition was valued at $12.7 million after consideration of the applicable fair value adjustments to the earn-out, resulting in the Company paying $7.8 million in cash and issuing 27,724 shares of its common stock at closing in addition to an earn-out of up to 184,012 shares of its stock and $3.8 million in cash, in exchange for all of the outstanding shares of Reltco. The earn-out was recorded as a $4.3 million contingent liability on the acquisition date and is earned proportionally based on the ratio of the new subsidiary's actual future aggregate net income after tax divided by a target net income after tax of approximately $6.0 million over the four year earn-out period. Fair value measurement of the earn-out was calculated using the Monte Carlo Simulation. The Monte Carlo Simulation simulates 100,000 trials to assess the expected market price as of the earn-out measurement date at the end of each of the next four years based on the Cox, Ross & Rubinstein option pricing methodology. The Monte Carlo Simulation utilized various assumptions that include a risk free rate of return through the end of each measurement period equivalent to that of a U.S. Treasury, expected volatility of 30.00% over four years and a dividend yield of 0.40%.
The merger was accounted for in accordance with the acquisition method of accounting, and the identifiable assets acquired and liabilities assumed were recorded at their estimated fair values as of the acquisition date separately from goodwill. The estimated fair values of assets acquired and liabilities assumed are based on the information available at the date of the acquisition. Management continues to evaluate these fair values, which are subject to revision as additional information becomes available. During the one year measurement period, contingent consideration is recorded at fair value based on the terms of the purchase agreement with subsequent quarterly changes in fair value recorded through earnings. For the nine months ended September 30, 2017 the Company recorded expense of $350 thousand, related to the increased fair value of contingent consideration using the Monte Carlo Simulation. There was no expense recorded for this contingent consideration during the three months ended September 30, 2017. The assumptions utilized include a risk free rate of return through the end of each measurement period equivalent to that of a U.S. Treasury, expected volatility of 30.00% over the remaining 3.25 years and a dividend yield of 0.51%.

Table of Contents

Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

The following table summarizes the allocation of the purchase price on the date of acquisition to assets acquired and the liabilities assumed based on their estimated fair values:
Fair value of assets acquired 
Cash$102
Accounts receivable159
Intangible assets5,505
Total assets acquired5,766
Fair value of liabilities assumed 
Contingent consideration4,300
Accounts payable and other liabilities381
Total liabilities assumed4,681
Net assets acquired$1,085
Purchase price 
Common shares issued27,724
Purchase price per share of the Company’s common stock$20.38
Company common stock issued565
Cash7,798
Total purchase price8,363
Goodwill$7,278
Goodwill recorded represents future revenues and efficiencies gained through the Reltco acquisition. Goodwill in this transaction is expected to be deductible for income tax purposes. Intangible assets consist of trade names of $1.2 million, customer relationships of $3.9 million, and non-compete agreements of $405 thousand. The trade names have indefinite lives and the customer relationships and non-compete agreements range from five to eight years.
The Company recorded merger expenses of $766 thousand during the nine month period ended September 30, 2017. No merger expenses were recorded during the three month period ended September 30, 2017. The company recorded $52 thousand and $62 thousand in merger expenses during the three and nine months period ended September 30, 2016.
The following pro forma financial information for the quarters ended September 30, 2017 and 2016 reflects the Company's estimated consolidated pro forma results of operations as if the Reltco acquisition occurred on January 1, 2016:
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Revenue (net interest income and noninterest income)$46,085
 $40,627
 $133,306
 $106,960
Net income available to common stockholders12,862
 4,183
 28,807
 9,952
Basic earnings per share0.34
 0.12
 0.81
 0.29
Diluted earnings per share0.33
 0.12
 0.78
 0.28
Note 5.4. Investment Securities
The carrying amount of investment securities and their approximate fair values are reflected in the following table:
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
June 30, 2018       
US treasury securities$4,961
 $
 $9
 $4,952
US government agencies32,896
 
 395
 32,501
Residential mortgage-backed securities351,556
 14
 6,133
 345,437
Mutual fund2,129
 
 76
 2,053
Total$391,542
 $14
 $6,613
 $384,943
        
December 31, 2017       
US government agencies$22,778
 $3
 $157
 $22,624
Residential mortgage-backed securities70,167
 1
 1,472
 68,696
Mutual fund2,090
 
 55
 2,035
Total$95,035
 $4
 $1,684
 $93,355
There were no sales of securities during the three and six months ended June 30, 2018 and 2017.

Table of Contents

Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
September 30, 2017       
US government agencies$17,829
 $11
 $35
 $17,805
Residential mortgage-backed securities57,685
 
 936
 56,749
Mutual fund2,070
 
 49
 2,021
Total$77,584
 $11
 $1,020
 $76,575
        
December 31, 2016       
US government agencies$17,803
 $52
 $32
 $17,823
Residential mortgage-backed securities52,301
 3
 1,031
 51,273
Mutual fund2,012
 
 52
 1,960
Total$72,116
 $55
 $1,115
 $71,056
There were no sales of securities during the three and nine months ended September 30, 2017.TheThe following tables show gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position.
Less Than 12 Months 12 Months or More TotalLess Than 12 Months 12 Months or More Total
September 30, 2017
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
June 30, 2018
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
US treasury securities$4,952
 $9
 $
 $
 $4,952
 $9
US government agencies$4,996
 $16
 $1,496
 $19
 $6,492
 $35
21,045
 343
 6,462
 52
 27,507
 395
Residential mortgage-backed securities28,397
 461
 21,767
 475
 50,164
 936
292,323
 4,083
 41,850
 2,050
 334,173
 6,133
Mutual fund2,021
 49
 
 
 2,021
 49

 
 2,053
 76
 2,053
 76
Total$35,414
 $526
 $23,263
 $494
 $58,677
 $1,020
$318,320
 $4,435
 $50,365
 $2,178
 $368,685
 $6,613
Less Than 12 Months 12 Months or More TotalLess Than 12 Months 12 Months or More Total
December 31, 2016
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
December 31, 2017
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
US government agencies$6,508
 $32
 $
 $
 $6,508
 $32
$14,842
 $100
 $6,465
 $57
 $21,307
 $157
Residential mortgage-backed securities49,109
 1,017
 1,635
 14
 50,744
 1,031
23,481
 439
 40,648
 1,033
 64,129
 1,472
Mutual fund1,960
 52
 
 
 1,960
 52

 
 2,035
 55
 2,035
 55
Total$57,577
 $1,101
 $1,635
 $14
 $59,212
 $1,115
$38,323
 $539
 $49,148
 $1,145
 $87,471
 $1,684
At SeptemberJune 30, 2017,2018, there were twelvetwenty-five residential mortgage-backed securities, and onethree US government agency securitysecurities and the 504 Fund mutual fund in unrealized loss positions for greater than 12 months and fourteenone US treasury security, forty residential mortgage-backed securities twoand seven US government agency securities and the 504 Fund mutual fund investment in an unrealized loss positionpositions for less than 12 months. Unrealized losses at December 31, 20162017 were comprised of twotwenty-three residential mortgage-backed securities, three US government agencies and the 504 mutual fund in unrealized loss positions for greater than 12 months and threefive US government agency securities twenty-twoand eight residential mortgage-backed securities and the 504 Fund mutual fund investment in an unrealized loss positionpositions for less than 12 months.
These unrealized losses are primarily the result of volatility in the market and are related to market interest rates. Since none of the unrealized losses relate to marketability of the securities or the issuer’s ability to honor redemption obligations and the Company has the intent and ability to hold the securities for a sufficient period of time to recover unrealized losses, none of the securities are deemed to be other than temporarily impaired.
All residential mortgage-backed securities in the Company’s portfolio at SeptemberJune 30, 20172018 and December 31, 20162017 were backed by USU.S. government sponsored enterprises (“GSEs”).

Table of Contents

Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

The following is a summary of investment securities by maturity:
September 30, 2017June 30, 2018
Available-for-SaleAvailable-for-Sale
Amortized
cost
 
Fair
value
US treasury securities   
One to five years$4,961
 $4,952
Total4,961
 4,952
Amortized
cost
 
Fair
value
   
US government agencies      
Within one year$11,302
 $11,312
6,323
 6,300
One to five years6,527
 6,492
26,573
 26,201
Total17,829
 17,804
32,896
 32,501
      
Residential mortgage-backed securities      
One to five years4,298
 4,121
Five to ten years7,264
 7,200
51,439
 50,648
After 10 years50,421
 49,550
295,819
 290,668
Total57,685
 56,750
351,556
 345,437
      
Total$75,514
 $74,554
$389,413
 $382,890
The table above reflects contractual maturities. Actual results will differ as the loans underlying the residential mortgage-backed securities may repay sooner than scheduled. This table excludes the 504 Fund mutual fund investment.
At December 31, 2016, an investment security with a fair market value of $1.5 million was pledged to secure a line of credit with the Company’s correspondent bank. At SeptemberJune 30, 2017, the security pledged to secure a line of credit with the Company's correspondent bank was released. At September 30, 20172018 and December 31, 2016,2017, an investment security with a fair market value of $100 thousand was pledged to the Ohio State Treasurer to allow the Company's trust department to conduct business in the state of Ohio and investment securities with a fair market value of $2.5 million and $1.2 million, respectively, were pledged to the Company's trust department for uninsured trust assets held by the trust department.


Table of Contents

Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

Note 6.5. Loans and Leases Held for Investment and Allowance for Loan and Lease Losses
Loan and Lease Portfolio Segments
The following describes the risk characteristics relevant to each of the portfolio segments. Each loan and lease category is assigned a risk grade during the origination and closing process based on criteria described later in this section.
Commercial and Industrial
Commercial and industrial loans (C&I) receive similar underwriting treatment as commercial real estate loans in that the repayment source is analyzed to determine its ability to meet cash flow coverage requirements as set forth by Bank policies. Repayment of the Bank’s C&I loans generally comes from the generation of cash flow as the result of the borrower’s business operations. This business cycle itself brings a certain level of risk to the portfolio. In some instances, these loans may carry a higher degree of risk due to a variety of reasons – illiquid collateral, specialized equipment, highly depreciable assets, uncollectable accounts receivable, revolving balances, or simply being unsecured. As a result of these characteristics, the SBA guarantee on these loans is an important factor in mitigating risk.
Construction and Development
Construction and development loans are for the purpose of acquisition and development of land to be improved through the construction of commercial buildings. Such loans are usually paid off through the conversion to permanent financing for the long-term benefit of the borrower’s ongoing operations. At the completion of the project, if the loan is converted to permanent financing or if scheduled loan amortization begins, it is then reclassified to the “Commercial Real Estate” segment. Underwriting of construction and development loans typically includes analysis of not only the borrower’s financial condition and ability to meet the required debt obligations, but also the general market conditions associated with the area and type of project being funded.


Table of Contents

Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

Commercial Real Estate
Commercial real estate loans are extensions of credit secured by owner occupied and non-owner occupied collateral. Underwriting generally involves intensive analysis of the financial strength of the borrower and guarantor, liquidation value of the subject collateral, the associated unguaranteed exposure, and any available secondary sources of repayment, with the greatest emphasis given to a borrower’s capacity to meet cash flow coverage requirements as set forth by Bank policies. Such repayment of commercial real estate loans is commonly derived from the successful ongoing operations of the business occupying the property. These typically include small businesses and professional practices.
Commercial Land
Commercial land loans are extensions of credit secured by farmland. Such loans are often for land improvements related to agricultural endeavors that may include construction of new specialized facilities. These loans are usually repaid through the conversion to permanent financing, or if scheduled loans amortization begins, for the long-term benefit of the borrower’s ongoing operations. Underwriting generally involves intensive analysis of the financial strength of the borrower and guarantor, liquidation value of the subject collateral, the associated unguaranteed exposure, and any available secondary sources of repayment, with the greatest emphasis given to a borrower’s capacity to meet cash flow coverage requirements as set forth by Bank policies.
Each of the loan types referenced in the sections above is further segmented into verticals in which the Bank chooses to operate. The Bank chooses to finance businesses operating in specific industries because of certain similarities. The similarities range from historical default and loss characteristics to business operations. However, there are differences that create the necessity to underwrite these loans according to varying criteria and guidelines. When underwriting a loan, the Bank considers numerous factors such as cash flow coverage, the credit scores of the guarantors, revenue growth, practice ownership experience and debt service capacity. Minimum guidelines have been set with regard to these various factors and deviations from those guidelines require compensating strengths when considering a proposed loan.

Table of Contents

Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

Loans and leases consist of the following:
September 30,
2017
 December 31,
2016
June 30,
2018
 December 31,
2017
Commercial & Industrial      
Agriculture$2,698
 $1,714
$5,813
 $3,274
Death Care Management12,101
 9,684
15,720
 13,495
Healthcare41,454
 37,270
44,524
 43,301
Independent Pharmacies97,171
 83,677
102,995
 99,920
Registered Investment Advisors91,241
 68,335
96,473
 93,770
Veterinary Industry45,570
 38,930
49,156
 46,387
Other Industries142,115
 94,836
217,551
 184,903
Total432,350
 334,446
532,232
 485,050
Construction & Development      
Agriculture34,636
 32,372
34,971
 34,188
Death Care Management4,744
 3,956
7,542
 6,119
Healthcare46,814
 30,467
61,114
 49,770
Independent Pharmacies1,696
 2,013
2,186
 1,496
Registered Investment Advisors329
 294
1,286
 376
Veterinary Industry13,265
 11,514
18,198
 13,184
Other Industries45,052
 31,715
74,450
 58,120
Total146,536
 112,331
199,747
 163,253
Commercial Real Estate      
Agriculture14,689
 5,591
49,009
 46,717
Death Care Management61,462
 52,510
66,671
 67,381
Healthcare121,331
 114,281
152,025
 126,631
Independent Pharmacies18,508
 15,151
19,368
 19,028
Registered Investment Advisors13,550
 11,462
11,040
 11,789
Veterinary Industry110,028
 102,906
122,593
 113,932
Other Industries106,418
 46,245
194,266
 134,172
Total445,986
 348,146
614,972
 519,650
Commercial Land      
Agriculture146,814
 113,569
193,613
 178,897
Total146,814
 113,569
193,613
 178,897
Total Loans and Leases1
1,171,686
 908,492
1,540,564
 1,346,850
Net Deferred Costs8,038
 7,648
8,470
 8,545
Discount on SBA 7(a) and USDA Unguaranteed2
(9,837) (8,574)(14,666) (11,422)
Loans and Leases, Net of Unearned$1,169,887
 $907,566
$1,534,368
 $1,343,973
1Total loans and leases include $40.4$141.5 million and $37.7$99.7 million of U.S. government guaranteed loans as of SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively.
2The Company measures the carrying value of the retained portion of loans sold at fair value under ASC Subtopic 825-10. The value of these retained loan balances is discounted based on the estimates derived from comparable unguaranteed loan sales.

Table of Contents

Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

Credit Risk Profile
The Bank uses internal loan and lease reviews to assess the performance of individual loans and leases by industry segment. An independent review of the loan and lease portfolio is performed annually by an external firm. The goal of the Bank’s annual review of select borrowers' financial performance is to validate the adequacy of the risk grade assigned.
The Bank uses a grading system to rank the quality of each loan and lease. The grade is periodically evaluated and adjusted as performance dictates. Loan and lease grades 1 through 4 are passing grades and grade 5 is special mention. Collectively, grades 6 through 8 represent classified loans and leases in the Bank’s portfolio. The following guidelines govern the assignment of these risk grades:
Exceptional (1 Rated): These loans and leases are of the highest quality, with strong, well-documented sources of repayment. Debt service coverage (“DSC”) is over 1.75X based on historical results. Secondary source of repayment is strong, with a loan to value (“LTV”) of 65% or less if secured solely by commercial real estate (“CRE”). Discounted collateral coverage from all sources should exceed 125%. Guarantors have credit scores above 740.
Quality (2 Rated): These loans and leases are of good quality, with good, well-documented sources of repayment. DSC is over 1.25X based on historical or pro-forma results. Secondary source of repayment is good, with a LTV of 75% or less if secured solely by CRE. Discounted collateral coverage should exceed 100%. Guarantors have credit scores above 700.
Acceptable (3 rated): These loans and leases are of acceptable quality, with acceptable sources of repayment. DSC of over 1.00X based on historical or pro-forma results. Companies that do not meet these credit metrics must be evaluated to determine if they should be graded below this level.
Acceptable (4 rated): These loans and leases are considered very weak pass. These loans and leases are riskier than a 3-rated credit, but due to various mitigating factors are not considered a Special mention or worse. The mitigating factors must clearly be identified to offset further downgrade. Examples of loans and leases that may be put in this category include start-up loans and leases and loans and leases with less than 1:1 cash flow coverage with other sources of repayment.
Special mention (5 rated): These loans and leases are considered as emerging problems, with potentially unsatisfactory characteristics. These loans and leases require greater management attention. A loan or lease may be put into this category if the Bank is unable to obtain financial reporting from a company to fully evaluate its position.
Substandard (6 rated): Loans and leases graded Substandard are inadequately protected by current sound net worth, paying capacity of the borrower, or pledged collateral. They typically have unsatisfactory characteristics causing more than acceptable levels of risk, and have one or more well-defined weaknesses that could jeopardize the repayment of the debt.
Doubtful (7 rated): Loans and leases graded Doubtful have inherent weaknesses that make collection or liquidation in full questionable. Loans and leases graded Doubtful must be placed on non-accrual status.
Loss (8 rated): Loss rated loans and leases are considered uncollectible and of such little value that their continuance as an active Bank asset is not warranted. The asset should be charged off, even though partial recovery may be possible in the future.

Table of Contents

Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

The following tables summarize the risk grades of each category:
Risk Grades
1 - 4
 
Risk Grade
5
 
Risk Grades
6 - 8
 Total
Risk Grades
1 - 4
 
Risk Grade
5
 
Risk Grades
6 - 8
 Total
September 30, 2017       
June 30, 2018       
Commercial & Industrial              
Agriculture$2,470
 $228
 $
 $2,698
$5,596
 $217
 $
 $5,813
Death Care Management11,976
 118
 7
 12,101
15,517
 197
 6
 15,720
Healthcare32,350
 1,716
 7,388
 41,454
36,461
 3,256
 4,807
 44,524
Independent Pharmacies87,173
 6,523
 3,475
 97,171
88,684
 6,554
 7,757
 102,995
Registered Investment Advisors87,940
 2,566
 735
 91,241
92,254
 1,420
 2,799
 96,473
Veterinary Industry41,738
 1,833
 1,999
 45,570
44,754
 1,649
 2,753
 49,156
Other Industries142,096
 19
 
 142,115
203,813
 12,366
 1,372
 217,551
Total405,743
 13,003
 13,604
 432,350
487,079
 25,659
 19,494
 532,232
Construction & Development              
Agriculture34,636
 
 
 34,636
32,431
 
 2,540
 34,971
Death Care Management4,744
 
 
 4,744
7,542
 
 
 7,542
Healthcare44,937
 704
 1,173
 46,814
56,542
 2,534
 2,038
 61,114
Independent Pharmacies1,696
 
 
 1,696
2,186
 
 
��2,186
Registered Investment Advisors329
 
 
 329
1,286
 
 
 1,286
Veterinary Industry13,265
 
 
 13,265
17,012
 1,186
 
 18,198
Other Industries45,052
 
 
 45,052
72,558
 1,892
 
 74,450
Total144,659
 704
 1,173
 146,536
189,557
 5,612
 4,578
 199,747
Commercial Real Estate              
Agriculture14,689
 
 
 14,689
49,009
 
 
 49,009
Death Care Management54,684
 4,288
 2,490
 61,462
59,696
 3,862
 3,113
 66,671
Healthcare111,943
 5,050
 4,338
 121,331
129,714
 9,378
 12,933
 152,025
Independent Pharmacies15,043
 1,843
 1,622
 18,508
13,603
 2,930
 2,835
 19,368
Registered Investment Advisors13,406
 144
 
 13,550
10,908
 132
 
 11,040
Veterinary Industry95,055
 2,680
 12,293
 110,028
103,055
 3,655
 15,883
 122,593
Other Industries105,738
 680
 
 106,418
192,441
 1,825
 
 194,266
Total410,558
 14,685
 20,743
 445,986
558,426
 21,782
 34,764
 614,972
Commercial Land              
Agriculture144,687
 2,104
 23
 146,814
183,117
 5,371
 5,125
 193,613
Total144,687
 2,104
 23
 146,814
183,117
 5,371
 5,125
 193,613
Total1
$1,105,647
 $30,496
 $35,543
 $1,171,686
$1,418,179
 $58,424
 $63,961
 $1,540,564

Table of Contents

Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

Risk Grades
1 - 4
 
Risk Grade
5
 
Risk Grades
6 - 8
 Total
Risk Grades
1 - 4
 
Risk Grade
5
 
Risk Grades
6 - 8
 Total
December 31, 2016       
December 31, 2017       
Commercial & Industrial              
Agriculture$1,656
 $58
 $
 $1,714
$3,052
 $222
 $
 $3,274
Death Care Management9,452
 121
 111
 9,684
13,371
 117
 7
 13,495
Healthcare28,723
 681
 7,866
 37,270
36,530
 2,246
 4,525
 43,301
Independent Pharmacies73,948
 6,542
 3,187
 83,677
86,152
 5,541
 8,227
 99,920
Registered Investment Advisors65,297
 2,246
 792
 68,335
90,911
 2,134
 725
 93,770
Veterinary Industry34,407
 1,967
 2,556
 38,930
42,313
 1,704
 2,370
 46,387
Other Industries94,736
 100
 
 94,836
184,540
 363
 
 184,903
Total308,219
 11,715
 14,512
 334,446
456,869
 12,327
 15,854
 485,050
Construction & Development              
Agriculture32,061
 
 311
 32,372
31,738
 2,450
 
 34,188
Death Care Management3,956
 
 
 3,956
6,119
 
 
 6,119
Healthcare30,467
 
 
 30,467
47,813
 699
 1,258
 49,770
Independent Pharmacies2,013
 
 
 2,013
1,496
 
 
 1,496
Registered Investment Advisors294
 
 
 294
376
 
 
 376
Veterinary Industry9,725
 1,789
 
 11,514
13,184
 
 
 13,184
Other Industries31,715
 
 
 31,715
58,120
 
 
 58,120
Total110,231
 1,789
 311
 112,331
158,846
 3,149
 1,258
 163,253
Commercial Real Estate              
Agriculture5,591
 
 
 5,591
46,717
 
 
 46,717
Death Care Management46,427
 4,314
 1,769
 52,510
60,671
 3,881
 2,829
 67,381
Healthcare103,097
 7,142
 4,042
 114,281
112,321
 9,992
 4,318
 126,631
Independent Pharmacies12,654
 1,968
 529
 15,151
15,641
 1,825
 1,562
 19,028
Registered Investment Advisors11,462
 
 
 11,462
11,649
 140
 
 11,789
Veterinary Industry88,168
 3,995
 10,743
 102,906
97,065
 2,948
 13,919
 113,932
Other Industries46,245
 
 
 46,245
133,493
 679
 
 134,172
Total313,644
 17,419
 17,083
 348,146
477,557
 19,465
 22,628
 519,650
Commercial Land              
Agriculture112,333
 1,138
 98
 113,569
176,811
 2,086
 
 178,897
Total112,333
 1,138
 98
 113,569
176,811
 2,086
 
 178,897
Total1
$844,427
 $32,061
 $32,004
 $908,492
$1,270,083
 $37,027
 $39,740
 $1,346,850
1Total loans and leases include $40.4$141.5 million of U.S. government guaranteed loans as of SeptemberJune 30, 2017,2018, segregated by risk grade as follows: Risk Grades 1 – 4 = $12.1$84.8 million, Risk Grade 5 = $3.7$12.0 million, Risk Grades 6 – 8 = $24.6$44.7 million. As of December 31, 2016,2017, total loans and leases include $37.7$99.7 million of U.S. government guaranteed loans, segregated by risk grade as follows: Risk Grades 1 – 4 = $8.7$65.0 million, Risk Grade 5 = $7.7$6.7 million, Risk Grades 6 – 8 = $21.3$28.0 million.

Table of Contents

Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

Past Due Loans and Leases
Loans and leases are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans and leases less than 30 days past due and accruing are included within current loans and leases shown below. The following tables show an age analysis of past due loans and leases as of the dates presented.
Less Than 30
Days Past
Due & Not
Accruing
 
30-89 Days
Past Due
& Accruing
 
30-89 Days
Past Due &
Not Accruing
 
Greater
Than 90
Days Past
Due
 Total Not
Accruing
& Past Due
 Current Total Loans and Leases 90
Days or More
Past Due &
Still Accruing
Less Than 30
Days Past
Due & Not
Accruing
 
30-89 Days
Past Due
& Accruing
 
30-89 Days
Past Due &
Not Accruing
 
Greater
Than 90
Days Past
Due
 Total Not
Accruing
& Past Due
 Current Total Loans and Leases 90
Days or More
Past Due &
Still Accruing
September 30, 2017               
June 30, 2018               
Commercial & Industrial                              
Agriculture$
 $
 $
 $
 $
 $2,698
 $2,698
 $
$
 $
 $
 $
 $
 $5,813
 $5,813
 $
Death Care Management
 
 
 
 
 12,101
 12,101
 

 
 
 
 
 15,720
 15,720
 
Healthcare535
 76
 16
 6,152
 6,779
 34,675
 41,454
 

 49
 757
 2,287
 3,093
 41,431
 44,524
 
Independent Pharmacies331
 44
 
 2,274
 2,649
 94,522
 97,171
 
338
 
 
 7,308
 7,646
 95,349
 102,995
 
Registered Investment Advisors
 
 
 
 
 91,241
 91,241
 

 577
 2,102
 
 2,679
 93,794
 96,473
 
Veterinary Industry224
 29
 536
 796
 1,585
 43,985
 45,570
 
170
 126
 620
 1,072
 1,988
 47,168
 49,156
 
Other Industries
 
 
 
 
 142,115
 142,115
 
596
 615
 
 
 1,211
 216,340
 217,551
 
Total1,090
 149
 552
 9,222
 11,013
 421,337
 432,350
 
1,104
 1,367
 3,479
 10,667
 16,617
 515,615
 532,232
 
Construction & Development                              
Agriculture
 
 
 
 
 34,636
 34,636
 

 
 
 2,539
 2,539
 32,432
 34,971
 
Death Care Management
 
 
 
 
 4,744
 4,744
 

 
 
 
 
 7,542
 7,542
 
Healthcare
 
 
 
 
 46,814
 46,814
 

 
 
 
 
 61,114
 61,114
 
Independent Pharmacies
 
 
 
 
 1,696
 1,696
 

 
 
 
 
 2,186
 2,186
 
Registered Investment Advisors
 
 
 
 
 329
 329
 

 
 
 
 
 1,286
 1,286
 
Veterinary Industry
 
 
 
 
 13,265
 13,265
 

 1,186
 
 
 1,186
 17,012
 18,198
 
Other Industries
 
 
 
 
 45,052
 45,052
 

 37
 
 
 37
 74,413
 74,450
 
Total
 
 
 
 
 146,536
 146,536
 

 1,223
 
 2,539
 3,762
 195,985
 199,747
 
Commercial Real Estate                              
Agriculture
 
 
 
 
 14,689
 14,689
 

 
 
 
 
 49,009
 49,009
 
Death Care Management
 298
 174
 1,402
 1,874
 59,588
 61,462
 
158
 1,447
 
 1,358
 2,963
 63,708
 66,671
 
Healthcare40
 
 2,679
 829
 3,548
 117,783
 121,331
 
2,334
 
 37
 6,596
 8,967
 143,058
 152,025
 
Independent Pharmacies
 
 
 1,622
 1,622
 16,886
 18,508
 
2,835
 
 
 
 2,835
 16,533
 19,368
 
Registered Investment Advisors
 
 
 
 
 13,550
 13,550
 

 
 
 
 
 11,040
 11,040
 
Veterinary Industry1,906
 3,915
 132
 2,749
 8,702
 101,326
 110,028
 
1,867
 3,185
 2,506
 5,500
 13,058
 109,535
 122,593
 
Other Industries
 7,750
 
 
 7,750
 98,668
 106,418
 

 
 
 
 
 194,266
 194,266
 
Total1,946
 11,963
 2,985
 6,602
 23,496
 422,490
 445,986
 
7,194
 4,632
 2,543
 13,454
 27,823
 587,149
 614,972
 
Commercial Land                              
Agriculture23
 
 
 
 23
 146,791
 146,814
 
5,125
 
 
 
 5,125
 188,488
 193,613
 
Total23
 
 
 
 23
 146,791
 146,814
 
5,125
 
 
 
 5,125
 188,488
 193,613
 
Total1
$3,059
 $12,112
 $3,537
 $15,824
 $34,532
 $1,137,154
 $1,171,686
 $
$13,423
 $7,222
 $6,022
 $26,660
 $53,327
 $1,487,237
 $1,540,564
 $

Table of Contents

Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

Less Than 30
Days Past
Due & Not
Accruing
 
30-89 Days
Past Due
& Accruing
 
30-89 Days
Past Due &
Not Accruing
 
Greater
Than 90
Days
Past Due
 Total Not
Accruing
& Past Due
 Current Total Loans and Leases 90
Days or More
Past Due &
Still Accruing
Less Than 
30 Days Past
Due & Not
Accruing
 
30-89 Days
Past Due
& Accruing
 
30-89 Days
Past Due &
Not Accruing
 
Greater
Than 90
Days
Past Due
 Total Not
Accruing
& Past Due
 Current Total Loans and Leases 90
Days or More
Past Due &
Still Accruing
December 31, 2016               
December 31, 2017               
Commercial & Industrial                              
Agriculture$
 $
 $
 $
 $
 $1,714
 $1,714
 $
$
 $
 $
 $
 $
 $3,274
 $3,274
 $
Death Care Management
 
 
 
 
 9,684
 9,684
 

 
 
 
 
 13,495
 13,495
 
Healthcare
 272
 496
 5,920
 6,688
 30,582
 37,270
 
788
 131
 14
 3,004
 3,937
 39,364
 43,301
 
Independent Pharmacies42
 293
 408
 2,349
 3,092
 80,585
 83,677
 
236
 2,930
 1,349
 3,376
 7,891
 92,029
 99,920
 
Registered Investment Advisors
 
 
 
 
 68,335
 68,335
 

 321
 
 
 321
 93,449
 93,770
 
Veterinary Industry32
 151
 646
 1,441
 2,270
 36,660
 38,930
 
212
 594
 508
 797
 2,111
 44,276
 46,387
 
Other Industries
 
 
 
 
 94,836
 94,836
 

 
 
 
 
 184,903
 184,903
 
Total74
 716
 1,550
 9,710
 12,050
 322,396
 334,446
 
1,236
 3,976
 1,871
 7,177
 14,260
 470,790
 485,050
 
Construction & Development                              
Agriculture231
 80
 
 
 311
 32,061
 32,372
 

 
 
 
 
 34,188
 34,188
 
Death Care Management
 
 
 
 
 3,956
 3,956
 

 
 
 
 
 6,119
 6,119
 
Healthcare
 
 
 
 
 30,467
 30,467
 

 
 
 
 
 49,770
 49,770
 
Independent Pharmacies
 
 
 
 
 2,013
 2,013
 

 
 
 
 
 1,496
 1,496
 
Registered Investment Advisors
 
 
 
 
 294
 294
 

 
 
 
 
 376
 376
 
Veterinary Industry
 
 
 
 
 11,514
 11,514
 

 
 
 
 
 13,184
 13,184
 
Other Industries
 
 
 
 
 31,715
 31,715
 

 
 
 
 
 58,120
 58,120
 
Total231
 80
 
 
 311
 112,020
 112,331
 

 
 
 
 
 163,253
 163,253
 
Commercial Real Estate                              
Agriculture
 
 
 
 
 5,591
 5,591
 

 
 
 
 
 46,717
 46,717
 
Death Care Management
 
 188
 1,423
 1,611
 50,899
 52,510
 

 
 168
 1,391
 1,559
 65,822
 67,381
 
Healthcare
 
 3,180
 45
 3,225
 111,056
 114,281
 
40
 54
 1,916
 1,550
 3,560
 123,071
 126,631
 
Independent Pharmacies
 
 
 529
 529
 14,622
 15,151
 

 
 
 1,562
 1,562
 17,466
 19,028
 
Registered Investment Advisors
 
 
 
 
 11,462
 11,462
 

 
 
 
 
 11,789
 11,789
 
Veterinary Industry898
 3,981
 737
 5,158
 10,774
 92,132
 102,906
 
1,804
 3,226
 
 4,765
 9,795
 104,137
 113,932
 
Other Industries
 
 
 
 
 46,245
 46,245
 

 
 
 
 
 134,172
 134,172
 
Total898
 3,981
 4,105
 7,155
 16,139
 332,007
 348,146
 
1,844
 3,280
 2,084
 9,268
 16,476
 503,174
 519,650
 
Commercial Land                              
Agriculture58
 40
 
 
 98
 113,471
 113,569
 

 
 
 
 
 178,897
 178,897
 
Total58
 40
 
 
 98
 113,471
 113,569
 

 
 
 
 
 178,897
 178,897
 
Total1
$1,261
 $4,817
 $5,655
 $16,865
 $28,598
 $879,894
 $908,492
 $
$3,080
 $7,256
 $3,955
 $16,445
 $30,736
 $1,316,114
 $1,346,850
 $
1Total loans and leases include $40.4$141.5 million of U.S. government guaranteed loans as of SeptemberJune 30, 2017,2018, of which $14.3$21.7 million is greater than 90 days past due, $5.0$9.2 million is 30-89 days past due and $21.1$110.6 million is included in current loans and leases as presented above. As of December 31, 2016,2017, total loans and leases include $37.7$99.7 million of U.S. government guaranteed loans, of which $13.7$15.0 million is greater than 90 days past due, $6.8$7.4 million is 30-89 days past due and $17.2$77.3 million is included in current loans and leases as presented above.

Table of Contents

Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

Nonaccrual Loans and Leases
Loans and leases that become 90 days delinquent, or in cases where there is evidence that the borrower’s ability to make the required payments is impaired, are placed in nonaccrual status and interest accrual is discontinued. If interest on nonaccrual loans and leases had been accrued in accordance with the original terms, interest income would have increased by approximately $302$588 thousand and $165$306 thousand for the three months ended SeptemberJune 30, 20172018 and 2016,2017, respectively, and for the ninesix months ended SeptemberJune 30, 20172018 and 20162017 interest income would have increased approximately $831 thousand$1.0 million and $451$582 thousand, respectively. All nonaccrual loans and leases are included in the held for investment portfolio.
Nonaccrual loans and leases as of SeptemberJune 30, 20172018 and December 31, 20162017 are as follows:
September 30, 2017Loan and Lease Balance 
Guaranteed
Balance
 
Unguaranteed
Exposure
Commercial & Industrial     
Healthcare$6,703
 $5,712
 $991
Independent Pharmacies2,605
 2,253
 352
Registered Investment Advisors
 
 
Veterinary Industry1,556
 1,517
 39
Total10,864
 9,482
 1,382
Commercial Real Estate
    
Death Care Management1,576
 1,246
 330
Healthcare3,548
 2,749
 799
Independent Pharmacies1,622
 1,622
 
Veterinary Industry4,787
 3,999
 788
Total11,533
 9,616
 1,917
Commercial Land

    
    Agriculture23
 23
 
     Total23
 23
 
Total$22,420
 $19,121
 $3,299

Table of Contents

Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

June 30, 2018Loan and Lease Balance 
Guaranteed
Balance
 
Unguaranteed
Exposure
Commercial & Industrial     
Healthcare$3,044
 $2,735
 $309
Independent Pharmacies7,646
 6,919
 727
Registered Investment Advisors2,102
 1,577
 525
Veterinary Industry1,862
 1,827
 35
Other Industries596
 
 596
Total15,250
 13,058
 2,192
Construction & Development     
    Agriculture2,539
 1,904
 635
     Total2,539
 1,904
 635
Commercial Real Estate
    
Death Care Management1,516
 1,210
 306
Healthcare8,967
 6,080
 2,887
Independent Pharmacies2,835
 2,126
 709
Veterinary Industry9,873
 8,531
 1,342
Total23,191
 17,947
 5,244
Commercial Land

    
    Agriculture5,125
 1,730
 3,395
     Total5,125
 1,730
 3,395
Total$46,105
 $34,639
 $11,466
December 31, 2016Loan and Lease Balance 
Guaranteed
Balance
 
Unguaranteed
Exposure
December 31, 2017Loan and Lease Balance 
Guaranteed
Balance
 
Unguaranteed
Exposure
Commercial & Industrial          
Healthcare$6,416
 $5,152
 $1,264
$3,806
 $3,235
 $571
Independent Pharmacies2,799
 2,204
 595
4,961
 3,906
 1,055
Veterinary Industry2,119
 2,079
 40
1,517
 1,478
 39
Total11,334
 9,435
 1,899
Construction & Development     
Agriculture231
 173
 58
Total231
 173
 58
10,284
 8,619
 1,665
Commercial Real Estate          
Death Care Management1,611
 1,263
 348
1,559
 1,237
 322
Healthcare3,225
 2,731
 494
3,506
 2,719
 787
Independent Pharmacies529
 
 529
1,562
 1,562
 
Veterinary Industry6,793
 5,395
 1,398
6,569
 5,733
 836
Total12,158
 9,389
 2,769
13,196
 11,251
 1,945
Commercial Land     
Agriculture58
 
 58
Total58
 
 58
$23,480
 $19,870
 $3,610
Total$23,781
 $18,997
 $4,784

Table of Contents

Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

Allowance for Loan and Lease Loss Methodology
The methodology and the estimation process for calculating the Allowance for Loan and Lease Losses (“ALLL”) is described below:
Estimated credit losses should meet the criteria for accrual of a loss contingency, i.e., a provision to the ALLL, set forth in GAAP. The Company’s methodology for determining the ALLL is based on the requirements of GAAP, the Interagency Policy Statement on the Allowance for Loan and Lease Losses and other regulatory and accounting pronouncements. The ALLL is determined by the sum of three separate components: (i) the impaired loan and lease component, which addresses specific reserves for impaired loans and leases; (ii) the general reserve component, which addresses reserves for pools of homogeneous loans and leases; and (iii) an unallocated reserve component (if any) based on management’s judgment and experience. The loan and lease pools and impaired loans and leases are mutually exclusive; any loan or lease that is impaired is excluded from its homogenous pool for purposes of that pool’s reserve calculation, regardless of the level of impairment.
The ALLL policy for pooled loans and leases is governed in accordance with banking regulatory guidance for homogenous pools of non-impaired loans and leases that have similar risk characteristics. The Company follows a consistent and structured approach for assessing the need for reserves within each individual loan and lease pool.
Loans and leases are considered impaired when, based on current information and events, it is probable that the creditor will be unable to collect all interest and principal payments due according to the originally contracted, or reasonably modified, terms of the loan or lease agreement. The Company has determined that loans and leases that meet the criteria defined below must be reviewed quarterly to determine if they are impaired.
All commercial loans and leases classified substandard or worse.
Any other delinquent loan or lease that is in a nonaccrual status, or any loan or lease that is delinquent more than 89 days and still accruing interest.
Any loan or lease which has been modified such that it meets the definition of a Troubled Debt Restructuring (TDR).
The Company’s policy for impaired loan and lease accounting subjects all loans and leases to impairment recognition; however, loan and lease relationships with unguaranteed credit exposure of less than $100,000 are generally not evaluated on an individual basis for impairment and instead are evaluated collectively using a methodology based on historical specific reserves on similar sized loans and leases. Any loan or lease not meeting the above criteria and determined to be impaired is subjected to an impairment analysis, which is a calculation of the probable loss on the loan or lease. This portion is the loan's or lease’s “impairment,” and is established as a specific reserve against the loan or lease, or charged against the ALLL.
Individual specific reserve amounts imply probability of loss and may not be carried in the reserve indefinitely. When the amount of the actual loss becomes reasonably quantifiable, the amount of the loss is charged off against the ALLL, whether or not all liquidation and recovery efforts have been completed. If the total amount of the individual specific reserve that will eventually be charged off cannot yet be sufficiently quantified but some portion of the impairment can be viewed as a confirmed loss, then the confirmed loss portion should be charged off against the ALLL and the individual specific reserve reduced by a corresponding amount.
For impaired loans or leases, the reserve amount is calculated on a loan or lease-specific basis. The Company utilizes two methods of analyzing impaired loans and leases not guaranteed by the SBA:
The Fair Market Value of Collateral method utilizes the value at which the collateral could be sold considering the appraised value, appraisal discount rate, prior liens and selling costs. The amount of the reserve is the deficit of the estimated collateral value compared to the loan or lease balance.
The Present Value of Future Cash Flows method takes into account the amount and timing of cash flows and the effective interest rate used to discount the cash flows.

Table of Contents

Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

The following table details activity in the allowance for loan and lease losses by portfolio segment allowance for the periods presented:
Three months ended
Construction &
Development
 
Commercial
Real Estate
 
Commercial
& Industrial
 
Commercial
Land
 Total
Construction &
Development
 
Commercial
Real Estate
 
Commercial
& Industrial
 
Commercial
Land
 Total
September 30, 2017         
June 30, 2018         
Beginning Balance$1,603
 $7,494
 $8,351
 $2,112
 $19,560
$2,428
 $11,244
 $12,201
 $2,177
 $28,050
Charge offs
 (665) (343) 
 (1,008)
 (419) (549) 
 (968)
Recoveries
 4
 39
 6
 49

 29
 152
 
 181
Provision36
 1,565
 827
 (2) 2,426
(201) 554
 1,573
 161
 2,087
Ending Balance$1,639
 $8,398
 $8,874
 $2,116
 $21,027
$2,227
 $11,408
 $13,377
 $2,338
 $29,350
September 30, 2016         
June 30, 2017         
Beginning Balance$1,208
 $4,079
 $5,601
 $1,421
 $12,309
$1,884
 $6,226
 $7,846
 $2,239
 $18,195
Charge offs
 
 (939) 
 (939)
 (19) (178) 
 (197)
Recoveries
 1
 1
 
 2

 4
 2
 
 6
Provision225
 261
 2,907
 413
 3,806
(281) 1,283
 681
 (127) 1,556
Ending Balance$1,433
 $4,341
 $7,570
 $1,834
 $15,178
$1,603
 $7,494
 $8,351
 $2,112
 $19,560
Nine months endedConstruction &
Development
 Commercial
Real Estate
 Commercial
& Industrial
 Commercial
Land
 Total
September 30, 2017         
Six months endedConstruction &
Development
 Commercial
Real Estate
 Commercial
& Industrial
 Commercial
Land
 Total
June 30, 2018         
Beginning Balance$1,693
 $5,897
 $8,413
 $2,206
 $18,209
$2,030
 $9,180
 $10,751
 $2,229
 $24,190
Charge offs
 (952) (1,754) (35) (2,741)
 (419) (1,221) 
 (1,640)
Recoveries
 17
 55
 6
 78

 33
 288
 
 321
Provision(54) 3,436
 2,160
 (61) 5,481
197
 2,614
 3,559
 109
 6,479
Ending Balance$1,639
 $8,398
 $8,874
 $2,116
 $21,027
$2,227
 $11,408
 $13,377
 $2,338
 $29,350
September 30, 2016         
June 30, 2017         
Beginning Balance$1,064
 $2,486
 $2,766
 $1,099
 $7,415
$1,693
 $5,897
 $8,413
 $2,206
 $18,209
Charge offs
 (7) (1,307) (63) (1,377)
 (287) (1,411) (35) (1,733)
Recoveries
 4
 444
 
 448

 13
 16
 
 29
Provision369
 1,858
 5,667
 798
 8,692
(90) 1,871
 1,333
 (59) 3,055
Ending Balance$1,433
 $4,341
 $7,570
 $1,834
 $15,178
$1,603
 $7,494
 $8,351
 $2,112
 $19,560
The following tables detail the recorded allowance for loan and lease losses and the investment in loans and leases related to each portfolio segment, disaggregated on the basis of impairment evaluation methodology:
September 30, 2017
Construction &
Development
 
Commercial
Real Estate
 
Commercial
& Industrial
 
Commercial
Land
 Total
June 30, 2018
Construction &
Development
 
Commercial
Real Estate
 
Commercial
& Industrial
 
Commercial
Land
 Total
Allowance for Loan and Lease Losses:                  
Loans and leases individually evaluated for impairment$53
 $1,610
 $1,290
 $
 $2,953
$365
 $2,601
 $2,597
 $1,355
 $6,918
Loans and leases collectively evaluated for impairment2
1,586
 6,788
 7,584
 2,116
 18,074
1,862
 8,807
 10,780
 983
 22,432
Total allowance for loan and lease losses$1,639
 $8,398
 $8,874
 $2,116
 $21,027
$2,227
 $11,408
 $13,377
 $2,338
 $29,350
Loans and leases receivable1:
                  
Loans and leases individually evaluated for impairment$1,151
 $16,231
 $7,321
 $
 $24,703
$4,557
 $28,966
 $10,836
 $5,116
 $49,475
Loans and leases collectively evaluated for impairment2
145,385
 429,755
 425,029
 146,814
 1,146,983
195,190
 586,006
 521,396
 188,497
 1,491,089
Total loans and leases receivable$146,536
 $445,986
 $432,350
 $146,814
 $1,171,686
$199,747
 $614,972
 $532,232
 $193,613
 $1,540,564

Table of Contents

Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

December 31, 2016
Construction &
Development
 
Commercial
Real Estate
 
Commercial
& Industrial
 
Commercial
Land
 Total
December 31, 2017
Construction &
Development
 
Commercial
Real Estate
 
Commercial
& Industrial
 
Commercial
Land
 Total
Allowance for Loan and Lease Losses:                  
Loans and leases individually evaluated for impairment$
 $1,496
 $1,458
 $
 $2,954
$157
 $1,502
 $1,126
 $
 $2,785
Loans and leases collectively evaluated for impairment2
1,693
 4,401
 6,955
 2,206
 15,255
1,873
 7,678
 9,625
 2,229
 21,405
Total allowance for loan and lease losses$1,693
 $5,897
 $8,413
 $2,206
 $18,209
$2,030
 $9,180
 $10,751
 $2,229
 $24,190
Loans and leases receivable1:
                  
Loans and leases individually evaluated for impairment$
 $16,359
 $6,884
 $
 $23,243
$1,237
 $17,105
 $8,672
 $
 $27,014
Loans and leases collectively evaluated for impairment2
112,331
 331,787
 327,562
 113,569
 885,249
162,016
 502,545
 476,378
 178,897
 1,319,836
Total loans and leases receivable$112,331
 $348,146
 $334,446
 $113,569
 $908,492
$163,253
 $519,650
 $485,050
 $178,897
 $1,346,850
1Loans and leases receivable includes $40.4$141.5 million of U.S. government guaranteed loans as of SeptemberJune 30, 2017,2018, of which $24.7$45.2 million are impaired. As of December 31, 2016,2017, loans and leases receivable includes $37.7$99.7 million of U.S. government guaranteed loans, of which $22.1$28.1 million are considered impaired.
2
Included in loans and leases collectively evaluated for impairment are impaired loans and leases with individual unguaranteed exposure of less than $100 thousand. As of SeptemberJune 30, 2017,2018, these balances totaled $13.4$15.7 million, of which $12$14.4 million are guaranteed by the U.S. government and $1.4$1.3 million are unguaranteed. As of December 31, 2016,2017, these balances totaled $12.3$14.8 million, of which $10.0$13.2 million are guaranteed by the U.S. government and $2.3$1.6 million are unguaranteed. The allowance for loan and lease losses associated with these loans and leases totaled $417$510 thousand and $438$279 thousand as of SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively.

Table of Contents

Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

Loans and leases classified as impaired as of the dates presented are summarized in the following tables.
September 30, 2017
Recorded
Investment
 
Guaranteed
Balance
 
Unguaranteed
Exposure
June 30, 2018
Recorded
Investment
 
Guaranteed
Balance
 
Unguaranteed
Exposure
Commercial & Industrial          
Death Care Management$8
 $
 $8
$6
 $
 $6
Healthcare7,384
 5,712
 1,672
4,836
 3,468
 1,368
Independent Pharmacies4,282
 2,514
 1,768
8,054
 6,918
 1,136
Registered Investment Advisors743
 
 743
2,807
 1,577
 1,230
Veterinary Industry2,407
 1,605
 802
2,900
 2,328
 572
Other Industries1,371
 163
 1,208
Total14,824
 9,831
 4,993
19,974
 14,454
 5,520
Construction & Development          
Agriculture2,534
 1,905
 629
Healthcare1,151
 880
 271
2,023
 1,528
 495
Total1,151
 880
 271
4,557
 3,433
 1,124
Commercial Real Estate          
Death Care Management2,486
 1,246
 1,240
3,137
 2,296
 841
Healthcare4,334
 2,999
 1,335
13,573
 9,241
 4,332
Independent Pharmacies1,622
 1,622
 
2,834
 2,126
 708
Veterinary Industry13,700
 8,051
 5,649
15,947
 11,916
 4,031
Total22,142
 13,918
 8,224
35,491
 25,579
 9,912
Commercial Land          
Agriculture23
 23
 
5,116
 1,730
 3,386
Total23
 23
 
5,116
 1,730
 3,386
Total$38,140
 $24,652
 $13,488
$65,138
 $45,196
 $19,942
December 31, 2016
Recorded
Investment
 
Guaranteed
Balance
 
Unguaranteed
Exposure
December 31, 2017
Recorded
Investment
 
Guaranteed
Balance
 
Unguaranteed
Exposure
Commercial & Industrial          
Death Care Management$111
 $
 $111
$7
 $
 $7
Healthcare7,923
 5,453
 2,470
4,551
 3,235
 1,316
Independent Pharmacies3,514
 2,495
 1,019
8,571
 6,356
 2,215
Registered Investment Advisors796
 
 796
733
 
 733
Veterinary Industry2,882
 2,199
 683
2,762
 2,001
 761
Total15,226
 10,147
 5,079
16,624
 11,592
 5,032
Construction & Development          
Agriculture300
 233
 67
Healthcare1,237
 944
 293
Total300
 233
 67
1,237
 944
 293
Commercial Real Estate          
Death Care Management1,768
 1,264
 504
2,831
 1,237
 1,594
Healthcare4,044
 2,985
 1,059
4,315
 2,967
 1,348
Independent Pharmacies528
 
 528
1,562
 1,562
 
Veterinary Industry13,561
 7,518
 6,043
15,266
 9,768
 5,498
Total19,901
 11,767
 8,134
23,974
 15,534
 8,440
Commercial Land          
Agriculture91
 
 91

 
 
Total91
 
 91

 
 
Total$35,518
 $22,147
 $13,371
$41,835
 $28,070
 $13,765

Table of Contents

Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

The following table presents evaluated balances of loans and leases classified as impaired at the dates presented that carried an associated reserve as compared to those with no reserve. The recorded investment includes accrued interest and net deferred loan and lease fees or costs.
September 30, 2017June 30, 2018
Recorded Investment    Recorded Investment    
With a
Recorded
Allowance
 
With No
Recorded
Allowance
 Total 
Unpaid
Principal
Balance
 
Related
Allowance
Recorded
With a
Recorded
Allowance
 
With No
Recorded
Allowance
 Total 
Unpaid
Principal
Balance
 
Related
Allowance
Recorded
Commercial & Industrial                  
Death Care Management$
 $8
 $8
 $7
 $
$6
 $
 $6
 $6
 $1
Healthcare6,675
 709
 7,384
 8,034
 681
4,081
 755
 4,836
 5,221
 378
Independent Pharmacies2,622
 1,660
 4,282
 4,697
 76
7,639
 415
 8,054
 9,183
 400
Registered Investment Advisors668
 75
 743
 735
 521
2,807
 
 2,807
 2,799
 1,012
Veterinary Industry2,033
 374
 2,407
 2,800
 173
2,900
 
 2,900
 3,279
 194
Other Industries1,371
 
 1,371
 1,372
 757
Total11,998
 2,826
 14,824
 16,273
 1,451
18,804
 1,170
 19,974
 21,860
 2,742
Construction & Development                  
Agriculture2,534
 
 2,534
 2,539
 17
Healthcare1,151
 
 1,151
 1,173
 53
2,023
 
 2,023
 2,038
 348
Total1,151
 
 1,151
 1,173
 53
4,557
 
 4,557
 4,577
 365
Commercial Real Estate                  
Death Care Management1,867
 619
 2,486
 2,625
 187
2,980
 157
 3,137
 3,248
 160
Healthcare3,759
 575
 4,334
 4,352
 261
13,202
 371
 13,573
 13,566
 1,242
Independent Pharmacies1,622
 
 1,622
 2,163
 9
2,834
 
 2,834
 2,835
 288
Veterinary Industry11,506
 2,194
 13,700
 14,787
 1,408
15,947
 
 15,947
 16,956
 1,276
Total18,754
 3,388
 22,142
 23,927
 1,865
34,963
 528
 35,491
 36,605
 2,966
Commercial Land                  
Agriculture23
 
 23
 58
 
5,116
 
 5,116
 5,125
 1,355
Total23
 
 23
 58
 
5,116
 
 5,116
 5,125
 1,355
Total Impaired Loans and Leases$31,926
 $6,214
 $38,140
 $41,431
 $3,369
$63,440
 $1,698
 $65,138
 $68,167
 $7,428

Table of Contents

Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

December 31, 2016December 31, 2017
Recorded Investment    Recorded Investment    
With a
Recorded
Allowance
 
With No
Recorded
Allowance
 Total 
Unpaid
Principal
Balance
 
Related
Allowance
Recorded
With a
Recorded
Allowance
 
With No
Recorded
Allowance
 Total 
Unpaid
Principal
Balance
 
Related
Allowance
Recorded
Commercial & Industrial                  
Death Care Management$8
 $103
 $111
 $111
 $1
$
 $7
 $7
 $7
 $
Healthcare7,259
 664
 7,923
 8,120
 778
3,521
 1,030
 4,551
 5,643
 165
Independent Pharmacies3,184
 330
 3,514
 3,610
 327
8,154
 417
 8,571
 9,078
 521
Registered Investment Advisors796
 
 796
 792
 514
662
 71
 733
 725
 504
Veterinary Industry2,754
 128
 2,882
 3,369
 106
2,505
 257
 2,762
 3,113
 182
Total14,001
 1,225
 15,226
 16,002
 1,726
14,842
 1,782
 16,624
 18,566
 1,372
Construction & Development                  
Agriculture300
 
 300
 311
 13
Healthcare1,237
 
 1,237
 1,258
 157
Total300
 
 300
 311
 13
1,237
 
 1,237
 1,258
 157
Commercial Real Estate                  
Death Care Management1,580
 188
 1,768
 1,904
 34
2,221
 610
 2,831
 2,964
 260
Healthcare3,514
 530
 4,044
 4,042
 47
3,717
 598
 4,315
 4,332
 192
Independent Pharmacies528
 
 528
 529
 284
1,562
 
 1,562
 1,933
 8
Veterinary Industry11,193
 2,368
 13,561
 14,283
 1,273
13,711
 1,555
 15,266
 16,584
 1,075
Total16,815
 3,086
 19,901
 20,758
 1,638
21,211
 2,763
 23,974
 25,813
 1,535
Commercial Land                  
Agriculture91
 
 91
 161
 15

 
 
 58
 
Total91
 
 91
 161
 15

 
 
 58
 
Total Impaired Loans and Leases$31,207
 $4,311
 $35,518
 $37,232
 $3,392
$37,290
 $4,545
 $41,835
 $45,695
 $3,064

Table of Contents

Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

The following table presents the average recorded investment of impaired loans and leases for each period presented and interest income recognized during the period in which the loans and leases were considered impaired.
Three months ended
September 30, 2017
 Three months ended
September 30, 2016
Three months ended
June 30, 2018
 Three months ended
June 30, 2017
Average
Balance
 Interest
Income
Recognized
 Average
Balance
 Interest
Income
Recognized
Average
Balance
 Interest
Income
Recognized
 Average
Balance
 Interest
Income
Recognized
Commercial & Industrial              
Death Care Management$42
 $1
 $9
 $
$7
 $
 $111
 $2
Healthcare7,076
 11
 6,345
 38
5,094
 19
 6,708
 19
Independent Pharmacies4,266
 26
 1,946
 18
7,978
 7
 5,647
 23
Registered Investment Advisors894
 14
 742
 7
2,818
 12
 2,100
 15
Veterinary Industry2,511
 11
 2,501
 13
2,930
 18
 2,448
 10
Other Industries1,373
 5
 
 
Total14,789
 63
 11,543
 76
20,200
 61
 17,014
 69
Construction & Development              
Agriculture2,526
 
 
 
Healthcare602
 2
 
 
1,799
 28
 
 
Total602
 2
 
 
4,325
 28
 
 
Commercial Real Estate              
Death Care Management2,512
 13
 1,801
 2
3,122
 27
 2,536
 14
Healthcare3,079
 11
 1,012
 12
12,852
 64
 1,808
 12
Independent Pharmacies1,985
 
 551
 2
2,836
 1
 2,169
 
Veterinary Industry13,950
 132
 12,218
 87
16,135
 98
 14,777
 133
Total21,526
 156
 15,582
 103
34,945
 190
 21,290
 159
Commercial Land              
Agriculture23
 
 156
 
5,138
 25
 196
 
Total23
 
 156
 
5,138
 25
 196
 
Total$36,940
 $221
 $27,281
 $179
$64,608
 $304
 $38,500
 $228

Table of Contents

Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

Nine months ended
September 30, 2017
 Nine months ended
September 30, 2016
Six months ended
June 30, 2018
 Six months ended
June 30, 2017
Average
Balance
 Interest
Income
Recognized
 Average
Balance
 Interest
Income
Recognized
Average
Balance
 Interest
Income
Recognized
 Average
Balance
 Interest
Income
Recognized
Commercial & Industrial              
Death Care Management$313
 $3
 $9
 $
$7
 $
 $1,776
 $3
Healthcare4,996
 25
 5,777
 60
5,188
 31
 5,054
 41
Independent Pharmacies7,998
 52
 1,927
 51
8,038
 27
 5,050
 37
Registered Investment Advisors1,438
 28
 588
 13
2,825
 24
 1,740
 30
Veterinary Industry4,329
 24
 2,715
 29
2,917
 38
 8,663
 21
Other Industries1,373
 5
 
 
Total19,074
 132
 11,016
 153
20,348
 125
 22,283
 132
Construction & Development              
Agriculture2,509
 5
 
 
Healthcare120
 2
 
 
1,579
 51
 
 
Total120
 2
 
 
4,088
 56
 
 
Commercial Real Estate              
Death Care Management2,030
 30
 1,811
 5
3,133
 64
 6,637
 19
Healthcare2,940
 24
 1,013
 27
12,486
 80
 1,642
 24
Independent Pharmacies149
 
 551
 2
2,836
 1
 1,176
 
Veterinary Industry13,069
 278
 12,266
 249
16,159
 235
 6,663
 238
Total18,188
 332
 15,641
 283
34,614
 380
 16,118
 281
Commercial Land              
Agriculture199
 
 355
 
5,138
 25
 466
 
Total199
 
 355
 
5,138
 25
 466
 
Total$37,581
 $466
 $27,012
 $436
$64,188
 $586
 $38,867
 $413
During the six months ended June 30, 2018, there was one construction and development healthcare loan modified to extend the interest only period. The TDR had a pre-modification and post-modification recorded investment of $612 thousand. There were no TDRs modified during the three months ended June 30, 2018. There was one TDR made for payment deferral and extension of amortization during the three and six months ended June 30, 2017. The TDR has a pre-modification and post-modification recorded investment of $262 thousand.
Concessions made to improve a loan and lease’s performance have varying degrees of success. No TDRs that were modified within the twelve months ended June 30, 2018 subsequently defaulted during the three and six months ended June 30, 2018.
As of June 30, 2017, one TDR that was modified within the twelve months ended June 30, 2017 subsequently defaulted. This TDR was a commercial and industrial healthcare loan that was previously modified for payment deferral. The recorded investment for this TDR at June 30, 2017 was $107 thousand.


Table of Contents

Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

Note 6. Equipment Leasing
The following tables presentCompany purchases new equipment for the typespurpose of TDRs that were made duringleasing such equipment to customers within its verticals. Equipment purchased to fulfill commitments to commercial renewable energy projects is rented out under operating leases while leases of equipment outside of the threerenewable energy vertical are generally direct financing leases. Accordingly, leased assets under operating leases are included in premises and nine months ended September 30, 2017equipment while leased assets under direct financing leases are included in loans and 2016:leases held for investment.
Direct Financing Leases
Interest income on direct financing leases is recognized when earned.  Unearned interest is recognized over the lease term on a basis which results in a constant rate of return on the unrecovered lease investment.  The term of each lease is generally 3-7 years which is consistent with the useful life of the equipment with no residual value.  The gross lease payments receivable and the net investment included in accounts receivable for such leases are as follows:

Three months ended September 30, 2017
Three months ended September 30, 2016

All Restructurings
All Restructurings

Number of Loans
Pre-
modification
Recorded
Investment

Post-
modification
Recorded
Investment

Number of
Loans

Pre-
modification
Recorded
Investment

Post-
modification
Recorded
Investment
Payment Deferral and Extended Amortization










Commercial & Industrial










Independent Pharmacies

$

$



$

$
Total Payment Deferral and Extended Amortization










Payment Deferral










Commercial & Industrial










Healthcare





1

440

440
Veterinary Industry2

559

559






Total Payment Deferral2

559

559

1

440

440
Total2

$559

$559

1

$440

$440
 As of
 June 30, 2018 December 31, 2017
Gross direct finance lease payments receivable$4,880
 $2,399
Less – unearned interest(795) (373)
Net investment in direct financing leases$4,085
 $2,026
Future minimum lease payments under finance leases are as follows:

Nine months ended September 30, 2017
Nine months ended September 30, 2016

All Restructurings
All Restructurings

Number of
Loans

Pre-
modification
Recorded
Investment

Post-
modification
Recorded
Investment

Number of
Loans

Pre-
modification
Recorded
Investment

Post-
modification
Recorded
Investment
Payment Deferral and Extended Amortization










Commercial & Industrial










Independent Pharmacies1

262

262






Total Payment Deferral and Extended Amortization1

262

262






Payment Deferral










Commercial & Industrial










Healthcare





1

440

440
Veterinary Industry2

559

559

1

420

420
Total Payment Deferral2

559

559

2

860

860
Total3

$821

$821

2

$860

$860
As of June 30, 2018 Amount
2018 $487
2019 1,009
2020 998
2021 916
2022 733
Thereafter 737
Total $4,880

Concessions made to improve a loanInterest income of $73 thousand and lease’s performance have varying degrees of success. No TDRS that were modified within$7 thousand was recognized in the twelvethree months ended SeptemberJune 30, 2017 subsequently defaulted during2018 and 2017. Interest income of $120 thousand and $7 thousand was recognized in the three or ninesix months ended SeptemberJune 30, 2018 and 2017.
Operating Leases
The term of each operating lease is generally 10 to 15 years. The Company retains ownership of the equipment and associated tax benefits such as investment tax credits and accelerated depreciation. At the end of the lease term, the lessee has the option to renew the lease for two additional terms or purchase the equipment at the then current fair market value.
Rental revenue from operating leases is recognized over a straight-line basis over the term of the lease. Rental equipment is recorded at cost and depreciated to an estimated residual value on a straight-line basis over the estimated useful life. The useful lives generally range from 20 to 25 years and residual values generally range from 20% to 40%, however, they are subject to periodic evaluation. Changes in useful lives or residual values will impact depreciation expense and any gain or loss from the sale of used equipment. The estimated useful lives and residual values of the Company's leasing equipment are based on industry disposal experience and the Company's expectations for future sale prices.
If the Company decides to sell or otherwise dispose of rental equipment, it is carried at the lower of cost or fair value less costs to sell or dispose.   Repair and maintenance costs that do not extend the lives of the rental equipment are charged to direct operating expenses at the time the costs are incurred.

Table of Contents

Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

As of SeptemberJune 30, 2016, one TDR2018, the Company had a net investment of $129.7 million in assets included in premises and equipment that are subject to operating leases. Of the net investment, the gross balance of the assets was modified within$135.6 million and accumulated depreciation was $5.9 million as of June 30, 2018. Depreciation expense recognized on these assets for the twelvethree and six months ended SeptemberJune 30, 2016 subsequently defaulted during2018 was $2.0 million and $3.7 million, respectively. Depreciation expense recognized for the ninethree and six months ended SeptemberJune 30, 2016. This TDR2017 was a commercial and industrial veterinary loan that was previously modified for payment deferral. The recorded investment for this TDR at September 30, 2016 was $311$297 thousand.
A maturity analysis of future minimum lease payments under non-cancelable operating leases is as follows:

As of June 30, 2018 Amount
2018 $3,200
2019 7,486
2020 7,536
2021 7,572
2022 7,599
Thereafter 49,337
Total $82,730
Table of Contents

Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

Note 7. Servicing Assets
Loans serviced for others are not included in the accompanying balance sheet. The unpaid principal balances of loans serviced for others requiring recognition of a servicing asset were $2.36$2.58 billion and $2.22$2.44 billion at SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively. The unpaid principal balance for all loans serviced for others was $2.67 billion and $2.54 billion at June 30, 2018 and December 31, 2017, respectively.
The following summarizes the activity pertaining to servicing rights:
Three Months Ended
September 30,
 Nine Months Ended
September 30,
Three Months Ended
June 30,
 Six Months Ended
June 30,
2017 2016 2017 20162018 2017 2018 2017
Balance at beginning of period$53,675
 $48,454
 $51,994
 $44,230
$53,120
 $53,584
 $52,298
 $51,994
Additions, net3,527
 4,964
 9,412
 11,923
4,202
 2,503
 9,076
 5,885
Fair value changes:              
Due to changes in valuation inputs or assumptions(789) (1,452) 342
 (821)(552) 365
 (553) 861
Decay due to increases in principal paydowns or runoff(3,021) (2,237) (8,356) (5,603)(4,081) (2,777) (8,132) (5,065)
Balance at end of period$53,392
 $49,729
 $53,392
 $49,729
$52,689
 $53,675
 $52,689
 $53,675
The fair value of servicing rights was determined using discount rates ranging from 10.1% to 14.5%15.4% on SeptemberJune 30, 20172018 and 8.1%9.0% to 14.1%13.2% on SeptemberJune 30, 2016.2017. The fair value of servicing rights was determined using prepayment speeds ranging from 3.1% to 10.0%23.3% on SeptemberJune 30, 20172018 and 2.9%3.1% to 9.8%10.2% on SeptemberJune 30, 2016,2017, depending on the stratification of the specific right. Changes to fair value are reported in loan servicing asset revaluation within the consolidated statements of income.
The fair value of servicing rights is highly sensitive to changes in underlying assumptions. Changes in prepayment speed assumptions have the most significant impact on the fair value of servicing rights. Generally, as interest rates rise on variable rate loans, loan prepayments increase due to an increase in refinance activity, which results in a decrease in the fair value of servicing assets. Measurement of fair value is limited to the conditions existing and the assumptions used as of a particular point in time, and those assumptions may not be appropriate if they are applied at a different time.


Table of Contents

Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

Note 8. Borrowings
Total outstanding short and long term borrowings consisted of the following:
 September 30,
2017
 December 31,
2016
Long term borrowings   
On September 11, 2014, the Company financed the construction of an additional building located on the Company’s Tiburon Drive main campus with a $24 million construction line of credit with an unaffiliated commercial bank, secured by both properties at its Tiburon Drive main facility location. Payments were interest only through September 11, 2016 at a fixed rate of 3.95% for a term of 84 months. Monthly principal and interest payments of $146 thousand began in October 2016 with all principal and accrued interest due on September 11, 2021. The construction line is fully disbursed and there was no remaining available credit on this construction line at September 30, 2017.$23,195
 $23,864
On February 23, 2015, the Company transferred two related party loans to an unaffiliated commercial bank in exchange for $4.7 million. The exchange price equated to the unpaid principal balance plus accrued but uncollected interest at the time of transfer. The terms of the transfer agreement with the unaffiliated commercial bank identified the transaction as a secured borrowing for accounting purposes. Interest accrues at prime plus 1% with monthly principal and interest payments over a term of 60 months. The interest rate at September 30, 2017 is 5.25%. The maturity date is October 5, 2019. The pledged collateral is classified in other assets with a fair value of $3.7 million at September 30, 2017. Underlying loans carry a risk grade of 3 and are current with no delinquencies.3,677
 3,979
Total long term borrowings$26,872
 $27,843
June 30,
2018
December 31,
2017
Short term borrowings
On October 20, 2017, the Company entered into a revolving line of credit of $20 million with an unaffiliated commercial bank. The note is unsecured and accrues interest at LIBOR plus 1.750% for a term of 12 months. Payments are interest only with all principal and accrued interest due on October 19, 2018. The terms of this loan require the Company to maintain minimum capital and debt service coverage ratios. No advances have been made to this line of credit and there is $20 million of available credit remaining at June 30, 2018.$
$
On September 18, 2014, the Company entered into a note payable revolving line of credit of $8.1 million with an unaffiliated commercial bank. On April 18, 2017, the Company renewed and increased the revolving line of credit to $25 million. The note is unsecured and accrues interest at Prime minus 0.50% for a term of 24 months. Payments are interest only with all principal and accrued interest due on April 30, 2019. The terms of this loan require the Company to maintain minimum capital, liquidity and Texas ratios. This line of credit was paid in full on August 25, 2017, and there is $25 million of available credit remaining at June 30, 2018.

Total short term borrowings$
$
 June 30,
2018
 December 31,
2017
Long term borrowings   
On September 11, 2014, the Company financed the construction of an additional building located on the Company’s Tiburon Drive main campus with a $24 million construction line of credit with an unaffiliated commercial bank, secured by both properties at its Tiburon Drive main facility location. Payments were interest only through September 11, 2016 at a fixed rate of 3.95% for a term of 84 months. Monthly principal and interest payments of $146 thousand began in October 2016 with all principal and accrued interest due on September 11, 2021. This note was repaid in full on January 31, 2018.$
 $22,990
On February 23, 2015, the Company transferred two related party loans to an unaffiliated commercial bank in exchange for $4.7 million. The exchange price equated to the unpaid principal balance plus accrued but uncollected interest at the time of transfer. The terms of the transfer agreement with the unaffiliated commercial bank identified the transaction as a secured borrowing for accounting purposes. Interest accrues at prime plus 1% with monthly principal and interest payments over a term of 60 months. The interest rate at June 30, 2018 is 5.75%. The maturity date is October 5, 2019. The pledged collateral is classified in other assets with a fair value of $3.4 million at June 30, 2018. Underlying loans carry a risk grade of 3 and are current with no delinquencies.3,368
 3,574
In October 2017, the Company entered into a capital lease of $19 thousand with an unaffiliated equipment lease company, secured by fitness equipment which is included in premises and equipment on the consolidated balance sheet. Payments are principal and interest due monthly starting December 15, 2017 over a term of 60 months. At the end of the lease term there is a $1.00 bargain purchase option.17
 
Total long term borrowings$3,385
 $26,564
The Company may purchase federal funds through unsecured federal funds lines of credit with various correspondent banks, which totaled $47.5$72.5 million and $26.5$47.5 million as of SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively. These lines are intended for short-term borrowings and are subject to restrictions limiting the frequency and terms of advances. These lines of credit are payable on demand and bear interest based upon the daily federal funds rate. The Company had no outstanding balances on the lines of credit as of SeptemberJune 30, 20172018 and December 31, 2016.
The Company has $25 million available in an unsecured line of credit with a correspondent bank as of September 30, 2017. The line was increased from $8.1 million to $25 million on April 18, 2017. At December 31, 2016, there was $8.1 million available on this unsecured line of credit. The term is 24 months, maturing April 30, 2019, and interest accrues at Prime minus 0.50%. Payments are interest only with all principal and accrued interest due on April 30, 2019. The terms of the loan require the Company to maintain minimum capital, liquidity and Texas ratios. There was no outstanding balance on this line of credit as of September 30, 2017 and December 31, 2016.

Table of Contents

Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

The Company has entered into a repurchase agreement with a third party for $5 million as of SeptemberJune 30, 20172018 and December 31, 2016.2017. At the time the Company enters into a transaction with the third party, the Company must transfer securities or other assets against the funds received. The terms of the agreement are set at market conditions at the time the Company enters into such transaction. The Company had no outstanding balance on the repurchase agreement as of SeptemberJune 30, 20172018 and December 31, 2016.2017.

Table of Contents

Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

The Company may borrow funds through the Federal Reserve Bank’s discount window. These borrowings are secured by a blanket floating lien on qualifying loans with a balance of $321.0$370.3 million and $281.3$348.5 million as of SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively. At SeptemberJune 30, 20172018 and December 31, 2016,2017, the Company had approximately $175.0$204.1 million and $142.7$189.1 million, respectively, in borrowing capacity available under these arrangements with no outstanding balance as of SeptemberJune 30, 20172018 and December 31, 2016.2017.
Note 9. Income Taxes
The Company's effective tax rate is lower than the U.S. statutory rate primarily because of the anticipated effect of investment tax credits during 2017.2018. The Company's effective tax rate in the future will depend on the actual investment tax credits earned as a part of its financing renewable energy applications.
In the first quarter of 2017, share based compensation expense excess tax benefits of $874 thousand were reflected in the consolidated statements of income as a component of the provision for income taxes as a result of the adoption of ASU 2016-09. Please refer to Note 2 for more details regarding the adoption of ASU 2016-09.
Note 10. Fair Value of Financial Instruments
Fair Value Hierarchy
There are three levels of inputs in the fair value hierarchy that may be used to measure fair value. Financial instruments are considered Level 1 when valuation can be based on quoted prices in active markets for identical assets or liabilities. Level 2 financial instruments are valued using quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or models using inputs that are observable or can be corroborated by observable market data of substantially the full term of the assets or liabilities. Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable and when determination of the fair value requires significant management judgment or estimation.
Financial Instruments Measured at Fair Value
The following sections provide a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the fair value hierarchy:
Investment securities: Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, discounted cash flow or at net asset value per share. Level 2 securities would include USU.S. government agency securities, mortgage-backed securities, obligations of states and political subdivisions and certain corporate, asset backed mutual fund and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy.
Impaired loans: Impairment of a loan is based on the fair value of the collateral of the loan for collateral-dependent loans. Fair value of the loan’s collateral, when the loan is dependent on collateral, is determined by appraisals or independent valuation which is then adjusted for the cost related to liquidation of the collateral. For non-collateral dependent loans, impairment is determined by the present value of expected future cash flows. Impaired loans classified as Level 3 are based on management’s judgment and estimation.
Servicing assets: Servicing rights do not trade in an active, open market with readily observable prices. While sales of servicing rights do occur, the precise terms and conditions typically are not readily available. Accordingly, the Company estimates the fair value of servicing rights using discounted cash flow models incorporating numerous assumptions from the perspective of a market participant including servicing income, servicing costs, market discount rates and prepayment speeds. Due to the nature of the valuation inputs, servicing rights are classified within Level 3 of the valuation hierarchy.
Foreclosed assets: Foreclosed real estate is adjusted to fair value less selling costs upon transfer of the loans to foreclosed real estate. Subsequently, foreclosed real estate is carried at the lower of carrying value or fair value less selling costs. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. Given the lack of observable market prices for identical properties and market discounts applied to appraised values, the Company generally classifies foreclosed assets as nonrecurring Level 3.

Table of Contents

Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

Equity warrant assets: Fair value measurements of equity warrant assets of private companies are priced based on a Black-Scholes option pricing model to estimate the asset value by using stated strike prices, option expiration dates, risk-free interest rates and option volatility assumptions. Option volatility assumptions used in the Black-Scholes model are based on public companies that operate in similar industries as the companies in our private company portfolio. Option expiration dates are modified to account for estimates to actual life relative to stated expiration. Values are further adjusted for a general lack of liquidity due to the private nature of the associated underlying company. The Company classifies equity warrant assets within Level 3 of the valuation hierarchy.
Contingent consideration liability: Contingent consideration associated with the acquisition of Reltco will be adjusted to fair value quarterly until settled. The assumptions used to measure fair value are based on internal metrics that are unobservable and therefore the contingent consideration liability is classified within Level 3 of the valuation hierarchy.
Recurring Fair Value
The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis.
September 30, 2017Total Level 1 Level 2 Level 3
June 30, 2018Total Level 1 Level 2 Level 3
Investment securities available-for-sale              
US treasury securities$4,952
 $
 $4,952
 $
US government agencies$17,804
 $
 $17,804
 $
32,501
 
 32,501
 
Residential mortgage-backed securities56,750
 
 56,750
 
345,437
 
 345,437
 
Mutual fund2,021
 
 2,021
 
2,053
 
 2,053
 
Servicing assets1
53,392
 
 
 53,392
52,689
 
 
 52,689
Equity warrant assets399
 
 
 399
Total assets at fair value$129,967
 $
 $76,575
 $53,392
$438,031
 $
 $384,943
 $53,088
              
Contingent consideration liability2
$4,650
 $
 $
 $4,650
$1,640
 $
 $
 $1,640
Total liabilities at fair value$4,650
 $
 $
 $4,650
$1,640
 $
 $
 $1,640
December 31, 2016Total Level 1 Level 2 Level 3
December 31, 2017Total Level 1 Level 2 Level 3
Investment securities available-for-sale              
US government agencies$17,823
 $
 $17,823
 $
$22,624
 $
 $22,624
 $
Residential mortgage-backed securities51,273
 
 51,273
 
68,696
 
 68,696
 
Mutual fund1,960
 
 1,960
 
2,035
 
 2,035
 
Servicing assets1
51,994
 
 
 51,994
52,298
 
 
 52,298
Total assets at fair value$123,050
 $
 $71,056
 $51,994
$145,653
 $
 $93,355
 $52,298
       
Contingent consideration liability2
$1,900
 $
 $
 $1,900
Total liabilities at fair value$1,900
 $
 $
 $1,900
1
See Note 7 for a rollforward of recurring Level 3 fair values for servicing assets and various assumptions used in the fair value measurement.
2See Note 4 for activity related to the recurring Level 3 fair valueActivity for the contingent consideration liability and various assumptions used induring the six months ended June 30, 2018 consisted of a $260 thousand negative fair value measurement.adjustment. There was no activity for the contingent consideration liability during the three months ended June 30, 2018. During the three months ended June 30, 2017, the Company recorded a $150 thousand positive fair value adjustment. During the six months ended June 30, 2017, $4.3 million of contingent consideration was recorded upon the acquisition of Reltco as well as $350 thousand positive fair value adjustments.

Table of Contents

Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

Non-recurring Fair Value
The tables below present the recorded amount of assets and liabilities measured at fair value on a non-recurring basis.
September 30, 2017Total Level 1 Level 2 Level 3
June 30, 2018Total Level 1 Level 2 Level 3
Impaired loans and leases$28,557
 $
 $
 $28,557
$56,012
 $
 $
 $56,012
Foreclosed assets2,231
 
 
 2,231
1,725
 
 
 1,725
Total assets at fair value$30,788
 $
 $
 $30,788
$57,737
 $
 $
 $57,737
December 31, 2016Total Level 1 Level 2 Level 3
Impaired loans and leases$27,815
 $
 $
 $27,815
Foreclosed assets1,648
 
 
 1,648
Total assets at fair value$29,463
 $
 $
 $29,463

Table of Contents

Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

December 31, 2017Total Level 1 Level 2 Level 3
Impaired loans and leases$34,493
 $
 $
 $34,493
Foreclosed assets1,281
 
 
 1,281
Total assets at fair value$35,774
 $
 $
 $35,774
Level 3 Analysis
For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of SeptemberJune 30, 20172018 and December 31, 20162017 the significant unobservable inputs used in the fair value measurements were as follows:
SeptemberJune 30, 2018
Level 3 Assets with Significant
Unobservable Inputs
 Fair Value Valuation Technique 
Significant
Unobservable
Inputs
 Range
Impaired loans and leases $56,012
 Discounted appraisals
Discounted expected cash flows
 
Appraisal adjustments (1)
Interest rate & repayment term
 10% to 48% Weighted average discount rate 6.93%
Foreclosed assets $1,725
 Discounted appraisals 
Appraisal adjustments (1)
 9% to 37%
Equity warrant assets $399
 
Black-Scholes option pricing model

 
Volatility
Risk-free interest rate
Marketability discount
Remaining life
 20.10%
2.85%
20%
9 years
Contingent consideration liability $1,640
 Monte Carlo simulation Volatility
Risk-free rate of return
Dividend yield
Remaining life
 25.00%
2.09%
0.43%
2.75 years
December 31, 2017
Level 3 Assets with Significant
Unobservable Inputs
 Fair Value Valuation Technique 
Significant
Unobservable
Inputs
 Range
Impaired Loans and Leases $28,557
 Discounted appraisals
Discounted expected cash flows
 
Appraisal adjustments (1)
Interest rate & repayment term
 0% to 25% Weighted average discount rate 6.01%
Foreclosed Assets $2,231
 Discounted appraisals 
Appraisal adjustments (1)
 10% to 35%
December 31, 2016
Level 3 Assets with Significant
Unobservable Inputs
 Fair Value Valuation Technique 
Significant
Unobservable
Inputs
 Range
Impaired Loans and Leases $27,815
 Discounted appraisals
Discounted expected cash flows
 
Appraisal adjustments (1)
Interest rate & repayment term
 0% to 25% Weighted average discount rate 5.28%
Foreclosed Assets $1,648
 Discounted appraisals 
Appraisal adjustments (1)
 10% to 35%
Level 3 Assets with Significant
Unobservable Inputs
 Fair Value Valuation Technique 
Significant
Unobservable
Inputs
 Range
Impaired loans and leases $34,493
 Discounted appraisals
Discounted expected cash flows
 
Appraisal adjustments (1)
Interest rate & repayment term
 10% to 25% Weighted average discount rate 6.26%
Foreclosed assets $1,281
 Discounted appraisals 
Appraisal adjustments (1)
 10% to 37%
Contingent consideration liability $1,900
 Monte Carlo simulation Volatility
Risk-free rate of return
Dividend yield
Remaining life
 25.00%
1.43%
0.51%
3.00 years
(1)Appraisals may be adjusted by management for customized discounting criteria, estimated sales costs, and proprietary qualitative adjustments.
Estimated Fair Value of Other Financial Instruments
GAAP also requires disclosure of fair value information about financial instruments carried at book value on the balance sheet. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments not measured at fair value on the consolidated balance sheets:
Cash and due from banks: The carrying amounts reported in the balance sheet for cash and due from banks approximate their fair values.
Certificates of deposit with other banks: The fair value of certificates of deposit with other banks is estimated based on discounting cash flows using the rates currently offered for instruments of similar remaining maturities.
Loans held for sale: The fair values of loans held for sale are based on quoted market prices, where available, and determined by discounting estimated cash flows using interest rates approximating the Company’s current origination rates for similar loans adjusted to reflect the inherent credit risk.
Loans and leases held for investment: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying amounts. The fair values for other loans and leases are estimated using discounted cash flow analysis, based on interest rates currently being offered for loans and leases with similar terms to borrowers of similar credit quality. Loan and lease fair value estimates include judgments regarding future expected loss experience and risk characteristics. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values, where applicable.
Accrued interest: The carrying amounts of accrued interest approximate fair value.

Table of Contents

Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

Deposits: The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain typesEstimated Fair Value of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.Other Financial Instruments
Short and long term borrowings: The fair valuesGAAP also requires disclosure of the Company’s short term borrowings approximate fair value while long term borrowings are estimated using discounted cash flow analyses basedof financial instruments carried at book value on the Company’s current incremental debt rates for similar types of debt arrangements.
consolidated balance sheet. The carrying amounts and estimated fair values of the Company’s financial instruments are as follows:
September 30, 2017
Carrying
Amount
 
Quoted Price
In Active
Markets for
Identical Assets
/Liabilities
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Fair
Value
June 30, 2018
Carrying
Amount
 
Quoted Price
In Active
Markets for
Identical Assets
/Liabilities
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Fair
Value
Financial assets                  
Cash and due from banks$260,907
 $260,907
 $
 $
 $260,907
$392,941
 $392,941
 $
 $
 $392,941
Certificates of deposit with other banks3,250
 3,251
 
 
 3,251
2,250
 2,243
 
 
 2,243
Investment securities, available-for-sale76,575
 
 76,575
 
 76,575
384,943
 
 384,943
 
 384,943
Loans held for sale(1)692,586
 
 
 770,923
 770,923
757,494
 
 
 772,006
 772,006
Loans and leases, net of allowance for loan and lease losses(1)1,148,860
 
 
 1,151,601
 1,151,601
1,505,018
 
 
 1,500,415
 1,500,415
Servicing assets53,392
 
 
 53,392
 53,392
52,689
 
 
 52,689
 52,689
Accrued interest receivable9,669
 9,669
 
 
 9,669
13,807
 13,807
 
 
 13,807
Financial liabilities                  
Deposits2,012,891
 
 1,996,493
 
 1,996,493
2,969,236
 
 2,910,479
 
 2,910,479
Accrued interest payable270
 270
 
 
 270
534
 534
 
 
 534
Long term borrowings26,872
 
 
 27,904
 27,904
3,385
 
 
 3,399
 3,399
December 31, 2016
Carrying
Amount
 
Quoted Price
In Active
Markets for
Identical Assets
/Liabilities
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Fair
Value
December 31, 2017
Carrying
Amount
 
Quoted Price
In Active
Markets for
Identical Assets
/Liabilities
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Fair
Value
Financial assets                  
Cash and due from banks$238,008
 $238,008
 $
 $
 $238,008
$295,271
 $295,271
 $
 $
 $295,271
Certificates of deposit with other banks7,250
 7,236
 
 
 7,236
3,000
 2,993
 
 
 2,993
Investment securities, available-for-sale71,056
 
 71,056
 
 71,056
93,355
 
 93,355
 
 93,355
Loans held for sale(1)394,278
 
 
 426,220
 426,220
680,454
 
 
 706,972
 706,972
Loans and leases, net of allowance for loan and lease losses(1)889,357
 
 
 873,158
 873,158
1,319,783
 
 
 1,319,615
 1,319,615
Servicing assets51,994
 
 
 51,994
 51,994
52,298
 
 
 52,298
 52,298
Accrued interest receivable7,520
 7,520
 
 
 7,520
10,160
 10,160
 
 
 10,160
Financial liabilities                  
Deposits1,485,076
 
 1,469,173
 
 1,469,173
2,260,263
 
 2,232,370
 
 2,232,370
Accrued interest payable319
 319
 
 
 319
367
 367
 
 
 367
Long term borrowings27,843
 
 
 29,559
 29,559
26,564
 
 
 27,390
 27,390
(1)In accordance with the adoption of ASU 2016-01, as of June 30, 2018, the fair value of loans and leases were measured using an exit price notion. As of December 31, 2017, the fair value of loans and leases were measured using an entry price notion.


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Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

Note 11. Commitments and Contingencies
Litigation
In the normal course of business the Company is involved in various legal proceedings. Management believes that the outcome of such proceedings will not materially affect the financial position, results of operations or cash flows of the Company.

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Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

Financial Instruments with Off-balance-sheet Risk
The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, credit risk in excess of the amount recognized in the balance sheet.
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as for on-balance-sheet instruments. A summary of the Company’s commitments is as follows:
September 30,
2017
 December 31,
2016
June 30,
2018
 December 31,
2017
Commitments to extend credit$1,563,688
 $1,342,271
$1,349,217
 $1,701,137
Standby letters of credit1,861
 343
2,636
 2,298
Solar purchase commitments182,610
 
49,844
 106,921
Airplane purchase agreement commitments
 21,500
19,450
 25,450
Total unfunded off-balance-sheet credit risk$1,748,159
 $1,364,114
$1,421,147
 $1,835,806
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the party. Collateral held varies, but may include accounts receivable, inventory, property and equipment, residential real estate and income-producing commercial properties. In 2012, the Company began issuing commitment letters after approval of the loan by the Credit Department. Commitment letters generally expire ninety days after issuance.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held varies as specified above and is required in instances which the Company deems necessary.
Solar purchase commitments are to purchase solar assets to fulfill leasing obligations.
As of SeptemberJune 30, 20172018 and December 31, 2016,2017, the Company had unfunded commitments to provide capital contributions for on-balance sheet investments in the amount of $4.4$3.3 million and $4.9$3.5 million, respectively.
Concentrations of Credit Risk
Although the Company is not subject to any geographic concentrations, a substantial amount of the Company’s loans, leases, and commitments to extend credit have been granted to customers in the agriculture, healthcare and veterinary verticals. The concentrations of credit by type of loan are set forth in Note 6.5. The distribution of commitments to extend credit approximates the distribution of loans outstanding. The Company does not have a significant number of credits to any single borrower or group of related borrowers whereby their retained unguaranteed exposure exceeds $5.0$7.5 million, except for seventeennine relationships that have a retained unguaranteed exposure of $144.6$109.3 million of which $90.8$100.3 million of the unguaranteed exposure has been disbursed.
Additionally, the Company has future minimum lease payments due under non-cancelable operating leases totaling $33.0$82.7 million, of which $28.0$62.1 million is due from twofour relationships.

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Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

The Company from time-to-time may have cash and cash equivalents on deposit with financial institutions that exceed federally-insured limits.


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Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

Note 12. Stock Plans
On March 20, 2015, the Company adopted the 2015 Omnibus Stock Incentive Plan which replaced the previously existing Amended Incentive Stock Option Plan and Nonstatutory Stock Option Plan. Subsequently on May 24, 2016, the 2015 Omnibus Stock Incentive Plan was amended to authorize awards covering a maximum of 7,000,000 common voting shares and has an expiration date of March 20, 2025. On May 15, 2018, the Amended and Restated 2015 Omnibus Stock Incentive Plan was amended to authorize awards covering a maximum of 8,750,000 common voting shares. Options or restricted shares granted under the Amended and Restated 2015 Omnibus Stock Incentive Plan (the "Plan") expire no more than 10 years from the date of grant. Exercise prices under the Plan are set by the Board of Directors at the date of grant, but shall not be less than 100% of fair market value of the related stock at the date of the grant. Options or restricted shares vest over a minimum of three years from the date of the grant.
Stock Options
Compensation cost relating to share-based payment transactions are recognized in the financial statements with measurement based upon the fair value of the equity or liability instruments issued. For the three months ended SeptemberJune 30, 20172018 and 2016,2017, the Company recognized $536$347 thousand and $580$468 thousand in compensation expense for stock options, respectively. For the ninesix months ended SeptemberJune 30, 20172018 and 2016,2017, the Company recognized $1.4 million$780 thousand and $1.8 million$882 thousand in compensation expense for stock options, respectively.
Stock option activity under the Plan during the ninesix month periods ended SeptemberJune 30, 20172018 and 20162017 is summarized below.
Shares 
Weighted
Average
Exercise Price
 
Weighted
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value
Shares 
Weighted
Average
Exercise Price
 
Weighted
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value
Outstanding at December 31, 20163,478,208
 $11.51
  
Outstanding at December 31, 20173,058,459
 $11.30
  
Exercised76,285
 7.89
  144,671
 8.66
  
Forfeited203,671
 14.12
  134,623
 14.11
  
Granted
 
    
 
    
Outstanding at September 30, 20173,198,252
 $11.43
 7.31 years $38,411,802
Exercisable at September 30, 2017703,425
 $10.41
 7.06 years $9,171,805
Outstanding at June 30, 20182,779,165
 $11.30
 6.54 years $53,786,948
Exercisable at June 30, 2018727,697
 $9.83
 6.27 years $15,148,795
 Shares 
Weighted
Average
Exercise Price
 
Weighted
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value
Outstanding at December 31, 20153,546,992
 $11.17
    
Exercised25,406
 5.79
    
Forfeited166,483
 9.01
    
Granted169,987
 14.02
    
Outstanding at September 30, 20163,525,090
 $11.44
 8.30 years $14,212,513
Exercisable at September 30, 2016478,141
 $9.22
 7.84 years $2,887,741
The following is a summary of non-vested stock option activity for the Company for the nine months ended September 30, 2017 and 2016.
 Shares 
Weighted
Average
Exercise Price
 
Weighted
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value
Outstanding at December 31, 20163,478,208
 $11.51
    
Exercised58,921
 7.73
    
Forfeited195,468
 14.38
    
Granted
 
    
Outstanding at June 30, 20173,223,819
 $11.41
 7.56 years $41,246,695
Exercisable at June 30, 2017596,021
 $9.06
 7.18 years $9,021,234

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Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

 Shares 
Weighted
Average
Grant Date
Fair Value
Non-vested at December 31, 20163,016,100
 $4.78
Granted
 
Vested317,602
 4.17
Forfeited203,671
 6.03
Non-vested at September 30, 20172,494,827
 $4.75
The following is a summary of non-vested stock option activity for the Company for the six months ended June 30, 2018 and 2017.
Shares 
Weighted
Average
Grant Date
Fair Value
Shares 
Weighted
Average
Grant Date
Fair Value
Non-vested at December 31, 20153,393,441
 $4.56
Non-vested at December 31, 20172,364,999
 $4.65
Granted169,987
 6.58

 
Vested349,996
 4.22
(178,908) 2.95
Forfeited166,483
 3.13
(134,623) 6.26
Non-vested at September 30, 20163,046,949
 $4.79
Non-vested at June 30, 20182,051,468
 4.79
 Shares 
Weighted
Average
Grant Date
Fair Value
Non-vested at December 31, 20163,016,100
 $4.78
Granted
 
Vested(192,834) 2.12
Forfeited(195,468) 6.17
Non-vested at June 30, 20172,627,798
 4.87
The total intrinsic value of options exercised at SeptemberJune 30, 2018 and 2017 and 2016 was $1.1$2.9 million and $223$867 thousand, respectively.
At SeptemberJune 30, 2017,2018, unrecognized compensation costs relating to stock options amounted to $9.8$7.2 million which will be recognized over a weighted average period of 2.932.42 years.
The weighted average fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The expected volatility is based on historical volatility. The risk-free interest rates for periods within the contractual life of the awards are based on the U.S. Treasury yield curve in effect at the time of the grant. The expected life is based on historical exercise experience. The dividend yield assumption is based on the Company’s history and expectation of dividend payouts. There were no stock options granted during the three and ninesix months ended SeptemberJune 30, 2018 or 2017.
Restricted Stock
Restricted stock awards are authorized in the form of restricted stock awards or units ("RSU"s) and restricted stock awards or units with a market price condition ("Market RSU"s).
RSUs have a restriction based on the passage of time and may also have a restriction based on a non-market-related performance criteria. The fair value of the RSUs is based on the closing price on the date of the grant.
Market RSUs also have a restriction based on the passage of time and non-market-related performance criteria, but also have a restriction based on market price criteria related to the Company’s share price closing at or above a specified price ranging from $34.00 to $38.00$48.00 per share for at least twenty (20) consecutive trading days at any time prior to expiration date. The amount of Market RSUs earned will not exceed 100% of the Market RSUs awarded. The fair value of the Market RSUs and the implied service period is calculated using the Monte Carlo Simulationsimulation method.
RSU stock activity under the Plan during the first nine months of 2017 is summarized below.
 Shares 
Weighted
Average Grant
Date Fair Value
Non-vested at December 31, 2016134,969
 $14.96
Granted62,721
 23.85
Vested38,205
 15.40
Forfeited7,485
 13.96
Non-vested at September 30, 2017152,000
 $18.57

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Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

RSU stock activity under the Plan during the first six months of 2018 is summarized below.
 Shares 
Weighted
Average Grant
Date Fair Value
Non-vested at December 31, 2017181,814
 $20.03
Granted152,422
 28.01
Vested(56,799) 26.54
Forfeited(11,320) 23.36
Non-vested at June 30, 2018266,117
 23.07
For the three months ended SeptemberJune 30, 20172018 and 2016,2017, the Company recognized $191$921 thousand and $3.1 million$167 thousand in compensation expense for RSUs, respectively. For the ninesix months ended SeptemberJune 30, 20172018 and 2016,2017, the Company recognized $517$1.8 million and $326 thousand and $5.3 million in compensation expense for RSUs, respectively.
At SeptemberJune 30, 2017,2018, unrecognized compensation costs relating to RSUs amounted to $2.5$5.3 million which will be recognized over a weighted average period of 4.554.78 years.

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Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

Market RSU stock activity under the Plan during the first ninesix months of 20172018 is summarized below.
Shares 
Weighted
Average Grant
Date Fair Value
Shares 
Weighted
Average Grant
Date Fair Value
Non-vested at December 31, 20162,364,500
 $8.28
Non-vested at December 31, 20172,532,808
 $8.78
Granted233,791
 
75,000
 17.51
Vested
 

 
Forfeited4,007
 11.38
(216,019) 9.06
Non-vested at September 30, 20172,594,284
 $8.79
Non-vested at June 30, 20182,391,789
 9.03
The compensation expense for Market RSUs is measured based on their grant date fair value as calculated using the Monte Carlo Simulationsimulation and is recognized on a straight-line basis over the average vesting period. The Monte Carlo Simulationsimulation used 100,000 simulation paths to assess the expected date of achieving the market price criteria.
Related to the 100,733 Market RSUs granted on January 31, 2017 and the 3,05875,000 Market RSUs granted on May 8, 2017,14, 2018, the share price simulation was based on the Cox, Ross & Rubinstein option pricing methodology for a period of 7.0 years. The implied term of the restricted stock was 4.13.3 years. The Monte Carlo Simulation used various assumptions that included a risk free rate of return of 2.28%2.96%, expected volatility of 30.00%27.00% and a dividend yield of 0.39%.
Related to the 130,000 Market RSUs granted on August 7, 2017, the share price simulation was based on the Cox, Ross & Rubinstein option pricing methodology for a period of 7.0 years. The implied term of the restricted stock was 3.9 years. The Monte Carlo Simulation used various assumptions that included a risk free rate of return of 2.07%, expected volatility of 30.00% and a dividend yield of 0.33%0.42%.
For the three months ended SeptemberJune 30, 20172018 and 2016,2017, the Company recognized $1.3$947 thousand and $1.2 million and $346 thousand in compensation expense for Market RSUs, respectively. For the ninesix months ended SeptemberJune 30, 20172018 and 2016,2017, the Company recognized $3.7$1.9 million and $577 thousand$2.4 million in compensation expense for Market RSUs, respectively.
All of the Company's Market RSUs had an effective grant date of May 24, 2016, NovemberAt June 30, 2016, January 31, 2017, May 8, 2017 and August 7, 2017
At September 30, 2017,2018, unrecognized compensation costs relating to Market RSUs amounted to $17.9$13.5 million which will be recognized over a weighted average period of 3.272.56 years.
Employee Stock Purchase Plan
The Company adopted an Employee Stock Purchase Plan on October 8, 2014. On May 24, 2016, the plan was amended and the Amended and Restated Employee Stock Purchase Plan (the "ESPP") became effective within the meaning of Section 423 of the Internal Revenue Code of 1986, as amended. Under the ESPP, eligible employees are able to purchase available shares with post-tax dollars as of the grant date. In order for employees to be eligible to participate in the ESPP they must be employed or on an authorized leave of absence from the Company or any subsidiary immediately prior to the grant date. ESPP stock purchases cannot exceed $25 thousand in fair market value per employee per calendar year. Options to purchase shares under the ESPP are granted at a 15% discount to fair market value. ExpenseThere was no expense recognized in relation to the ESPP for the nine months ended September 30, 2017 was $79 thousand. There were no ESPP purchases for the nine months ended September 30, 2016. For the three months ended SeptemberJune 30, 20172018 and 2016,2017. For the six months ended June 30, 2018 and 2017 the Company recognized $36$29 thousand and $0$43 thousand expense, respectively.


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Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements


Note 13. Subsequent Event
Management has evaluated subsequent events through the date the financial statements were available to be issued and determined that the following event required disclosure:
Unconsolidated Joint Venture
On OctoberAugust 1, 2017,2018, the Company closedfinanced the digital banking joint venture between Live Oak Banking Company and First Data Corporation ("First Data"). The new company, named Apiture, combines First Data's and the Bank's digital banking platforms, products, services, and certain human resources used in the creation and deliverysale of technology solutions for financial institutions. The contributed assets of both the Company and First Data are considered businesses in accordance with relevant accounting standards. At closing both the Bank and First Data received equal voting interests in Apiture in exchange for their respective contributions. As a term of the closing agreements, First Data is entitled to a preference in Apiture's cash earnings for the remainder of calender 2017 and all of 2018, not to exceed $18.0 million and $18.9 million, respectively.
As a result of this transaction, the Company and First Data each have, directly or indirectly, equal voting interests in Apiture. In addition, the Company has analyzed the Contribution Agreement and determined that Apiture is not a variable interest entity. The Company also considered the partners' participating rights under the Contribution Agreement and determined that the joint venture partners have the ability to participate in major decisions, which equates to shared decision making. Accordingly, the Bank has significant influence but does not control the joint venture. Therefore, the joint venture will be accounted for as an equity method investment effective on October 1, 2017 (the date of the transaction). Under the equity method of accounting, the net equity investment of the Bank and the Bank's share of net income or loss from the unconsolidated entity will be reflected in the Company's consolidated balance sheets and the consolidated statements of income.
The preliminary estimated fair value of Apiture at the date of closing was approximately $150 million. Based on the aforementioned cash earnings preference to First Data during 2017 and 2018, the valuation of equity interests received in exchange for contributions by the two initial investors was unequal. As a consequence of this preference the preliminary initial economicits entire interest in ApitureReltco, Inc. and National Assurance Title, Inc. for First Data was equal to 54.7% or $82.0 million, while the Company's preliminary initial economic interest in Apiture was equal to 45.3%, or $68.0$3.0 million.  As the Company had no carrying amount for its contribution in the formationFinalization of Apiture, the preliminary pre-tax results for this transactionReltco's financial records as of the date of closing would be a $68.0 million equity method investment on the balance sheet and a one-time gain of the same amount on the income statement.
The Company is undertaking a comprehensive review of the preliminary fair value estimates to ensure they conform to the measurement and reporting requirements set forth in the accounting guidance for equity method investments and joint ventures, business combinations, and fair value measurements guidance. Determining the fair value of the joint venture and the partners' contributions to the joint venture are complex analyses that involve significant judgment regarding estimates and assumptions. Accordingly, the initial accounting for this transactionAugust 1, 2018, is still in process.  Accordingly, accounting for the financial impact of this divestiture is still in process.  Based on initial estimates, the Company anticipates this sale to result in a net cost of approximately $2.5 million. 


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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following presents management’s discussion and analysis of the financial condition and results of operations of Live Oak Bancshares, Inc. (the “Company” or “LOB”). This discussion should be read in conjunction with the financial statements and related notes included elsewhere in this quarterly report on Form 10-Q and with the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 20162017 (the "2016"2017 Annual Report"). Results of operations for the periods included in this quarterly report on Form 10-Q are not necessarily indicative of results to be obtained during any future period.
Important Note Regarding Forward-Looking Statements
This quarterly report on Form 10-Q contains statements that management believes are forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. These statements generally relate to the Company’s financial condition, results of operations, plans, objectives, future performance or business. They usually can be identified by the use of forward-looking terminology, such as “believes,” “expects,” or “are expected to,” “plans,” “projects,” “goals,” “estimates,” “will,” “may,” “should,” “could,” “would,” “continues,” “intends to,” “outlook” or “anticipates,” or variations of these and similar words, or by discussions of strategies that involve risks and uncertainties. You should not place undue reliance on these statements, as they are subject to risks and uncertainties, including but not limited to, those described in this quarterly report on Form 10-Q.

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When considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements management may make. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information actually known to the Company at the time. Management undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Forward-looking statements contained in this quarterly report on Form 10-Q are based on current expectations, estimates and projections about the Company’s business, management’s beliefs and assumptions made by management. These statements are not guarantees of the Company’s future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in the forward-looking statements. These risks, uncertainties and assumptions include, without limitation:
deterioration in the financial condition of borrowers resulting in significant increases in the Company’s loan and lease losses and provisions for those losses and other adverse impacts to results of operations and financial condition;
changes in Small Business Administration ("SBA") rules, regulations and loan products, including specifically the Section 7(a) program, changes in SBA standard operating procedures or changes to the status of Live Oak Banking Company (the "Bank") as an SBA Preferred Lender;
changes in rules, regulations or procedures for other government loan programs, including those of the United States Department of Agriculture;
changes in interest rates that affect the level and composition of deposits, loan demand and the values of loan collateral, securities, and interest sensitive assets and liabilities;
the failure of assumptions underlying the establishment of reserves for possible loan and lease losses;
changes in loan underwriting, credit review or loss reserve policies associated with economic conditions, examination conclusions, or regulatory developments;
a reduction in or the termination of the Company’s ability to use the technology-based platform that is critical to the success of the Company’s business model, including a failure in or a breach of the Company’s operational or security systems or those of its third party service providers;
changes in financial market conditions, either internationally, nationally or locally in areas in which the Company conducts operations, including reductions in rates of business formation and growth, demand for the Company’s products and services, commercial and residential real estate development and prices, premiums paid in the secondary market for the sale of loans, and valuation of servicing rights;
changes in accounting principles, policies, and guidelines applicable to bank holding companies and banking;
fluctuations in markets for equity, fixed-income, commercial paper and other securities, which could affect availability, market liquidity levels, and pricing;
the effects of competition from other commercial banks, non-bank lenders, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and mutual funds, and other financial institutions operating in the Company’s market area and elsewhere, including institutions operating regionally, nationally and internationally, together with such competitors offering banking products and services by mail, telephone and the Internet;
the Company's ability to attract and retain key personnel;

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changes in governmental monetary and fiscal policies as well as other legislative and regulatory changes, including with respect to SBA lending programs and investment tax credits;
changes in political and economic conditions;
the impact of heightened regulatory scrutiny of financial products and services, primarily led by the Consumer Financial Protection Bureau;
the Company's ability to comply with any requirements imposed on it by regulators, and the potential negative consequences that may result;
operational, compliance and other factors, including conditions in local areas in which the Company conducts business such as inclement weather or a reduction in the availability of services or products for which loan proceeds will be used, that could prevent or delay closing and funding loans before they can be sold in the secondary market;
the effect of any mergers, acquisitions or other transactions, to which the Company or the Bank may from time to time be a party, including management’s ability to successfully integrate any businesses acquired;

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other risk factors listed from time to time in reports that the Company files with the SEC, including in the Company’s 20162017 Annual Report and the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2017;Report; and
the success at managing the risks involved in the foregoing.
Except as otherwise disclosed, forward-looking statements do not reflect: (i) the effect of any acquisitions, divestitures or similar transactions that have not been previously disclosed; (ii) any changes in laws, regulations or regulatory interpretations; or (iii) any change in current dividend or repurchase strategies, in each case after the date as of which such statements are made. All forward-looking statements speak only as of the date on which such statements are made, and the Company undertakes no obligation to update any statement, to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.
Amounts in all tables in Management’s Discussion and Analysis of Financial Condition and Results of Operations have been presented in thousands, except percentage, time period, stock option, share and per share data or where otherwise indicated.
Nature of Operations
LOB is a bank holding company headquartered in Wilmington, North Carolina incorporated under the laws of North Carolina in December 2008. The Company conducts business operations primarily through its commercial bank subsidiary, Live Oak Banking Company (the “Bank”). The Bank was incorporated in February 2008 as a North Carolina-chartered commercial bank. The Bank specializes in providing lending services to small businesses nationwide in targeted industries.nationwide. The Bank identifies and grows within selected industry sectors, or verticals, by leveraging expertise within those industries, and more broadly to select borrowers outside of those industries. A significant portion of the loans originated by the Bank are guaranteed by the SBA under its 7(a) program. In 2010, the Bank formed Live Oak Number One, Inc., a wholly-owned subsidiary, to hold properties foreclosed on by the Bank.
Effective July 29, 2016, the Company elected to become a “financial holding company” within the meaning of the Bank Holding Company Act. A financial holding company, and the nonbank companies under its control, are permitted to engage in activities considered financial in nature or incidental to financial activities. For the Company to become and remain eligible for financial holding company status, it and the Bank must meet certain criteria, including capital, management and Community Reinvestment Act (“CRA”) requirements. The failure to meet such criteria could, depending on which requirements were not met, result in the Company facing restrictions on new financial activities or acquisitions or being required to discontinue existing activities that are not otherwise permissible for bank holding companies.
In 2017, the Bank entered into a joint venture, Apiture LLC (“Apiture”), with First Data Corporation for the purpose of creating next generation technology for financial institutions. In addition to the Bank, the Company owns Live Oak Clean Energy Financing LLC, formed in November 2016, for the purpose of providing financing to entities for renewable energy applications; Live Oak Ventures, Inc. (formerly known as “Canapi, 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, opened in September 2015 for the purpose of providing Company employees and business visitors an on-site restaurant location; Government Loan Solutions, Inc. (“GLS”), a management and technology consulting firm that specializes in the settlement, accounting, and securitization processes for government guaranteed loans, including loans originated under the SBA 7(a) loan program and U.S. Department of Agriculture ("USDA")-guaranteed loans; and 504 Fund Advisors, LLC (“504FA”), which was formed to serve as the investment advisor to The 504 Fund, a closed-end mutual fund organized to invest in SBA section 504 loans.
On February 1, 2017, In addition, the Company completed its acquisition ofowned Reltco Inc. and National Assurance Title, Inc. (collectively referred to as "Reltco" or "title insurance business"“Reltco”), two nationwide title agencies under common control based in Tampa, Florida. until the Company sold Reltco on August 1, 2018. See Note 13 - Subsequent Event for more information.

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The Company generates revenue primarily from the sale of SBA-guaranteed loans and USDA guaranteed Rural Energy for America Program ("REAP") and Business & Industry ("B&I") loans and net interest income. Income from the sale of loans is comprised of loan servicing revenue and revaluation of related servicing assets and net gains on sales of loans. Offsetting these revenues are the cost of funding sources, provision for loan and lease losses, any costs related to foreclosed assets and other operating costs such as salaries and employee benefits, travel, professional services, advertising and marketing and tax expense.
On July 23, 2015 the Company closed on its initial public offering with a secondary offering completed in August of 2017.
Business Outlook
Below is a discussion of management’s current expectations regarding company performance over the near-term based on market conditions, the regulatory environment and business strategies as of the time the Company filed this Report. Actual outcomes and results may differ materially from what is expressed or forecasted in these forward-looking statements. See “Important Note Regarding Forward-Looking Statements” in this Report for more information on forward-looking statements.

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The Company expects the loan and lease portfolio to originate approximately $1.90continue to 2.00 billion in loansgrow and leases andto maintain an effective tax rate of less than 10%in the very low single digit range for the full year of 2017, excluding the effect of the expected one-time gain arising from the recently announced joint venture with First Data.2018.
Results of Operations
Performance Summary
Three months ended SeptemberJune 30, 20172018 compared with three months ended SeptemberJune 30, 20162017
For the three months ended SeptemberJune 30, 2017,2018, the Company reported net income of $12.9$14.3 million, or $0.33$0.34 per diluted share, as compared to $3.5$9.8 million, or $0.10$0.27 per diluted share, for the three months ended SeptemberJune 30, 2016.2017. This increase in net income is primarily due to the following items:
Increased net interest income of $9.4$8.7 million, or 80.8%47.1%, predominately driven by significant growth in the combined held for sale and held for investment loan and lease portfolios;
Increased net gains on sales of loans of $4.9 million, or 26.9%, as a result of higher loan sale volumes partially offset by lower average premiums;
Increased lease income of $1.9 million for lease activities that began in the second quarter of 2017; and
Increased loan servicing revenue of $791 thousand, or 12.8%, attributable to a higher serviced loan portfolio.
Partially offsetting the above factors was a decline in title insurance income of $1.4 million combined with increases in various cost factors as follows: $531 thousand in the provision expense for loan and lease losses, $2.5 million in the loan servicing asset revaluation loss, $4.2 million in salaries and employee benefits, $1.0 million in data processing expense, and $1.7 million in equipment expense.
Six months ended June 30, 2018 compared with six months ended June 30, 2017
For the six months ended June 30, 2018, the Company reported net income of $26.7 million, or $0.64 per diluted share, as compared to $15.9 million, or $0.44 per diluted share, for the six months ended June 30, 2017. This increase in net income is primarily attributable to the following items:
Increased net interest income of $17.5 million, or 51.4%, predominately driven by significant growth in the loans and leases held for sale and held for investment portfolios combined with a much higher net interest margin;
Decreased provision for loan and lease losses of $1.4 million was driven largely by improvements in the performance of the loan portfolio;portfolios;
Increased loan servicing revenue of $630 thousand, or 10.8%, as a result of continued growth in the servicing portfolio due to ongoing loan sales;
Revenues of $2.0 million from the title insurance company subsidiary acquired in the first quarter of 2017;
Increases in other noninterest income of $1.1$1.8 million, or 171.4%, related to the growth in the Company’s renewable energy leasing business and trust management services; and
Decreased income tax expense of $7.6 million, or 297.5%, due to the ongoing operation of the renewable energy leasing business yielding investment tax credits.
Partially offsetting the above factors that contributed to increased levels of net income was a $3.7 million decrease in the net gains on sales of loans, $1.6 million increase in salaries and employee benefits, $1.6 million in equipment expense and $1.5 million in other expenses. The increase in salaries and employee benefits and other expenses were influenced by the growth of the overall business, including the addition of the title insurance subsidiary in the first quarter of 2017, compared to the same period of 2016. Equipment expense increased principally due to higher levels of depreciation related to aircraft acquired in the first quarter of 2017 and solar panels purchased for the renewable energy leasing initiative.
Nine months ended September 30, 2017 compared with nine months ended September 30, 2016
For the nine months ended September 30, 2017, the Company reported net income of $28.8 million, or $0.78 per diluted share, as compared to $8.3 million, or $0.24 per diluted share, for the nine months ended September 30, 2016. This increase in net income is primarily attributable to the following items:
Increased net interest income of $24.8 million, or 82.0%, predominately driven by significant growth in the loans and leases held for sale and held for investment portfolios combined with a significantly higher net interest margin;
Decreased provision for loan and lease losses of $3.2 million principally driven by the one-time transfer of $318.8 million in unguaranteed loans from held for sale to held for investment classification during the second quarter of 2016;
Increased loan servicing revenue of $2.9 million, or 18.2%14.6%, as a result of continued growth in the servicing portfolio due to ongoing loan sales;
Increased net gains on sales of loans of $2.5$10.4 million, or 4.7%27.9%, due to a higher year-to-date sale volume partially offset by a slight decrease in the average net gain per loan sold; and
RevenuesIncreased lease income of $5.8$3.5 million from the title insurance company subsidiary acquiredfor operating lease activities that began in the firstsecond quarter of 2017; and
Decreased income tax expense of $10.3 million, or 159.9%, due to the ongoing operation of the renewable energy leasing business yielding investment tax credits.2017.
Partially offsetting the above factors that contributed to increased levels of net income was a $28.1$3.4 million increase in provision expense for loan and lease losses, $12.6 million increase in noninterest expense, largely comprised of the effects of continued investments to support growing levels of business and business diversification.
Net Interest Incomediversification, an increase of $5.6 million in the loan servicing asset revaluation loss, and Margina $1.5 million decrease in title insurance income.

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Net Interest Income and Margin
Net interest income represents the difference between the income that the Company earns on interest-earning assets and the cost ofit incurs on interest-bearing liabilities. The Company’s net interest income depends upon the volume of interest-earning assets and interest-bearing liabilities and the interest rates that the Company earns or pays on them. Net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as “volume changes.” It is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds, referred to as “rate changes.” Without a branch network, the Bank generates deposits over the Internet and in the community in which it is headquartered. Due to the nature of a branchless bank and the relatively low overhead required for deposit gathering, the rates that the Bank offers are generally above the industry average.
Three months ended SeptemberJune 30, 20172018 compared with three months ended SeptemberJune 30, 20162017
For the three months ended SeptemberJune 30, 2017,2018, net interest income increased $9.4$8.7 million, or 80.8%47.1%, to $21.0$27.0 million compared to $11.6$18.4 million for the three months ended SeptemberJune 30, 2016.2017. This increase was principally due to the significant growth in average interest earning assets, predominately loans and leases, and to a lesser extent by higher yields on these assets which outpaced the growth and change in the cost of interest bearing liabilities.liabilities, primarily related to deposits. Average interest earning assets increased by $746.9 million,$1.26 billion, or 53.8%66.7%, to $2.13$3.14 billion for the three months ended SeptemberJune 30, 2017,2018, compared to $1.39$1.88 billion for the three months ended SeptemberJune 30, 2016,2017, while the yield on average interest earning assets rose sharply by seventy-nineincreased five basis points to 5.24%. The cost of funds on interest bearing liabilities for the three months ended SeptemberJune 30, 20172018 increased twentyfifty-two basis points to 1.43%1.86%, and the average balance of interest bearing liabilities increased by $717.1 million,$1.21 billion, or 56.6%68.2%, over the same period.period in 2017. As indicated in the rate/volume table below, the increase in interest earning assets and corresponding yields outpaced the higher volume of interest bearing liabilities and correspondingalong with an increasing cost of funds, was outpaced by the positive effects of the increased volume of interest earning assets along with much higher yields, resulting in increased interest income of $12.6$16.6 million and increased interest expense of $3.2$8.0 million for the three months ended SeptemberJune 30, 20172018 compared to the three months ended SeptemberJune 30, 2016.2017. For the three months ended SeptemberJune 30, 20172018 compared to the three months ended September 30, 2016, net interest margin increased sharply from 3.32% to 3.91% due to the aforementioned effects.
Nine months ended September 30, 2017 compared with nine months ended September 30, 2016
For the nine months ended SeptemberJune 30, 2017, net interest margin declined from 3.92% to 3.46%, respectively, principally due to the narrowing of the interest rate spread during the quarter. This short-term compression of the spread was largely the result of strategic liquidity initiatives which were accomplished during the first quarter of 2018 which led to much higher levels of investment securities and cash balances held with other banks.
Six months ended June 30, 2018 compared with six months ended June 30, 2017
For the six months ended June 30, 2018, net interest income increased $24.8$17.5 million, or 82.0%51.4%, to $55.1$51.5 million compared to $30.3$34.0 million for the ninesix months ended SeptemberJune 30, 2016.2017. This increase was also principally due to the significant growth in average interest earning assets and to a lesser extent higher yields on these assets outpacing the growth and change in the cost of interest bearing liabilities. Average interest earning assets increased by $702.0 million,$1.12 billion, or 58.4%62.8%, to $1.90$2.91 billion for the ninesix months ended SeptemberJune 30, 20172018 compared to $1.20$1.79 billion for the ninesix months ended SeptemberJune 30, 2016,2017, while the yield on average interest earning assets increased by sixty-fourtwenty-one basis points to 5.12%5.27%. The cost of funds on interest bearing liabilities for the ninesix months ended SeptemberJune 30, 20172018 increased by elevenfifty basis points to 1.34%1.79%, and the average balance of interest bearing liabilities increased by $688.0 million,$1.09 billion, or 63.13%65.0%, during the same period. As indicated in the rate/volume table below, the increase in interest bearing liabilities and corresponding cost of funds was outpaced by the positive effects of the increased volume of interest earning assets along with much higher yields, resulting in increased interest income of $32.6$31.2 million and increased interest expense of $7.8$13.7 million for the ninesix months ended SeptemberJune 30, 2017.2018. For the ninesix months ended SeptemberJune 30, 20172018 compared to the ninesix months ended SeptemberJune 30, 2016,2017, net interest margin increased sharplydeclined from 3.36%3.84% to 3.87%3.58% due to the aforementioned effects.

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Average Balances and Yields. The following table presents information regarding average balances for assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amount of interest expense on average interest-bearing liabilities, and the resulting average yields and costs. The yields and costs for the periods indicated are derived by dividing the income or expense by the average balances for assets or liabilities, respectively, for the periods presented and annualizing that result. Loan fees are included in interest income on loans.
 Three months ended September 30, Three months ended June 30,
 2017 2016 2018 2017
 Average Balance  Interest Average Yield/Rate Average Balance  Interest Average Yield/Rate Average Balance  Interest Average Yield/Rate Average Balance  Interest Average Yield/Rate
Interest earning assets:                        
Interest earning balances in other banks $292,066
 $870
 1.18% $231,238
 $264
 0.45% $505,351
 $2,179
 1.73% $199,904
 $470
 0.94%
Investment securities 73,312
 325
 1.76
 69,869
 337
 1.91
 383,154
 2,530
 2.65
 69,544
 316
 1.82
Loans held for sale 653,342
 9,922
 6.03
 358,867
 4,996
 5.52
 744,789
 11,937
 6.43
 562,984
 8,226
 5.86
Loans and leases held for investment (1)
 1,116,209
 17,055
 6.06
 728,041
 9,965
 5.43
 1,504,738
 24,330
 6.49
 1,050,074
 15,333
 5.86
Total interest earning assets 2,134,929
 28,172
 5.24
 1,388,015
 15,562
 4.45
 3,138,032
 40,976
 5.24
 1,882,506
 24,345
 5.19
Less: allowance for loan and lease losses (19,544)     (12,188)     (27,930)     (18,198)    
Non-interest earning assets 242,014
     146,159
     424,100
     209,484
    
Total assets $2,357,399
     $1,521,986
     $3,534,202
     $2,073,792
    
                        
Interest bearing liabilities:                        
Interest bearing checking $35,127
 $51
 0.58% $
 $
 % $36,926
 $100
 1.09% $40,541
 $57
 0.56%
Savings 196,220
 682
 1.38
 
 
 
 998,521
 4,061
 1.63
 3,809
 12
 1.26
Money market accounts 453,985
 1,303
 1.14
 471,447
 866
 0.73
 151,880
 463
 1.22
 475,265
 1,114
 0.94
Certificates of deposit 1,257,072
 4,722
 1.49
 767,887
 2,823
 1.46
 1,806,063
 9,303
 2.07
 1,219,542
 4,409
 1.45
Total deposits 1,942,404
 6,758
 1.38
 1,239,334
 3,689
 1.18
 2,993,390
 13,927
 1.87
 1,739,157
 5,592
 1.29
Other borrowings 42,219
 389
 3.66
 28,172
 242
 3.41
 3,488
 1
 0.11
 42,765
 361
 3.39
Total interest bearing liabilities 1,984,623
 7,147
 1.43
 1,267,506
 3,931
 1.23
 2,996,878
 13,928
 1.86
 1,781,922
 5,953
 1.34
Non-interest bearing deposits 43,652
     20,742
     53,922
     32,718
    
Non-interest bearing liabilities 22,650
     20,807
     21,217
     22,165
    
Shareholders' equity 306,474
     212,914
     462,185
     236,987
    
Noncontrolling interest 
     17
    
Total liabilities and shareholders' equity $2,357,399
     $1,521,986
     $3,534,202
     $2,073,792
    
                        
Net interest income and interest rate spread   $21,025
 3.81% 
 $11,631
 3.22%   $27,048
 3.38% 
 $18,392
 3.85%
                        
Net interest margin     3.91
     3.32
     3.46
     3.92
                        
Ratio of average interest-earning assets to average interest-bearing liabilities     107.57%     109.51%     104.71%     105.64%
(1)Average loan and lease balances include non-accruing loans.

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 Nine months ended September 30, Six months ended June 30,
 2017 2016 2018 2017
 Average Balance Interest Average Yield/Rate Average Balance Interest Average Yield/Rate Average Balance Interest Average Yield/Rate Average Balance Interest Average Yield/Rate
Interest earning assets:                        
Interest earning balances in other banks $229,074
 $1,682
 0.98% $189,944
 $650
 0.46% $430,107
 $3,394
 1.59% $197,056
 $812
 0.83%
Investment securities 71,319
 964
 1.81
 60,057
 840
 1.86
 283,083
 3,647
 2.60
 70,306
 639
 1.83
Loans held for sale 561,408
 24,679
 5.88
 428,316
 17,666
 5.49
 736,323
 23,085
 6.32
 514,920
 14,777
 5.79
Loans and leases held for investment(1)
 1,041,265
 45,611
 5.86
 522,757
 21,202
 5.40
 1,456,659
 45,873
 6.35
 1,002,932
 28,536
 5.74
Total interest earning assets 1,903,066
 72,936
 5.12
 1,201,074
 40,358
 4.48
 2,906,172
 75,999
 5.27
 1,785,214
 44,764
 5.06
Less: allowance for loan and lease losses (18,652)     (9,463)     (26,085)     (18,199)    
Non-interest earning assets 206,653
     143,876
     410,585
     188,679
    
Total assets $2,091,067
     $1,335,487
     $3,290,672
     $1,955,694
    
                        
Interest bearing liabilities:                        
Interest bearing checking $39,973
 $173
 0.58% $
 $
 % $40,243
 $203
 1.02% $42,436
 $121
 0.57%
Savings 67,395
 693
 1.37
 
 
 
 910,880
 7,179
 1.59
 1,915
 12
 1.26
Money market accounts 469,505
 3,365
 0.96
 423,923
 2,384
 0.75
 160,370
 983
 1.24
 477,393
 2,062
 0.87
Certificates of deposit 1,163,081
 12,662
 1.46
 637,469
 6,992
 1.46
 1,640,479
 15,980
 1.96
 1,115,307
 7,940
 1.44
Total deposits 1,739,954
 16,893
 1.30
 1,061,392
 9,376
 1.18
 2,751,972
 24,345
 1.78
 1,637,051
 10,135
 1.25
Other borrowings 37,736
 985
 3.49
 28,345
 725
 3.41
 7,336
 130
 3.57
 35,457
 596
 3.39
Total interest bearing liabilities 1,777,690
 17,878
 1.34
 1,089,737
 10,101
 1.23
 2,759,308
 24,475
 1.79
 1,672,508
 10,731
 1.29
Non-interest bearing deposits 35,073
     19,314
     55,252
     30,713
    
Non-interest bearing liabilities 22,288
     19,444
     20,125
     22,104
    
Shareholders’ equity 256,016
     206,967
     455,987
     230,369
    
Noncontrolling interest 
     25
     
     
    
Total liabilities and shareholders’ equity $2,091,067
     $1,335,487
     $3,290,672
     $1,955,694
    
                        
Net interest income and interest rate spread   $55,058
 3.78%   $30,257
 3.25%   $51,524
 3.48%   $34,033
 3.77%
                        
Net interest margin     3.87
     3.36
     3.58
     3.84
                        
Ratio of average interest-earning assets to average interest-bearing liabilities     107.05%     110.22%     105.32%     106.74%
(1)Average loan and lease balances include non-accruing loans.

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Rate/Volume Analysis. The following table sets forth the effects of changing rates and volumes on net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, increases or decreases attributable to changes in both rate and volume that cannot be segregated have been allocated proportionally based on the changes due to rate and the changes due to volume.
Three months ended September 30, Nine months ended September 30,Three months ended June 30, Six months ended June 30,
2017 vs. 2016 2017 vs. 20162018 vs. 2017 2018 vs. 2017
Increase (Decrease) Due to Increase (Decrease) Due toIncrease (Decrease) Due to Increase (Decrease) Due to
Rate Volume Total Rate Volume TotalRate Volume Total Rate Volume Total
Interest income:                      
Interest earning balances in other banks$481
 $125
 $606
 $821
 $211
 $1,032
$691
 $1,018
 $1,709
 $1,182
 $1,400
 $2,582
Investment securities(28) 16
 (12) (31) 155
 124
466
 1,748
 2,214
 670
 2,338
 3,008
Loans held for sale640
 4,286
 4,926
 1,343
 5,670
 7,013
926
 2,785
 3,711
 1,660
 6,648
 8,308
Loans and leases held for investment1,468
 5,622
 7,090
 2,538
 21,871
 24,409
2,002
 6,995
 8,997
 3,738
 13,599
 17,337
Total interest income2,561
 10,049
 12,610
 4,671
 27,907
 32,578
4,085
 12,546
 16,631
 7,250
 23,985
 31,235
Interest expense:                      
Interest bearing checking
 51
 51
 
 173
 173
50
 (7) 43
 91
 (9) 82
Savings
 682
 682
 
 693
 693
459
 3,590
 4,049
 737
 6,430
 7,167
Money market accounts478
 (41) 437
 689
 292
 981
221
 (872) (651) 577
 (1,656) (1,079)
Certificates of deposit81
 1,818
 1,899
 (74) 5,744
 5,670
2,323
 2,571
 4,894
 3,613
 4,427
 8,040
Other borrowings22
 125
 147
 26
 234
 260
(177) (183) (360) 13
 (479) (466)
Total interest expense581
 2,635
 3,216
 641
 7,136
 7,777
2,876
 5,099
 7,975
 5,031
 8,713
 13,744
Net interest income$1,980
 $7,414
 $9,394
 $4,030
 $20,771
 $24,801
$1,209
 $7,447
 $8,656
 $2,219
 $15,272
 $17,491
Provision for Loan and Lease Losses
The provision for loan and lease losses represents the amount necessary to be charged against the current period’s earnings to maintain the allowance for loan and lease losses at a level that is appropriate in relation to the estimated losses inherent in the loan and lease portfolio. A number of factors are considered in determining the required level of loan and lease loss reserves and the provision required to achieve the appropriate reserve level, including loan and lease growth, credit risk rating trends, nonperforming loan and lease levels, delinquencies, loan and lease portfolio concentrations and economic and market trends.
The provision for loan and lease losses for the third quarter of 2017 was $2.4 million compared to $3.8 million for the same period in 2016, a decrease of $1.4 million, or 36.3%, largely driven by lower levels of specific reserve requirements. For the nine months ended September 30, 2017 the provision was $5.5 million compared to $8.7 million for the same period in 2016, a decrease of $3.2 million, or 36.9%. The decrease in the provision for loan and lease losses for the nine months ended September 30, 2017 was principally driven by the one-time transfer in the second quarter of 2016 of $318.8 million in unguaranteed loans and leases from being classified as held for sale to held for investment. This reclassification resulted in a $4.0 million increase in the provision for loan and lease losses during the second quarter of 2016. Partially offsetting the effects of the 2016 loan reclassification were additional reserves recorded to accommodate robust loan and lease growth in 2017.
Loans and leases held for investment of $1.17 billion as of September 30, 2017 increased by $402.9 million, or 52.5%, compared to September 30, 2016. This growth was fueled by strong loan origination volume of $1.45 billion in the first three quarters of 2017.
Net charge-offs were $959 thousand, or 0.34% of average quarterly loans and leases held for investment on an annualized basis, for the three months ended September 30, 2017, compared to net charge-offs of $937 thousand, or 0.51%, for the three months ended September 30, 2016. Net charge-offs for the first nine months of 2017 and 2016 totaled $2.7 million and $929 thousand, respectively. Year-to-date net charge-offs as a percentage of year-to-date average loans held for investment were 0.26% and 0.18% at September 30, 2017 and 2016, respectively. Net charge-offs are a key element of historical experience in the Company's estimation of the allowance for loan and lease losses.
In addition, at September 30, 2017, nonperforming loans and leases not guaranteed by the SBA totaled $3.3 million, which was 0.28% of the held-for-investment loan and lease portfolio compared to $3.4 million, or 0.44%, of loans and leases held for investment at September 30, 2016.

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Losses inherent in loan relationships are mitigated if a portion of the loan is guaranteed by the SBA or USDA. A typical SBA 7(a) loan carries a 75% guarantee while USDA guarantees range from 60% to 80% depending on loan size, which reducesserve to reduce the risk profile of these loans. The Company believes that its focus on compliance with regulations and guidance from the SBA and USDA are key factors to managing this risk.
The provision for loan and lease losses for the second quarter of 2018 was $2.1 million compared to $1.6 million for the same period in 2017, an increase of $531 thousand, or 34.1%. For the six months ended June 30, 2018 the provision was $6.5 million compared to $3.1 million for the same period in 2017, an increase of $3.4 million, or 112.1%. The increase in the provision for loan and lease losses for both quarter over quarter and year to year periods was largely driven by overall loan and lease growth and higher levels of loans with classified risk grades.
Loans and leases held for investment of $1.53 billion as of June 30, 2018 increased by $449.9 million, or 41.5%, compared to June 30, 2017. This growth was fueled by strong loan origination volumes and continued disbursements for loans in the construction portfolio over the past year in conjunction with the Company's prior decision to retain a greater portion of loans on its consolidated balance sheet.
Net charge-offs were $787 thousand, or 0.21% of average quarterly loans and leases held for investment on an annualized basis, for the three months ended June 30, 2018, compared to net charge-offs of $191 thousand, or 0.07%, for the three months ended June 30, 2017. Net charge-offs for the first six months of 2018 and 2017 totaled $1.3 million and $1.7 million, respectively. Year to date net charge-offs as a percentage of year to date average loans held for investment were 0.09% and 0.17% at June 30, 2018 and 2017, respectively. Net charge-offs are a key element of historical experience in the Company's estimation of the allowance for loan and lease losses.
In addition, at June 30, 2018, nonperforming loans and leases not guaranteed by the SBA totaled $11.5 million, which was 0.75% of the held-for-investment loan and lease portfolio compared to $3.6 million, or 0.33% of loans and leases held for investment at June 30, 2017.

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Noninterest Income
Noninterest income is principally comprised of net gains from the sale of SBA and USDA-guaranteed loans along with loan servicing revenue and revaluation. Revenue from the sale of loans depends upon the volume, maturity structure and rates of underlying loans as well as the pricing and availability of funds in the secondary markets prevailing in the period between completed loan funding and closing of sale. In addition, the loan servicing revaluation is significantly impacted by changes in market rates and other underlying assumptions such as prepayment speeds and default rates. Noninterest income also commonly includes lease income, construction supervision fee income and title insurance income. Other less common elements of noninterest income include nonrecurring gains and losses on investments.
The following table shows the components of noninterest income and the dollar and percentage changes for the periods presented.
Three Months Ended
September 30,
 Increase (Decrease)Three Months Ended
June 30,
 Increase (Decrease)
2017 2016 Amount Percent2018 2017 Amount Percent
Noninterest income              
Loan servicing revenue$6,490
 $5,860
 $630
 10.75 %$6,965
 $6,174
 $791
 12.81 %
Loan servicing asset revaluation(3,691) (3,421) (270) 7.89
(3,670) (1,164) (2,506) (215.29)
Net gains on sales of loans18,148
 21,833
 (3,685) (16.88)23,061
 18,176
 4,885
 26.88
Gain on sale of securities available-for-sale
 1
 (1) (100.00)
Lease income1,920
 9
 1,911
 21,233.33
Construction supervision fee income362
 502
 (140) (27.89)597
 286
 311
 108.74
Title insurance income1,968
 
 1,968
 100.00
996
 2,397
 (1,401) (58.45)
Other noninterest income1,783
 657
 1,126
 171.39
744
 789
 (45) (5.70)
Total noninterest income$25,060
 $25,432
 $(372) (1.46)%$30,613
 $26,667
 $3,946
 14.80 %
Nine Months Ended
September 30,
 Increase (Decrease)Six Months Ended
June 30,
 Increase (Decrease)
2017 2016 Amount Percent2018 2017 Amount Percent
Noninterest income              
Loan servicing revenue$18,587
 $15,725
 $2,862
 18.20 %$13,863
 $12,097
 $1,766
 14.60 %
Loan servicing asset revaluation(6,864) (5,051) (1,813) 35.89
(8,758) (3,173) (5,585) (176.02)
Net gains on sales of loans55,276
 52,813
 2,463
 4.66
47,479
 37,128
 10,351
 27.88
Gain on sale of investment securities available-for-sale
 1
 (1) (100.00)
Lease income3,528
 9
 3,519
 39,100.00
Construction supervision fee income1,077
 1,799
 (722) (40.13)1,376
 715
 661
 92.45
Title insurance income5,803
 
 5,803
 100.00
2,296
 3,835
 (1,539) (40.13)
Other noninterest income3,601
 1,925
 1,676
 87.06
1,585
 1,809
 (224) (12.38)
Total noninterest income$77,480
 $67,212
 $10,268
 15.28 %$61,369
 $52,420
 $8,949
 17.07 %
For the three months ended SeptemberJune 30, 2017,2018, noninterest income decreasedincreased by $372 thousand,$3.9 million, or 1.5%14.8%, compared to the three months ended SeptemberJune 30, 2016.2017. The declineincrease from the prior year is primarily the result of net gains on sales of loans decreasing $3.7increasing $4.9 million to $18.1$23.1 million in the thirdsecond quarter of 20172018 compared to $21.8$18.2 million in the thirdsecond quarter of 20162017, as a function of reducedhigher volume of guaranteed loansloan sales which was partially offset by an improvement in thea lower average net gain on sale of guaranteed loans. The latter is primarily a function of the mix of loans sold. Lease income of $1.9 million related to renewable energy initiatives that began in the second quarter of 2017 and increased loan servicing revenues of $791 thousand arising from growth in the serviced loan portfolio also contributed to higher levels of noninterest income in the second quarter of 2018. Partially offsetting the effectsoverall increase in noninterest income was a higher negative loan servicing revaluation adjustment of lower gains on sales of loans were increased servicing revenue of $630 thousand,$2.5 million and a decrease in title insurance income of $2.0 million from the acquisition of a nationwide title insurance business on February 1, 2017 and increased other noninterest income of $1.1$1.4 million. The increase in other noninterest income was primarily comprised of $682 thousand of operating lease income from renewable energy assets and trust management income of $236 thousand.
For the ninesix months ended SeptemberJune 30, 2017,2018, noninterest income increased by $10.3$8.9 million, or 15.3%17.1%, compared to the ninesix months ended SeptemberJune 30, 2016.2017. Increases in noninterest income were primarily the result of higher year-to-date levels in the serviced loan portfolio and the volume of loans sold in the secondary market which generated $2.9$1.8 million of increased servicing revenue and $2.5$10.4 million of increased net gains on sale of loans. Also drivingcontributing to increased levels of noninterest income was $5.8$3.5 million in title insurance revenue from the acquisition of a nationwide title insurance business in early 2017 and increased other

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noninterest income of $1.7 million. The increase in other noninterest income was primarily comprised of $691 thousand of operating lease income from renewable energy assets and trust management income of $845 thousand.income. Partly offsetting the overall increase in noninterest income was a higher negative loan servicing revaluation adjustment of $1.8$5.6 million and a decline in title insurance income of $1.5 million.

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The following table reflects loan and lease production, sales of guaranteed loans and the aggregate balance in guaranteed loans sold. These components are key drivers of the Company's noninterest income.
Three months ended September 30, Three months ended
June 30,
Three months ended
June 30,
 Three months ended
March 31,
2017 2016 2017 20162018 2017 2018 2017
Amount of loans and leases originated$395,682
 $381,050
 $586,471
 $356,865
$491,797
 $586,471
 $397,559
 $468,663
Guaranteed portions of loans sold163,843
 210,610
 203,714
 135,555
295,216
 203,714
 247,243
 208,715
Outstanding balance of guaranteed loans sold (1)
2,584,163
 2,102,468
 2,521,506
 1,970,908
2,951,379
 2,521,506
 2,812,108
 2,410,791
Nine months ended September 30, For years ended December 31,Six months ended June 30, For years ended December 31,
2017 2016 2016 2015 2014 20132018 2017 2017 2016 2015 2014
Amount of loans and leases originated$1,450,816
 $1,022,445
 $1,537,010
 $1,158,640
 $848,090
 $498,752
$889,356
 $1,055,134
 $1,934,238
 $1,537,010
 $1,158,640
 $848,090
Guaranteed portions of loans sold576,272
 501,808
 761,933
 640,886
 433,912
 339,342
542,459
 412,429
 787,926
 761,933
 640,886
 433,912
Outstanding balance of guaranteed loans sold (1)
2,584,163
 2,102,468
 2,278,618
 1,779,989
 1,302,828
 1,005,764
2,951,379
 2,521,506
 2,680,641
 2,278,618
 1,779,989
 1,302,828
(1)This represents the outstanding principal balance of guaranteed loans serviced, as of the last day of the applicable period, which have been sold into the secondary market.
Changes in various components of noninterest income are discussed in more detail below.
Loan Servicing Revenue: While portions of the loans that the Bank originates are sold and generate gain on sale revenue, servicing rights for all loans that the Bank originates, including loans sold, are retained by the Bank. In exchange for continuing to service loans that are sold, the Bank receives fee income represented in loan servicing revenue equivalent to one percent of the outstanding balance of SBA loans sold and 0.40% of the outstanding balance of USDA loans sold. In addition, the cost of servicing sold loans is approximately 0.40% of the balance of the loans sold, which is included in the loan servicing revaluation computations. Unrecognized servicing revenue is reflected in a servicing asset recorded on the balance sheet. Revenues associated with the servicing of loans are recognized over the expected life of the loan through the income statement, and the servicing asset is reduced as this revenue is recognized. For three and ninesix months ended SeptemberJune 30, 2017,2018, loan servicing revenue increased $630$791 thousand, or 10.8%12.8%, and $2.9$1.8 million, or 18.2%14.6%, respectively, as compared to the three and ninesix months ended SeptemberJune 30, 2016,2017, as a result of an increase in the average outstanding balance of guaranteed loans sold. At SeptemberJune 30, 2017,2018, the outstanding balance of government guaranteed loans sold in the secondary market was $2.58$2.95 billion. At SeptemberJune 30, 2016,2017, the outstanding balance of SBA guaranteed loans sold was $2.10$2.52 billion.
Loan Servicing Revaluation: The Company revalues its serviced loan portfolio at least quarterly. The revaluation considers the amortization of the portfolio, current market conditions for loan sale premiums, and current prepayment speeds. For the three months ended SeptemberJune 30, 2017,2018, there was a net negative loan servicing revaluation adjustment of $3.7 million compared to a net negative revaluation adjustment of $3.4$1.2 million for the three months ended SeptemberJune 30, 2016.2017. For the ninesix months ended SeptemberJune 30, 2017,2018, there was a net negative loan servicing revaluation adjustment of $6.9$8.8 million compared to a net negative revaluation adjustment of $5.1$3.2 million for the ninesix months ended SeptemberJune 30, 2016.2017. The higher negative loan servicing revaluation amount for the thirdsecond quarter of 20172018 as compared to the thirdsecond quarter of 20162017 was principally driven by amortization of the serviced portfolio during that period partially offset by improvements in the secondary market. The higher year-to-date negative loan servicing revaluation amount as compared to the same period in 2016 was principally driven by amortization of the serviced portfolio combined with decreases in the secondary market for guaranteed portions of 7(a) loans.period.

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Net Gains on Sale of Loans: For the three and ninesix months ended SeptemberJune 30, 2017,2018, net gains on sales of loans decreased $3.7increased $4.9 million, or 16.9%26.9%, and increased $2.5$10.4 million, or 4.7%27.9%, respectively, compared to the three and ninesix months ended SeptemberJune 30, 2016.2017. For the three months ended SeptemberJune 30, 2017, the volume of guaranteed loans sold decreased $46.8 million, or 22.2%, to $163.8 million from $210.6 million for the three months ended September 30, 2016. This decline in guaranteed sale volume was principally the result of a decrease in the percentage of loans that were fully funded and thereby eligible for sale at closing arising largely from seasonality in our renewable energy vertical. For the nine months ended September 30, 2017,2018, the volume of guaranteed loans sold increased $74.5$91.5 million, or 14.8%44.9%, to $576.3$295.2 million from $501.8$203.7 million for the ninethree months ended SeptemberJune 30, 2016.2017. For the six months ended June 30, 2018, the volume of guaranteed loans sold increased $130.0 million, or 31.5%, to $542.5 million from $412.4 million for the six months ended June 30, 2017. The volume-driven increases in the year-to-date net gain on loan sale comparisons were partially offset by lower average premiums paid in the secondary market.market primarily due to changes in the mix of loans sold. The average net gain on sale of loans for the three and ninesix months ended SeptemberJune 30, 20172018 was $111lower at $83 thousand and $97$90 thousand of revenue for each $1 million in loans sold, respectively, compared to $104$92 thousand and $105$91 thousand of revenue for each $1 million in loans sold for the three and ninesix months ended SeptemberJune 30, 2016. The lower average premiums recorded in 2017 were driven by increased USDA guaranteed loan sales which commonly receive lower premiums than SBA guaranteed loan sales.2017.

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Noninterest Expense
Noninterest expense comprises all operating costs of the Company, such as employee related costs, travel, professional services, advertising and marketing expenses, exclusive of interest and income tax expense.
The following table shows the components of noninterest expense and the related dollar and percentage changes for the periods presented.
 Three Months Ended
September 30,
 Increase (Decrease)
 2017 2016 Amount Percent
Noninterest expense       
Salaries and employee benefits$19,037
 $17,471
 $1,566
 8.96%
Non-staff expenses:       
Travel expense2,289
 2,218
 71
 3.20
Professional services expense1,068
 907
 161
 17.75
Advertising and marketing expense1,516
 1,097
 419
 38.20
Occupancy expense1,473
 1,058
 415
 39.22
Data processing expense1,982
 1,252
 730
 58.31
Equipment expense2,228
 611
 1,617
 264.65
Other loan origination and maintenance expense1,601
 806
 795
 98.64
FDIC insurance858
 210
 648
 308.57
Title insurance closing services expense687
 
 687
 100.00
Other expense3,117
 1,588
 1,529
 96.28
Total non-staff expenses16,819
 9,747
 7,072
 72.56
Total noninterest expense$35,856
 $27,218
 $8,638
 31.74%

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 Three Months Ended
June 30,
 Increase (Decrease)
 2018 2017 Amount Percent
Noninterest expense       
Salaries and employee benefits$22,146
 $17,968
 $4,178
 23.25 %
Non-staff expenses:       
Travel expense2,041
 2,148
 (107) (4.98)
Professional services expense1,119
 1,424
 (305) (21.42)
Advertising and marketing expense1,868
 1,976
 (108) (5.47)
Occupancy expense1,882
 1,350
 532
 39.41
Data processing expense2,906
 1,858
 1,048
 56.40
Equipment expense3,368
 1,703
 1,665
 97.77
Other loan origination and maintenance expense1,414
 981
 433
 44.14
FDIC insurance1,010
 724
 286
 39.50
Title insurance closing services expense372
 785
 (413) (52.61)
Other expense2,704
 2,383
 321
 13.47
Total non-staff expenses18,684
 15,332
 3,352
 21.86
Total noninterest expense$40,830
 $33,300
 $7,530
 22.61 %
Nine Months Ended
September 30,
 Increase (Decrease)Six Months Ended
June 30,
 Increase (Decrease)
2017 2016 Amount Percent2018 2017 Amount Percent
Noninterest expense              
Salaries and employee benefits$55,687
 $45,875
 $9,812
 21.39 %$42,355
 $36,650
 $5,705
 15.57 %
Non-staff expenses:              
Travel expense6,035
 6,394
 (359) (5.61)3,884
 3,746
 138
 3.68
Professional services expense4,228
 2,345
 1,883
 80.30
2,417
 3,160
 (743) (23.51)
Advertising and marketing expense4,977
 3,425
 1,552
 45.31
3,530
 3,461
 69
 1.99
Occupancy expense4,018
 3,306
 712
 21.54
3,739
 2,545
 1,194
 46.92
Data processing expense5,536
 3,864
 1,672
 43.27
5,743
 3,554
 2,189
 61.59
Equipment expense5,005
 1,696
 3,309
 195.11
6,445
 2,777
 3,668
 132.08
Other loan origination and maintenance expense3,587
 2,001
 1,586
 79.26
2,743
 1,986
 757
 38.12
FDIC insurance2,308
 507
 1,801
 355.23
1,582
 1,450
 132
 9.10
Title insurance closing services expense1,877
 
 1,877
 100.00
798
 1,190
 (392) (32.94)
Other expense8,883
 4,648
 4,235
 91.11
5,666
 5,766
 (100) (1.73)
Total non-staff expenses46,454
 28,186
 18,268
 64.81
36,547
 29,635
 6,912
 23.32
Total noninterest expense$102,141
 $74,061
 $28,080
 37.91 %$78,902
 $66,285
 $12,617
 19.03 %
Total noninterest expense for the three and ninesix months ended SeptemberJune 30, 20172018 increased $8.6$7.5 million, or 31.7%22.6%, and $28.1$12.6 million or 37.9%19.0%, respectively, compared to the same periods in 2016.2017. The increase in noninterest expense was predominately impacted byprincipally comprised of increased personnel, occupancy, data processing and equipment expense and other expenses primarily driven by the significant growth of the Company's core business. Changes in various components of noninterest expense are discussed below.

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Salaries and employee benefits: Total personnel expense for the three and ninesix months ended SeptemberJune 30, 20172018 increased by $1.6$4.2 million, or 9.0%23.3%, and $9.8$5.7 million, or 21.4%15.6%, respectively, compared to the same periods in 2016. A significant driver2017. The primary drivers for this increase was the acquisition of a nationwide title insurance business on February 1, 2017 with 54 full-time and 5 part-time employees. Also contributing to the growth in personnel expense was continued investment in human capital to support the growing loan and lease production from new and existing verticals.verticals partially offset by transferring the recognition of costs associated with software development to data processing expense with the formation of Apiture. Total full-time equivalent employees increased from 400517 at SeptemberJune 30, 20162017 to 530522 at SeptemberJune 30, 2017.2018. Salaries and employee benefits expense included $2.0$2.2 million and $4.1$1.9 million of stock basedstock-based compensation in the three months ended SeptemberJune 30, 20172018 and 2016,2017, respectively and $6.2$4.6 million and $7.6$3.9 million for the ninesix months ended SeptemberJune 30, 20172018 and 2016,2017, respectively. Expenses related to the employee stock purchase program, stock grants, stock option compensation and restricted stock expense are all considered stock basedstock-based compensation.
Of the total stock basedstock-based compensation, $286$357 thousand for the thirdsecond quarter of 2017 and $1.0 million$709 thousand for the first nine monthshalf of 2018 and $378 thousand for the second quarter and $724 thousand for the first half 2017, respectively, included in salaries and employee benefits iswere related to restricted stock unit ("RSU") awards with a market price condition of $34 per share for key employee retention with an effective grant date of May 24, 2016. See Note 10 - Stock Plans in the Notes to the Unaudited Consolidated Financial Statements in our quarterly report on Form 10-Q for the period ended March 31, 2016, for more information.

Professional servicesOccupancy expense: For the three and ninesix months ended SeptemberJune 30, 2017,2018, total professional servicesoccupancy expense increased $161$532 thousand, or 17.8%39.4%, and $1.9$1.2 million, or 80.3%46.9%, respectively, compared to the same periods in 2016. The primary drivers of2017. This increase was driven by continued investment in facilities and infrastructure to support the year over year increase were advisory, consulting, and due diligence expenses related to the February 2017 acquisition of a title insurance business.
Advertising and marketing expense: For the three and nine months ended September 30, 2017, total advertising and marketing expense increased $419 thousand, or 38.2%, and $1.6 million, or 45.3%, respectively, compared to the same periods in 2016. The primary driver of the increase in advertising and marketing expense was the cost of growing brand recognition in new and existing verticals and launching a new deposit platform.Company's growth initiatives.
Data processing expense: For the three and ninesix months ended SeptemberJune 30, 2017,2018, total data processing expense increased $730 thousand,$1.1 million, or 58.3%56.4%, and $1.7$2.2 million, or 43.3%61.6%, respectively, compared to the same periods in 2016. The primary driver of the2017. Largely influencing this increase in data processing expense was the growth in our loancontribution of software development resources to Apiture which transferred the recognition of costs associated with the Company’s technology development from salaries and deposit portfolios and the development of a new deposit platform.employee benefits to data processing.
Equipment expense: For the three and ninesix months ended SeptemberJune 30, 2017,2018, the total costs associated with equipment increased $1.6$1.7 million, or 264.6%97.8%, and $3.3$3.7 million, or 195.1%, respectively, compared to the same period in 2016. A major factor behind

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this increase was the higher level of depreciation related to the first quarter addition of two new aircraft combined with useful lives being shortened for existing aircraft as well as for solar panels acquired to meet leasing commitments.
FDIC insurance: For the three and nine months ended September 30, 2017, total Federal Deposit Insurance Corporation (FDIC) insurance expense increased $648 thousand, or 308.6%, and $1.8 million, or 355.2%132.1%, respectively, compared to the same periods in 2016. This2017. A major factor behind this increase was the resultdepreciation of revised premium requirements of all FDIC-insured financial institutionssolar panels arising from operating lease activities that began in the latter partsecond quarter of 2016 along with significantly higher deposit levels.
Title insurance closing services expense: With the first quarter 2017 acquisition of a nationwide title insurance company, this is a new expense category. This category reflects the cost of closing services such as notary and abstracting in the delivery of title insurance agency products. For the three and nine months ended September 30, 2017, total title insurance closing services expense was $687 thousand and $1.9 million, respectively.
Other expense: For the three and nine months ended September 30, 2017, the total costs associated with other expenses increased $1.5 million, or 96.3%, and $4.2 million, or 91.1%, respectively, compared to the same periods in 2016. The quarter-over-quarter increase in other expenses was predominately comprised of costs associated with support expenses and infrastructure driven by business growth and an increase in charitable contributions. The year-over-year increase in other expense was comprised predominately of charitable initiatives, costs associated with the newly acquired title company, and a first quarter 2017 loss incurred upon the trade-in of an existing aircraft.2017.
Income Tax Expense
The effective tax rates for the three and ninesix months ended SeptemberJune 30, 2017 were (64.8)%2018 was 3.3% and (15.5)%2.9%, respectively, compared to the effective rates of 42.4%4.0% and 43.7%7.0% for the three and ninesix months ended SeptemberJune 30, 2016,2017, respectively. The negative effective rates of (64.8)% and (15.5)% for the three and nine-month periods ended September 30, 2017tax rate principally reflected an increase in anticipated investment in renewable energy assets generatingthe generation of investment tax credits. Ascredits by the lessor of these assets,solar panel leasing activity under the Company is accomplishing broaderCompany’s strategic initiatives in the renewable energy sector. The year to date tax rate also benefited from the first quarter adoption of a new accounting pronouncement related to the treatment of share based compensation issued by the Financial Accounting Standards Board that was effective January 1, 2017; "Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting," also referred to as ASU 2016-09.
Discussion and Analysis of Financial Condition
SeptemberJune 30, 20172018 vs. December 31, 20162017
Total assets at SeptemberJune 30, 20172018 were $2.43$3.47 billion, an increase of $676.9$714.5 million, or 38.6%25.9%, compared to total assets of $1.76$2.76 billion at December 31, 2016.2017. The growth in total assets was principally driven by the following:

Increased cash and due from banks largely due to the successful secondary offering completed in August of 2017 of $113.1 million andsignificant growth from deposit gathering campaigns generating $527.8that generated $709.0 million in new deposits;deposits and were designed to strengthen the liquidity profile;
Increased investment in securities available-for-sale of $291.6 million which was driven by the Company's strategic plan to enhance contingency funding sources;
Growth in loan and lease originationsportfolio of $267.4 million due to newly originated loans combined with longer retention times of loans held for sale, comprised largely of loans intentionally held for longer periodssale; and those in newer verticals which require a period of loan advances to become fully funded prior to being sold;
Growth inIncreased premises and equipment of $56.0 million related primarily to constructionexpansion of a new aircraft hangar, the addition of two new aircraft in replacement of two older onesfacilities to accommodate Company growth and the addition of solar panels to meet leasing commitments;
Increased other assets largely related to:
goodwill and intangibles generated by the first quarter acquisition of Reltco, and
income taxes receivable arising from investment tax credits generated by investment in solar panels classified in premises and equipment in which the Company is the lessor.

commitments.
Cash and cash equivalents were $260.9$392.9 million at SeptemberJune 30, 2017,2018, an increase of $22.9$97.7 million, or 9.6%33.1%, compared to $238.0$295.3 million at December 31, 2016.2017. This increase primarily reflected the results of a successful deposit gathering campaign combined withcampaigns and the net proceeds from the Company’s secondary capital raise in the third quarter.sale of loans.
Total investment securities increased $5.5$291.6 million during the first ninesix months of 2017,2018, from $71.1$93.4 million at December 31, 2016,2017, to $76.6$384.9 million at SeptemberJune 30, 2017,2018, an increase of 7.8%312.3%. The Company increased its investment securities during the first and second quarter of 2018 as part of the aforementioned strategic plan to enhance contingent funding sources. The investment portfolio is comprised of USU.S. government agency securities, residential mortgage-backed securities and a mutual fund.

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Loans held for sale increased $298.3$77.1 million, or 75.7%11.3%, during the first ninesix months of 2017,2018, from $394.3$680.5 million at December 31, 2016,2017, to $692.6$757.5 million at SeptemberJune 30, 2017.2018. The increase was primarily the result of strong growth in loan origination activities throughout 2017 and the strategy to enhance interest income by increasing the retention time of guaranteed loans along with growth in certain loans that take time to fully fund.
Loans and leases held for investment increased $262.3$190.4 million, or 28.9%14.2%, during the first ninesix months of 2017,2018, from $907.6 million$1.34 billion at December 31, 2016,2017, to $1.17$1.53 billion at SeptemberJune 30, 2017.2018. The increase was primarily the result of robustcontinued loan and lease growth from origination activities during the first three quartersand second quarter of 20172018 combined with greater retention of loans on the consolidated balance sheet.
Premises and equipment, net increased $64.6$56.0 million, or 99.9%31.3%, during the first ninesix months of 2017.2018. This increase was primarily driven by construction of a new aircraft hangar and the replacement of two older aircraft with two new ones better suitedfacilities to service the Company's growing nationwide customer baseaccommodate Company growth and the addition of solar panels to meet leasing commitments.
ServicingOther assets increased $1.4$6.9 million, or 2.7%5.1%, during the first ninesix months of 2017,2018, from $52.0$134.2 million at December 31, 2016,2017 to $53.4$141.1 million at SeptemberJune 30, 2017. The increase in servicing assets is primarily the result of loan sales outpacing the amortization of the existing serviced portfolio.
Other assets increased $28.1 million, or 76.1%, during the first nine months of 2017, from $37.0 million at December 31, 2016 to $65.2 million at September 30, 2017.2018. The increase in other assets was primarily driven by the recognitioncomprised of $8.9$3.6 million in income taxesaccrued interest receivable arising fromand a $3.0 million cost method investment tax credits generated from the investmentby Canapi in solar panel leasing activities combined with the first quarter 2017 acquisition of the nationwide title insurance business. As a result of the title insurance acquisition, other assets includes goodwill and intangible assets of $7.3 million and $5.3 million, respectively.financial services startup.
Total deposits were $2.01$2.97 billion at SeptemberJune 30, 2017,2018, an increase of $527.8$709.0 million, or 35.5%31.4%, from $1.49$2.26 billion at December 31, 2016.2017. The increase in deposits was driven by a new deposit savings product andthe combined success of deposit gathering campaigns to support the growth in loan and lease originations.originations and strategic liquidity initiatives.
Long term borrowings decreased $971 thousand,$23.2 million, or 3.5%87.3%, during the first ninesix months of 2017,2018, from $27.8$26.6 million at December 31, 20162017 to $26.9$3.4 million at SeptemberJune 30, 2017.2018. The decrease in long term borrowings was primarily the result of significant debt reduction following a successfulreductions during the first quarter of 2018, largely funded by capital raiseraised in the third quarter.quarter of 2017.
Other liabilities increased $8.3Shareholders’ equity at June 30, 2018 was $463.0 million or 42.8%, during the first nine months of 2017, from $19.5as compared to $436.9 million at December 31, 2016 to $27.8 million at September 30, 2017. The increase in other liabilities was principally driven by a $4.7 million earn-out contingent liability related to the acquisition of the title insurance business and an increase in accrued expenses of $5.7 million in support of ongoing business growth. This was partially offset by a decrease in income taxes payable of $2.1 million.
Shareholders’ equity at September 30, 2017 was $364.6 million as compared to $222.8 million at December 31, 2016. The book value per share was $9.15$11.55 at SeptemberJune 30, 20172018 compared to a book value per share of $6.51$10.95 at December 31, 2016.2017. Average equity to average assets was 12.2%13.9% for the ninesix months ended SeptemberJune 30, 20172018 compared to 14.6%13.5% for the year ended December 31, 2016.2017. The increase in shareholders’ equity was principally the result of the issuance of 5.2 million additional common shares with net proceeds of $113.1 million and net income to common shareholders for the ninesix months ended SeptemberJune 30, 20172018 of $28.8$26.7 million combined with stock basedstock-based compensation expense of $5.7$4.6 million, and $565 thousand related to the issuance of stock in the title insurance company acquisition, partially offset by cash withheld in lieuother comprehensive losses of issuing restricted stock upon vesting of $4.8$4.0 million and $2.6$2.4 million in dividends.
Asset Quality
Management considers asset quality to be of primary importance. A formal loan review function, independent of loan origination, is used to identify and monitor problem loans. This function reports directly to the Audit & Risk Committee of the Board of Directors.
Nonperforming Assets
The Bank places loans on nonaccrual status when they become 90 days past due as to principal or interest payments, or prior to that if management has determined based upon current information available to them that the timely collection of principal or interest is not probable. When a loan is placed on nonaccrual status, any interest previously accrued as income but not actually collected is reversed and recorded as a reduction of loan interest and fee income. Typically, collections of interest and principal received on a nonaccrual loan are applied to the outstanding principal as determined at the time of collection of the loan.

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Troubled debt restructurings occur when, because of economic or legal reasons pertaining to the debtor’s financial difficulties, debtors are granted concessions that would not otherwise be considered. Such concessions would include, but are not limited to, the transfer of assets or the issuance of equity interests by the debtor to satisfy all or part of the debt, modification of the terms of debt or the substitution or addition of debtor(s).

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The following table provides information with respect to nonperforming assets and troubled debt restructurings at the dates indicated.
September 30, 2017 December 31, 2016June 30, 2018 December 31, 2017
Nonperforming assets:      
Total nonperforming loans (all on nonaccrual)$22,420
 $23,781
$46,105
 $23,480
Total accruing loans past due 90 days or more
 

 
Foreclosed assets2,231
 1,648
1,725
 1,281
Total troubled debt restructurings8,527
 9,856
11,241
 10,223
Less nonaccrual troubled debt restructurings(6,078) (7,688)(7,628) (8,129)
Total performing troubled debt restructurings2,449
 2,168
3,613
 2,094
Total nonperforming assets and troubled debt restructurings$27,100
 $27,597
$51,443
 $26,855
Total nonperforming loans to total loans and leases held for investment1.92% 2.62%3.00% 1.75%
Total nonperforming loans to total assets0.92% 1.36%1.33% 0.85%
Total nonperforming assets and troubled debt restructurings to total assets1.11% 1.57%1.48% 0.97%
September 30, 2017 December 31, 2016June 30, 2018 December 31, 2017
Nonperforming assets guaranteed by U.S. government:      
Total nonperforming loans guaranteed by the SBA (all on nonaccrual)$19,121
 $18,997
$34,639
 $19,870
Total accruing loans past due 90 days or more guaranteed by the SBA
 

 
Foreclosed assets guaranteed by the SBA1,785
 1,402
1,528
 1,191
Total troubled debt restructurings guaranteed by the SBA5,427
 6,723
8,257
 7,178
Less nonaccrual troubled debt restructurings guaranteed by the SBA(5,340) (6,602)(6,800) (7,099)
Total performing troubled debt restructurings guaranteed by SBA87
 121
1,457
 79
Total nonperforming assets and troubled debt restructurings guaranteed by the SBA$20,993
 $20,520
$37,624
 $21,140
Total nonperforming loans not guaranteed by the SBA to total held for investment loans and leases0.28% 0.53%0.75% 0.27%
Total nonperforming loans not guaranteed by the SBA to total assets0.14% 0.27%0.33% 0.13%
Total nonperforming assets and troubled debt restructurings not guaranteed by the SBA to total assets0.25% 0.40%0.40% 0.21%
Total nonperforming assets and troubled debt restructurings at SeptemberJune 30, 20172018 were $27.1$51.4 million, which represented a $497 thousand,$24.6 million, or 1.8%91.6%, decreaseincrease from December 31, 2016.2017. Total nonperforming assets at SeptemberJune 30, 20172018 were comprised of $22.4$46.1 million in nonaccrual loans and $2.2$1.7 million in foreclosed assets. Of the $27.1$51.4 million of nonperforming assets and troubled debt restructurings ("TDRs"), $21.0$37.6 million carried an SBA guarantee, leaving an unguaranteed exposure of $6.1$13.8 million in total nonperforming assets and TDRs at SeptemberJune 30, 2017.2018. The unguaranteed exposure in total nonperforming assets and TDRs at December 31, 20162017 was $7.1$5.7 million. Unguaranteed exposure relating to nonperforming assets and TDRs at SeptemberJune 30, 2017 decreased2018 increased by $970 thousand,$8.1 million, or 13.7%141.8%, compared to December 31, 2016.2017. Almost all of this increase in nonperforming assets and TDRs arose from our mature verticals. See the below discussion related to the change in potential problem and impaired loans for management’s overall observations in regard to growth in this area.
As a percentage of the Bank’s total capital, nonperforming loans represented 10.2%12.7% at SeptemberJune 30, 2017,2018, compared to nonperforming loans of 15.3%7.8% of the Bank’s total capital at December 31, 2016.2017. Adjusting the ratio to include only the unguaranteed portion of nonperforming loans to reflect management’s belief that the greater magnitude of risk resides in this portion, the ratios at SeptemberJune 30, 20172018 and December 31, 20162017 were 1.5%3.2% and 3.1%1.2%, respectively.

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As of SeptemberJune 30, 20172018 and December 31, 2016,2017, potential problem and impaired loans and leases totaled $66.0$122.4 million and $64.1$76.8 million, respectively. Risk Grades 5 through 8 represent the spectrum of criticized and impaired loans.loans and leases. At SeptemberJune 30, 2017,2018, the portion of criticized loans and leases guaranteed by the SBA or USDA totaled $28.2$56.6 million resulting in unguaranteed exposure risk of $37.8$65.7 million, or 3.3%4.7% of total held for investment unguaranteed exposure. This compares to the December 31, 20162017 portion of criticized loans and leases guaranteed by the SBA or USDA which totaled $29.0$34.7 million resulting in unguaranteed exposure risk of $35.1$42.1 million, or 4.0%3.4% of total held for investment unguaranteed exposure. As of SeptemberJune 30, 20172018 loans and leases in Healthcare, Veterinary Healthcare and Independent Pharmacies industry verticals comprise the largest portion of the total potential problem and impaired loans at 28.5%20.5%, 30.8%28.6% and 20.4%16.4%, respectively. As of December 31, 20162017 loans in the Healthcare and Veterinary industries comprisecomprised the largest portion of the total potential problem and impaired loans and leases at 30.8%30.0% and 32.9%27.3%, respectively. TheNo systemic issues were identified in the first half of 2018 increase in potential problem and impaired loans and leases which were comprised of a relatively small number of borrowers largely concentrated in our more mature verticals. Furthermore, the Company believes that its underwriting and credit quality standards have improved as the business has matured.
The Bank does not classify loans and leases that experience insignificant payment delays and payment shortfalls as impaired. The Bank considers an “insignificant period of time” from payment delays to be a period of 90 days or less. The Bank would consider a modification for a customer experiencing what is expected to be a short-term event that has temporarily impacted cash flow. This could be due, among other reasons, to illness, weather, impact from a one-time expense, slower than expected start-up, construction issues or other short-term issues. In all cases, credit will review the request to determine if the customer is stressed and how the event has impacted the ability of the customer to repay the loan or lease long term. To date, the only types of short term modifications the Bank has given are payment deferral and interest only extensions. The Bank does not typically alter the rate or lengthen the amortization of the note due to insignificant payment delays. Short term modifications are not classified as TDRs, because they do not meet the definition set by the applicable accounting standards and the Federal Deposit Insurance Corporation.
During the third quarter of 2017, the Southern U.S. and Puerto Rico encountered three hurricanes while California suffered from wildfires. As a nationwide lender the Company has over approximately 350 borrowers in the affected areas. As a result of these unfortunate disasters, Live Oak has actively reached out to each of these borrowers to work with any that have been impacted. At this time, there have been a limited number of short-term payment deferrals provided to help borrowers in need with none deemed to meet the definition of a troubled debt restructuring and no impairments have been realized as a result of these events. We are continuing to work with borrowers impacted by these disasters.
Management endeavors to be proactive in its approach to identify and resolve special mention (Risk Grade 5)problem loans and leases and is focused on working with the borrowers and guarantors of these loans and leases to provide loan and lease modifications when warranted. At SeptemberManagement implements a proactive approach to identifying and classifying loans and leases as criticized, Risk Grade 5. For example, at June 30, 20172018 and December 31, 2016,2017, Risk Grade 5 loans and leases totaled $30.5$58.4 million and $32.1$37.0 million, respectively. The decrease in Risk Grade 5 loans from December 31, 2016 to September 30, 2017 was principally confined to three verticals; Veterinary ($3.2 million or 41.8% of decrease), Healthcare ($353 thousand or 4.5% of decrease), and Independent Pharmacy ($144 thousand or 1.7% of decrease). The decrease in these three verticals was offset by an increase in Risk Grade 5 loans from December 31, 20162017 to SeptemberJune 30, 2017 in two2018 was principally confined to four verticals; AgricultureGovernment Contracting ($1.110.9 million or 95.0%51.2% of increase), Wine and Craft Beverage ($2.9 million or 13.4% of increase), Healthcare ($2.2 million or 10.4% of increase) and Investment AdvisorsIndependent Pharmacies ($464 thousand2.1 million or 20.7% of decrease)9.9%). The majority of the Government Contracting loans downgraded to Risk Grade 5 in the first half of 2018 are asset-based, collateral intensive loans.  During the second quarter, management enhanced the risk grading methodology for these types of loans.  The enhanced methodology includes more robust collateral centric loss given default measures.   As these loans come up for renewal and reapproval, additional servicing controls can be enhanced and appropriately measured, which is expected to improve the overall decreaserisk grades for some of these loans.  This will be a process over the next several quarters. The first half of 2018 increase in Risk Grade 5 loans from December 31, 2016related to September 30, 2017Wine and Craft Beverage, Healthcare, and Independent Pharmacies was the result of routine credit monitoring indue to the ongoing risk grade management process.maturity of larger existing verticals. At SeptemberJune 30, 2017,2018, approximately 99.9%97.2% of loans classified as Risk Grade 5 are performing with no current payments past due. While the level of nonperforming assets fluctuates in response to changing economic and market conditions, the relative size and composition of the loan portfolio, and management’s degree of success in resolving problem assets, management believes that a proactive approach to early identification and intervention is critical to successfully managing a small business loan portfolio.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses (“ALLL”), a material estimate which could change significantly in the near-term in the event of rapidly deteriorating credit quality, is established through a provision for loan and lease losses charged to earnings to account for losses that are inherent in the loan and lease portfolio and estimated to occur, and is maintained at a level that management considers appropriate to absorb potential losses in the portfolio. Loan and lease losses are charged against the ALLL when management believes that the collectibilitycollectability of the principal loan and lease balance is unlikely. Subsequent recoveries, if any, are credited to the ALLL when received.
Judgment in determining the adequacy of the ALLL is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available and as situations and information change.
The ALLL is evaluated on a quarterly basis by management and takes into consideration such factors as changes in the nature and volume of the loan and lease portfolio, overall portfolio quality, review of specific problem loans and leases and current economic conditions and trends that may affect the borrower’s ability to repay.

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Estimated credit losses should meet the criteria for accrual of a loss contingency, i.e., a provision to the ALLL, set forth in accounting principles generally accepted in the United States of America (“GAAP”). Methodology for determining the ALLL is generally based on GAAP, the Interagency Policy Statement on the Allowance for Loan and Lease Losses and other regulatory and accounting

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pronouncements. The ALLL is determined by the sum of three separate components: (i) the impaired loan or lease component, which addresses specific reserves for impaired loans or leases; (ii) the general reserve component, which addresses reserves for pools of homogeneous loans and leases; and (iii) an unallocated reserve component (if any) based on management’s judgment and experience. The loan and lease pools and impaired loans and leases are mutually exclusive; any loan or lease that is impaired should be excluded from its homogeneous pool for purposes of that pool’s reserve calculation, regardless of the level of impairment.
During the second quarter of 2016, the Company implemented enhancements to the methodology for estimating the allowance for loan and lease losses, including refinements to the measurement of qualitative factors in the estimation process. Management believes these enhancements will improve the precision of the process for estimating the allowance.
The ALLL of $18.2$24.2 million at December 31, 20162017 increased by $2.8$5.2 million, or 15.5%21.3%, to $21.0$29.4 million at SeptemberJune 30, 2017.2018. The ALLL, as a percentage of loans and leases held for investment, amounted to 1.8%1.9% at SeptemberJune 30, 20172018 and 2.0%1.8% at December 31, 2016.2017. The declining level ofincrease in the allowance for loan and lease losses was largely attributable to continued growth in relation to total loans and leases held for investment was principally driven by improvements in industry-specific loss rates and lower levels of classified loans combined with the migration to Company-specific loss rates for maturing verticals which was partially offset by an increase in reserves due to loan and lease volume and the effect of higher net charge-offs,portfolio, as addressed in the Provision for Loan and Lease Losses section of Results of Operations. General reserves as a percentage of non-impaired loans amounted to 1.56%1.50% at SeptemberJune 30, 20172018 and 1.70%1.62% December 31, 2016.2017. See the aforementioned Provision for Loan and Lease Losses section of this section for a discussion of the Company's charge-off experience.
Actual past due held for investment loans and leases have decreasedincreased by $12.3 million since December 31, 20162017. Of this increase, $10.2 million, or 83.4%, is over 90 days past due with $3.4 million of that amount being comprised of unguaranteed loans and leases. At June 30, 2018 and December 31, 2017 total held for investment unguaranteed loans and leases past due as managementa percentage of total held for investment unguaranteed loans and leases was 0.65% and 0.43%, respectively. The growth in past dues during the first half of 2018 is reflected in the earlier discussed increase in classified loans during the same period. Management continues to actively monitor and work to improve asset quality. Management believes the ALLL of $21.0$29.4 million at SeptemberJune 30, 20172018 is appropriate in light of the risk inherent in the loan and lease portfolio. Management’s judgments are based on numerous assumptions about current events that it believes to be reasonable, but which may or may not be valid. Thus, there can be no assurance that loan and lease losses in future periods will not exceed the current ALLL or that future increases in the ALLL will not be required. No assurance can be given that management’s ongoing evaluation of the loan and lease portfolio in light of changing economic conditions and other relevant circumstances will not require significant future additions to the ALLL, thus adversely affecting the Company’s operating results. Additional information on the ALLL is presented in Note 65 - Loans and Leases Held for Investment and Allowance for Loan and Lease Losses of the Notes to the Unaudited Consolidated Financial Statements in this report.
Liquidity Management
Liquidity management refers to the ability to meet day-to-day cash flow requirements based primarily on activity in loan and deposit accounts of the Company’s customers. Liquidity is immediately available from four major sources: (a) cash on hand and on deposit at other banks; (b) the outstanding balance of federal funds sold; (c) the market value of unpledged investment securities; and (d) availability under lines of credit. At SeptemberJune 30, 2017,2018, the total amount of these four items was $589.1 million,$1.10 billion, or 25.1%31.8% of total assets, an increase of $93.3$430.0 million from $495.8$674.2 million, or 28.2%24.4% of total assets, at December 31, 2016.2017.
Loans and other assets are funded primarily by loan sales, wholesale deposits and core deposits. To date, an increasing retail deposit base and an increased amount of long-term brokered depositslong term wholesale deposit base have been adequate to meet loan obligations, while maintaining the desired level of immediate liquidity. Additionally, an increased investment securities portfolio is available for both immediate and secondary liquidity purposes.
At SeptemberJune 30, 2017,2018, none of the investment securities portfolio was pledged to secure public deposits or pledged to retail repurchase agreements, while $100 thousand was pledged for trust activities in the State of Ohio and $2.5 million was pledged for uninsured trust assets, leaving $74.0$382.3 million available as lendable collateral. In addition, of the $260.9 million in cash on hand, $1.5 million was pledged for ACH processing at one of the correspondent depository banks.


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Contractual Obligations
The following table presents the Company’s significant fixed and determinable contractual obligations by payment date as of SeptemberJune 30, 2017.2018. The payment amounts represent those amounts contractually due to the recipient. The table excludes liabilities recorded where management cannot reasonably estimate the timing of any payments that may be required in connection with these liabilities.

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Payments Due by PeriodPayments Due by Period
Total 
Less than
One
Year
 
One to
Three
Years
 
Three to
Five
Years
 
More
Than Five
Years
Total 
Less than
One
Year
 
One to
Three
Years
 
Three to
Five
Years
 
More
Than Five
Years
Contractual Obligations  
Deposits without stated maturity$828,947
 $
 $
 $
 $
$1,203,260
 $1,203,260
 $
 $
 $
Time deposits1,183,944
 860,718
 209,019
 114,207
 
1,765,976
 999,604
 622,724
 67,482
 76,166
Long term borrowings26,872
 844
 5,472
 20,556
 
3,385
 3
 3,376
 6
 
Operating lease obligations1
3,037
 941
 1,345
 463
 288
3,096
 1,501
 979
 489
 127
Total$2,042,800
 $862,503
 $215,836
 $135,226
 $288
$2,975,717
 $2,204,368
 $627,079
 $67,977
 $76,293
1The following obligations only include base rent and does not include any additional payments such as taxes, insurance, maintenance and repairs or common area maintenance.
As of SeptemberJune 30, 20172018 and December 31, 2016,2017, the Company had unfunded commitments to provide capital contributions for on-balance sheet investments in the amount of $4.4$3.3 million and $4.9$3.5 million, respectively.
Asset/Liability Management and Interest Rate Sensitivity
One of the primary objectives of asset/liability management is to maximize the net interest margin while minimizing the earnings risk associated with changes in interest rates. One method used to manage interest rate sensitivity is to measure, over various time periods, the interest rate sensitivity positions, or gaps. This method, however, addresses only the magnitude of asset and liability repricing timing differences as of the report date and does not address earnings, or market value.value nor growth. Therefore, management uses an earnings simulation model to prepare, on a regular basis, earnings projections based on a range of interest rate scenarios to more accurately measure interest rate risk.
The balance sheet is asset-sensitive with a total cumulative gap position of 5.92%2.5% at SeptemberJune 30, 2017. The cash on hand from the August 2017 capital raise and2018. Loan growth in savings deposits during the quarter has increasedcontributed to the asset-liabilityasset sensitivity of the Company in the current period. An asset-sensitive position means that net interest income will generally move in the same direction as interest rates. For instance, if interest rates increase, net interest income can be expected to increase, and if interest rates decrease, net interest income can be expected to decrease. The Company attempts to mitigate interest rate risk with the majority ofby matching funding assets and liabilities being short-term, adjustablewith similar rate instruments. The quarterly revaluation adjustment to the servicing asset, however, adjusts in an opposite direction to interest rate changes. Asset/liability sensitivity is primarily derived from the prime-based loans that adjust as the prime interest rate changes and the longer duration of indeterminate term deposits.


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Capital
The maintenance of appropriate levels of capital is a management priority and is monitored on a regular basis. The Company’s principal goals related to the maintenance of capital are to provide adequate capital to support the Company’s risk profile consistent with the risk appetite approved by the Board of Directors; provide financial flexibility to support future growth and client needs; comply with relevant laws, regulations, and supervisory guidance; achieve optimal credit ratings for the Company and its subsidiaries; and provide a competitive return to shareholders. Management regularly monitors the capital position of the Company on both a consolidated and bank level basis. In this regard, management’s goal is to maintain capital at levels that are in excess of the regulatory “well capitalized” levels. Risk-based capital ratios, which include Tier 1 Capital, Total Capital and Common Equity Tier 1 Capital, are calculated based on regulatory guidance related to the measurement of capital and risk-weighted assets.
The Basel III Capital Rules, a comprehensive capital framework for U.S. banking organizations, became effective for the Company and Bank on January 1, 2015 (subject to a phase-in period for certain provisions). Quantitative measures established by the Basel III Capital Rules to ensure capital adequacy require the maintenance of minimum amounts and ratios (set forth in the table below) of Common Equity Tier 1 capital, Tier 1 capital and Total capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to adjusted quarterly average assets (as defined).
When fully phased in on January 1, 2019, the Basel III Capital Rules will require the Company and Bank to maintain (i) a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of at least 4.5%, plus a 2.5% "capital conservation buffer" (which is added to the 4.5% Common Equity Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of at least 7.0% upon full implementation), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation), (iii) a minimum ratio of Total capital (that is, Tier 1 plus Tier 2) to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation) and (iv) a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average quarterly assets.
The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and will be phased in over a three-year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019). Banking institutions with a ratio of Common Equity Tier 1 capital to risk-weighted assets below the effective minimum (4.5% plus the capital conservation buffer) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.

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Capital amounts and ratios as of SeptemberJune 30, 20172018 and December 31, 2016,2017, are presented in the table below.
Actual 
Minimum
Capital
Requirement
 
Minimum
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions (1)
Actual 
Minimum
Capital
Requirement
 
Minimum
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions (1)
Amount Ratio Amount Ratio Amount RatioAmount Ratio Amount Ratio Amount Ratio
Consolidated - September 30, 2017           
Consolidated - June 30, 2018           
Common Equity Tier 1 (to Risk-Weighted Assets)$323,780
 17.72% $82,232
 4.50% N/A
 N/A
$413,433
 16.78% $110,877
 4.50% N/A
 N/A
Total Capital (to Risk-Weighted Assets)$344,807
 18.87% $146,191
 8.00% N/A
 N/A
$442,783
 17.97% $197,115
 8.00% N/A
 N/A
Tier 1 Capital (to Risk-Weighted Assets)$323,780
 17.72% $109,643
 6.00% N/A
 N/A
$413,433
 16.78% $147,836
 6.00% N/A
 N/A
Tier 1 Capital (to Average Assets)$323,780
 13.95% $92,863
 4.00% N/A
 N/A
$413,433
 11.81% $140,067
 4.00% N/A
 N/A
Bank - September 30, 2017           
Bank - June 30, 2018           
Common Equity Tier 1 (to Risk-Weighted Assets)$198,353
 11.26% $79,287
 4.50% $114,525
 6.50%$332,848
 13.71% $109,266
 4.50% $157,829
 6.50%
Total Capital (to Risk-Weighted Assets)$219,651
 12.47% $140,954
 8.00% $176,193
 10.00%$362,309
 14.92% $194,251
 8.00% $242,813
 10.00%
Tier 1 Capital (to Risk-Weighted Assets)$198,353
 11.26% $105,716
 6.00% $140,954
 8.00%$332,848
 13.71% $145,688
 6.00% $194,251
 8.00%
Tier 1 Capital (to Average Assets)$198,353
 8.78% $90,382
 4.00% $112,978
 5.00%$332,848
 9.65% $137,905
 4.00% $172,381
 5.00%
Consolidated - December 31, 2016           
Consolidated - December 31, 2017           
Common Equity Tier 1 (to Risk-Weighted Assets)$206,670
 15.31% $60,732
 4.50% N/A
 N/A
$390,816
 17.81% $98,764
 4.50% N/A
 N/A
Total Capital (to Risk-Weighted Assets)$223,559
 16.56% $107,968
 8.00% N/A
 N/A
$415,006
 18.91% $175,580
 8.00% N/A
 N/A
Tier 1 Capital (to Risk-Weighted Assets)$206,670
 15.31% $80,976
 6.00% N/A
 N/A
$390,816
 17.81% $131,685
 6.00% N/A
 N/A
Tier 1 Capital (to Average Assets)$206,670
 12.00% $68,919
 4.00% N/A
 N/A
$390,816
 15.50% $100,828
 4.00% N/A
 N/A
Bank - December 31, 2016           
Bank - December 31, 2017           
Common Equity Tier 1 (to Risk-Weighted Assets)$139,078
 10.68% $58,579
 4.50% $84,615
 6.50%$277,943
 12.89% $97,060
 4.50% $140,197
 6.50%
Total Capital (to Risk-Weighted Assets)$155,423
 11.94% $104,141
 8.00% $130,177
 10.00%$302,385
 14.02% $172,551
 8.00% $215,688
 10.00%
Tier 1 Capital (to Risk-Weighted Assets)$139,078
 10.68% $78,106
 6.00% $104,141
 8.00%$277,943
 12.89% $129,413
 6.00% $172,551
 8.00%
Tier 1 Capital (to Average Assets)$139,078
 8.41% $66,142
 4.00% $82,678
 5.00%$277,943
 11.36% $97,864
 4.00% $122,330
 5.00%
(1)Prompt corrective action provisions are not applicable at the bank holding company level.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in accordance with GAAP requires the Company to make estimates and judgments that affect reported amounts of assets, liabilities, income and expenses and related disclosure of contingent assets and liabilities. The Company bases estimates on historical experience and on various other assumptions that are believed to be reasonable under current circumstances, results of which form the basis for making judgments about the carrying value of certain assets and liabilities that are not readily available from other sources. Estimates are evaluated on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions.
Accounting policies, as described in detail in the Notes to the Company’s Unaudited Consolidated Financial Statements in this report, are an integral part of the Company’s consolidated financial statements. A thorough understanding of these accounting policies is essential when reviewing the Company’s reported results of operations and financial position. Management believes that the critical accounting policies and estimates listed below require the Company to make difficult, subjective or complex judgments about matters that are inherently uncertain.
Determination of the allowance for loan and lease losses;
Valuation of servicing assets;
Income taxes;
Restricted stock unit awards with market price conditions;
Valuation of foreclosed assets;
Business combination and goodwill; and
Valuation

Table of earn-out contingent liability.Contents

Unconsolidated joint ventures.
Changes in these estimates, that are likely to occur from period to period, or the use of different estimates that the Company could have reasonably used in the current period, would have a material impact on the Company’s financial position, results of operations or liquidity.


Item 3. Quantitative and Qualitative Disclosures About Market Risk
Management considers interest rate risk the most significant market risk. Interest rate risk is the exposure to adverse changes in net interest income due to changes in interest rates. Consistency of net interest income is largely dependent upon the effective management of interest rate risk.
The Company’s Asset/Liability Management Committee (“ALCO”), which includes senior management representatives and reports to the Board of Directors, monitors and manages interest rate risk. See “Asset/Liability Management and Interest Rate Sensitivity” in Item 2 of this Form 10-Q for further discussion.
The objective of asset/liability management is the maximization of net interest income within the Company’s risk guidelines. This objective is accomplished through management of the balance sheet composition, maturities, liquidity, and interest rate risk exposures arising from changing economic conditions, interest rates and customer preferences.
To identify and manage its interest rate risk, the Company employs an earnings simulation model to analyze net interest income sensitivity to changing interest rates. The model is based on contractual cash flows and repricing characteristics and incorporates market-based assumptions regarding the effect of changing interest rates on the prepayment rates of certain assets and liabilities. The model also includes management projections for activity levels in each of the product lines offered by the Bank. Assumptions are inherently uncertain, and the measurement of net interest income or the impact of rate fluctuations on net interest income cannot be precisely predicted. Actual results may differ materially from simulated results due to timing, magnitude, and frequency of interest rate changes as well as changes in market conditions and management strategies.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
An evaluation of the Company’s disclosure controls and procedures (as defined in Rules 13(a)-15(e) and 15(d)-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), was carried out under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer as of SeptemberJune 30, 2017,2018, the last day of the period covered by this Quarterly Report. The Company’s Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of SeptemberJune 30, 20172018 in ensuring that the information required to be disclosed in the reports the Company files or submits under the Exchange Act is (i) accumulated and communicated to management (including the Company’s Chief Executive Officer and Chief Financial Officer) as appropriate to allow timely decisions regarding required disclosures, and (ii) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the three months ended SeptemberJune 30, 20172018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.



PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of operations, the Company is party to various legal proceedings. The Company is not involved in, nor has it terminated during the three and ninesix months ended SeptemberJune 30, 2017,2018, any pending legal proceedings other than nonmaterial proceedings occurring in the ordinary course of business.
Item 1A. Risk Factors
See “Risk Factors” in Part 1, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, and "Risk Factors" in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2017, for a detailed discussion of risk factors affecting the Company. There have been no material changes to the risk factors that have been previously disclosed in these filings.the Company’s 2017 Annual Report filed with the SEC.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.

















Item 6. Exhibits
Exhibits to this report are listed in the Index to Exhibits section of this report.


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Live Oak Bancshares, Inc.
(Registrant)
Date: August 7, 2018By:
/s/  S. Brett Caines
S. Brett Caines
Chief Financial Officer


INDEX TO EXHIBITS
Exhibit
No.
 Description of Exhibit
   
3.1
 
3.2
 
4.1
 
4.2
 
10.1
31.1
 
31.2
 
32
 
101
 Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of SeptemberJune 30, 20172018 and December 31, 2016;2017; (ii) Consolidated Statements of Income for the Three and NineSix Months Ended SeptemberJune 30, 20172018 and 2016;2017; (iii) Consolidated Statements of Comprehensive Income for the Three and NineSix Months Ended SeptemberJune 30, 20172018 and 2016;2017; (iv) Consolidated Statements of Changes in Shareholders’ Equity for the NineSix Months Ended SeptemberJune 30, 20172018 and 2016;2017; (v) Consolidated Statements of Cash Flows for the NineSix Months Ended SeptemeberJune 30, 20172018 and 2016;2017; and (vi) Notes to Consolidated Financial Statements*
*    Indicates a document being filed with this Form 10-Q.
**Furnished herewith. This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that Section. Such exhibit shall not be deemed incorporated into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.



SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Live Oak Bancshares, Inc.
(Registrant)
Date: November 6, 2017By:
/s/  S. Brett Caines
S. Brett Caines
Chief Financial Officer

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