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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ýxQuarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended SeptemberJune 30, 20172023
or
¨oTransition 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.jpgLiveOakBancsharesLogo.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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Voting Common Stock, no par value per shareLOBNew York Stock Exchange LLC
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  ¨Yes x No o
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  ¨Yes x No o
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 filerx¨Accelerated filerxo
Non-accelerated filero
¨ (Do not check if smaller reporting company)
Smaller reporting company¨o
Emerging growth companyxo
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. ¨o
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES  ¨    NO  ýYes o No x
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 1, 2023, there were 35,233,24144,363,165 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, 20172023
TABLE OF CONTENTS

Page
Page
PART I. FINANCIAL INFORMATION
Financial Statements (Unaudited)
1
Condensed Consolidated Balance Sheets as of SeptemberJune 30, 20172023 and December 31, 20162022
1
Condensed Consolidated Statements of Income for the Three and NineSix Months Ended SeptemberJune 30, 20172023 and 20162022
2
Condensed Consolidated Statements of Comprehensive Income for the Three and NineSix Months Ended SeptemberJune 30, 20172023 and 20162022
43
Condensed Consolidated Statements of Changes in Shareholders’ Equity for the NineThree and Six Months Ended SeptemberJune 30, 20172023 and 20162022
54
Condensed Consolidated Statements of Cash Flows for the NineSix Months Ended SeptemberJune 30, 20172023 and 20162022
6
Notes to Unaudited Condensed Consolidated Financial Statements
8
Management’s Discussion and Analysis of Financial Condition and Results of Operations
4738
Quantitative and Qualitative Disclosures about Market Risk
6760
Controls and Procedures
6761
PART II. OTHER INFORMATION
Legal Proceedings
6863
Risk Factors
6863
Unregistered Sales of Equity Securities and Use of Proceeds
6863
Defaults Upon Senior Securities
6863
Mine Safety Disclosures
6863
Other Information
6863
Exhibits
68Exhibits
64
Signatures
70
Index to Exhibits
X64
Signatures
65




Table of Contents

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Live Oak Bancshares, Inc.
Condensed Consolidated Balance Sheets
As of SeptemberJune 30, 20172023 (unaudited) and December 31, 2016*2022*
(Dollars in thousands)
June 30,
2023		December 31,
2022
Assets
Cash and due from banks$808,131 $280,239 
Federal funds sold— 136,397 
Certificates of deposit with other banks4,000 4,000 
Investment securities available-for-sale1,133,146 1,014,719 
Loans held for sale523,776 554,610 
Loans and leases held for investment (includes $441,781 and $494,458 measured at fair value, respectively)7,836,398 7,344,178 
Allowance for credit losses on loans and leases(120,116)(96,566)
Net loans and leases7,716,282 7,247,612 
Premises and equipment, net269,485 263,290 
Servicing assets31,042 26,323 
Other assets333,334 328,308 
Total assets$10,819,196 $9,855,498 
Liabilities and Shareholders’ Equity  
Liabilities  
Deposits:  
Noninterest-bearing$229,833 $194,100 
Interest-bearing9,649,278 8,690,828 
Total deposits9,879,111 8,884,928 
Borrowings28,317 83,203 
Other liabilities79,280 76,334 
Total liabilities9,986,708 9,044,465 
Shareholders’ equity  
Preferred stock, no par value, 1,000,000 shares authorized, none issued or outstanding at June 30, 2023 and December 31, 2022— — 
Class A common stock, no par value, 100,000,000 shares authorized, 44,351,715 and 44,061,244 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively341,032 330,854 
Class B common stock, no par value, 10,000,000 shares authorized, none issued or outstanding at June 30, 2023 and December 31, 2022— — 
Retained earnings589,036 572,497 
Accumulated other comprehensive loss(97,580)(92,318)
Total shareholders’ equity832,488 811,033 
Total liabilities and shareholders’ equity$10,819,196 $9,855,498 
 September 30,
2017		 December 31,
2016*
Assets   
Cash and due from banks$260,907
 $238,008
Certificates of deposit with other banks3,250
 7,250
Investment securities available-for-sale76,575
 71,056
Loans held for sale692,586
 394,278
Loans and leases held for investment1,169,887
 907,566
Allowance for loan and lease losses(21,027) (18,209)
Net loans and leases1,148,860
 889,357
Premises and equipment, net129,233
 64,661
Foreclosed assets2,231
 1,648
Servicing assets53,392
 51,994
Other assets65,155
 37,009
Total assets$2,432,189
 $1,755,261
Liabilities and Shareholders’ Equity   
Liabilities   
Deposits:   
Noninterest-bearing$55,260
 $27,990
Interest-bearing1,957,631
 1,457,086
Total deposits2,012,891
 1,485,076
Long term borrowings26,872
 27,843
Other liabilities27,835
 19,495
Total liabilities2,067,598
 1,532,414
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
Retained earnings49,707
 23,518
Accumulated other comprehensive loss(620) (652)
Total equity364,591
 222,847
Total liabilities and shareholders’ equity$2,432,189
 $1,755,261
*Derived from audited consolidated financial statements.
See Notes to Unaudited Condensed Consolidated Financial Statements

1
Table of Contents

Live Oak Bancshares, Inc.
Condensed Consolidated Statements of Income
For the three and ninesix months ended SeptemberJune 30, 20172023 and 20162022 (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,
2023202220232022
Interest income
Loans and fees on loans$152,362 $94,157 $291,414 $183,355 
Investment securities, taxable8,503 4,046 16,050 7,445 
Other interest earning assets8,847 1,044 13,664 1,229 
Total interest income169,712 99,247 321,128 192,029 
Interest expense   
Deposits85,003 18,777 152,598 33,125 
Borrowings407 536 2,211 1,191 
Total interest expense85,410 19,313 154,809 34,316 
Net interest income84,302 79,934 166,319 157,713 
Provision for loan and lease credit losses13,028 5,267 32,049 7,103 
Net interest income after provision for loan and lease credit losses71,274 74,667 134,270 150,610 
Noninterest income
Loan servicing revenue6,687 6,477 13,067 12,833 
Loan servicing asset revaluation(2,831)(8,668)(2,475)(10,237)
Net gains on sales of loans10,804 5,630 20,979 26,607 
Net gain (loss) on loans accounted for under the fair value option1,728 (4,461)(2,801)(3,945)
Equity method investments (loss) income(2,055)119,056 (5,007)116,932 
Equity security investments gains (losses), net121 1,655 198 1,611 
Lease income2,535 2,510 5,070 5,013 
Management fee income3,266 2,558 6,738 4,046 
Other noninterest income3,901 3,772 7,966 8,337 
Total noninterest income24,156 128,529 43,735 161,197 
Noninterest expense
Salaries and employee benefits43,066 46,276 87,831 84,783 
Travel expense2,770 2,358 5,181 4,255 
Professional services expense1,996 3,988 2,923 6,779 
Advertising and marketing expense3,009 2,301 6,612 4,030 
Occupancy expense2,205 2,773 4,130 5,100 
Technology expense8,005 5,762 15,734 11,815 
Equipment expense4,023 3,784 7,841 7,600 
Other loan origination and maintenance expense3,442 3,022 7,369 6,135 
Renewable energy tax credit investment impairment— 50 69 50 
FDIC insurance5,061 2,164 8,464 4,136 
Contributions and donations— 5,515 — 6,238 
Other expense2,880 2,886 9,265 5,672 
Total noninterest expense76,457 80,879 155,419 146,593 
Income before taxes18,973 122,317 22,586 165,214 
Income tax expense1,429 25,278 4,644 33,666 
Net income$17,544 $97,039 $17,942 $131,548 
Basic earnings per share$0.40 $2.22 $0.41 $3.01 
Diluted earnings per share$0.39 $2.16 $0.40 $2.92 
See Notes to Unaudited Condensed Consolidated Financial Statements

2
Table of Contents

Live Oak Bancshares, Inc.
Condensed Consolidated Statements of Comprehensive Income
For the three and ninesix months ended SeptemberJune 30, 20172023 and 20162022 (unaudited)
(Dollars in thousands)
 Three Months Ended
September 30,		 Nine Months Ended
September 30,
 2017 2016 2017 2016
Net income$12,862
 $3,478
 $28,769
 $8,284
Other comprehensive income before tax:       
Net unrealized (loss) gain on investment securities arising during the period(168) (115) 52
 525
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
Income tax benefit (expense)65
 45
 (20) (202)
Other comprehensive (loss) income, net of tax(103) (71) 32
 322
Total comprehensive income$12,759
 $3,407
 $28,801
 $8,606
Three Months Ended
June 30,		Six Months Ended
June 30,
2023202220232022
Net income$17,544 $97,039 $17,942 $131,548 
Other comprehensive loss before tax:
Net unrealized loss on investment securities available-for-sale during the period(17,348)(29,967)(6,916)(80,561)
Reclassification adjustment for gain on sale of securities available-for-sale included in net income— — — — 
Other comprehensive loss before tax(17,348)(29,967)(6,916)(80,561)
Income tax benefit4,163 7,190 1,654 19,332 
Other comprehensive loss, net of tax(13,185)(22,777)(5,262)(61,229)
Total comprehensive income$4,359 $74,262 $12,680 $70,319 
See Notes to Unaudited Condensed Consolidated Financial Statements


3
Table of Contents

Live Oak Bancshares, Inc.
Condensed Consolidated Statements of Changes in Shareholders’ Equity
For the ninethree and six months ended SeptemberJune 30, 20172023 and 20162022 (unaudited)
(Dollars in thousands)
Three Months Ended
Common stockRetained
earnings		Accumulated
other
comprehensive
income (loss)		Total
equity
SharesAmount
Class AClass B
Balance at March 31, 202344,290,840—$334,672 $572,530 $(84,395)$822,807 
Net income——— 17,544 — 17,544 
Other comprehensive loss——— — (13,185)(13,185)
Issuance of restricted stock38,145—— — — — 
Tax withholding related to vesting of restricted stock and other——(249)— — (249)
Stock option exercises22,730—297 — — 297 
Stock option compensation expense——4 — — 4 
Restricted stock compensation expense——6,308 — — 6,308 
Transfer from retained earnings to other assets for pro rata portion of equity method investee stock compensation expense——— 292 — 292 
Cash dividends ($0.03 per share)——— (1,330)— (1,330)
Balance at June 30, 202344,351,715—$341,032 $589,036 $(97,580)$832,488 
Balance at March 31, 202243,787,660—$315,607 $434,226 $(36,506)$713,327 
Net income——— 97,039 — 97,039 
Other comprehensive loss——— — (22,777)(22,777)
Issuance of restricted stock17,156—— — — — 
Tax withholding related to vesting of restricted stock and other——(197)— — (197)
Stock option exercises49,195—434 — — 434 
Stock option compensation expense——234 — — 234 
Restricted stock compensation expense——4,846 — — 4,846 
Transfer from retained earnings to other assets for pro rata portion of equity method investee stock compensation expense——— 71 — 71 
Cash dividends ($0.03 per share)——— (1,315)— (1,315)
Balance at June 30, 202243,854,011—$320,924 $530,021 $(59,283)$791,662 

4
 Common stock 
Retained
earnings
 
Accumulated
other
comprehensive
income (loss)
 
Non-
controlling
interest
 
Total
equity
Shares   
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
Net income—
 —
 —
 28,769
 —
 —
 28,769
Other comprehensive income—
 —
 —
 —
 32
 —
 32
Issuance of restricted stock306,902
 —
 —
 —
 —
 —
 —
Withholding cash issued in lieu of restricted stock issuance—
 —
 (4,891) —
 —
 —
 (4,891)
Employee stock purchase program22,634
 —
 445
 —
 —
 —
 445
Stock option exercises76,285
 —
 602
 —
 —
 —
 602
Stock option based compensation expense—
 —
 1,496
 —
 —
 —
 1,496
Restricted stock expense—
 —
 4,210
 —
 —
 —
 4,210
Stock issued in acquisition of Reltco, Inc.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
Dividends (distributions to shareholders)—
 —
 —
 (2,580) —
 —
 (2,580)
Balance at September 30, 201735,218,617
 4,643,530
 $315,504
 $49,707
 $(620) $—
 $364,591
See Notes to Unaudited Consolidated Financial Statements

Table of Contents

Live Oak Bancshares, Inc.
Condensed Consolidated Statements of Changes in Shareholders’ Equity (Continued)
For the three and six months ended June 30, 2023 and 2022 (unaudited)
(Dollars in thousands)
Six Months Ended
Common stockRetained
earnings
Accumulated
other
comprehensive
income (loss)
Total
equity
SharesAmount
Class AClass B
Balance at December 31, 202244,061,244—$330,854 $572,497 $(92,318)$811,033 
Net income——— 17,942 — 17,942 
Other comprehensive loss——— — (5,262)(5,262)
Issuance of restricted stock201,019—— — — — 
Tax withholding related to vesting of restricted stock and other——(3,602)— — (3,602)
Employee stock purchase program31,059—631 — — 631 
Stock option exercises58,393—664 — — 664 
Stock option based compensation expense——137 — — 137 
Restricted stock compensation expense——12,348 — — 12,348 
Adoption of ASU 2022-02
——— 676 — 676 
Transfer from retained earnings to other assets for pro rata portion of equity method investee stock compensation expense——— 578 — 578 
Cash dividends ($0.06 per share)——— (2,657)— (2,657)
Balance at June 30, 202344,351,715—$341,032 $589,036 $(97,580)$832,488 
Balance at December 31, 202143,494,046125,024$312,294 $400,893 $1,946 $715,133 
Net income——— 131,548 — 131,548 
Other comprehensive loss——— — (61,229)(61,229)
Issuance of restricted stock112,693—— — — — 
Tax withholding related to vesting of restricted stock and other——(3,091)— — (3,091)
Employee stock purchase program11,119—534 — — 534 
Stock option exercises111,129—1,153 — — 1,153 
Stock option based compensation expense——625 — — 625 
Restricted stock compensation expense——9,409 — — 9,409 
Non-voting common stock converted to voting common stock in private sale125,024(125,024)— — — — 
Transfer from retained earnings to other assets for pro rata portion of equity method investee stock compensation expense——— 207 — 207 
Cash dividends ($0.06 per share)——— (2,627)— (2,627)
Balance at June 30, 202243,854,011—$320,924 $530,021 $(59,283)$791,662 
See Notes to Unaudited Condensed Consolidated Financial Statements
5
Table of Contents
Live Oak Bancshares, Inc.
Condensed Consolidated Statements of Cash Flows
For the ninesix months ended SeptemberJune 30, 20172023 and 20162022 (unaudited)
(Dollars in thousands)
 Nine Months Ended
September 30,
 2017 2016
Cash flows from operating activities   
Net income$28,769
 $8,284
Adjustments to reconcile net income to net cash used by operating activities:   
Depreciation and amortization7,020
 3,201
Provision for loan losses5,481
 8,692
Amortization of premium on securities, net of accretion355
 135
Amortization of discount on unguaranteed loans, net1,263
 773
Deferred tax expense (benefit)413
 (510)
Originations of loans held for sale(884,741) (701,415)
Proceeds from sales of loans held for sale648,300
 555,192
Net gains on sale of loans held for sale(55,276) (52,813)
Net loss on sale of foreclosed assets30
 61
Net increase in servicing assets(1,398) (5,499)
Gain on sale of securities available-for-sale—
 (1)
Net loss on disposal of premises and equipment213
 —
Stock option based compensation expense1,496
 1,752
Restricted stock expense4,210
 5,893
Stock based compensation expense excess tax benefits1,073
 —
     Business combination contingent consideration fair value adjustment350
 —
Changes in assets and liabilities:   
Other assets(17,661) (858)
Other liabilities3,875
 2,652
Net cash used by operating activities(256,228) (174,461)
Cash flows from investing activities   
Purchases of securities available-for-sale(13,009) (24,946)
Proceeds from sales, maturities, calls, and principal paydowns of securities available-for-sale7,187
 8,764
Proceeds from sale/collection of foreclosed assets50
 680
Business combination, net of cash acquired(7,696) —
Maturities of certificates of deposit with other banks4,000
 2,750
Loan and lease originations and principal collections, net(273,501) (154,738)
Purchases of premises and equipment, net(71,420) (1,194)
Net cash used in investing activities(354,389) (168,684)
Six Months Ended
June 30,
20232022
Cash flows from operating activities
Net income$17,942 $131,548 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization10,447 10,553 
Provision for loan and lease credit losses32,049 7,103 
Amortization of premium on securities, net of accretion132 2,378 
Deferred tax (benefit) expense(9,723)17,439 
Originations of loans held for sale(425,441)(495,699)
Proceeds from sales of loans held for sale649,306 529,989 
Net gains on sale of loans held for sale(20,979)(26,607)
Net loss on sale of foreclosed assets— 41 
Net loss on loans accounted for under fair value option2,801 3,945 
Net (increase) decrease in servicing assets(4,719)4,913 
Net loss on disposal of property and equipment402 22 
Equity method investments loss (income)5,007 (116,932)
Equity security investments (gains) losses, net(198)(1,611)
Renewable energy tax credit investment impairment69 50 
Stock option compensation expense137 625 
Restricted stock compensation expense12,348 9,409 
Stock based compensation excess tax (shortfall) benefit(574)1,106 
Lease right-of-use assets and liabilities, net(30)569 
Changes in assets and liabilities:
Other assets20,429 (11,017)
Other liabilities5,533 9,847 
Net cash provided by operating activities294,938 77,671 
Cash flows from investing activities
Purchases of investment securities available-for-sale(174,710)(200,285)
Proceeds from maturities, calls, and principal paydown of investment securities available-for-sale49,235 95,429 
Proceeds from SBA reimbursement/sale of foreclosed assets, net— 333 
Maturities of certificates of deposits with other banks— 500 
Loan and lease originations and principal collections, net(689,804)(449,892)
Purchases of equity security investments(1,206)— 
Purchases of equity method investments(4,323)— 
Proceeds from sale of equity method investments— 125,321 
Proceeds from sale of premises and equipment— 2 
Purchases of premises and equipment, net(16,968)(28,231)
Net cash used by investing activities(837,776)(456,823)
See Notes to Unaudited Condensed Consolidated Financial Statements

6
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Live Oak Bancshares, Inc.
Condensed Consolidated Statements of Cash Flows (Continued)
For the ninesix months ended SeptemberJune 30, 20172023 and 20162022 (unaudited)
(Dollars in thousands)
 Nine Months Ended
September 30,
 2017 2016
Cash flows from financing activities   
Net increase in deposits527,815
 598,229
Proceeds from long term borrowings16,900
 —
Repayment of long term borrowings(25,971) (301)
Proceeds from short term borrowings23,100
 —
Repayment of short term borrowings(15,000) —
Stock option exercises602
 147
Employee stock purchase program445
 —
Withholding cash issued in lieu of restricted stock(4,891) —
Sale of common stock, net of issuance costs113,096
 —
Shareholder dividend distributions(2,580) (2,052)
Net cash provided by financing activities633,516
 596,023
Net increase in cash and cash equivalents22,899
 252,878
Cash and cash equivalents, beginning238,008
 102,607
Cash and cash equivalents, ending$260,907
 $355,485
    
Supplemental disclosure of cash flow information   
Interest paid$17,927
 $10,120
Income tax7,094
 5,739
    
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
Transfers from short term borrowings to long term borrowings8,100
 —
Business combination:   
Assets acquired (excluding goodwill)5,766
 —
Liabilities assumed4,681
 —
Purchase price8,363
 —
Goodwill recorded7,278
 —
Six Months Ended
June 30,
20232022
Cash flows from financing activities
Net increase in deposits$994,183 $1,043,700 
Proceeds from borrowings2,906,039 12,051 
Repayment of borrowings(2,960,925)(244,131)
Stock option exercises664 1,153 
Employee stock purchase program631 534 
Withholding cash issued in lieu of restricted stock and other(3,602)(3,091)
Shareholder dividend distributions(2,657)(2,627)
Net cash provided by financing activities934,333 807,589 
Net increase in cash and cash equivalents391,495 428,437 
Cash and cash equivalents, beginning416,636 203,750 
Cash and cash equivalents, ending$808,131 $632,187 
Supplemental disclosures of cash flow information
Interest paid$153,724 $34,850 
Income tax paid, net5,233 6,778 
Supplemental disclosures of noncash operating, investing, and financing activities
Unrealized holding losses on investment securities available-for-sale, net of taxes$(5,262)$(61,229)
Transfers from loans and leases to foreclosed real estate and other repossessions or SBA receivable14,908 11,278 
Net transfers between foreclosed real estate and SBA receivable— 55 
Transfer of loans held for sale to loans and leases held for investment56,852 88,915 
Transfer of loans and leases held for investment to loans held for sale284,081 227,705 
Transfer from retained earnings to other assets for pro rata portion of equity method investee stock compensation expense578 207 
Equity method investment commitments7,721 10,566 
Equity security investment commitments— 415 
See Notes to Unaudited Condensed Consolidated Financial Statements

7
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Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1. Basis of Presentation
Nature of Operations
Live Oak Bancshares, Inc. (the(collectively with its subsidiaries including Live Oak Banking Company, the “Company” or “LOB”) is a bank holding company headquartered in Wilmington, North Carolina incorporated under the laws of the State 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 and deposit related services to small businesses nationwide in targeted industries, which we refer to as verticals. The Bank identifies and grows within credit-worthy industries through expertise within those industries.nationwide. 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"Agriculture’s (“USDA”) Rural Energy for America Program ("REAP"), Water and Environmental Program (“WEP”), Business & Industry ("(“B&I"&I”) and Community Facilities loan programs. On July 28, 2015 the Company completed its initial public offeringThese loans are to small businesses and professionals with a secondary offering completed in August of 2017. In 2010,what the Bank formed Live Oak Number One, Inc., a wholly-owned subsidiary, to hold properties foreclosedbelieves are lower risk characteristics. Industries, or “verticals,” on by the Bank.
In addition towhich the Bank focuses its lending efforts are carefully selected. The Bank also lends more broadly to select borrowers outside of those verticals.
The Company’s wholly owned subsidiaries are 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;Bank, Government Loan Solutions, Inc. (“GLS”), Live Oak Grove, LLC (“Grove”), Live Oak Ventures, Inc. (“Live Oak Ventures”), and Canapi Advisors, LLC (“Canapi Advisors”). GLS is a management and technology consulting firm that specializesadvises and offers solutions and services to participants in the government guaranteed lending sector. GLS primarily provides services in connection with the settlement, accounting, and securitization processes for government guaranteed loans, including loans originated under the SBA 7(a) loan programprograms and USDA-guaranteed loans;USDA guaranteed loans. The Grove provides Company employees 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 asbusiness visitors 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 formedon-site restaurant location. Live Oak Ventures, Inc. for theVentures’ purpose ofis investing in businesses that align with the Company's strategic initiative to be a leader in financial technology. Canapi Advisors provides investment advisory services to a series of funds focused on providing venture capital to new and emerging financial technology companies.
In November 2016, the Company formedThe Bank’s wholly owned subsidiaries are Live Oak Number One, Inc., Live Oak Clean Energy Financing LLC for(“LOCEF”), Live Oak Private Wealth, LLC (“Live Oak Private Wealth”) and Tiburon Land Holdings, LLC (“TLH”). Live Oak Number One, Inc. holds properties foreclosed on by the purpose of providingBank. LOCEF provides financing to entities for renewable energy applications. Live Oak Private Wealth provides high-net-worth individuals and families with strategic wealth and investment management services. During the first quarter of 2022, Jolley Asset Management, LLC (“JAM”) was merged into Live Oak Private Wealth. JAM was previously a wholly owned subsidiary of Live Oak Private Wealth. TLH was formed in the third quarter of 2022 to hold land adjacent to the Bank's headquarters consisting of wetlands and other protected property for the use and enjoyment of the Bank's employees and customers.
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 Combination for a further discussion of this transaction.
The Company earnsgenerates revenue primarily from net interest income and secondarily through the origination and sale of SBA and USDA-guaranteedgovernment guaranteed loans. Income from the retention of loans and netis comprised principally of interest income. Income from the sale of loans is comprised of loan servicing revenue and revaluation of related servicing rights along with net gains on the salesales of loans, revenues on the servicing of sold loans and valuation of loan servicing rights.loans. Offsetting these revenues are the cost of funding sources, provision for loan and lease credit 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. The Company also has less routinely generated gains and losses arising from its financial technology investments predominantly in its fintech segment.
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Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
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 ninethree and six months ended SeptemberJune 30, 20172023 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2017.2023. The consolidated balance sheetCondensed Consolidated Balance Sheet as of December 31, 20162022 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, 2016,2022, filed with the Securities Exchange Commission (“SEC”) on March 9, 2017February 23, 2023 (SEC File No. 001-37497) (the "2016 Annual Report"“2022 Form 10-K”). 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 2016 Annual Report.2022 Form 10-K. These unaudited interim consolidated financial statementsUnaudited Interim Condensed Consolidated Financial Statements should be read in conjunction with the audited consolidated financial statements and footnotes in the Company's 2016 Annual Report.2022 Form 10-K.

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

The preparation of financial statements in conformity with United States (“US”) 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 Condensed Consolidated Financial Statements have been presented in thousands, except percentage, time period, stock option, share and per share data or where otherwise indicated.
Business Segments
Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Management has determined that the Company has one significanttwo reportable operating segment, which is providing a lending platform for small businesses nationwide. In determiningsegments: Banking and Fintech, as discussed more fully in Note 11. Segments.
Changes in Accounting Estimates
During the appropriatenessfirst quarter of segment definition,2023, the Company considersrefined its allowance for credit losses (“ACL”) methodology for estimating probability of default (“PD”) and loss given default (“LGD”). Additionally, the materialityCompany began using internally calculated prepayment rates based on its historical information. These changes, based on the continued maturity of internal data, resulted in a potential segment,$1.5 million increase in the componentsACL in the first quarter of the business about which financial information is available, and components for which management regularly evaluates relative to resource allocation and performance assessment.
Equipment Leasing2023.
The Company purchases new equipmentalso refined its methodology for the purposeestimating its reserve on unfunded loan commitments by incorporating historical utilization rates on unused lines of leasing such equipmentcredit and updating probability assumptions related 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 resultsconstruction loan commitments. These changes resulted in a constant rate$2.4 million increase in the reserve on unfunded commitments in the first quarter of return on2023.
These refinements have been accounted for as changes in accounting estimates under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 250, Accounting Changes and Error Corrections, with prospective application beginning in the unrecovered lease investment.  The termperiod 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, 2017 the Company had net investments in direct financing lease receivables of $1.1 million.
Operating Leases
The term of each operating lease is generally 10 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 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 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.
As of September 30, 2017 the Company had a net investment of $47.5 million in assets included in premises and equipment that are subject to operating leases.
A maturity analysis of future minimum lease payments under non-cancelable operating leases is as follows:change.

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Live Oak Bancshares, Inc.
Notes to Unaudited Condensed 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 element 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 upon 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 estimated fair value of the asset. There have been no impairments of long-lived assets.
Change in Accounting Estimate
During 2017, the Company assessed its estimate of the useful lives of the Company’s aircraft transportation. The Company revised its original useful life estimate 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 on 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
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.
Note 2. Recent Accounting Pronouncements
In May 2014,March 2020, the Financial Accounting Standards Board (“FASB”)FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers2020-04 “Reference Rate Reform (Topic 606)”848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2014-09”2020-04”). This standard is intendedASU 2020-04 provides optional guidance for a limited period of time to clarifyease the principlespotential burden in accounting for (or 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 incomethe effects of) reference rate reform on financial assets and financial liabilities, all of which are explicitly excluded from the scope ofreporting. In December 2022, ASU 2014-09, and non-interest income. The Company's revenue streams included in non-interest income that are within the scope2022-06 “Reference Rate Reform (Topic 848): Deferral of the guidance are primarily related to salesSunset Date of foreclosed assets, construction supervision fees, title insurance income and trust fiduciary fees.Topic 848” was issued deferring the sunset date of Topic 848. With the amendments, the ASU can be adopted by the Company as of March 12, 2020, through December 31, 2024. The Company does not expect the adoption of ASU 2014-09 tobelieve these standards will have a material effectimpact on theits consolidated financial statements. To address the discontinuance of LIBOR, the Company stopped originating variable LIBOR-based loans effective December 31, 2021 and started to negotiate loans using the preferred replacement index, the Secured Overnight Financing Rate (“SOFR”) or a relevant duration U.S. Treasury rate. For currently outstanding LIBOR-based loans, the timing and manner in which each customer’s contract transitions from LIBOR to another rate will vary on a case-by-case basis. As of June 30, 2023, the Company has transitioned nearly all its LIBOR-based loan exposure to an alternative index. The Company expectsremaining LIBOR-based loans will transition to adopt the standard in the first quarter of 2018 with a cumulative effect adjustment to opening retained earnings, if such adjustment is deemed to be significant.an alternative index at their next repricing date.
In February 2016,March 2022, the FASB issued ASU No. 2016-02, “Leases2022-02 “Financial Instruments – Credit Losses (Topic 842)”326): Troubled Debt Restructurings (“TDRs”) and Vintage Disclosures” (“ASU 2016-02”2022-02”). ASU 2022-02 eliminates the accounting guidance for TDRs by creditors in ASC 310-40, Receivables – Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings when a borrower is experiencing financial difficulty. Additionally, for public business entities, ASU 2022-02 requires that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of ASC 326-20, Financial Instruments – Credit Losses – Measured at Amortized Cost. The FASB issued this ASU to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities onCompany adopted 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 Companystandard on January 1, 2019. The impact2023 using the modified retrospective method resulting in a net increase to retained earnings 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.$676 thousand.
In March 2016,June 2022, the FASB issued ASU No. 2016-09, “Compensation-Stock Compensation2022-03 “Fair Value Measurement (Topic 718): Improvements820) Fair Value Measurement of Equity Securities Subject to Employee Share-Based Payment AccountingContractual Restrictions” (“ASU 2016-09”2022-03”). ASU 2016-09 simplifies the accounting for share-based payment transactions for items including income tax consequences, classification of awards as2022-03 indicates a contractual sale restriction on 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. Startingsecurities should not be considered in the first quarter of 2017, stock-based compensation excess tax benefits or deficiencies are reflectedmeasuring fair value, however, disclosure should be made about such restrictions. The amendments 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 2016-13this standard will be effective for the Company on January 1, 2020. The Company is currently evaluating the potential impact of ASU 2016-13 on the 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 is also currently evaluating selected third-party vendor solutions 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.
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, 2018.2024. The Company does not expectbelieve this amendment to have a material 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 impairmentstandard 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,March 2023, the FASB issued ASU No. 2017-05, “Other Income - Gains2023-02 “Investments-Equity Method and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20) - Clarifying the Scope of Asset Derecognition Guidance andJoint Ventures (Topic 323): Accounting for Partial Sales of Nonfinancial Assets”Investments in Tax Credit Structures Using the Proportional Amortization Method” (“ASU 2017-05”2023-02”). ASU 2017-05 clarifies2023-02 permits companies to account for tax equity investments, regardless of the scope of Subtopic 610-20 and adds guidance on nonfinancial asset derecognition as well astax credit program from which the accounting for partial sales of nonfinancial assets.income tax credits are received, using the proportional amortization method if certain conditions are met. The amendments conform the derecognition guidance on nonfinancial assets with the model for transactions in the new revenue standard. ASU 2017-05this standard will be effective for the Company on January 1, 2018 and is2024. The Company does not expected tobelieve this standard will have a significantmaterial impact on its consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, "Compensation - Stock Compensation (Topic 718) - Scope of Modification Accounting" ("ASU 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. ASU 2017-09 will be effective for the Company on January 1, 2018 and is not expected to have a significant impact on its consolidated financial statements.
10
In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities" ("ASU 2017-12"). ASU 2017-12 amends the hedge accounting recognition and presentation requirements in ASC 815 to improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities to better align the entity’s financial reporting for hedging relationships with those risk

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Live Oak Bancshares, Inc.
Notes to Unaudited Condensed 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 averageweighted-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 sharedshare in the net income of the Company.
Three Months Ended
June 30,		Six Months Ended
June 30,
2023202220232022
Basic earnings per share:
Net income$17,544 $97,039 $17,942 $131,548 
Weighted-average basic shares outstanding44,327,47443,824,70744,242,78543,763,681
Basic earnings per share$0.40 $2.22 $0.41 $3.01 
Diluted earnings per share:
Net income, for diluted earnings per share$17,544 $97,039 $17,942 $131,548 
Total weighted-average basic shares outstanding44,327,47443,824,70744,242,78543,763,681
Add effect of dilutive stock options and restricted stock grants507,615978,571657,5381,252,082
Total weighted-average diluted shares outstanding44,835,08944,803,27844,900,32345,015,763
Diluted earnings per share$0.39 $2.16 $0.40 $2.92 
Anti-dilutive stock options and restricted shares2,096,220869,7532,096,220869,753
 Three Months Ended
September 30,		 Nine Months Ended
September 30,
 2017 2016 2017 2016
Basic earnings per share:       
Net income available to common shareholders$12,862
 $3,479
 $28,769
 $8,293
Weighted-average basic shares outstanding37,366,041
 34,206,943
 35,485,371
 34,191,014
Basic earnings per share$0.34
 $0.10
 $0.81
 $0.24
Diluted earnings per share:       
Net income available to common shareholders, for diluted earnings per share$12,862
 $3,479
 $28,769
 $8,293
Total weighted-average basic shares outstanding37,366,041
 34,206,943
 35,485,371
 34,191,014
Add effect of dilutive stock options and restricted stock grants1,278,636
 794,874
 1,244,683
 812,408
Total weighted-average diluted shares outstanding38,644,677
 35,001,817
 36,730,054
 35,003,422
Diluted earnings per share$0.33
 $0.10
 $0.78
 $0.24
Anti-dilutive shares243,199
 1,778,995
 250,698
 1,778,995

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

Note 4. Business CombinationSecurities
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. Investment SecuritiesAvailable-for-Sale
The carrying amount of investment securities and their approximate fair values are reflected in the following table:

June 30, 2023
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
US government agencies$31,032 $— $536 $30,496 
Mortgage-backed securities1,226,789 107 127,759 1,099,137 
Municipal bonds3,212 — 177 3,035 
Other debt securities500 — 22 478 
Total$1,261,533 $107 $128,494 $1,133,146 
December 31, 2022
US government agencies$16,080 $— $412 $15,668 
Mortgage-backed securities1,116,387 270 121,083 995,574 
Municipal bonds3,223 — 246 2,977 
Other debt securities500 — — 500 
Total$1,136,190 $270 $121,741 $1,014,719 
During the three and six months ended June 30, 2023, two mortgage-backed securities totaling $2.7 million were settled. During the three months ended June 30, 2022, nine mortgage-backed securities totaling $18.8 million were settled. During the six months ended June 30, 2022, eighteen mortgage-backed securities totaling $32.7 million were settled.
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Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements

Accrued interest receivable on available-for-sale securities totaled $3.4 million and $2.9 million at June 30, 2023 and December 31, 2022, respectively, and is included in other assets in the accompanying Unaudited Condensed Consolidated Balance Sheets.
 
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 grossdebt securities available-for-sale in an unrealized loss position for which an allowance for credit losses and fair value,has not been recorded, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position.
Less Than 12 Months12 Months or MoreTotal
June 30, 2023
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
US government agencies$23,832 $246 $6,664 $290 $30,496 $536 
Mortgage-backed securities346,178 12,368 742,007 115,391 1,088,185 127,759 
Municipal bonds— — 3,035 177 3,035 177 
Other debt securities478 22 — — 478 22 
Total$370,488 $12,636 $751,706 $115,858 $1,122,194 $128,494 
 Less Than 12 Months 12 Months or More Total
September 30, 2017
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
US government agencies$4,996
 $16
 $1,496
 $19
 $6,492
 $35
Residential mortgage-backed securities28,397
 461
 21,767
 475
 50,164
 936
Mutual fund2,021
 49
 —
 —
 2,021
 49
Total$35,414
 $526
 $23,263
 $494
 $58,677
 $1,020
 Less Than 12 Months 12 Months or More Total
December 31, 2016
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
US government agencies$6,508
 $32
 $—
 $—
 $6,508
 $32
Residential mortgage-backed securities49,109
 1,017
 1,635
 14
 50,744
 1,031
Mutual fund1,960
 52
 —
 —
 1,960
 52
Total$57,577
 $1,101
 $1,635
 $14
 $59,212
 $1,115
Less Than 12 Months12 Months or MoreTotal
December 31, 2022
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
US government agencies$15,668 $412 $— $— $15,668 $412 
Mortgage-backed securities513,639 29,060 456,972 92,023 970,611 121,083 
Municipal bonds2,884 241 93 5 2,977 246 
Total$532,191 $29,713 $457,065 $92,028 $989,256 $121,741 
Management evaluates available-for-sale debt securities to determine whether the unrealized loss is due to credit-related factors or non-credit-related factors. The evaluation considers the extent to which the security’s fair value is less than cost, the financial condition and near-term prospects of the issuer, and intent and ability of the Company to retain its investment in the security for a period of time sufficient to allow for any anticipated recovery in fair value.
At SeptemberJune 30, 2017,2023, there were twelve residential359 mortgage-backed securities, two US government agency securities and two municipal bonds in unrealized loss positions for greater than 12 months. There were 88 mortgage-backed securities, seven US government agency securities, and one other debt security in unrealized loss positions for less than 12 months. Unrealized losses at December 31, 2022 were comprised of 185 mortgage-backed securities and one US government agency securitymunicipal bond in unrealized loss positions for greater than 12 months and fourteen residential236 mortgage-backed securities, twofive US government agency securities and the 504 Fund mutual fund investment in an unrealized loss position for less than 12 months. Unrealized losses at December 31, 2016 were comprised of two residential mortgage-backed securitiesone municipal bond in unrealized loss positions for greater than 12 months and three US government agency securities, twenty-two residential mortgage-backed securities and the 504 Fund mutual fund investment in an unrealized loss position for less than 12 months.
These unrealized losses are primarily the result of non-credit-related 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’sissuers' 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.losses have been recognized in the Company’s Unaudited Condensed Consolidated Statements of Income.
All residential mortgage-backed securities in the Company’s portfolio at SeptemberJune 30, 20172023 and December 31, 20162022 were backed by USU.S. government sponsored enterprises (“GSEs”).

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

The following is a summary of investment securities by maturity:
June 30, 2023
Available-for-Sale
Amortized CostFair Value
US government agencies
Within one year$8,000 $7,939 
One to five years20,421 20,027 
Five to ten years2,611 2,530 
Total31,032 30,496 
Mortgage-backed securities
Within one year629 626 
One to five years173,870 163,603 
Five to ten years257,837 227,520 
After 10 years794,453 707,388 
Total1,226,789 1,099,137 
Municipal bonds
Five to ten years3,114 2,951 
After 10 years98 84 
Total3,212 3,035 
Other debt securities
Within one year500 478 
Total500 478 
Total$1,261,533 $1,133,146 
 September 30, 2017
 Available-for-Sale
 
Amortized
cost
 
Fair
value
US government agencies   
Within one year$11,302
 $11,312
One to five years6,527
 6,492
Total17,829
 17,804
    
Residential mortgage-backed securities   
Five to ten years7,264
 7,200
After 10 years50,421
 49,550
Total57,685
 56,750
    
Total$75,514
 $74,554
Mortgage-backed securities are included in maturity categories based on their contractual maturity date. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.
The table above reflects contractual maturities. Actual results will differ as the loans underlying the mortgage-backedThere were no securities may repay sooner than scheduled. This table excludes the 504 Fund mutual fund investment.
Atpledged at June 30, 2023 or December 31, 2016, an investment2022.
Other
Other investments, largely comprised of non-marketable equity investments, are generally accounted for under the equity method or equity 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 September 30, 2017, the security pledged to secure a line of credit with the Company's correspondent bank was released. At September 30, 2017accounting and December 31, 2016, 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 businessare included in other assets in the state of Ohio and investment securities with a fair market value of $2.5 million and $1.2 million, respectively, were pledgedaccompanying Unaudited Condensed Consolidated Balance Sheets. The below tables provide additional information related to the Company's trust departmentinvestments accounted for uninsured trust assets held by the trust department.
Note 6. 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,under 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.

two methods.

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

Equity Method Accounting
Commercial Real Estate
Commercial real estate loans are extensionsThe carrying amount and ownership percentage of credit secured by owner occupiedeach equity investment over which the Company has significant influence at June 30, 2023 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 loansDecember 31, 2022 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 referencedreflected 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.following table:
June 30, 2023December 31, 2022
AmountOwnership %AmountOwnership %
Apiture, Inc.$57,658 40.3 %$60,320 40.3 %
Canapi Ventures SBIC Fund, LP (1) (5)
18,281 2.9 %19,246 2.9 %
Canapi Ventures Fund, LP (2) (5)
2,279 1.5 %2,382 1.5 %
Canapi Ventures Fund II, LP (3) (5)
7,335 1.6 %7,412 1.6 %
Canapi Ventures SBIC Fund II, LP (4) (5)
7,856 2.9 %7,981 3.7 %
Other Fintech investments in private companies (6)
— — %241 4.3 %
Other (7)
20,554 Various12,476 Various
Total$113,963 $110,058 
(1)Includes unfunded commitments of $5.4 million and $5.5 million as of June 30, 2023 and December 31, 2022, respectively.
(2)Includes unfunded commitments of $613 thousand and $617 thousand as of June 30, 2023 and December 31, 2022, respectively.
(3)Includes unfunded commitments of $6.9 million as of June 30, 2023 and December 31, 2022.
(4)Includes unfunded commitments of $7.6 million and $7.5 million as of June 30, 2023 and December 31, 2022, respectively.
(5)Investee is accounted for under equity method due to the Company's participation as an investment advisor.
(6)As of December 31, 2022, Other Fintech investments include Kwipped, Inc. As of June 30, 2023, the investment has been moved to equity security as the preferred shares do not qualify as in-substance common stock.
(7)As of June 30, 2023, Other investments include low income housing tax credit (“LIHTC”) in Estrella Landing Apartments LLC (“Estrella Landing”), in which the company holds a 99.9% limited member interest. Also included in Other investments are solar income tax credit investments in Green Sun Tenant LLC (“Green Sun”), SVA 2021-2 TE Holdco LLC (“Sun Vest”) and EG5 CSP1 Holding LLC (“HEP”), which the Company holds a 99.0% limited member interest in all investments. Also included are Cape Fear Collective Impact Opportunity 1 LLC (“Cape Fear Collective”), Cape Fear Collective Impact Opportunity 2 LLC (“Cape Fear Collective 2”) and OTR Fund I, LLC ("OTR") which the Company holds 99.0%, 32.3%, and 11.5% of limited member interests, respectively. As of June 30, 2023, there was an unfunded commitment of $7.7 million for Estrella Landing. The Company also has an unrecorded commitment related to a solar income tax credit investment for $18.1 million. As of December 31, 2022, Other investments include Green Sun, Sun Vest, and HEP, which the Company holds a 99.0% limited member interest in all investments. Also included within Other investments are Cape Fear Collective and Cape Fear Collective 2, which the Company holds 99.0% and 32.3% of limited member interests, respectively. As of December 31, 2022 an unfunded commitment of $2.6 million was recorded as a liability for HEP, and as of June 30, 2023, this commitment has been funded. Managing control of the above investments resides with the managing members.

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

Equity Security Accounting
Loans and leases consistThe carrying amount of the following:Company’s investments in non-marketable equity securities with no readily determinable fair value and amounts recognized in earnings on a cumulative basis as of June 30, 2023 and as of and for the six months ended June 30, 2023 and 2022 is reflected in the following table:
As of and for the six month period ended
Cumulative AdjustmentsJune 30, 2023June 30, 2022
Carrying value (1)
$77,586 $72,760 
Carrying value adjustments:
Impairment$— — — 
Upward changes for observable prices (2)
50,492 — 1,492 
Downward changes for observable prices(86)— — 
Net upward change$50,406 $— $1,492 
 September 30,
2017		 December 31,
2016
Commercial & Industrial   
Agriculture$2,698
 $1,714
Death Care Management12,101
 9,684
Healthcare41,454
 37,270
Independent Pharmacies97,171
 83,677
Registered Investment Advisors91,241
 68,335
Veterinary Industry45,570
 38,930
Other Industries142,115
 94,836
Total432,350
 334,446
Construction & Development   
Agriculture34,636
 32,372
Death Care Management4,744
 3,956
Healthcare46,814
 30,467
Independent Pharmacies1,696
 2,013
Registered Investment Advisors329
 294
Veterinary Industry13,265
 11,514
Other Industries45,052
 31,715
Total146,536
 112,331
Commercial Real Estate   
Agriculture14,689
 5,591
Death Care Management61,462
 52,510
Healthcare121,331
 114,281
Independent Pharmacies18,508
 15,151
Registered Investment Advisors13,550
 11,462
Veterinary Industry110,028
 102,906
Other Industries106,418
 46,245
Total445,986
 348,146
Commercial Land   
Agriculture146,814
 113,569
Total146,814
 113,569
Total Loans and Leases1
1,171,686
 908,492
Net Deferred Costs8,038
 7,648
Discount on SBA 7(a) and USDA Unguaranteed2
(9,837) (8,574)
Loans and Leases, Net of Unearned$1,169,887
 $907,566
1(1)Total loans and leases include $40.4Includes $2.8 million and $37.7$3.2 million of U.S. government guaranteed loansin unfunded commitments as of SeptemberJune 30, 20172023, and December 31, 2016,June 30, 2022, respectively.
2(2)The Company measuresCumulative adjustments excludes $13.9 million in realized gains for sale of an investment in the carrying valuesecond quarter 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.2021.
For the three and six months ended June 30, 2023, the Company recognized unrealized losses on all equity securities held at the reporting date of $20 thousand and $4 thousand, respectively. For the three and six months ended June 30, 2022, the Company recognized unrealized gains on all equity securities held at the reporting date of $1.5 million and $1.4 million, respectively.
Variable Interest Entities
Variable interests are defined as contractual ownership or other interests in an entity that change with fluctuations in the fair value of an entity's net asset value (a “VIE”). The primary beneficiary consolidates the VIE. The primary beneficiary is defined as the enterprise that has both the power to direct the activities of the VIE that most significantly impact the entity's economic performance and the obligation to absorb losses or the right to receive benefits that could be significant to the VIE.
Solar Renewable Energy Tax Credit Investments
The Company has equity interests in several limited liability companies that own and operate solar renewable energy projects which are accounted for as equity method investments. Over the course of the investments, the Company will receive federal and state tax credits, tax-related benefits, and excess cash available for distribution, if any. The Company may be called to sell its interest in the limited partnerships through a call option once all investment tax credits have been recognized.
Affordable Housing
The Company has an equity investment in a limited liability company (“LIHTC”) that qualifies as an affordable housing project, managed by an unrelated general partner. The Company accounts for the investment under the proportional amortization method. Under this method an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance as a component of income tax expense. The Company also has equity interests in two limited liability companies that invest in the acquisition, rehabilitation, or new construction of local qualified housing projects which are accounted for as equity method investments.

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

Canapi Funds
Credit Risk ProfileThe Company’s limited partnership investments in the Canapi Funds focus on providing venture capital to new and emerging financial technology companies. After initial commitment and over the course of the investment period, the Company will make capital contributions and receive profit and return of capital distributions as a result of fund performance until the funds wind down.
Non-marketable and Other Equity Investments
The Bank uses internal loanCompany also has limited interests in several non-marketable funds, including Small Business Investment Company (“SBIC”) and lease reviewsventure capital funds, which are accounted for as equity security investments. After the initial commitment and over the course of the investment period, the Company will make capital contributions and receive profit and return of capital distributions as a result of fund performance until the funds wind down. While the partnership agreements allow the Company to assessremove the general partner, this right is not deemed to be substantive as the general partner can only be removed for cause. All investments are generally non-redeemable and distributions are expected to be received through the liquidation of the underlying investments throughout the life of the investment fund. Investments may only be sold or transferred subject to the notice and approval provisions of the underlying investment agreement.
The above investments meet the criteria of a VIE, however, the Company is not the primary beneficiary of the entities, as it does not have the power to direct the activities that most significantly impact the economic 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.entities.
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 leasesCompany’s investment in the Bank’s portfolio. unconsolidated VIEs are carried in other assets and the Company’s unfunded capital and other commitments related to the unconsolidated VIEs are carried in other liabilities on the Unaudited Condensed Consolidated Balance Sheets.
The following guidelines governCompany’s maximum exposure to loss from unconsolidated VIEs includes the assignmentinvestment recorded on the Company’s Unaudited Condensed Consolidated Balance Sheets. For solar ITC investments, the balance sheet figures are net of these risk grades:
Exceptional (1 Rated): These loansany impairment recognized, and leases are of the highest quality, with strong, well-documented sources of repayment. Debt service coverage (“DSC”) is over 1.75Xincludes previously recorded tax credits which remain subject to recapture by taxing authorities based on historical results. Secondary source of repaymentcompliance features required to be met at the project level. While the Company believes the potential for loss from these investments is strong, withremote, the maximum exposure for solar tax credit investments was determined by assuming 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.scenario where related tax credits were recaptured.

16
Table of Contents

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

The following tables summarizetable provides a summary of the risk gradesVIEs that the Company has not consolidated as of each category:June 30, 2023 and December 31, 2022:
June 30, 2023Investment Carrying AmountMaximum Exposure to LossLiability RecognizedClassification
Solar tax credit investments$4,079 $19,203 $— 
Other assets (1)
Affordable housing15,964 15,964 7,721 
Other assets & other liabilities (2)
Canapi Funds35,751 35,751 20,525 Other assets & other liabilities
Non-marketable and other equity investments8,986 8,986 2,769 Other assets & other liabilities
December 31, 2022Investment Carrying AmountMaximum Exposure to LossLiability RecognizedClassification
Solar tax credit investments$5,221 $24,295 $2,641 
Other assets & other liabilities(3)
Affordable housing7,255 7,255 — Other assets
Canapi Funds37,021 37,021 20,474 Other assets & other liabilities
Non-marketable and other equity investments8,509 8,509 3,033 Other assets & other liabilities
(1)Maximum exposure to loss represents $4.1 million of current investments and a scenario in which related tax credits are recaptured, collectively totaling $19.2 million.
(2)Maximum exposure to loss represents $16.0 million of investments. As there are no tax credits allocated in the current year, there is no increase to the maximum exposure to loss related to recaptured tax credits on the $8.8 million LIHTC investment.
(3)Maximum exposure to loss represents $5.2 million of current investments and a scenario in which related tax credits are recaptured, collectively totaling $24.3 million.

17
 
Risk Grades
1 - 4
 
Risk Grade
5
 
Risk Grades
6 - 8
 Total
September 30, 2017       
Commercial & Industrial       
Agriculture$2,470
 $228
 $—
 $2,698
Death Care Management11,976
 118
 7
 12,101
Healthcare32,350
 1,716
 7,388
 41,454
Independent Pharmacies87,173
 6,523
 3,475
 97,171
Registered Investment Advisors87,940
 2,566
 735
 91,241
Veterinary Industry41,738
 1,833
 1,999
 45,570
Other Industries142,096
 19
 —
 142,115
Total405,743
 13,003
 13,604
 432,350
Construction & Development       
Agriculture34,636
 —
 —
 34,636
Death Care Management4,744
 —
 —
 4,744
Healthcare44,937
 704
 1,173
 46,814
Independent Pharmacies1,696
 —
 —
 1,696
Registered Investment Advisors329
 —
 —
 329
Veterinary Industry13,265
 —
 —
 13,265
Other Industries45,052
 —
 —
 45,052
Total144,659
 704
 1,173
 146,536
Commercial Real Estate       
Agriculture14,689
 —
 —
 14,689
Death Care Management54,684
 4,288
 2,490
 61,462
Healthcare111,943
 5,050
 4,338
 121,331
Independent Pharmacies15,043
 1,843
 1,622
 18,508
Registered Investment Advisors13,406
 144
 —
 13,550
Veterinary Industry95,055
 2,680
 12,293
 110,028
Other Industries105,738
 680
 —
 106,418
Total410,558
 14,685
 20,743
 445,986
Commercial Land       
Agriculture144,687
 2,104
 23
 146,814
Total144,687
 2,104
 23
 146,814
Total1
$1,105,647
 $30,496
 $35,543
 $1,171,686

Table of Contents

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

 
Risk Grades
1 - 4
 
Risk Grade
5
 
Risk Grades
6 - 8
 Total
December 31, 2016       
Commercial & Industrial       
Agriculture$1,656
 $58
 $—
 $1,714
Death Care Management9,452
 121
 111
 9,684
Healthcare28,723
 681
 7,866
 37,270
Independent Pharmacies73,948
 6,542
 3,187
 83,677
Registered Investment Advisors65,297
 2,246
 792
 68,335
Veterinary Industry34,407
 1,967
 2,556
 38,930
Other Industries94,736
 100
 —
 94,836
Total308,219
 11,715
 14,512
 334,446
Construction & Development       
Agriculture32,061
 —
 311
 32,372
Death Care Management3,956
 —
 —
 3,956
Healthcare30,467
 —
 —
 30,467
Independent Pharmacies2,013
 —
 —
 2,013
Registered Investment Advisors294
 —
 —
 294
Veterinary Industry9,725
 1,789
 —
 11,514
Other Industries31,715
 —
 —
 31,715
Total110,231
 1,789
 311
 112,331
Commercial Real Estate       
Agriculture5,591
 —
 —
 5,591
Death Care Management46,427
 4,314
 1,769
 52,510
Healthcare103,097
 7,142
 4,042
 114,281
Independent Pharmacies12,654
 1,968
 529
 15,151
Registered Investment Advisors11,462
 —
 —
 11,462
Veterinary Industry88,168
 3,995
 10,743
 102,906
Other Industries46,245
 —
 —
 46,245
Total313,644
 17,419
 17,083
 348,146
Commercial Land       
Agriculture112,333
 1,138
 98
 113,569
Total112,333
 1,138
 98
 113,569
Total1
$844,427
 $32,061
 $32,004
 $908,492
1Total loans and leases include $40.4 million of U.S. government guaranteed loans as of September 30, 2017, segregated by risk grade as follows: Risk Grades 1 – 4 = $12.1 million, Risk Grade 5 = $3.7 million, Risk Grades 6 – 8 = $24.6 million. As of December 31, 2016, total loans and leases include $37.7 million of U.S. government guaranteed loans, segregated by risk grade as follows: Risk Grades 1 – 4 = $8.7 million, Risk Grade 5 = $7.7 million, Risk Grades 6 – 8 = $21.3 million.

Table of Contents

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

Past DueNote 5. Loans and Leases Held for Investment and Credit Quality
The following tables present total loans and leases held for investment and an aging analysis for the Company’s portfolio segments. 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.
Current or Less than 30 Days
Past Due		30-89 Days
Past Due		90 Days or More Past DueTotal Past DueTotal Carried at Amortized
Cost
Loans Accounted for Under
the Fair Value Option(1)
Total Loans and Leases
June 30, 2023
Commercial & Industrial
Small Business Banking$1,800,842$8,096$28,490$36,586$1,837,428$160,621$1,998,049
Specialty Lending1,253,649—1,8651,8651,255,51423,1001,278,614
Energy & Infrastructure495,5803,8543,0826,936502,51647,580550,096
Paycheck Protection Program8,068———8,068—8,068
Total3,558,13911,95033,43745,3873,603,526231,3013,834,827
Construction & Development
Small Business Banking479,107———479,107—479,107
Specialty Lending108,210———108,210—108,210
Energy & Infrastructure6,779———6,779—6,779
Total594,096———594,096—594,096
Commercial Real Estate
Small Business Banking2,199,3599,78922,22732,0162,231,375148,6962,380,071
Specialty Lending353,60412,232—12,232365,8362,153367,989
Energy & Infrastructure118,230—3,0723,072121,30218,565139,867
Total2,671,19322,02125,29947,3202,718,513169,4142,887,927
Commercial Land
Small Business Banking493,789—1,9171,917495,70641,066536,772
Total493,789—1,9171,917495,70641,066536,772
Total$7,317,217$33,971$60,653$94,624$7,411,841$441,781$7,853,622
Net deferred fees(17,224)
Loans and Leases, Net$7,836,398
Guaranteed Balance$2,655,758$11,414$47,265$58,679$2,714,437$74,225$2,788,662
% Guaranteed36.3%33.6%77.9%62.0%36.6%16.8%35.5%
18
 
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               
Commercial & Industrial               
Agriculture$—
 $—
 $—
 $—
 $—
 $2,698
 $2,698
 $—
Death Care Management—
 —
 —
 —
 —
 12,101
 12,101
 —
Healthcare535
 76
 16
 6,152
 6,779
 34,675
 41,454
 —
Independent Pharmacies331
 44
 —
 2,274
 2,649
 94,522
 97,171
 —
Registered Investment Advisors—
 —
 —
 —
 —
 91,241
 91,241
 —
Veterinary Industry224
 29
 536
 796
 1,585
 43,985
 45,570
 —
Other Industries—
 —
 —
 —
 —
 142,115
 142,115
 —
Total1,090
 149
 552
 9,222
 11,013
 421,337
 432,350
 —
Construction & Development               
Agriculture—
 —
 —
 —
 —
 34,636
 34,636
 —
Death Care Management—
 —
 —
 —
 —
 4,744
 4,744
 —
Healthcare—
 —
 —
 —
 —
 46,814
 46,814
 —
Independent Pharmacies—
 —
 —
 —
 —
 1,696
 1,696
 —
Registered Investment Advisors—
 —
 —
 —
 —
 329
 329
 —
Veterinary Industry—
 —
 —
 —
 —
 13,265
 13,265
 —
Other Industries—
 —
 —
 —
 —
 45,052
 45,052
 —
Total—
 —
 —
 —
 —
 146,536
 146,536
 —
Commercial Real Estate               
Agriculture—
 —
 —
 —
 —
 14,689
 14,689
 —
Death Care Management—
 298
 174
 1,402
 1,874
 59,588
 61,462
 —
Healthcare40
 —
 2,679
 829
 3,548
 117,783
 121,331
 —
Independent Pharmacies—
 —
 —
 1,622
 1,622
 16,886
 18,508
 —
Registered Investment Advisors—
 —
 —
 —
 —
 13,550
 13,550
 —
Veterinary Industry1,906
 3,915
 132
 2,749
 8,702
 101,326
 110,028
 —
Other Industries—
 7,750
 —
 —
 7,750
 98,668
 106,418
 —
Total1,946
 11,963
 2,985
 6,602
 23,496
 422,490
 445,986
 —
Commercial Land               
Agriculture23
 —
 —
 —
 23
 146,791
 146,814
 —
Total23
 —
 —
 —
 23
 146,791
 146,814
 —
Total1
$3,059
 $12,112
 $3,537
 $15,824
 $34,532
 $1,137,154
 $1,171,686
 $—

Table of Contents

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

Current or Less than 30 Days
Past Due
30-89 Days
Past Due
90 Days or More Past DueTotal Past DueTotal Carried at Amortized
Cost
Loans Accounted for Under
the Fair Value Option(1)
Total Loans and Leases
December 31, 2022
Commercial & Industrial
Small Business Banking$1,719,165$21,589$16,221$37,810$1,756,975$182,348$1,939,323
Specialty Lending1,022,6153982666641,023,27929,0841,052,363
Energy & Infrastructure420,447—3,0823,082423,52950,094473,623
Paycheck Protection Program13,134———13,134—13,134
Total3,175,36121,98719,56941,5563,216,917261,5263,478,443
Construction & Development
Small Business Banking471,2431,500—1,500472,743—472,743
Specialty Lending104,069———104,069—104,069
Energy & Infrastructure13,753———13,753—13,753
Total589,0651,500—1,500590,565—590,565
Commercial Real Estate
Small Business Banking2,137,02812,0825,77117,8532,154,881166,5952,321,476
Specialty Lending319,419———319,4192,050321,469
Energy & Infrastructure136,706—3,0723,072139,77822,123161,901
Total2,593,15312,0828,84320,9252,614,078190,7682,804,846
Commercial Land       
Small Business Banking429,0141,6631,9173,580432,59442,164474,758
Total429,0141,6631,9173,580432,59442,164474,758
Total$6,786,593$37,232$30,329$67,561$6,854,154$494,458$7,348,612
Net deferred fees(4,434)
Loans and Leases, Net$7,344,178
 
Guaranteed Balance$2,657,770$20,199$26,026$46,225$2,703,995$67,268$2,771,263
% Guaranteed39.2%54.3%85.8%68.4%39.5%13.6%37.7%
(1)Retained portions of government guaranteed loans sold prior to January 1, 2021 are carried at fair value under FASB ASC Subtopic 825-10, Financial Instruments: Overall. See Note 9. Fair Value of Financial Instruments for additional information.
19
 
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               
Commercial & Industrial               
Agriculture$—
 $—
 $—
 $—
 $—
 $1,714
 $1,714
 $—
Death Care Management—
 —
 —
 —
 —
 9,684
 9,684
 —
Healthcare—
 272
 496
 5,920
 6,688
 30,582
 37,270
 —
Independent Pharmacies42
 293
 408
 2,349
 3,092
 80,585
 83,677
 —
Registered Investment Advisors—
 —
 —
 —
 —
 68,335
 68,335
 —
Veterinary Industry32
 151
 646
 1,441
 2,270
 36,660
 38,930
 —
Other Industries—
 —
 —
 —
 —
 94,836
 94,836
 —
Total74
 716
 1,550
 9,710
 12,050
 322,396
 334,446
 —
Construction & Development               
Agriculture231
 80
 —
 —
 311
 32,061
 32,372
 —
Death Care Management—
 —
 —
 —
 —
 3,956
 3,956
 —
Healthcare—
 —
 —
 —
 —
 30,467
 30,467
 —
Independent Pharmacies—
 —
 —
 —
 —
 2,013
 2,013
 —
Registered Investment Advisors—
 —
 —
 —
 —
 294
 294
 —
Veterinary Industry—
 —
 —
 —
 —
 11,514
 11,514
 —
Other Industries—
 —
 —
 —
 —
 31,715
 31,715
 —
Total231
 80
 —
 —
 311
 112,020
 112,331
 —
Commercial Real Estate               
Agriculture—
 —
 —
 —
 —
 5,591
 5,591
 —
Death Care Management—
 —
 188
 1,423
 1,611
 50,899
 52,510
 —
Healthcare—
 —
 3,180
 45
 3,225
 111,056
 114,281
 —
Independent Pharmacies—
 —
 —
 529
 529
 14,622
 15,151
 —
Registered Investment Advisors—
 —
 —
 —
 —
 11,462
 11,462
 —
Veterinary Industry898
 3,981
 737
 5,158
 10,774
 92,132
 102,906
 —
Other Industries—
 —
 —
 —
 —
 46,245
 46,245
 —
Total898
 3,981
 4,105
 7,155
 16,139
 332,007
 348,146
 —
Commercial Land               
Agriculture58
 40
 —
 —
 98
 113,471
 113,569
 —
Total58
 40
 —
 —
 98
 113,471
 113,569
 —
Total1
$1,261
 $4,817
 $5,655
 $16,865
 $28,598
 $879,894
 $908,492
 $—
1Total loans and leases include $40.4 million of U.S. government guaranteed loans as of September 30, 2017, of which $14.3 million is greater than 90 days past due, $5.0 million is 30-89 days past due and $21.1 million is included in current loans and leases as presented above. As of December 31, 2016, total loans and leases include $37.7 million of U.S. government guaranteed loans, of which $13.7 million is greater than 90 days past due, $6.8 million is 30-89 days past due and $17.2 million is included in current loans and leases as presented above.

Table of Contents

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

Credit Quality Indicators
NonaccrualThe following tables present asset quality indicators by portfolio class and origination year. See Note 3. Loans and Leases
Loans Held for Investment and leases that become 90 days delinquent, orCredit Quality in cases where there is evidencethe Company’s 2022 Form 10-K for additional discussion around the asset quality indicators that the borrower’s abilityCompany uses to make the required payments is impaired, are placed in nonaccrual statusmanage 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 thousand and $165 thousand for the three months ended September 30, 2017 and 2016, respectively, and for the nine months ended September 30, 2017 and 2016 interest income would have increased approximately $831 thousand and $451 thousand, respectively. All nonaccrual loans and leases are included in the held for investment portfolio.monitor credit risk.
Nonaccrual loans and leases as of September 30, 2017 and December 31, 2016 are as follows:
Term Loans and Leases Amortized Cost Basis by Origination Year
20232022202120202019PriorRevolving Loans
Amortized Cost Basis		Revolving Loans
Converted to Term
Total(1)
June 30, 2023
Small Business Banking
Risk Grades 1 - 4$440,780 $1,453,858 $1,301,691 $734,205 $387,068 $341,376 $68,046 $4,361 $4,731,385 
Risk Grade 51,573 41,286 27,317 39,763 36,410 50,466 15,666 1,055 213,536 
Risk Grades 6 - 8— 7,790 13,165 14,139 24,268 38,225 1,108 — 98,695 
Total442,353 1,502,934 1,342,173 788,107 447,746 430,067 84,820 5,416 5,043,616 
Specialty Lending
Risk Grades 1 - 4352,528 548,744 332,847 112,710 17,730 5,930 160,775 9,965 1,541,229 
Risk Grade 5— 43,148 45,208 16,882 12,439 4,042 23,930 7,500 153,149 
Risk Grades 6 - 8— — 20,088 1,328 5,002 166 8,598 — 35,182 
Total352,528 591,892 398,143 130,920 35,171 10,138 193,303 17,465 1,729,560 
Energy & Infrastructure
Risk Grades 1-4113,399 176,727 152,760 39,360 50,716 28,752 12,822 — 574,536 
Risk Grade 5— 4,024 2,634 13,517 7,104 10,358 — — 37,637 
Risk Grades 6 - 8— — 6,436 3,572 — 8,416 — — 18,424 
Total113,399 180,751 161,830 56,449 57,820 47,526 12,822 — 630,597 
Paycheck Protection Program
Risk Grades 1 - 4— — 4,151 3,917 — — — — 8,068 
Total— — 4,151 3,917 — — — — 8,068 
Total$908,280 $2,275,577 $1,906,297 $979,393 $540,737 $487,731 $290,945 $22,881 $7,411,841 
Year-To-Date Gross Charge-offs
Small Business Banking$— $1,426 $621 $255 $586 $513 $50 $— $3,451 
Specialty Lending— — 4,315 514 — — 888 — 5,717 
Total$— $1,426 $4,936 $769 $586 $513 $938 $— $9,168 
20
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 Condensed Consolidated Financial Statements

Term Loans and Leases Amortized Cost Basis by Origination Year
20222021202020192018PriorRevolving Loans
Amortized Cost Basis		Revolving Loans
Converted to Term
Total(1)
December 31, 2022
Small Business Banking
Risk Grades 1 - 4$1,427,182 $1,400,726 $795,647 $426,401 $217,893 $204,933 $65,455 $1,738 $4,539,975 
Risk Grade 515,942 17,745 40,202 45,712 26,124 27,212 13,210 204 186,351 
Risk Grades 6 - 81,806 4,277 17,845 23,470 14,094 27,215 1,638 522 90,867 
Total1,444,930 1,422,748 853,694 495,583 258,111 259,360 80,303 2,464 4,817,193 
Specialty Lending         
Risk Grades 1 - 4635,079 355,785 144,545 25,849 6,574 788 153,062 31,504 1,353,186 
Risk Grade 57,341 33,272 12,329 10,201 4,399 — 6,619 248 74,409 
Risk Grades 6 - 8— 11,433 416 5,577 166 — 1,343 237 19,172 
Total642,420 400,490 157,290 41,627 11,139 788 161,024 31,989 1,446,767 
Energy & Infrastructure
Risk Grades 1 - 4199,338 176,855 39,600 51,190 23,374 19,694 12,751 351 523,153 
Risk Grade 54,024 4,409 500 6,976 4,706 5,142 — — 25,757 
Risk Grades 6 - 8— 3,082 16,589 — 8,479 — — — 28,150 
Total203,362 184,346 56,689 58,166 36,559 24,836 12,751 351 577,060 
Paycheck Protection Program         
Risk Grades 1 - 4— 7,421 5,713 — — — — — 13,134 
Total— 7,421 5,713 — — — — — 13,134 
Total$2,290,712 $2,015,005 $1,073,386 $595,376 $305,809 $284,984 $254,078 $34,804 $6,854,154 
(1)Excludes $441.8 million and $494.5 million of loans accounted for under the fair value option as of June 30, 2023 and December 31, 2022, respectively.
The following tables present guaranteed and unguaranteed loan and lease balances by asset quality indicator:
June 30, 2023
Loan and Lease
Balance(1)
Guaranteed BalanceUnguaranteed Balance% Guaranteed
Risk Grades 1 - 4$6,855,218 $2,487,302 $4,367,916 36.3 %
Risk Grade 5404,322 133,822 270,500 33.1 
Risk Grades 6 - 8152,301 93,313 58,988 61.3 
Total$7,411,841 $2,714,437 $4,697,404 36.6 %
December 31, 2022
Loan and Lease
Balance(1)
Guaranteed BalanceUnguaranteed Balance% Guaranteed
Risk Grades 1 - 4$6,429,448 $2,508,229 $3,921,219 39.0 %
Risk Grade 5286,517 115,573 170,944 40.3 
Risk Grades 6 - 8138,189 80,193 57,996 58.0 
Total$6,854,154 $2,703,995 $4,150,159 39.5 %
(1)Excludes $441.8 million and $494.5 million of loans accounted for under the fair value option as of June 30, 2023 and December 31, 2022, respectively.
21
December 31, 2016Loan and Lease Balance 
Guaranteed
Balance
 
Unguaranteed
Exposure
Commercial & Industrial     
Healthcare$6,416
 $5,152
 $1,264
Independent Pharmacies2,799
 2,204
 595
Veterinary Industry2,119
 2,079
 40
Total11,334
 9,435
 1,899
Construction & Development     
Agriculture231
 173
 58
Total231
 173
 58
Commercial Real Estate     
Death Care Management1,611
 1,263
 348
Healthcare3,225
 2,731
 494
Independent Pharmacies529
 —
 529
Veterinary Industry6,793
 5,395
 1,398
Total12,158
 9,389
 2,769
Commercial Land     
Agriculture58
 —
 58
Total58
 —
 58
Total$23,781
 $18,997
 $4,784

Table of Contents

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

Nonaccrual Loans and Leases
Allowance for LoanAs of June 30, 2023 and Lease Loss Methodology
The methodologyDecember 31, 2022 there were no loans greater than 90 days past due 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 basedstill accruing. There was no interest income recognized 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 impairednonaccrual loans and leases are mutually exclusive; any loan or lease thatduring the three and six months ended June 30, 2023 and 2022. Accrued interest receivable on loans totaled $51.8 million and $46.5 million at June 30, 2023 and December 31, 2022, respectively, and is impaired is excluded from its homogenous pool for purposes of that pool’s reserve calculation, regardless ofincluded in other assets in the level of impairment.accompanying Unaudited Condensed Consolidated Balance Sheets.
The ALLL policy for pooledNonaccrual loans and leases is governed in accordance with banking regulatory guidanceheld for homogenous poolsinvestment as of non-impairedJune 30, 2023 and December 31, 2022 are as follows:
June 30, 2023
Loan and Lease
Balance(1)
Guaranteed
Balance		Unguaranteed BalanceUnguaranteed
Exposure with No ACL
Commercial & Industrial
Small Business Banking$31,105 $27,185 $3,920 $407 
Specialty Lending15,824 4,619 11,205 — 
Energy & Infrastructure6,936 2,794 4,142 2,629 
Total53,865 34,598 19,267 3,036 
Commercial Real Estate
Small Business Banking35,410 23,529 11,881 5,651 
Specialty Lending12,232 — 12,232 — 
Energy & Infrastructure3,072 2,799 273 — 
Total50,714 26,328 24,386 5,651 
Commercial Land
Small Business Banking6,642 5,396 1,246 196 
Total6,642 5,396 1,246 196 
Total$111,221 $66,322 $44,899 $8,883 
December 31, 2022
Loan and Lease
Balance(1)
Guaranteed
Balance		Unguaranteed BalanceUnguaranteed
Exposure with No ACL
Commercial & Industrial
Small Business Banking$22,321 $19,302 $3,019 $407 
Specialty Lending3,647 384 3,263 — 
Energy & Infrastructure3,082 2,794 288 288 
Total29,050 22,480 6,570 695 
Commercial Real Estate
Small Business Banking34,520 23,830 10,690 3,611 
Energy & Infrastructure3,072 2,799 273 — 
Total37,592 26,629 10,963 3,611 
Commercial Land
Small Business Banking6,750 5,499 1,251 196 
Total6,750 5,499 1,251 196 
Total$73,392 $54,608 $18,784 $4,502 
(1)Excludes nonaccrual loans and leases that have similar risk characteristics. The Company follows a consistent and structured approachaccounted for assessingunder 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:
Thefair value option. See Note 9. 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.Financial Instruments for additional information.
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.



22
Table of Contents

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

When a loan or lease is placed on nonaccrual status, any accrued interest is reversed from loan interest income. The following table summarizes the amount of accrued interest reversed during the periods presented:
Three Months Ended June 30,Six Months Ended June 30,
2023202220232022
Commercial & Industrial$963 $141 $1,342 $310 
Commercial Real Estate294 4 467 182 
Commercial Land— — — 105 
Total$1,257 $145 $1,809 $597 
The following table presents the amortized cost basis of collateral-dependent loans and leases, which are individually evaluated to determine expected credit losses, as of June 30, 2023 and December 31, 2022:
Total Collateral Dependent LoansUnguaranteed Portion
June 30, 2023Real EstateBusiness AssetsOtherReal EstateBusiness AssetsOtherAllowance for Credit Losses
Commercial & Industrial
Small Business Banking$5,549 $— $— $1,085 $— $— $490 
Specialty Lending— 7,964 — — 7,964 — 5,858 
Energy & Infrastructure3,022 — — 227 — — — 
Total8,571 7,964 — 1,312 7,964 — 6,348 
Commercial Real Estate
Small Business Banking16,963 — — 8,093 — — 420 
Total16,963 — — 8,093 — — 420 
Commercial Land
Small Business Banking4,917 — — 999 — — 16 
Total4,917 — — 999 — — 16 
Total$30,451 $7,964 $— $10,404 $7,964 $— $6,784 
Total Collateral Dependent LoansUnguaranteed Portion
December 31, 2022Real EstateBusiness AssetsOtherReal EstateBusiness AssetsOtherAllowance for Credit Losses
Commercial & Industrial
Small Business Banking$2,730 $— $— $414 $— $— $— 
Specialty Lending— 371 — — 371 — 291 
Energy & Infrastructure16,378 — — 13,583 — — — 
Total19,108 371 — 13,997 371 — 291 
Commercial Real Estate
Small Business Banking15,286 — — 6,440 — — 152 
Total15,286 — — 6,440 — — 152 
Commercial Land
Small Business Banking1,743 — — 202 — — — 
Total1,743 — — 202 — — — 
Total$36,137 $371 $— $20,639 $371 $— $443 
23
Table of Contents
Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Allowance for Credit Losses - Loans and Leases
See Note 1. Organization and Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements in the Company’s 2022 Form 10-K for a description of the methodologies used to estimate the ACL.
The following table details activity in the allowance for loan and lease lossesACL by portfolio segment allowance for the periods presented:
Three Months EndedCommercial
& Industrial		Construction &
Development		Commercial
Real Estate		Commercial
Land		Total
June 30, 2023
Beginning Balance$72,058 $6,954 $25,062 $4,168 $108,242 
Charge offs(2,198)— (278)— (2,476)
Recoveries558 — 764 — 1,322 
Provision8,989 (526)4,360 205 13,028 
Ending Balance$79,407 $6,428 $29,908 $4,373 $120,116 
June 30, 2022
Beginning Balance$34,162 $4,102 $21,614 $3,180 $63,058 
Charge offs(1,812)— (433)(318)(2,563)
Recoveries35 — 66 — 101 
Provision8,793 (598)(3,407)479 5,267 
Ending Balance$41,178 $3,504 $17,840 $3,341 $65,863 
Three months ended
Construction &
Development
 
Commercial
Real Estate
 
Commercial
& Industrial
 
Commercial
Land
 Total
September 30, 2017         
Six Months EndedSix Months EndedCommercial
& Industrial		Construction &
Development		Commercial
Real Estate		Commercial
Land		Total
June 30, 2023June 30, 2023
Beginning BalanceBeginning Balance$64,995 $5,101 $22,901 $3,569 $96,566 
Adoption of ASU 2022-02Adoption of ASU 2022-02(25)(166)(83)(402)(676)
Charge offsCharge offs(8,476)— (692)— (9,168)
RecoveriesRecoveries581 — 764 — 1,345 
ProvisionProvision22,332 1,493 7,018 1,206 32,049 
Ending BalanceEnding Balance$79,407 $6,428 $29,908 $4,373 $120,116 
June 30, 2022June 30, 2022
Beginning Balance$1,603
 $7,494
 $8,351
 $2,112
 $19,560
Beginning Balance$37,770 $3,435 $19,068 $3,311 $63,584 
Charge offs—
 (665) (343) —
 (1,008)Charge offs(4,635)— (433)(652)(5,720)
Recoveries—
 4
 39
 6
 49
Recoveries180 — 716 — 896 
Provision36
 1,565
 827
 (2) 2,426
Provision7,863 69 (1,511)682 7,103 
Ending Balance$1,639
 $8,398
 $8,874
 $2,116
 $21,027
Ending Balance$41,178 $3,504 $17,840 $3,341 $65,863 
September 30, 2016         
Beginning Balance$1,208
 $4,079
 $5,601
 $1,421
 $12,309
Charge offs—
 —
 (939) —
 (939)
Recoveries—
 1
 1
 —
 2
Provision225
 261
 2,907
 413
 3,806
Ending Balance$1,433
 $4,341
 $7,570
 $1,834
 $15,178
During the three and six months ended June 30, 2023, the ACL increased as a result of continued loan growth, combined with portfolio trends and changes in the macroeconomic outlook. Additionally, during the first quarter of 2023, certain assumptions were refined, drawing more heavily on internal data, in the calculations of PD, LGD, and prepayment rates. These refinements increased the ACL by $1.5 million during the six months ended June 30, 2023. Loss rates are adjusted for twelve month forecasted unemployment followed by a twelve-month straight-line reversion period.
During the three and six month periods ended June 30, 2022, the ACL increased primarily as a result of the charge-offs that contributed to increased loss given default rates. Loss rates are adjusted for twelve month forecasted unemployment followed by a twelve-month straight-line reversion period.
24
Nine months endedConstruction &
Development		 Commercial
Real Estate		 Commercial
& Industrial		 Commercial
Land		 Total
September 30, 2017         
Beginning Balance$1,693
 $5,897
 $8,413
 $2,206
 $18,209
Charge offs—
 (952) (1,754) (35) (2,741)
Recoveries—
 17
 55
 6
 78
Provision(54) 3,436
 2,160
 (61) 5,481
Ending Balance$1,639
 $8,398
 $8,874
 $2,116
 $21,027
September 30, 2016         
Beginning Balance$1,064
 $2,486
 $2,766
 $1,099
 $7,415
Charge offs—
 (7) (1,307) (63) (1,377)
Recoveries—
 4
 444
 —
 448
Provision369
 1,858
 5,667
 798
 8,692
Ending Balance$1,433
 $4,341
 $7,570
 $1,834
 $15,178
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
Allowance for Loan and Lease Losses:         
Loans and leases individually evaluated for impairment$53
 $1,610
 $1,290
 $—
 $2,953
Loans and leases collectively evaluated for impairment2
1,586
 6,788
 7,584
 2,116
 18,074
Total allowance for loan and lease losses$1,639
 $8,398
 $8,874
 $2,116
 $21,027
Loans and leases receivable1:
         
Loans and leases individually evaluated for impairment$1,151
 $16,231
 $7,321
 $—
 $24,703
Loans and leases collectively evaluated for impairment2
145,385
 429,755
 425,029
 146,814
 1,146,983
Total loans and leases receivable$146,536
 $445,986
 $432,350
 $146,814
 $1,171,686

Table of Contents

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

Loan Modifications for Borrowers Experiencing Financial Difficulty
The Company may agree to modify the contractual terms of a loan to a borrower experiencing financial difficulty as a part of ongoing loss mitigation strategies. These modifications may result in an interest rate reduction, term extension, an other-than-insignificant payment delay, or a combination thereof. The Company typically does not offer principal forgiveness.
December 31, 2016
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
Loans and leases collectively evaluated for impairment2
1,693
 4,401
 6,955
 2,206
 15,255
Total allowance for loan and lease losses$1,693
 $5,897
 $8,413
 $2,206
 $18,209
Loans and leases receivable1:
         
Loans and leases individually evaluated for impairment$—
 $16,359
 $6,884
 $—
 $23,243
Loans and leases collectively evaluated for impairment2
112,331
 331,787
 327,562
 113,569
 885,249
Total loans and leases receivable$112,331
 $348,146
 $334,446
 $113,569
 $908,492
The following tables summarize the amortized cost basis of loans that were modified during the periods presented.

Three Months Ended June 30, 2023Other-Than-Insignificant
Payment Delay		Term ExtensionInterest Rate Reduction
Combination - Term Extension & Payment Delay		% of Total Class of
Financing Receivable
Small Business Banking$— $— $— $361 0.01 %
Specialty Lending— 4,427 — — 0.26 
Total$— $4,427 $— $361 0.27 %

Six Months Ended June 30, 2023Other-Than-Insignificant
Payment Delay		Term ExtensionInterest Rate ReductionCombination - Term Extension & Payment Delay% of Total Class of
Financing Receivable
Small Business Banking$— $— $3,436 $361 0.08 %
Specialty Lending— 244 — 4,183 0.26 
Energy & Infrastructure— 13,517 — — 2.14 
Total$— $13,761 $3,436 $4,544 2.48 %

As of June 30, 2023, the Company had commitments to lend additional funds to these borrowers totaling $5.4 million.

The following table presents an aging analysis of loans that were modified on or after January 1, 2023, the date the Company adopted ASU 2022-02, through June 30, 2023.

1Loans and leases receivable includes $40.4 million of U.S. government guaranteed loans as of September 30, 2017, of which $24.7 million are impaired. As of December 31, 2016, loans and leases receivable includes $37.7 million of U.S. government guaranteed loans, of which $22.1 million are considered impaired.Current30-89 Days
Past Due		90 Days or More Past DueTotal Past Due
Small Business Banking$3,797 $— $— $— 
Specialty Lending4,427 — — — 
Energy & Infrastructure13,517 — — — 
Total$21,741 $— $— $— 

The following tables summarize the financial impacts of loan modifications made to borrowers experiencing financial difficulty during the periods presented.

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 SeptemberThree Months Ended June 30, 2017, these balances totaled $13.4 million, of which $12 million are guaranteed by the U.S. government and $1.4 million are unguaranteed. As of December 31, 2016, these balances totaled $12.3 million, of which $10.0 million are guaranteed by the U.S. government and $2.3 million are unguaranteed.The allowance for loan and lease losses associated with these loans and leases totaled $417 thousand and $438 thousand as of September 30, 2017 and December 31, 2016, respectively.
2023
Weighted Average
Interest Rate Reduction		Weighted Average
Term Extension (in Months)
Small Business Banking— %161
Specialty Lending— 72

Six Months Ended June 30, 2023
Weighted Average
Interest Rate Reduction		Weighted Average
Term Extension (in Months)
Small Business Banking1.45 %161
Specialty Lending— 72
Energy & Infrastructure— 12


25
Table of Contents

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

There were no loans that were modified on or after January 1, 2023, the date the Company adopted ASU 2022-02, through June 30, 2023 that subsequently defaulted during the periods presented.
Loans
The Company’s ACL is estimated using lifetime historical loan performance adjusted to reflect current conditions and leases classified as impaired asreasonable and supportable forecasts. Upon determination that a modified loan, or portion of a modified loan, has subsequently been deemed uncollectible, the dates presented are summarizeduncollectible portion is written off. The amortized cost basis is reduced by the uncollectible amount and the ACL is adjusted by the same amount. As a result, the impact of loss mitigation strategies is captured in the estimates of PD and LGD.
Troubled Debt Restructurings
The following tables.tables present the types of loans modified as troubled debt restructurings (“TDRs”):
Three Months Ended June 30, 2022
Interest OnlyPayment DeferralExtend AmortizationOther
Total TDRs(1)
Number of
Loans		Recorded investment at
period end		Number of
Loans		Recorded investment at
period end		Number of
Loans		Recorded investment at
period end		Number of
Loans		Recorded investment at
period end		Number of
Loans		Recorded investment at
period end
Commercial & Industrial
Specialty Lending—$— 1$734 —$— —$— 1$734 
Total—— 1734 —— —— 1734 
Total—$— 1$734 —$— —$— 1$734 
(1)Excludes loans accounted for under the fair value option. See Note 9. Fair Value of Financial Instruments for additional information.
Six Months Ended June 30, 2022
Interest OnlyPayment DeferralExtend Amortization
Other(1)
Total TDRs(2)
Number of
Loans		Recorded investment at
period end		Number of
Loans		Recorded investment at
period end		Number of
Loans		Recorded investment at
period end		Number of
Loans		Recorded investment at
period end		Number of
Loans		Recorded investment at
period end
Commercial & Industrial
Small Business Banking—$— 3$3,119 2$1,528 1$527 6$5,174 
Specialty Lending—— 1734 —— —— 1734 
Total—— 43,853 21,528 1527 75,908 
Commercial Real Estate
Small Business Banking—— —— 14,847 —— 14,847 
Total—— —— 14,847 —— 14,847 
Total—$— 4$3,853 3$6,375 1$527 8$10,755 
(1)Includes one small business banking loan with extend amortization and a rate concession TDR.
(2)Excludes loans accounted for under the fair value option. See Note 9. Fair Value of Financial Instruments for additional information.
26
September 30, 2017
Recorded
Investment
 
Guaranteed
Balance
 
Unguaranteed
Exposure
Commercial & Industrial     
Death Care Management$8
 $—
 $8
Healthcare7,384
 5,712
 1,672
Independent Pharmacies4,282
 2,514
 1,768
Registered Investment Advisors743
 —
 743
Veterinary Industry2,407
 1,605
 802
Total14,824
 9,831
 4,993
Construction & Development     
Healthcare1,151
 880
 271
Total1,151
 880
 271
Commercial Real Estate     
Death Care Management2,486
 1,246
 1,240
Healthcare4,334
 2,999
 1,335
Independent Pharmacies1,622
 1,622
 —
Veterinary Industry13,700
 8,051
 5,649
Total22,142
 13,918
 8,224
Commercial Land     
Agriculture23
 23
 —
Total23
 23
 —
Total$38,140
 $24,652
 $13,488
December 31, 2016
Recorded
Investment
 
Guaranteed
Balance
 
Unguaranteed
Exposure
Commercial & Industrial     
Death Care Management$111
 $—
 $111
Healthcare7,923
 5,453
 2,470
Independent Pharmacies3,514
 2,495
 1,019
Registered Investment Advisors796
 —
 796
Veterinary Industry2,882
 2,199
 683
Total15,226
 10,147
 5,079
Construction & Development     
Agriculture300
 233
 67
Total300
 233
 67
Commercial Real Estate     
Death Care Management1,768
 1,264
 504
Healthcare4,044
 2,985
 1,059
Independent Pharmacies528
 —
 528
Veterinary Industry13,561
 7,518
 6,043
Total19,901
 11,767
 8,134
Commercial Land     
Agriculture91
 —
 91
Total91
 —
 91
Total$35,518
 $22,147
 $13,371

Table of Contents

Live Oak Bancshares, Inc.
Notes to Unaudited Condensed 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, 2017
 Recorded Investment    
 
With a
Recorded
Allowance
 
With No
Recorded
Allowance
 Total 
Unpaid
Principal
Balance
 
Related
Allowance
Recorded
Commercial & Industrial         
Death Care Management$—
 $8
 $8
 $7
 $—
Healthcare6,675
 709
 7,384
 8,034
 681
Independent Pharmacies2,622
 1,660
 4,282
 4,697
 76
Registered Investment Advisors668
 75
 743
 735
 521
Veterinary Industry2,033
 374
 2,407
 2,800
 173
Total11,998
 2,826
 14,824
 16,273
 1,451
Construction & Development         
Healthcare1,151
 —
 1,151
 1,173
 53
Total1,151
 —
 1,151
 1,173
 53
Commercial Real Estate         
Death Care Management1,867
 619
 2,486
 2,625
 187
Healthcare3,759
 575
 4,334
 4,352
 261
Independent Pharmacies1,622
 —
 1,622
 2,163
 9
Veterinary Industry11,506
 2,194
 13,700
 14,787
 1,408
Total18,754
 3,388
 22,142
 23,927
 1,865
Commercial Land         
Agriculture23
 —
 23
 58
 —
Total23
 —
 23
 58
 —
Total Impaired Loans and Leases$31,926
 $6,214
 $38,140
 $41,431
 $3,369

Table of Contents

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

 December 31, 2016
 Recorded Investment    
 
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
Healthcare7,259
 664
 7,923
 8,120
 778
Independent Pharmacies3,184
 330
 3,514
 3,610
 327
Registered Investment Advisors796
 —
 796
 792
 514
Veterinary Industry2,754
 128
 2,882
 3,369
 106
Total14,001
 1,225
 15,226
 16,002
 1,726
Construction & Development         
Agriculture300
 —
 300
 311
 13
Total300
 —
 300
 311
 13
Commercial Real Estate         
Death Care Management1,580
 188
 1,768
 1,904
 34
Healthcare3,514
 530
 4,044
 4,042
 47
Independent Pharmacies528
 —
 528
 529
 284
Veterinary Industry11,193
 2,368
 13,561
 14,283
 1,273
Total16,815
 3,086
 19,901
 20,758
 1,638
Commercial Land         
Agriculture91
 —
 91
 161
 15
Total91
 —
 91
 161
 15
Total Impaired Loans and Leases$31,207
 $4,311
 $35,518
 $37,232
 $3,392

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
 Average
Balance		 Interest
Income
Recognized		 Average
Balance		 Interest
Income
Recognized
Commercial & Industrial       
Death Care Management$42
 $1
 $9
 $—
Healthcare7,076
 11
 6,345
 38
Independent Pharmacies4,266
 26
 1,946
 18
Registered Investment Advisors894
 14
 742
 7
Veterinary Industry2,511
 11
 2,501
 13
Total14,789
 63
 11,543
 76
Construction & Development       
Healthcare602
 2
 —
 —
Total602
 2
 —
 —
Commercial Real Estate       
Death Care Management2,512
 13
 1,801
 2
Healthcare3,079
 11
 1,012
 12
Independent Pharmacies1,985
 —
 551
 2
Veterinary Industry13,950
 132
 12,218
 87
Total21,526
 156
 15,582
 103
Commercial Land       
Agriculture23
 —
 156
 —
Total23
 —
 156
 —
Total$36,940
 $221
 $27,281
 $179

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
 Average
Balance		 Interest
Income
Recognized		 Average
Balance		 Interest
Income
Recognized
Commercial & Industrial       
Death Care Management$313
 $3
 $9
 $—
Healthcare4,996
 25
 5,777
 60
Independent Pharmacies7,998
 52
 1,927
 51
Registered Investment Advisors1,438
 28
 588
 13
Veterinary Industry4,329
 24
 2,715
 29
Total19,074
 132
 11,016
 153
Construction & Development       
Healthcare120
 2
 —
 —
Total120
 2
 —
 —
Commercial Real Estate       
Death Care Management2,030
 30
 1,811
 5
Healthcare2,940
 24
 1,013
 27
Independent Pharmacies149
 —
 551
 2
Veterinary Industry13,069
 278
 12,266
 249
Total18,188
 332
 15,641
 283
Commercial Land       
Agriculture199
 —
 355
 —
Total199
 —
 355
 —
Total$37,581
 $466
 $27,012
 $436

Table of Contents

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

The following tables present the types of TDRs that were made during the three and nine months ended September 30, 2017 and 2016:

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

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

Concessions made to improve a loan and lease’sloan’s performance have varying degrees of success. No TDRSTwo TDRs that were modified within the twelve months ended SeptemberJune 30, 20172022 subsequently defaulted during the three or nine months ended SeptemberJune 30, 2017.

Table2022. The two TDR defaults were Commercial & Industrial Small Business Banking loans. One of Contents

Live Oak Bancshares, Inc.
Notesthe defaults had previously been modified to Unaudited Consolidated Financial Statements

Asextend amortization and had a recorded investment of September$349 thousand at June 30, 2016,2022. The second default had previously been modified for a payment deferral and had a recorded investment of $2.1 million at June 30, 2022. There was one TDR that was modified within the twelve months ended SeptemberJune 30, 20162022 that subsequently defaulted during the ninesix months ended SeptemberJune 30, 2016. This2022. The TDR was a commercial and industrial veterinary loan that washad previously been modified for a payment deferral. Thedefault and had a recorded investment of $633 thousand at June 30, 2022.
Note 6. Leases
Lessor Equipment Leasing
The Company may purchase new equipment for this TDRthe 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 in the accompanying Unaudited Condensed Consolidated Balance Sheets.
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 to 7 years which is consistent with the useful life of the equipment with no residual value. The net investment in direct finance leases included in loans and leases held for investment are as follows:
June 30, 2023December 31, 2022
Gross direct finance lease payments receivable$3,196 $4,284 
Less – unearned interest(336)(479)
Net investment in direct financing leases$2,860 $3,805 
Future minimum lease payments under finance leases are as follows:
As of June 30, 2023Amount
2023$811 
20241,288 
2025980 
2026117 
Total$3,196 
Interest income of $66 thousand and $93 thousand was recognized in the three months ended June 30, 2023 and 2022, respectively. Interest income of $139 thousand and $208 thousand was recognized in the six months ended June 30, 2023 and 2022, respectively.
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 September 30, 2016 was $311 thousand.the then-current fair market value.

27
Table of Contents

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

Rental revenue from operating leases is recognized on 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 50%, 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 equipment expense at the time the costs are incurred.
As of June 30, 2023 and December 31, 2022, the Company had a net investment of $109.4 million and $114.2 million, respectively, in assets included in premises and equipment that are subject to operating leases. Of the net investment, the gross balance of the assets was $163.4 million as of June 30, 2023 and December 31, 2022 and accumulated depreciation was $54.0 million and $49.2 million as of June 30, 2023 and December 31, 2022, respectively. Depreciation expense recognized on these assets was $2.4 million for the three months ended June 30, 2023 and 2022. Depreciation expense recognized on these assets was $4.8 million for the six months ended June 30, 2023 and 2022.
Lease income of $2.4 million was recognized in the three months ended June 30, 2023 and 2022. Lease income of $4.8 million and $4.7 million was recognized in the six months ended June 30, 2023 and 2022, respectively.
A maturity analysis of future minimum lease payments to be received under non-cancelable operating leases is as follows:
As of June 30, 2023Amount
2023$3,918 
20248,808 
20258,935 
20268,923 
20278,690 
Thereafter13,562 
Total$52,836 
Note 7. Servicing Assets
Loans serviced for others are not included in the accompanying balance sheet.Unaudited Condensed Consolidated Balance Sheets. The unpaid principal balancesbalance of loans serviced for others requiring recognition of a servicing asset were $2.36was $2.38 billion and $2.22$2.67 billion at SeptemberJune 30, 20172023 and December 31, 2016,2022, respectively. The unpaid principal balance for all loans serviced for others was $3.81 billion and $3.48 billion at June 30, 2023 and December 31, 2022, respectively.
The following summarizes the activity pertaining to servicing rights:
Three Months Ended
June 30,		Six Months Ended
June 30,
2023202220232022
Balance at beginning of period$29,357 $36,286 $26,323 $33,574 
Additions, net4,516 1,043 7,194 5,324 
Fair value changes:
Due to changes in valuation inputs or assumptions(501)(5,436)2,123 (4,048)
Decay due to increases in principal paydowns or runoff(2,330)(3,232)(4,598)(6,189)
Balance at end of period$31,042 $28,661 $31,042 $28,661 
28
 Three Months Ended
September 30,		 Nine Months Ended
September 30,
 2017 2016 2017 2016
Balance at beginning of period$53,675
 $48,454
 $51,994
 $44,230
Additions, net3,527
 4,964
 9,412
 11,923
Fair value changes:       
Due to changes in valuation inputs or assumptions(789) (1,452) 342
 (821)
Decay due to increases in principal paydowns or runoff(3,021) (2,237) (8,356) (5,603)
Balance at end of period$53,392
 $49,729
 $53,392
 $49,729
Table of Contents
Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
The fair value of servicing rights was determined using a weighted average discount rates ranging from 10.1% to 14.5%rate of 17.3% on SeptemberJune 30, 20172023 and 8.1% to 14.1%16.2% on SeptemberJune 30, 2016.2022. The fair value of servicing rights was determined using a weighted average prepayment speeds ranging from 3.1% to 10.0%speed of 15.8% on SeptemberJune 30, 20172023 and 2.9% to 9.8%15.9% on SeptemberJune 30, 2016,2022, with the actual rate depending on the stratification of the specific right. Changes to fair value are reported in loan servicing asset revaluation within the consolidated statementsUnaudited Condensed Consolidated Statements of income.Income.
The fair value of servicing rights is highly sensitive to changes in underlying assumptions. Changes in prepayment speed assumptions typically 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.assets, however, weakening economic conditions or significant declines in interest rates can also increase loan prepayment activity. 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 long term borrowings consisted of the following:
June 30,
2023		December 31,
2022
Borrowings
In March 2021, the Company entered into a 60-month term loan agreement of $50.0 million with a third party correspondent bank. The loan accrues interest at a fixed rate of 2.95% with a monthly payment sufficient to fully amortize the loan, with all remaining unpaid principal and interest due at maturity on March 30, 2026. The Company paid the Lender a non-refundable $325 thousand loan origination fee upon signing of the Note that is presented as a direct deduction from the carrying amount of the loan and will be amortized into interest expense over the life of the loan.$28,317 $33,203 
On December 30, 2022, the Company made an advance of $50.0 million on an overnight Fed Funds line of credit that is unsecured with a variable interest rate of 4.65%. The Company paid down the balance in full on January 3, 2023 and there is $100.0 million of available credit remaining at June 30, 2023.— 50,000 
Total borrowings$28,317 $83,203 
 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
The Company may purchase federal fundsAs of June 30, 2023 the Company’s unused borrowing capacity was $3.77 billion, remaining consistent with March 31, 2023. Unused borrowing capacity consists of access through unsecured federal fundsthe Federal Reserve Bank's discount window, available lines of credit with variousthe Federal Home Loan Bank and other correspondent banks which totaled $47.5 million and $26.5 million as well as access to a repurchase agreement. As of September 30, 2017 and December 31, 2016, respectively. These lines are intended for short-term borrowings and are subject to restrictions limiting2022 the frequency and terms of advances. These lines of credit are payable on demand and bear interestCompany's unused borrowing capacity was $3.55 billion based upon securities and loans identified as available for collateral and $4.88 billion based principally upon the daily federal funds rate. The Company had no outstanding balances on the lines of credit as of September 30, 2017 and December 31, 2016.
The Company has $25 millionstated available in an unsecured line of credit with a correspondent bank as of September 30, 2017. The line was increasedlimits 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 September 30, 2017 and December 31, 2016. 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 September 30, 2017 and December 31, 2016.
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 million and $281.3 million as of September 30, 2017 and December 31, 2016, respectively. At September 30, 2017 and December 31, 2016, the Company had approximately $175.0 million and $142.7 million, respectively, insources mentioned above. New borrowing capacity available under these arrangements with no outstanding balance as of September 30, 2017 and December 31, 2016.
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. The Company's effective tax rateadded 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 benefits2023 was from the Bank Term Funding Program (“BTFP”). Under the BTFP, advances must be secured by pledging eligible securities owned by the Company on March 12, 2023. BTFP advances can be requested for a term of $874 thousand were reflected inup to one year at a fixed market rate until 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.program ends March 11, 2024.
Note 10.9. 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 US 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.

29
Table of Contents

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

Recurring Fair Value
Contingent consideration liability: Contingent consideration associated withThe table below provides a rollforward of 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.equity warrant asset fair values.
Recurring Fair Value
Three Months Ended June 30,Six Months Ended June 30,
Equity Warrant Assets2023202220232022
Balance at beginning of period$2,187 $2,328 $2,210 $1,672 
New equity warrant assets91 48 244 704 
Changes in fair value, net194 46 18 46 
Settlements(221)— (221)— 
Balance at end of period$2,251 $2,422 $2,251 $2,422 
The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis.
June 30, 2023TotalLevel 1Level 2Level 3
Investment securities available-for-sale
US government agencies$30,496 $— $30,496 $— 
Mortgage-backed securities1,099,137 — 1,099,137 — 
Municipal bonds(1)
3,035 — 2,951 84 
Other debt securities(2)
478 — — 478 
Loans held for investment441,781 — — 441,781 
Servicing assets(3)
31,042 — — 31,042 
Mutual fund1,652 — 1,652 — 
Equity warrant assets2,251 — — 2,251 
Total assets at fair value$1,609,872 $— $1,134,236 $475,636 
September 30, 2017Total Level 1 Level 2 Level 3
Investment securities available-for-sale       
US government agencies$17,804
 $—
 $17,804
 $—
Residential mortgage-backed securities56,750
 —
 56,750
 —
Mutual fund2,021
 —
 2,021
 —
Servicing assets1
53,392
 —
 —
 53,392
Total assets at fair value$129,967
 $—
 $76,575
 $53,392
        
Contingent consideration liability2
$4,650
 $—
 $—
 $4,650
Total liabilities at fair value$4,650
 $—
 $—
 $4,650
December 31, 2022TotalLevel 1Level 2Level 3
Investment securities available-for-sale
US government agencies$15,668 $— $15,668 $— 
Mortgage-backed securities995,574 — 995,574 — 
Municipal bonds(1)
2,977 — 2,884 93 
Other debt securities500 — 500 — 
Loans held for investment494,458 — — 494,458 
Servicing assets(3)
26,323 — — 26,323 
Mutual fund1,656 — 1,656 — 
Equity warrant assets2,210 — — 2,210 
Total assets at fair value$1,539,366 $— $1,016,282 $523,084 
December 31, 2016Total Level 1 Level 2 Level 3
Investment securities available-for-sale       
US government agencies$17,823
 $—
 $17,823
 $—
Residential mortgage-backed securities51,273
 —
 51,273
 —
Mutual fund1,960
 —
 1,960
 —
Servicing assets1
51,994
 —
 —
 51,994
Total assets at fair value$123,050
 $—
 $71,056
 $51,994
1(1)During the three and six months ended June 30, 2023, the Company recorded a level 3 fair value adjustment gain of $1 thousand and loss of $9 thousand, respectively. During the three and six months ended June 30, 2022, the Company recorded a level 3 fair value adjustment loss of $1 thousand and $3 thousand, respectively.
(2)During the three and six months ended June 30, 2023, the Company recorded a level 3 fair value adjustment loss of $2 thousand and $22 thousand, respectively. During the three and six months ended June 30, 2022, the Company recorded a level 3 fair value adjustment loss of $10 thousand.
(3)See Note 7 for a rollforward of recurring Level 3 fair values for servicing assets and various assumptions used in the fair value measurement.assets.
2See Note 4 for activity related to the recurring Level 3 fair value for the contingent consideration liability and various assumptions used in the fair value measurement.
Non-recurring
30
Table of Contents
Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
For additional information on the valuation techniques and significant inputs for Level 2 and Level 3 assets and liabilities that are measured at fair value on a recurring basis, see Note 10. Fair Value of Financial Instruments in the Company’s 2022 Form 10-K.
Fair Value Option
Until the first quarter of 2021, the Company had historically elected to account for retained participating interests of all government guaranteed loans under the fair value option in order to align the accounting presentation with the Company’s viewpoint of the economics of the loans. Interest income is recognized in the same manner on loans reported at fair value as on non-fair value loans, except in regard to origination fees and costs which are recognized immediately upon fair value election. Not electing fair value generally results in a larger discount being recorded on the date of the sale. This discount is subsequently accreted into interest income over the underlying loan’s remaining term using the effective interest method. Management made this change of election in alignment with its ongoing effort to reduce volatility and drive more predictable revenue. In accordance with GAAP, any loans for which fair value was previously elected continue to be measured as such.
There were no loans accounted for under the fair value option that were 90 days or more past due and still accruing interest at June 30, 2023 or December 31, 2022. The unpaid principal balance of unguaranteed exposure for nonaccruals was $10.7 million and $7.2 million at June 30, 2023 and December 31, 2022, respectively.
The following tables provide more information about the fair value carrying amount and the unpaid principal outstanding of loans accounted for under the fair value option at June 30, 2023 and December 31, 2022.
June 30, 2023
Total LoansNonaccruals90 Days or More Past Due
Fair Value
Carrying
Amount		Unpaid
Principal
Balance		DifferenceFair Value
Carrying
Amount		Unpaid
Principal
Balance		DifferenceFair Value
Carrying
Amount		Unpaid
Principal
Balance		Difference
Fair Value Option Elections
Loans held for investment$441,781 $462,827 $(21,046)$53,716 $57,561 $(3,845)$35,070 $37,099 $(2,030)
$441,781 $462,827 $(21,046)$53,716 $57,561 $(3,845)$35,070 $37,099 $(2,030)
December 31, 2022
Total LoansNonaccruals90 Days or More Past Due
Fair Value
Carrying
Amount		Unpaid
Principal
Balance		DifferenceFair Value
Carrying
Amount		Unpaid
Principal
Balance		DifferenceFair Value
Carrying
Amount		Unpaid
Principal
Balance		Difference
Fair Value Option Elections
Loans held for investment$494,458 $513,219 $(18,761)$44,890 $46,993 $(2,103)$24,663 $26,321 $(1,658)
$494,458 $513,219 $(18,761)$44,890 $46,993 $(2,103)$24,663 $26,321 $(1,658)
The following table presents the net gains (losses) from changes in fair value.
Three Months Ended June 30,Six Months Ended June 30,
Gains (Losses) on Loans Accounted for under the Fair Value Option2023202220232022
Loans held for sale$— $(56)$— $(226)
Loans held for investment1,728 (4,405)(2,801)(3,719)
$1,728 $(4,461)$(2,801)$(3,945)
31
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Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Losses related to borrower-specific credit risk were $291 thousand and $3.5 million for the three and six months ended June 30, 2023, respectively, and $711 thousand and $2.8 million for the three and six months ended June 30, 2022, respectively.
The following tables summarize the activity pertaining to loans accounted for under the fair value option.
Three Months Ended June 30,Six Months Ended June 30,
Loans held for sale2023202220232022
Balance at beginning of period$— $25,056 $— $25,310 
Repurchases— — — 65 
Fair value changes— (56)— (226)
Settlements— (1,548)— (1,697)
Balance at end of period$— $23,452 $— $23,452 
Three Months Ended June 30,Six Months Ended June 30,
Loans held for investment2023202220232022
Balance at beginning of period$466,950 $600,571 $494,458 $645,201 
Repurchases4,063 1,380 15,897 2,905 
Fair value changes1,728 (4,405)(2,801)(3,719)
Settlements(30,960)(66,902)(65,773)(113,743)
Balance at end of period$441,781 $530,644 $441,781 $530,644 
Non-Recurring Fair Value
The tables below present the recorded amount of assets and liabilities measured at fair value on a non-recurring basis. The Company has no liabilities recorded at fair value on a non-recurring basis.
June 30, 2023TotalLevel 1Level 2Level 3
Collateral-dependent loans$7,085 $— $— $7,085 
Total assets at fair value$7,085 $— $— $7,085 
December 31, 2022TotalLevel 1Level 2Level 3
Collateral-dependent loans$4,840 $— $— $4,840 
Total assets at fair value$4,840 $— $— $4,840 
For additional information on the valuation techniques and significant inputs for Level 2 and Level 3 assets that are measured at fair value on a non-recurring basis, see Note 10. Fair Value of Financial Instruments in the Company’s 2022 Form 10-K.
32
September 30, 2017Total Level 1 Level 2 Level 3
Impaired loans and leases$28,557
 $—
 $—
 $28,557
Foreclosed assets2,231
 —
 —
 2,231
Total assets at fair value$30,788
 $—
 $—
 $30,788
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

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

Level 3 Analysis
For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of SeptemberJune 30, 20172023 and December 31, 20162022, the significant unobservable inputs used in the fair value measurements were as follows:
September 30, 2017
June 30, 2023
Level 3 Assets with Significant Unobservable InputsFair ValueValuation TechniqueSignificant Unobservable InputsRange
Weighted Average(1)
Recurring fair value
Municipal bond$84 Discounted expected cash flowsDiscount rate6.7 %N/A
Prepayment speed5.0 %N/A
Other debt security$478 Discounted expected cash flowsDiscount rate7.1 %N/A
Loans held for investment$441,781 Discounted expected cash flowsLoss rate0.0 % - 65.8 %2.1 %
Discount rate6.3 % - 10.2 %8.9 %
Prepayment speed12.6 %12.6 %
Equity warrant assets$2,251 Black-Scholes option pricing modelVolatility26.8 % - 90.0 %36.3 %
Risk-free interest rate3.7 % - 3.9 %3.7 %
Marketability discount20.0 %20.0 %
Remaining life3 - 10 years6.8 years
Non-recurring fair value
Collateral-dependent loans$7,085 Discounted appraisals
Appraisal adjustments (2)
10.0 % - 100.0 %37.7 %
December 31, 2022
Level 3 Assets with Significant Unobservable InputsFair ValueValuation TechniqueSignificant Unobservable InputsRange
Weighted Average(1)
Recurring fair value
Municipal bond$93 Discounted expected cash flowsDiscount rate6.0 %N/A
Prepayment speed5.0 %N/A
Loans held for investment$494,458 Discounted expected cash flowsLoss rate0.0 % - 79.3 %1.9 %
Discount rate7.5 % - 11.2 %10.0 %
Prepayment speed16.5 %16.5 %
Discounted appraisalsAppraisal adjustments0.0 % - 77.3 %28.6 %
Equity warrant assets$2,210 Black-Scholes option pricing modelVolatility26.5 % - 90.0 %34.2 %
Risk-free interest rate3.9 % - 4.0 %3.9 %
Marketability discount20.0 %20.0 %
Remaining life3 - 10 years7.7 years
Non-recurring fair value
Collateral-dependent loans$4,840 Discounted appraisals
Appraisal adjustments (2)
10.0 % - 66.5 %34.2 %
(1)Weighted averages are determined by the relative fair value of the instruments or the relative contribution to the instruments fair value.
(2)Appraisals may be adjusted by management for customized discounting criteria, estimated sales costs, and other qualitative adjustments.
33
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%
Table of Contents
December 31, 2016Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
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%
(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 the fair value information aboutof 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.

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

Deposits: The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types 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.
Short and long term borrowings: The fair values of the Company’s short term borrowings approximate fair value while long term borrowings are estimated using discounted cash flow analyses based on the Company’s current incremental debt rates for similar types of debt arrangements.Balance Sheets.
The carrying amounts and estimated fair values of the Company’s financial instruments not measured at fair value on a recurring or non-recurring basis are as follows:
June 30, 2023
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$808,131 $808,131 $— $— $808,131 
Certificates of deposit with other banks4,000 4,000 — — 4,000 
Loans held for sale523,776 — — 546,912 546,912 
Loans and leases held for investment, net of allowance for credit losses on loans and leases7,274,501 — — 7,572,899 7,572,899 
Financial liabilities
Deposits9,879,111 — 9,625,941 — 9,625,941 
Borrowings28,317 — — 27,684 27,684 
December 31, 2022
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$280,239 $280,239 $— $— $280,239 
Federal funds sold136,397 136,397 — — 136,397 
Certificates of deposit with other banks4,000 4,000 — — 4,000 
Loans held for sale554,610 — — 577,254 577,254 
Loans and leases held for investment, net of allowance for credit losses on loans and leases6,753,154 — — 6,652,936 6,652,936 
Financial liabilities
Deposits8,884,928 — 8,532,615 — 8,532,615 
Borrowings83,203 — — 82,258 82,258 
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
Financial assets         
Cash and due from banks$260,907
 $260,907
 $—
 $—
 $260,907
Certificates of deposit with other banks3,250
 3,251
 —
 —
 3,251
Investment securities, available-for-sale76,575
 —
 76,575
 —
 76,575
Loans held for sale692,586
 —
 —
 770,923
 770,923
Loans and leases, net of allowance for loan and lease losses1,148,860
 —
 —
 1,151,601
 1,151,601
Servicing assets53,392
 —
 —
 53,392
 53,392
Accrued interest receivable9,669
 9,669
 —
 —
 9,669
Financial liabilities         
Deposits2,012,891
 —
 1,996,493
 —
 1,996,493
Accrued interest payable270
 270
 —
 —
 270
Long term borrowings26,872
 —
 —
 27,904
 27,904
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
Financial assets         
Cash and due from banks$238,008
 $238,008
 $—
 $—
 $238,008
Certificates of deposit with other banks7,250
 7,236
 —
 —
 7,236
Investment securities, available-for-sale71,056
 —
 71,056
 —
 71,056
Loans held for sale394,278
 —
 —
 426,220
 426,220
Loans and leases, net of allowance for loan and lease losses889,357
 —
 —
 873,158
 873,158
Servicing assets51,994
 —
 —
 51,994
 51,994
Accrued interest receivable7,520
 7,520
 —
 —
 7,520
Financial liabilities         
Deposits1,485,076
 —
 1,469,173
 —
 1,469,173
Accrued interest payable319
 319
 —
 —
 319
Long term borrowings27,843
 —
 —
 29,559
 29,559


Table of Contents

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

Note 11.10. 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.
34
Table of Contents
Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Financial Instruments with Off-balance-sheetOff-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,
2023		December 31,
2022
Commitments to extend credit$1,563,688
 $1,342,271
Commitments to extend credit$3,120,016 $2,731,866 
Standby letters of credit1,861
 343
Standby letters of credit24,474 26,454 
Solar purchase commitments182,610
 —
Airplane purchase agreement commitments—
 21,500
Airplane purchase agreement commitments18,000 24,000 
Total unfunded off-balance-sheet credit risk$1,748,159
 $1,364,114
Total unfunded off-balance-sheet credit risk$3,162,490 $2,782,320 
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 commitmentCommitment letters are issued after approval of the loan by the Credit Department. Commitment lettersDepartment and 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.
As of SeptemberThe allowance for off-balance-sheet credit exposures was $4.8 million and $1.5 million at June 30, 20172023 and December 31, 2016,2022, respectively.
The Company is in the early phase of constructing a new facility to accommodate expansion of its main campus. The total estimated cost to complete the construction program is approximately $33.6 million. At June 30, 2023, the Company hadhas paid and was committed to approximately $7.0 million of the total estimated amount.
As of June 30, 2023 and December 31, 2022, the Company recorded unfunded commitments to provide capital contributions for on-balance sheeton-balance-sheet investments in the amount of $4.4$31.0 million and $4.9$26.1 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. 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$20.0 million, except for seventeentwenty-eight relationships that have a retained unguaranteed exposure of $144.6$932.0 million of which $90.8$578.3 million of the unguaranteed exposure has been disbursed.
Additionally, the Company has future minimum lease payments duereceivable under non-cancelable operating leases totaling $33.0$52.8 million, of which $28.0 million is due from two relationships.

Table of Contents

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

no relationships exceed $20.0 million.
The Company from time-to-time may have cash and cash equivalents on deposit with other financial institutions that exceed federally-insured limits.
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. 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 September 30, 2017 and 2016, the Company recognized $536 thousand and $580 thousand in compensation expense for stock options, respectively. For the nine months ended September 30, 2017 and 2016, the Company recognized $1.4 million and $1.8 million in compensation expense for stock options, respectively.
Stock option activity under the Plan during the nine month periods ended September 30, 2017 and 2016 is summarized below.
35
 Shares 
Weighted
Average
Exercise Price
 
Weighted
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value
Outstanding at December 31, 20163,478,208
 $11.51
    
Exercised76,285
 7.89
    
Forfeited203,671
 14.12
    
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
 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.

Table of Contents

Live Oak Bancshares, Inc.
Notes to Unaudited Condensed 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
 Shares 
Weighted
Average
Grant Date
Fair Value
Non-vested at December 31, 20153,393,441
 $4.56
Granted169,987
 6.58
Vested349,996
 4.22
Forfeited166,483
 3.13
Non-vested at September 30, 20163,046,949
 $4.79
Note 11. Segments
The total intrinsic valueCompany's management reporting process measures the performance of options exercised at September 30, 2017its operating segments based on internal operating structure, which is subject to change from time-to-time. Accordingly, the Company operates two reportable segments for management reporting purposes as discussed below:
Banking - This segment specializes in providing financing services to small businesses nationwide in targeted industries and 2016 was $1.1 milliondeposit-related services to small businesses, consumers and $223 thousand, respectively.other customers nationwide. The primary source of revenue for this segment is net interest income and secondarily the origination and sale of government guaranteed loans.
At September 30, 2017, unrecognized compensation costs relating to stock options amounted to $9.8 million which will be recognized over a weighted average periodFintech - This segment is involved in making strategic investments into emerging financial technology companies. The primary sources of 2.93 years.revenue for this segment are principally gains and losses on equity method and equity security investments and management fees. The Fintech segment is comprised of the Company's direct wholly owned subsidiaries Live Oak Ventures and Canapi Advisors, and the investments held by those entities, as well as the Bank's investment in Apiture.
The weighted average fair value of each stock option grant is estimated onfollowing tables provide financial information for the date of grant usingCompany's segments. The information provided under the Black-Scholes option-pricing model. The expected volatility is based on historical volatility. The risk-free interest rates for periods within the contractual lifecaption “Other” represents operations not considered to be reportable segments and/or general operating expenses of the awards are based onCompany, and includes the U.S. Treasury yield curve in effect atparent company, other non-bank subsidiaries and elimination adjustments to reconcile the timeresults 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 nine months ended September 30, 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 relatedoperating segments to the Company’s share price closing at or above a specified price ranging from $34.00 to $38.00 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 Simulation method.Unaudited Condensed Consolidated Financial Statements prepared in conformity with GAAP.
RSU stock activity under the Plan during the first nine months of 2017 is summarized below.
BankingFintechOtherConsolidated
As of and for the three months ended June 30, 2023
Interest income$169,586 $8 $118 $169,712 
Interest expense85,103 — 307 85,410 
Net interest income (loss)84,483 8 (189)84,302 
Provision for loan and lease credit losses13,028 — — 13,028 
Noninterest income21,488 1,998 670 24,156 
Noninterest expense71,916 2,707 1,834 76,457 
Income tax expense (benefit)1,404 26 (1)1,429 
Net income (loss)$19,623 $(727)$(1,352)$17,544 
Total assets$10,642,872 $124,459 $51,865 $10,819,196 
As of and for the three months ended June 30, 2022
Interest income$99,215 $36 $(4)$99,247 
Interest expense18,850 — 463 19,313 
Net interest income (loss)80,365 36 (467)79,934 
Provision for loan and lease credit losses5,267 — — 5,267 
Noninterest income5,168 122,661 700 128,529 
Noninterest expense76,779 2,146 1,954 80,879 
Income tax expense (benefit)(268)25,868 (322)25,278 
Net income (loss)$3,755 $94,683 $(1,399)$97,039 
Total assets$8,963,851 $158,930 $(1,884)$9,120,897 
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 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 Condensed Consolidated Financial Statements

For the three months ended September 30, 2017 and 2016, the Company recognized $191 thousand and $3.1 million in compensation expense for RSUs, respectively. For the nine months ended September 30, 2017 and 2016, the Company recognized $517 thousand and $5.3 million in compensation expense for RSUs, respectively.
At September 30, 2017, unrecognized compensation costs relating to RSUs amounted to $2.5 million which will be recognized over a weighted average period of 4.55 years.
BankingFintechOtherConsolidated
As of and for the six months ended June 30, 2023
Interest income$320,855 $20 $253 $321,128 
Interest expense154,180 — 629 154,809 
Net interest income (loss)166,675 20 (376)166,319 
Provision for loan and lease credit losses32,049 — — 32,049 
Noninterest income38,485 4,037 1,213 43,735 
Noninterest expense146,399 4,963 4,057 155,419 
Income tax expense (benefit)4,701 182 (239)4,644 
Net income (loss)$22,011 $(1,088)$(2,981)$17,942 
Total assets$10,642,872 $124,459 $51,865 $10,819,196 
As of and for the six months ended June 30, 2022
Interest income$191,961 $72 $(4)$192,029 
Interest expense33,380 — 936 34,316 
Net interest income (loss)158,581 72 (940)157,713 
Provision for loan and lease credit losses7,103 — — 7,103 
Noninterest income37,103 122,898 1,196 161,197 
Noninterest expense138,178 4,314 4,101 146,593 
Income tax expense (benefit)8,808 25,722 (864)33,666 
Net income (loss)$41,595 $92,934 $(2,981)$131,548 
Total assets$8,963,851 $158,930 $(1,884)$9,120,897 

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

Market 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, 20162,364,500
 $8.28
Granted233,791
 —
Vested—
 —
Forfeited4,007
 11.38
Non-vested at September 30, 20172,594,284
 $8.79
The compensation expense for Market RSUs is measured based on their grant date fair value as calculated using the Monte Carlo Simulation and is recognized on a straight-line basis over the average vesting period. The Monte Carlo Simulation 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 3,058 Market RSUs granted on May 8, 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 4.1 years. The Monte Carlo Simulation used various assumptions that included a risk free rate of return of 2.28%, expected volatility of 30.00% 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%.
For the three months ended September 30, 2017 and 2016, the Company recognized $1.3 million and $346 thousand in compensation expense for Market RSUs, respectively. For the nine months ended September 30, 2017 and 2016, the Company recognized $3.7 million and $577 thousand in compensation expense for Market RSUs, respectively.
All of the Company's Market RSUs had an effective grant date of May 24, 2016, November 30, 2016, January 31, 2017, May 8, 2017 and August 7, 2017
At September 30, 2017, unrecognized compensation costs relating to Market RSUs amounted to $17.9 million which will be recognized over a weighted average period of 3.27 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. 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 September 30, 2017 and 2016, the Company recognized $36 thousand and $0 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 October 1, 2017, the Company closed 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 delivery 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 economic interest in Apiture 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 million. As the Company had no carrying amount for its contribution in the formation of Apiture, the preliminary pre-tax results for this transaction 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 transaction is still in process.


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(individually, “Bancshares” and collectively with its subsidiaries including Live Oak Banking Company, the “Company” or “LOB”). This discussion should be read in conjunction with the unaudited condensed consolidated 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, 20162022 (the "2016 Annual Report"“2022 Form 10-K”). 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.business of Live Oak Bancshares, Inc. (the “Company”). 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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Report. 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-QReport 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"(“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"“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;Agriculture (“USDA”);
•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;
•recent adverse developments in the banking industry highlighted by high-profile bank failures and the potential impact of such developments on customer confidence, liquidity, and regulatory responses to these developments;
•the impacts of global health crises and pandemics, such as the Coronavirus Disease 2019 (“COVID-19”) pandemic, on trade (including supply chains and export levels), travel, employee productivity and other economic activities that may have a destabilizing and negative effect on financial markets, economic activity and customer behavior;
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•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 or to develop a next-generation banking platform, 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;
•changes in governmental monetary and fiscal policies as well as other legislative and regulatory changes, including with respect to SBA or USDA lending programs and investment tax credits;
•a deterioration of the credit rating for U.S. long-term sovereign debt, actions that the U.S. government may take to avoid exceeding the debt ceiling, and uncertainties surrounding the debt ceiling and the federal budget;
•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;Bureau and various state agencies;
•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;

•adverse results, including related fees and expenses, from pending or future lawsuits, government investigations or private actions;
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•other risk factors listed from time to time in reports that the Company files with the SEC, including those described under “Risk Factors” in this Report; and
•the Company’s 2016 Annual Report and the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2017; and
the success at managing the risks involved in the foregoing.
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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 (“MD&A”) have been presented in thousands, except percentage, time period, stock option, share and per share data or where otherwise indicated.
Nature of Operations
LOBBancshares is a financial holding company and a bank holding company headquartered in Wilmington, North Carolina incorporated under the laws of the state 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 and deposit related services to small businesses nationwide in targeted industries. The Bank identifies and grows within selected industry sectors, or verticals, by leveraging expertise within those industries.nationwide. A significant portion of the loans originated by the Bank are guaranteed by the SBA under itsthe 7(a) program. In 2010,Loan Program and the U.S. Department of Agriculture’s (“USDA”) Rural Energy for America Program (“REAP”), Water and Environmental Program (“WEP”), Business & Industry (“B&I”) and Community Facilities loan programs. These loans are to small businesses and professionals with what the Bank formedbelieves are lower risk characteristics. Industries, or “verticals,” on which the Bank focuses its lending efforts are carefully selected. The Bank also lends more broadly to select borrowers outside of those verticals.
The Company’s wholly owned material subsidiaries are the Bank, Government Loan Solutions (“GLS”), 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 addition to the Bank, the Company owns Live Oak Clean Energy FinancingGrove, LLC formed in November 2016, for the purpose of providing financing to entities for renewable energy applications;(“Grove”), Live Oak Ventures, Inc., formed in August 2016, for the purpose of investing in businesses that align with the Company's strategic initiative to be a leader in financial technology; (“Live Oak Grove,Ventures”) and Canapi Advisors, 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”Canapi Advisors”),. GLS is a management and technology consulting firm that specializesadvises and offers solutions and services to participants in the government guaranteed lending sector. GLS primarily provides services in connection with the settlement, accounting, and securitization processes for government guaranteed loans, including loans originated under the SBA 7(a) loan programprograms and U.S. DepartmentUSDA guaranteed loans. The Grove provides Company employees and business visitors an on-site restaurant location. Live Oak Ventures’ purpose is investing in businesses that align with the Company's strategic initiative to be a leader in financial technology. Canapi Advisors provides investment advisory services to a series of Agriculture ("USDA"funds (the “Canapi Funds”)-guaranteed loans; focused on providing venture capital to new and 504 Fund Advisors,emerging financial technology companies.
The Bank’s wholly owned subsidiaries are Live Oak Number One, Inc., Live Oak Clean Energy Financing LLC (“504FA”LOCEF”), whichLive Oak Private Wealth, LLC (“Live Oak Private Wealth”) and Tiburon Land Holdings, LLC (“TLH”). Live Oak Number One, Inc. holds properties foreclosed on by the Bank. LOCEF provides financing to entities for renewable energy applications. Live Oak Private Wealth provides high-net-worth individuals and families with strategic wealth and investment management services. During the first quarter of 2022, Jolley Asset Management, LLC (“JAM”) was merged into Live Oak Private Wealth. JAM was previously a wholly owned subsidiary of Live Oak Private Wealth. TLH was formed in the third quarter of 2022 to serve ashold land adjacent to the investment advisor to The 504 Fund, a closed-end mutual fund organized to invest in SBA section 504 loans.
On February 1, 2017,Bank's headquarters consisting of wetlands and other protected property for the Company completed its acquisitionuse and enjoyment of Reltco Inc.the Bank's employees and National Assurance Title, Inc. (collectively referred to as "Reltco" or "title insurance business"), two nationwide title agencies under common control based in Tampa, Florida.customers.
The Company generates revenue primarily from thenet interest income and secondarily through origination and sale of SBA-guaranteedgovernment guaranteed loans. Income from the retention of loans and USDA guaranteed Rural Energy for America Program ("REAP") and Business & Industry ("B&I") loans andis comprised principally of interest income. Income from the sale of loans is comprised of loan servicing revenue and revaluation of related servicing assets andalong with net gains on sales of loans. Offsetting these revenues are the cost of funding sources, provision for loan and lease credit 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 The Company closed onalso has less routinely generated gains and losses arising from its initial public offering with a secondary offering completedfinancial technology investments predominantly 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 strategiesits fintech segment, 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”discussed more fully later in this Report for more information on forward-looking statements.section under the caption “Results of Segment Operations.”

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The Company expects to originate approximately $1.90 to 2.00 billion in loans and leases and maintain an effective tax rate of less than 10% 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.
Results of Operations
Performance Summary
Three months ended SeptemberJune 30, 20172023 compared with three months ended SeptemberJune 30, 20162022
For the three months ended SeptemberJune 30, 2017,2023, the Company reported net income of $12.9$17.5 million, or $0.33$0.39 per diluted share, as compared to $3.5net income of $97.0 million, or $0.10$2.16 per diluted share, for the three months ended September 30, 2016. This increasesecond quarter of 2022.
The decrease in net income is primarilywas largely due to the following items:
Increased•Decrease in equity method investment income of $121.1 million, largely driven by the second quarter of 2022 gain of $120.5 million related to the Company's sale of its investment in Finxact, Inc. (“Finxact”); and
•Provision for loan and lease credit losses increased by $7.8 million to $13.0 million, compared to $5.3 million for the second quarter of 2022. The level of provision expense in the second quarter of 2023 was primarily the result of continued growth of the loan and lease portfolio combined with portfolio trends largely comprised of specific reserve increases in two impaired loans.
Key factors partially offsetting the decrease in net income for the second quarter of 2023 were:
•Increase in net interest income of $9.4$4.4 million, or 80.8%5.5%, predominately driven by significant growthfrom increases 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;
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 invariable interest-earning assets following the first quarter of 2017;
Increases in other noninterest income of $1.1 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 to2023 Federal Reserve rate increases combined with increased levels of net income wascash, investments and the total loan and lease portfolio, partially mitigated by a $3.7 million decrease in the net gains on sales of loans, $1.6 millioninterest margin arising from an increase in salaries and employee benefits, $1.6interest-bearing liabilities combined with average cost of funds outpacing the average yield on interest-earning assets;
•The net loss on loan servicing asset revaluation decreased $5.8 million, in equipment expense and $1.5or 67.3%, to $2.8 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 perioda net loss 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$8.7 million in unguaranteed loans from held for sale to held for investment classification during the second quarter of 2016;2022;
Increased loan servicing revenue of $2.9 million, or 18.2%, 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$5.2 million, or 4.7%91.9%, dueprincipally the result of a higher volume of loan sales in the second quarter of 2023;
•The net gain on loans accounted for under the fair value option of $1.7 million, improved by $6.2 million, from a net loss of $4.5 million in the second quarter of 2022;
•Decreased contributions and donations expense of $5.5 million, principally related to a higher year-to-date sale volume partially offset by a decreasespecial 2022 charitable donation of $5.0 million made in connection with the average net gain per loan sold;above discussed Finxact gain; and
Revenues of $5.8 million from the title insurance company subsidiary acquired in the first quarter of 2017; and
•Decreased income tax expense of $10.3$23.8 million, or 159.9%94.3%, principally related to above discussed decrease in net income.
Six months ended June 30, 2023 compared with six months ended June 30, 2022
For the six months ended June 30, 2023, the Company reported net income of $17.9 million, or $0.40 per diluted share, compared to net income of $131.5 million, or $2.92 per diluted share, for the first half of 2022.
The decrease in net income was largely due to the ongoing operationfollowing items:
•Decrease in equity method investment income of $121.9 million, principally a product of the renewable energy leasing business yielding investment tax credits.above discussed Finxact gain of $120.5 million in the second quarter of 2022;
Partially•Provision for loan and lease credit losses increased by $24.9 million, to $32.0 million, compared to $7.1 million for the first half of 2022. The level of provision expense in the first half of 2023 was primarily the result of continued growth of the loan and lease portfolio combined with portfolio trends and changes in the macroeconomic outlook;
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•Decreased net gains on sales of loans of $5.6 million, or 21.2%, principally the result of comparatively negative market premiums in the first half of 2023; and
•Increased FDIC insurance expense of $4.3 million, or 104.6%, largely a product of rate increases effective in 2023 combined with the ongoing growth of Live Oak Banking Company.
Key factors partially offsetting the above factors that contributed to increased levels ofdecrease in net income was a $28.1for the first half of 2023 were:
•Increase in net interest income of $8.6 million, increase in noninterest expense, largely comprisedor 5.5%, principally the result of the effectsabove discussed drivers of continued investmentsthe quarter over quarter increase;
•A net loss on loan servicing asset revaluation of $2.5 million compared to support growing levelsa net loss of business$10.2 million in the first half of 2022, resulting in a positive change of $7.8 million, or 75.8%;
•Decreased contributions and business diversification.donations expense of $6.2 million, principally related to a special 2022 charitable donation of $5.0 million discussed above related to the 2022 Finxact gain; and
•Decreased income tax expense of $29.0 million, or 86.2%, principally related to above discussed decrease in net income.
Net Interest Income and Margin

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Net interest income represents the difference between the income that the Company earns on interest-earning assets and the cost of 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.them, respectively. 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.” WithoutAs a bank without a branch network, the Bank generatesgathers 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, 20172023 compared with three months ended SeptemberJune 30, 20162022
For the three months ended SeptemberJune 30, 2017,2023, net interest income increased $9.4$4.4 million, or 80.8%5.5%, to $21.0$84.3 million compared to $11.6$79.9 million for the three months ended SeptemberJune 30, 2016.2022. This increase was principally due to the significant growth in average interest earning assetsthe held for investment loan and to a lesser extent higher yields on these assets which outpaced thelease portfolio outpacing growth and change in theinterest-bearing liabilities offset by an increase in average cost of funds which exceeded the increase in average yield on interest-earning assets. Excluding PPP loan impacts, comprised of amortization of net deferred fees combined with a 1% annualized interest bearing liabilities.rate less the related interest expense from funding activity, net interest income increased by $5.5 million. Average interest earninginterest-earning assets increased by $746.9 million,$2.03 billion, or 53.8%24.6%, to $2.13$10.27 billion for the three months ended September 30, 2017,second quarter of 2023, compared to $1.39$8.25 billion for the three months ended September 30, 2016,second quarter of 2022, while the yield on average interest earninginterest-earning assets rose sharply by seventy-nineincreased one hundred-eighty basis points to 5.24%6.63%. The cost of funds on interest bearinginterest-bearing liabilities for the three months ended September 30, 2017second quarter of 2023 increased twentytwo hundred-sixty basis points to 1.43%3.59%, and the average balance of interest bearinginterest-bearing liabilities increased by $717.1 million,$1.69 billion, or 56.6%21.6%, over the same period.second quarter of 2022.
The increase in average interest-bearing liabilities was largely driven by funding for significant loan originations and growth as well as maintenance of the Company's target liquidity profile. This increase was muted by a $95.0 million reduction in average borrowings largely related to Paycheck Protection Program Liquidity Facility, or PPPLF, repayments in 2022. As indicated in the rate/volume table below, the overall 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, resultingdiscussed above is reflected in increased interest income of $12.6$70.5 million and increasedoutpacing growth in interest expense of $3.2$66.1 million for the three months ended September 30, 2017second quarter of 2023 compared to the three months ended September 30, 2016. For the three months ended September 30, 2017 compared to the three months ended September 30, 2016,second quarter of 2022. The net interest margin increased sharplydecreased from 3.32%3.89% for the second quarter of 2022 to 3.91% due to3.29% for the aforementioned effects.second quarter of 2023.
Nine
42
Six months ended SeptemberJune 30, 20172023 compared with ninesix months ended SeptemberJune 30, 20162022
For the ninesix months ended SeptemberJune 30, 2017,2023, net interest income increased $24.8$8.6 million, or 82.0%5.5%, to $55.1$166.3 million compared to $30.3$157.7 million for the ninesix months ended SeptemberJune 30, 2016.2022. This increase was also principally due to the significant growth in average interest earning assetsthe held for investment loan and to a lesser extent higher yields on these assetslease portfolio outpacing the growth and change in theinterest-bearing liabilities offset by an increase in average cost of funds which exceeded the increase in average yield on interest-earning assets. Excluding PPP loan impacts, comprised of amortization of net deferred fees combined with a 1% annualized interest bearing liabilities.rate less the related interest expense from funding activity, net interest income increased by $13.8 million. Average interest earninginterest-earning assets increased by $702.0 million,$1.94 billion, or 58.4%24.1%, to $1.90$9.99 billion for the nine months ended September 30, 2017first half of 2023, compared to $1.20$8.05 billion for the nine months ended September 30, 2016,first half of 2022, while the yield on average interest earninginterest-earning assets increased by sixty-fourone hundred-sixty-seven basis points to 5.12%6.48%. The cost of funds on interest bearinginterest-bearing liabilities for the nine months ended September 30, 2017first half of 2023 increased by eleventwo hundred-forty-six basis points to 1.34%3.36%, and the average balance of interest bearinginterest-bearing liabilities increased by $688.0$1.61 billion, or 21.0%, over the first half of 2022.
The increase in average interest-bearing liabilities was largely driven by funding for significant loan originations and growth as well as maintenance of the Company's target liquidity profile. This increase was muted by a $99.4 million reduction in average borrowings largely related to Paycheck Protection Program Liquidity Facility, or 63.13%, during the same period.PPPLF, repayments in 2022. As indicated in the rate/volume table below, the overall 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, resultingdiscussed above is reflected in increased interest income of $32.6$129.1 million and increasedoutpacing growth in interest expense of $7.8$120.5 million for the nine months ended September 30, 2017. For the nine months ended September 30, 2017first half of 2023 compared to the nine months ended September 30, 2016,first half of 2022. The net interest margin decreased from 3.95% for the first half of 2022 to 3.36% for the first half of 2023.
During the first half of 2023, the Federal Reserve increased sharply from 3.36%the federal funds upper target rate by 75 basis points. Subsequently, on July 26, 2023 the Federal Reserve further increased the federal funds upper target rate by 25 basis points, to 3.87% due5.50%. In June 2023, the Federal Reserve released its most current federal funds target rate midpoint projections which implied an increase of the median Federal Funds rate to 5.6% by the aforementioned effects.end of 2023 and a decrease of approximately 100 basis points to 4.6% by the end of 2024. There can be no assurance that any further increases in the Federal Funds rate will occur, and if they do, the amount and timing of actual increases are subject to change. See Item 3. Quantitative and Qualitative Disclosures About Market Risk for information about the Company’s sensitivity to interest rates.

43

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 June 30,
20232022
Average
Balance		InterestAverage
Yield/Rate
Average
Balance
InterestAverage
Yield/Rate
Interest-earning assets:
Interest-earning balances in other banks$731,427 $8,847 4.85 %$328,014 $848 1.04 %
Federal funds sold— — — 78,216 196 1.01 
Investment securities1,252,320 8,503 2.72 915,106 4,046 1.77 
Loans held for sale516,378 12,153 9.44 1,119,094 15,969 5.72 
Loans and leases held for investment(1)
7,773,816 140,209 7.23 5,805,907 78,188 5.40 
Total interest-earning assets10,273,941 169,712 6.63 8,246,337 99,247 4.83 
Less: Allowance for credit losses on loans and leases(108,552)(62,566)
Noninterest-earning assets499,661 644,495 
Total assets$10,665,050 $8,828,266 
Interest-bearing liabilities:
Interest-bearing checking$300,046 $3,968 5.30 %$— $— — %
Savings4,277,850 41,930 3.93 3,894,177 7,538 0.78 
Money market accounts121,382 184 0.61 93,072 56 0.24 
Certificates of deposit4,792,289 38,921 3.26 3,714,882 11,183 1.21 
Total deposits9,491,567 85,003 3.59 7,702,131 18,777 0.98 
Borrowings37,997 407 4.30 132,969 536 1.62 
Total interest-bearing liabilities9,529,564 85,410 3.59 7,835,100 19,313 0.99 
Noninterest-bearing deposits205,741 96,123 
Noninterest-bearing liabilities80,427 55,725 
Shareholders' equity849,318 841,318 
Total liabilities and shareholders' equity$10,665,050 $8,828,266 
Net interest income and interest rate spread$84,302 3.04 %$79,934 3.84 %
Net interest margin3.29 %3.89 %
Ratio of average interest-earning assets to average interest-bearing liabilities107.81 %105.25 %
(1)Average loan and lease balances include non-accruing loans and leases.
44
  Three months ended September 30,
  2017 2016
  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%
Investment securities 73,312
 325
 1.76
 69,869
 337
 1.91
Loans held for sale 653,342
 9,922
 6.03
 358,867
 4,996
 5.52
Loans and leases held for investment (1)
 1,116,209
 17,055
 6.06
 728,041
 9,965
 5.43
Total interest earning assets 2,134,929
 28,172
 5.24
 1,388,015
 15,562
 4.45
Less: allowance for loan and lease losses (19,544)     (12,188)    
Non-interest earning assets 242,014
     146,159
    
Total assets $2,357,399
     $1,521,986
    
             
Interest bearing liabilities:            
Interest bearing checking $35,127
 $51
 0.58% $—
 $—
 —%
Savings 196,220
 682
 1.38
 —
 —
 —
Money market accounts 453,985
 1,303
 1.14
 471,447
 866
 0.73
Certificates of deposit 1,257,072
 4,722
 1.49
 767,887
 2,823
 1.46
Total deposits 1,942,404
 6,758
 1.38
 1,239,334
 3,689
 1.18
Other borrowings 42,219
 389
 3.66
 28,172
 242
 3.41
Total interest bearing liabilities 1,984,623
 7,147
 1.43
 1,267,506
 3,931
 1.23
Non-interest bearing deposits 43,652
     20,742
    
Non-interest bearing liabilities 22,650
     20,807
    
Shareholders' equity 306,474
     212,914
    
Noncontrolling interest —
     17
    
Total liabilities and shareholders' equity $2,357,399
     $1,521,986
    
             
Net interest income and interest rate spread   $21,025
 3.81% 
 $11,631
 3.22%
             
Net interest margin     3.91
     3.32
             
Ratio of average interest-earning assets to average interest-bearing liabilities     107.57%     109.51%
(1)Average loan and lease balances include non-accruing loans.

Table of Contents

Six Months Ended June 30,
20232022
Average
Balance
Interest
Average
Yield/Rate
Average
Balance
Interest
Average
Yield/Rate
Interest-earning assets:
Interest-earning balances in other banks$530,205 $12,040 4.58 %$276,114 $1,027 0.75 %
Federal funds sold69,629 1,624 4.70 43,897 202 0.93 
Investment securities1,220,028 16,050 2.65 905,403 7,445 1.66 
Loans held for sale538,385 24,139 9.04 1,117,360 31,152 5.62 
Loans and leases held for investment(1)
7,636,343 267,275 7.06 5,708,084 152,203 5.38 
Total interest-earning assets9,994,590 321,128 6.48 8,050,858 192,029 4.81 
Less: Allowance for credit losses on loans and leases(101,457)(62,649)
Noninterest-earning assets496,925 616,486 
Total assets$10,390,058 $8,604,695 
Interest-bearing liabilities:
Interest-bearing checking$161,626 $4,239 5.29 %$— $— — %
Savings4,242,763 78,181 3.72 3,750,838 12,378 0.67 
Money market accounts117,753 321 0.55 92,272 110 0.24 
Certificates of deposit4,664,536 69,857 3.02 3,633,547 20,637 1.15 
Total deposits9,186,678 152,598 3.35 7,476,657 33,125 0.89 
Borrowings97,920 2,211 4.55 197,369 1,191 1.22 
Total interest-bearing liabilities9,284,598 154,809 3.36 7,674,026 34,316 0.90 
Noninterest-bearing deposits191,489 91,373 
Noninterest-bearing liabilities72,467 53,841 
Shareholders' equity841,504 785,455 
Total liabilities and shareholders' equity$10,390,058 $8,604,695 
Net interest income and interest rate spread$166,319 3.12 %$157,713 3.91 %
Net interest margin3.36 %3.95 %
Ratio of average interest-earning assets to average interest-bearing liabilities107.65 %104.91 %
(1)Average loan and lease balances include non-accruing loans and leases.
45
  Nine months ended September 30,
  2017 2016
  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%
Investment securities 71,319
 964
 1.81
 60,057
 840
 1.86
Loans held for sale 561,408
 24,679
 5.88
 428,316
 17,666
 5.49
Loans and leases held for investment(1)
 1,041,265
 45,611
 5.86
 522,757
 21,202
 5.40
Total interest earning assets 1,903,066
 72,936
 5.12
 1,201,074
 40,358
 4.48
Less: allowance for loan and lease losses (18,652)     (9,463)    
Non-interest earning assets 206,653
     143,876
    
Total assets $2,091,067
     $1,335,487
    
             
Interest bearing liabilities:            
Interest bearing checking $39,973
 $173
 0.58% $—
 $—
 —%
Savings 67,395
 693
 1.37
 —
 —
 —
Money market accounts 469,505
 3,365
 0.96
 423,923
 2,384
 0.75
Certificates of deposit 1,163,081
 12,662
 1.46
 637,469
 6,992
 1.46
Total deposits 1,739,954
 16,893
 1.30
 1,061,392
 9,376
 1.18
Other borrowings 37,736
 985
 3.49
 28,345
 725
 3.41
Total interest bearing liabilities 1,777,690
 17,878
 1.34
 1,089,737
 10,101
 1.23
Non-interest bearing deposits 35,073
     19,314
    
Non-interest bearing liabilities 22,288
     19,444
    
Shareholders’ equity 256,016
     206,967
    
Noncontrolling interest —
     25
    
Total liabilities and shareholders’ equity $2,091,067
     $1,335,487
    
             
Net interest income and interest rate spread   $55,058
 3.78%   $30,257
 3.25%
             
Net interest margin     3.87
     3.36
             
Ratio of average interest-earning assets to average interest-bearing liabilities     107.05%     110.22%
(1)Average loan and lease balances include non-accruing loans.

Table of Contents

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 June 30,Six Months Ended June 30,
2023 vs. 20222023 vs. 2022
Increase (Decrease) Due toIncrease (Decrease) Due to
RateVolumeTotalRateVolumeTotal
Interest income:
Interest-earning balances in other banks$5,038$2,961$7,999$7,655 $3,358 $11,013 
Federal funds sold—(196)(196)1,063 359 1,422 
Investment securities2,5671,8904,4575,242 3,363 8,605 
Loans held for sale7,577(11,393)(3,816)14,037 (21,050)(7,013)
Loans and leases held for investment31,02330,99862,02155,619 59,453 115,072 
Total interest income46,20524,26070,46583,616 45,483 129,099 
Interest expense:
Interest-bearing checking—3,9683,968— 4,239 4,239 
Savings32,1402,25234,39260,459 5,344 65,803 
Money market accounts9830128161 50 211 
Certificates of deposit21,7415,99727,73838,572 10,648 49,220 
Borrowings571(700)(129)2,443 (1,423)1,020 
Total interest expense54,55011,54766,097101,635 18,858 120,493 
Net interest income$(8,345)$12,713$4,368$(18,019)$26,625 $8,606 
 Three months ended September 30, Nine months ended September 30,
 2017 vs. 2016 2017 vs. 2016
 Increase (Decrease) Due to Increase (Decrease) Due to
 Rate Volume Total Rate Volume Total
Interest income:           
Interest earning balances in other banks$481
 $125
 $606
 $821
 $211
 $1,032
Investment securities(28) 16
 (12) (31) 155
 124
Loans held for sale640
 4,286
 4,926
 1,343
 5,670
 7,013
Loans and leases held for investment1,468
 5,622
 7,090
 2,538
 21,871
 24,409
Total interest income2,561
 10,049
 12,610
 4,671
 27,907
 32,578
Interest expense:           
Interest bearing checking—
 51
 51
 —
 173
 173
Savings—
 682
 682
 —
 693
 693
Money market accounts478
 (41) 437
 689
 292
 981
Certificates of deposit81
 1,818
 1,899
 (74) 5,744
 5,670
Other borrowings22
 125
 147
 26
 234
 260
Total interest expense581
 2,635
 3,216
 641
 7,136
 7,777
Net interest income$1,980
 $7,414
 $9,394
 $4,030
 $20,771
 $24,801
Provision for Loan and Lease Credit Losses
The provision for loan and lease credit losses represents the amount necessary to be charged against the current period’s earnings to maintain the allowance for loancredit losses (“ACL”) on loans and lease lossesleases at a level that the Company believes 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.

Losses inherent in loan relationships are mitigated if a portion of the loan is guaranteed by the SBA or USDA. A typicalTypical SBA 7(a) loan carries a 75% guarantee whileand USDA guarantees range from 60%50% to 80%90% depending on loan size and type, 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.
For the second quarter of 2023, there was a provision for loan and lease credit losses of $13.0 million compared to $5.3 million for the same period in 2022, an increase of $7.8 million. For the first six months of 2023, there was a provision for loan and lease credit losses of $32.0 million compared to $7.1 million for the same period in 2022, an increase of $24.9 million. The increase in provision expense as compared to the second quarter of 2022 and first six months of 2022 was primarily the result of loan growth, combined with portfolio trends and changes in the macroeconomic outlook.
Loans and leases held for investment at historical cost were $7.39 billion as of June 30, 2023, increasing by $2.07 billion, or 38.7%, compared to June 30, 2022.
46
Net charge-offs for loans and leases carried at historical cost were $1.2 million, or 0.06% of average quarterly loans and leases held for investment, carried at historical cost, on an annualized basis, for the three months ended June 30, 2023, compared to net charge-offs of $2.5 million, or 0.19%, for the three months ended June 30, 2022. For the six months ended June 30, 2023, net charge-offs totaled $7.8 million compared to $4.8 million for the six months ended June 30, 2022, an increase of $3.0 million, or 62.2%. The increase in net charge-offs for the first half of 2023 was primarily isolated to two relationships. Net charge-offs are a key element of historical experience in the Company's estimation of the allowance for credit losses on loans and leases.
In addition, nonperforming loans and leases not guaranteed by the SBA or USDA, excluding $8.6 million and $3.6 million accounted for under the fair value option at June 30, 2023 and 2022, respectively, totaled $44.9 million, which was 0.61% of the held for investment loan and lease portfolio carried at historical cost at June 30, 2023, compared to $12.0 million, or 0.22% of loans and leases held for investment carried at historical cost at June 30, 2022. The increase in total nonperforming loans and leases not guaranteed and carried at historical cost was principally isolated to two large relationships.
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.related revaluation of the servicing asset. 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. Net gain (loss) on loans accounted for under the fair value option is also significantly impacted by changes in market rates, prepayment speeds and inherent credit risk. Other less commonconsistent 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 June 30,2023/2022 Increase (Decrease)
20232022AmountPercent
Noninterest income
Loan servicing revenue$6,687$6,477$2103.2 %
Loan servicing asset revaluation(2,831)(8,668)5,83767.3 
Net gains on sales of loans10,8045,6305,17491.9 
Net gain (loss) on loans accounted for under the fair value option1,728(4,461)6,189138.7 
Equity method investments (loss) income(2,055)119,056(121,111)(101.7)
Equity security investments gains (losses), net1211,655(1,534)(92.7)
Lease income2,5352,510251.0 
Management fee income3,2662,55870827.7 
Other noninterest income3,9013,7721293.4 
Total noninterest income$24,156$128,529$(104,373)(81.2)%
47
 Three Months Ended
September 30,		 Increase (Decrease)
 2017 2016 Amount Percent
Noninterest income       
Loan servicing revenue$6,490
 $5,860
 $630
 10.75 %
Loan servicing asset revaluation(3,691) (3,421) (270) 7.89
Net gains on sales of loans18,148
 21,833
 (3,685) (16.88)
Gain on sale of securities available-for-sale—
 1
 (1) (100.00)
Construction supervision fee income362
 502
 (140) (27.89)
Title insurance income1,968
 —
 1,968
 100.00
Other noninterest income1,783
 657
 1,126
 171.39
Total noninterest income$25,060
 $25,432
 $(372) (1.46)%
Nine Months Ended
September 30,		 Increase (Decrease)Six Months Ended June 30,2023/2022 Increase (Decrease)
2017 2016 Amount Percent20232022AmountPercent
Noninterest income       Noninterest income
Loan servicing revenue$18,587
 $15,725
 $2,862
 18.20 %Loan servicing revenue$13,067 $12,833 $234 1.8 %
Loan servicing asset revaluation(6,864) (5,051) (1,813) 35.89
Loan servicing asset revaluation(2,475)(10,237)7,762 75.8 
Net gains on sales of loans55,276
 52,813
 2,463
 4.66
Net gains on sales of loans20,979 26,607 (5,628)(21.2)
Gain on sale of investment securities available-for-sale—
 1
 (1) (100.00)
Construction supervision fee income1,077
 1,799
 (722) (40.13)
Title insurance income5,803
 —
 5,803
 100.00
Net gain (loss) on loans accounted for under the fair value optionNet gain (loss) on loans accounted for under the fair value option(2,801)(3,945)1,144 29.0 
Equity method investments (loss) incomeEquity method investments (loss) income(5,007)116,932 (121,939)(104.3)
Equity security investments gains (losses), netEquity security investments gains (losses), net198 1,611 (1,413)(87.7)
Lease incomeLease income5,070 5,013 57 1.1 
Management fee incomeManagement fee income6,738 4,046 2,692 66.5 
Other noninterest income3,601
 1,925
 1,676
 87.06
Other noninterest income7,966 8,337 (371)(4.5)
Total noninterest income$77,480
 $67,212
 $10,268
 15.28 %Total noninterest income$43,735 $161,197 $(117,462)(72.9)%
For the three months ended SeptemberJune 30, 2017,2023, noninterest income decreased by $372 thousand,$104.4 million, or 1.5%81.2%, compared to the three months ended SeptemberJune 30, 2016.2022. The decline fromdecrease over the prior year is primarily thea result of the $120.5 million Finxact gain included in equity method investment income in the second quarter of 2022. Partially offsetting the decrease over the second quarter of 2022 was lower losses of $5.8 million related to the servicing asset revaluation, an increase in net gains on sales of loans decreasing $3.7of $5.2 million, to $18.1combined with an incremental $6.2 million in the third quarter of 2017 compared to $21.8 million in the third quarter of 2016 as a function of reduced volume of guaranteed loans sales, which was partially offset by an improvement in the average net gain on saleloans accounted for under the fair value option.
For the six months ended June 30, 2023, noninterest income decreased by $117.5 million, or 72.9%, compared to the six months ended June 30, 2022. The decrease over the prior year is primarily a result of guaranteed loans. Partially offsetting the effectsabove mentioned Finxact gain in the second quarter of lower2022 combined with a decrease in net gains on sales of loans were increasedof $5.6 million. Partially offsetting the decrease over the prior year to date period was lower losses of $7.8 million related to the servicing revenue of $630 thousand, title insurance income of $2.0asset revaluation combined with a $2.7 million from the acquisition of a nationwide title insurance business on February 1, 2017 and increased other noninterest income of $1.1 million. The increase in other noninterestmanagement fee income was primarily comprised of $682 thousand of operating lease income from renewable energy assets and trust management income of $236 thousand.
For the nine months ended September 30, 2017, noninterest income increasedgenerated by $10.3 million, or 15.3%, compared to the nine months ended September 30, 2016. Increases in noninterest income were primarily the result of higher year-to-date levelsCanapi Advisors. Canapi Advisors is included in the serviced loan portfolio and the volume of loans sold in the secondary market which generated $2.9 million of increased servicing revenue and $2.5 million of increased net gains on sale of loans. Also driving increased levels of noninterest income was $5.8 million in title insurance revenue from the acquisition of a nationwide title insurance business in early 2017 and increased other

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. Partly offsetting the overall increase in noninterest income was a higher negative loan servicing revaluation adjustment of $1.8 million.Company's Fintech segment.
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 June 30,Three months ended March 31,
2023202220232022
Amount of loans and leases originated$861,033 $959,635 $1,030,882 $865,063 
Guaranteed portions of loans sold245,074 68,818 167,826 219,703 
Outstanding balance of guaranteed loans sold (1)
2,808,200 2,681,079 2,695,757 2,786,403 
Three months ended September 30, Three months ended
June 30,		Six Months Ended June 30,For years ended December 31,
2017 2016 2017 2016202320222022202120202019
Amount of loans and leases originated$395,682
 $381,050
 $586,471
 $356,865
Amount of loans and leases originated$1,891,915 $1,824,698 $4,007,621 $4,480,725 $4,450,198 $2,001,886 
Guaranteed portions of loans sold163,843
 210,610
 203,714
 135,555
Guaranteed portions of loans sold412,900 288,521 580,889 668,462 542,596 340,374 
Outstanding balance of guaranteed loans sold (1)
2,584,163
 2,102,468
 2,521,506
 1,970,908
Outstanding balance of guaranteed loans sold (1)
2,808,200 2,681,079 2,668,110 2,756,915 2,819,625 2,746,480 
(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.
48
 Nine months ended September 30, For years ended December 31,
 2017 2016 2016 2015 2014 2013
Amount of loans and leases originated$1,450,816
 $1,022,445
 $1,537,010
 $1,158,640
 $848,090
 $498,752
Guaranteed portions of loans sold576,272
 501,808
 761,933
 640,886
 433,912
 339,342
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
(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 nine months ended September 30, 2017, loan servicing revenue increased $630 thousand, or 10.8%, and $2.9 million, or 18.2%, respectively, compared to the three and nine months ended September 30, 2016, as a result of an increase in the average outstanding balance of guaranteed loans sold. At September 30, 2017, the outstanding balance of government guaranteed loans sold in the secondary market was $2.58 billion. At September 30, 2016, the outstanding balance of SBA guaranteed loans sold was $2.10 billion.
Loan ServicingAsset Revaluation: The Company revalues its serviced loan portfolio at least quarterly. The revaluation considersvaluation model incorporates assumptions that market participants would use in estimating future net servicing income, such as adequate compensation for servicing, the amortizationdiscount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses, with the prepayment speed being one of the portfolio, current market conditions for loan sale premiums, and current prepayment speeds.most sensitive assumptions. For the three months ended SeptemberJune 30, 2017,2023, there was a net negativeloss on loan servicing asset revaluation adjustment of $3.7$2.8 million, compared to a net negative revaluation adjustmentloss of $3.4$8.7 million for the three months ended SeptemberJune 30, 2016.2022, resulting in a positive comparative quarter change of $5.8 million, or 67.3%. For the ninesix months ended SeptemberJune 30, 2017,2023, there was a net negativeloss on loan servicing asset revaluation adjustment of $6.9$2.5 million compared to a net negative revaluation adjustment of $5.1$10.2 million for the ninesix months ended SeptemberJune 30, 2016.2022, resulting in a positive change of $7.8 million, or 75.8%. The higher negative loanincrease in the valuation of the servicing revaluation amount for the third quarter of 2017 asasset compared to the thirdsecond quarter and first half of 20162022 was driven by amortizationprincipally the result of negative market trends in 2022 outpacing those experienced in 2023.
Net Gains on Sales of Loans: For the serviced portfolio during that period partially offset by improvements in the secondary market. The higher year-to-date negative loan servicing revaluation amount asthree months ended June 30, 2023, net gains on sales of loans increased $5.2 million, or 91.9%, compared to the same period in 2016 was principally driven by amortizationthree months ended June 30, 2022. The volume of guaranteed loans sold increased $176.3 million, or 256.1%, for the serviced portfolio combined with decreasesthree months ended June 30, 2023 to $245.1 million from $68.8 million in the secondary market for guaranteed portions of 7(a) loans.

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Net Gains on Sale of Loans:three months ended June 30, 2022. For the three and ninesix months ended SeptemberJune 30, 2017,2023, net gains on sales of loans decreased $3.7$5.6 million, or 16.9%21.2%, and increased $2.5 million, or 4.7%, respectively, compared to the three and ninesix months ended SeptemberJune 30, 2016.2022. For the threesix 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, 2017,2023, the volume of guaranteed loans sold increased $74.5$124.4 million, or 14.8%43.1%, to $576.3$412.9 million from $501.8$288.5 million for the ninesix months ended SeptemberJune 30, 2016.2022. The volume-driven increases in the year-to-dateaverage net gain on loan sale comparisons were partially offset by lower average premiums paidpremium decreased from 108% to 105% in the secondary market.second quarters of 2022 and 2023, respectively, and decreased from 109% to 106% in the first halves of 2022 and 2023, respectively. The averageincrease in net gains on sales of loans over the second quarter of 2022 was principally the result of higher loan sale volume while the decrease over the first half of 2022 was principally related to the effect of weaker premiums outpacing heightened levels of sales volume.
Net Gain (Loss) on Loans Accounted for Under the Fair Value Option: For the three months ended June 30, 2023, the Company had a net gain on saleloans accounted for under the fair value option of $1.7 million compared to a net loss of $4.5 million for the second quarter of 2022, a positive change of $6.2 million, or 138.7%. For the six months ended June 30, 2023, the Company had a net loss on loans accounted for under the fair value option of $2.8 million compared to a net loss of $3.9 million for the same period of 2022, a positive change of $1.1 million, or 29.0%. The carrying amount of loans accounted for under the threefair value option at June 30, 2023 and nine months ended September 30, 20172022 was $111 thousand$441.8 million (all classified as held for investment) and $97 thousand$554.1 million ($23.5 million classified as held for sale and $530.6 million classified as held for investment), respectively, a decrease of revenue$112.3 million, or 20.3%. The incremental net gain on loans accounted for each $1 million in loans sold, respectively, under the fair value option compared to $104 thousand and $105 thousandboth prior periods was largely the result of revenue for each $1 millionmoderating interest rate impacts in loans sold for2023 combined with a continued decline in the three and nine months ended September 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.size of the underlying principal balance of the portfolio.
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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 June 30,2023/2022 Increase (Decrease)
20232022AmountPercent
Noninterest expense
Salaries and employee benefits$43,066 $46,276 $(3,210)(6.9)%
Non-employee expenses:
Travel expense2,770 2,358 412 17.5 
Professional services expense1,996 3,988 (1,992)(49.9)
Advertising and marketing expense3,009 2,301 708 30.8 
Occupancy expense2,205 2,773 (568)(20.5)
Technology expense8,005 5,762 2,243 38.9 
Equipment expense4,023 3,784 239 6.3 
Other loan origination and maintenance expense3,442 3,022 420 13.9 
Renewable energy tax credit investment impairment— 50 (50)(100.0)
FDIC insurance5,061 2,164 2,897 133.9 
Contributions and donations— 5,515 (5,515)(100.0)
Other expense2,880 2,886 (6)(0.2)
Total non-employee expenses33,391 34,603 (1,212)(3.5)
Total noninterest expense$76,457 $80,879 $(4,422)(5.5)%
Three Months Ended
September 30,		 Increase (Decrease)Six Months Ended June 30,2023/2022 Increase (Decrease)
2017 2016 Amount Percent20232022AmountPercent
Noninterest expense       Noninterest expense
Salaries and employee benefits$19,037
 $17,471
 $1,566
 8.96%Salaries and employee benefits$87,831 $84,783 $3,048 3.6 %
Non-staff expenses:       
Non-employee expenses:Non-employee expenses:
Travel expense2,289
 2,218
 71
 3.20
Travel expense5,181 4,255 926 21.8 
Professional services expense1,068
 907
 161
 17.75
Professional services expense2,923 6,779 (3,856)(56.9)
Advertising and marketing expense1,516
 1,097
 419
 38.20
Advertising and marketing expense6,612 4,030 2,582 64.1 
Occupancy expense1,473
 1,058
 415
 39.22
Occupancy expense4,130 5,100 (970)(19.0)
Data processing expense1,982
 1,252
 730
 58.31
Technology expenseTechnology expense15,734 11,815 3,919 33.2 
Equipment expense2,228
 611
 1,617
 264.65
Equipment expense7,841 7,600 241 3.2 
Other loan origination and maintenance expense1,601
 806
 795
 98.64
Other loan origination and maintenance expense7,369 6,135 1,234 20.1 
Renewable energy tax credit investment impairmentRenewable energy tax credit investment impairment69 50 19 38.0 
FDIC insurance858
 210
 648
 308.57
FDIC insurance8,464 4,136 4,328 104.6 
Title insurance closing services expense687
 —
 687
 100.00
Contributions and donationsContributions and donations— 6,238 (6,238)(100.0)
Other expense3,117
 1,588
 1,529
 96.28
Other expense9,265 5,672 3,593 63.3 
Total non-staff expenses16,819
 9,747
 7,072
 72.56
Total non-employee expensesTotal non-employee expenses67,588 61,810 5,778 9.3 
Total noninterest expense$35,856
 $27,218
 $8,638
 31.74%Total noninterest expense$155,419 $146,593 $8,826 6.0 %

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 Nine Months Ended
September 30,		 Increase (Decrease)
 2017 2016 Amount Percent
Noninterest expense       
Salaries and employee benefits$55,687
 $45,875
 $9,812
 21.39 %
Non-staff expenses:       
Travel expense6,035
 6,394
 (359) (5.61)
Professional services expense4,228
 2,345
 1,883
 80.30
Advertising and marketing expense4,977
 3,425
 1,552
 45.31
Occupancy expense4,018
 3,306
 712
 21.54
Data processing expense5,536
 3,864
 1,672
 43.27
Equipment expense5,005
 1,696
 3,309
 195.11
Other loan origination and maintenance expense3,587
 2,001
 1,586
 79.26
FDIC insurance2,308
 507
 1,801
 355.23
Title insurance closing services expense1,877
 —
 1,877
 100.00
Other expense8,883
 4,648
 4,235
 91.11
Total non-staff expenses46,454
 28,186
 18,268
 64.81
Total noninterest expense$102,141
 $74,061
 $28,080
 37.91 %
Total noninterest expense for the three and ninesix months ended SeptemberJune 30, 2017 increased $8.62023, decreased $4.4 million, or 31.7%5.5%, and $28.1increased $8.8 million, or 37.9%6.0%, respectively, compared to the same periods in 2016.2022. The increasechanges in noninterest expense for the comparable three and six month period was predominately impacted by increased personnel, equipment expense and other expenses primarilylargely driven by the significant growth of the Company's core business. Changes in various components, of noninterest expense areas discussed below.
Salaries and employee benefits: Total personnel expense for the three and ninesix months ended SeptemberJune 30, 2017 increased2023 decreased by $1.6$3.2 million, or 9.0%6.9%, and $9.8increased $3.0 million, or 21.4%3.6%, respectively, compared to the same periods in 2016. A significant driver for this2022. The decrease in salaries and employee benefits over the second quarter of 2022 was largely the product of lower levels in bonus accruals while the increase wasover the acquisitionfirst half of a nationwide title insurance business on February 1, 2017 with 54 full-time and 5 part-time employees. Also contributing2022 is principally related to the growth in personnel expense was continued investment in human capitalresources to support the growing loanstrategic and lease production from new and existing verticals.growth initiatives. Total full-time equivalent employees increased from 400891 at SeptemberJune 30, 20162022, to 530984 at SeptemberJune 30, 2017.2023. Salaries and employee benefits expense included $2.0$6.3 million and $4.1$12.5 million of stock basedstock-based compensation infor the three and six months ended SeptemberJune 30, 2017 and 2016,2023, respectively, and $6.2compared to $5.1 million and $7.6$10.0 million for the ninethree and six months ended SeptemberJune, 30, 2017 and 2016,2022, 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.
OfProfessional services expense: For the total stock based compensation, $286 thousand forthree and six months ended June 30, 2023, professional services expense decreased $2.0 million, or 49.9%, and $3.9 million, or 56.9%, respectively, compared to the thirdsame periods in 2022. The decrease compared to the prior periods was due to lower levels of legal fees combined with an insurance recovery of $1.3 million in the first quarter of 20172023 related to previously expensed legal fees.
Advertising and $1.0marketing expense: For the six months ended June 30, 2023, advertising and marketing expense increased $2.6 million, foror 64.1%, compared to the same period in 2022. The increase over the first nine monthshalf of 2017 included in salaries and employee benefits is 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 Plans2022 was largely driven by continued investment 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.Company’s lending and deposit market growth.

Professional servicesTechnology expense: For the three and ninesix months ended SeptemberJune 30, 2017, total professional services2023, technology expense increased $161 thousand,$2.2 million, or 17.8%38.9%, and $1.9$3.9 million, or 80.3%33.2%, respectively, compared to the same periods in 2016. The primary drivers of the year over year2022. This increase were advisory, consulting, and due diligence expenseswas primarily related to enhanced investments in the February 2017 acquisition of a title insurance business.Company’s technology resources.
Advertising and marketing expense:FDIC insurance: For the three and ninesix months ended SeptemberJune 30, 2017, total advertising and marketing expense2023, FDIC insurance increased $419 thousand,$2.9 million, or 38.2%133.9%, and $1.6$4.3 million, or 45.3%104.6%, respectively, compared to the same periods in 2016. The primary driver2022. This increase is largely the result of rate increases effective in 2023 combined with the increase in advertisingongoing growth of Live Oak Banking Company.
Contributions and marketing expense was the cost of growing brand recognition in new and existing verticals and launching a new deposit platform.
Data processing expense:donations: For the three and ninesix months ended SeptemberJune 30, 2017, total data processing2023, contributions and donations decreased $5.5 million, and $6.2 million, respectively, compared to the same periods in 2022. The decrease is principally related to a special charitable donation during the second quarter of 2022 of $5.0 million made in connection with the earlier discussed Finxact gain.
Other expense:For the six months ended June 30, 2023, other expense increased $730 thousand,$3.6 million, or 58.3%63.3%, compared to the same period in 2022, largely related to $2.9 million in increased levels of reserves on unfunded commitments. This increase in the reserve for unfunded commitments was largely a result of refinements to the estimation assumptions in the first quarter of 2023.
Income Tax Expense
For the three months ended June 30, 2023, income tax expense was $1.4 million compared to $25.3 million for the second quarter of 2022, and the Company’s effective tax rates were 7.5% and 20.7%, respectively. For the six months ended June 30, 2023, income tax expense was $4.6 million compared to $33.7 million for the first half of 2022, and the Company’s effective tax rates were 20.6% and 20.4%, respectively. The lower level of income tax expense for the second quarter and the first half of 2023 as compared to the same periods in 2022 was principally the result of decreased pretax income combined with increased tax credits.
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Results of Segment Operations
The Company’s operations are managed along two primary operating segments Banking and Fintech. A description of each segment and the methodologies used to measure financial performance is described in Note 11. Segments in the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements. Net income (loss) by operating segment is presented below:
Three Months Ended June 30,Six Months Ended June 30,
2023202220232022
Banking$19,623 $3,755 $22,011 $41,595 
Fintech(727)94,683 (1,088)92,934 
Other(1,352)(1,399)(2,981)(2,981)
Consolidated net income$17,544 $97,039 $17,942 $131,548 
Banking
For the three and six months ended June 30, 2023, net income increased $15.9 million and decreased $19.6 million, respectively, compared to the same periods of 2022. Key factors influencing these changes are discussed below.
For the three and six months ended June 30, 2023, net interest income increased $4.1 million, or 5.1%, and $1.7$8.1 million, or 43.3%5.1%, respectively, compared to the same periods in 2016. of 2022. See above section captioned “Net Interest Income and Margin” as it is principally related to the Banking segment.
The primary driver of the increase in data processing expense was the growth in ourprovision for loan and deposit portfolios and the development of a new deposit platform.
Equipment expense: Forlease credit losses for the three and ninesix months ended SeptemberJune 30, 2017, the total costs associated with equipment2023, increased $1.6$7.8 million or 264.6%, and $3.3$24.9 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%, respectively, compared to the same periods in 2016. This increase wasof 2022. See the resultanalysis of revised premium requirements of all FDIC-insured financial institutionsprovision for loan and lease credit losses included in the latter part of 2016 along with significantly higher deposit levels.above section captioned “Provision for Loan and Lease Credit Losses” as it is entirely related to the Banking segment.
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 ninesix months ended SeptemberJune 30, 2017, total title insurance closing services expense was $687 thousand2023, noninterest income increased $16.3 million and $1.9$1.4 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.of 2022. 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.
Income Tax Expense
The effective tax rates for the three month comparative period was principally driven by lower losses related to the loan servicing asset revaluation, increased net gains on sales of loans and ninean incremental gain on loans accounted for under the fair value option. See the analysis of these categories of noninterest income included in the above section captioned “Noninterest Income” for additional discussion.
For the three and six months ended SeptemberJune 30, 2017 were (64.8)%2023, noninterest expense decreased $4.9 million, or 6.3%, and (15.5)%increased $8.2 million, or 5.9%, respectively, compared to same periods of 2022. See the effective ratesanalysis of 42.4% and 43.7%these categories of noninterest expense included in the above section captioned “Noninterest Expense” for additional discussion.
For the three and ninesix months ended SeptemberJune 30, 2016, respectively.2023, income tax expense increased $1.7 million and decreased $4.1 million, respectively, compared to the same periods of 2022. The negative effective ratesdecrease compared to the six months ended June 30, 2022 is principally due to lower levels of (64.8)% and (15.5)% forpretax income.
Fintech
For the three and nine-monthsix months ended June 30, 2023, net income decreased by $95.4 million and $94.0 million, respectively, compared to same periods ended September 30, 2017 principally reflected anof 2022. The primary factor influencing this decrease compared to both prior periods is the $120.5 million Finxact gain included in equity method investment income in the second quarter of 2022. Partially offsetting the decrease over the first half of 2022 was a $2.7 million increase in anticipated investmentmanagement fee income earned by Canapi Advisors combined with lower levels of income tax expense as a result decreased pretax income in renewable energy assets generating investment tax credits. As the lessor2023.
52
Table of these assets, the Company is accomplishing broader 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.Contents
Discussion and Analysis of Financial Condition
SeptemberJune 30, 20172023 vs. December 31, 20162022
Total assets at SeptemberJune 30, 20172023 were $2.43$10.82 billion, an increase of $676.9$963.7 million, or 38.6%9.8%, compared to total assets of $1.76$9.86 billion at December 31, 2016.2022. The growth in total assets was principally driven by the following:

Increased•Cash and cash equivalents, comprised of cash and due from banks dueand federal funds sold, combined with investment securities available-for-sale was $1.94 billion at June 30, 2023, an increase of $509.9 million, or 35.6%, compared to $1.43 billion at December 31, 2022. This increase reflects growing deposit levels combined with strategic maintenance of the successful secondary offering completed in August of 2017 of $113.1 million and growth from deposit gathering campaigns generating $527.8 million in new deposits;Company's liquidity profile.
•Growth in loantotal loans and lease originations combined with longer retention times of loansleases held for investment and held for sale comprised largely of $461.4 million resulting from strong origination activity in the first six months of 2023 and holding loans intentionally heldavailable for sale for longer periods and those in newer verticals which require a period of loan advances to becometime before sale, as discussed more fully funded prior to being sold;
Growth in premises and equipment related primarily to construction of a new aircraft hangar, the addition of two new aircraft in replacement of two older ones 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.

Cash and cash equivalents were $260.9 million at September 30, 2017, an increase of $22.9 million, or 9.6%, compared to $238.0 million at December 31, 2016. This increase primarily reflected the results of a successful deposit gathering campaign combined with the net proceeds from the Company’s secondary capital raise in the third quarter.
below. Total investment securities increased $5.5 millionoriginations during the first nine monthshalf of 2017, from $71.1 million at December 31, 2016, to $76.6 million at September 30, 2017, an increase of 7.8%. The portfolio is comprised of US government agency securities, residential mortgage-backed securities and a mutual fund.

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2023 were $1.89 billion.
Loans held for sale increased $298.3decreased $30.8 million, or 75.7%5.6%, during the first ninesix months of 2017,2023, from $394.3$554.6 million at December 31, 2016,2022, to $692.6$523.8 million at SeptemberJune 30, 2017.2023. The increasedecrease in loans held for sale was primarilyprincipally due to the resultimpact of strong growthmarket conditions in a rising rate environment which has influenced management's intent to hold a greater portion of loans as held for investment combined with higher levels of loan origination activities throughout 2017 andsales in the strategy to enhance interest income by increasing the retention timefirst half of guaranteed loans along with growth in certain loans that take time to fully fund.2023.
Loans and leases held for investment increased $262.3$492.2 million, or 28.9%6.7%, during the first ninesix months of 2017,2023, from $907.6 million$7.34 billion at December 31, 2016,2022, to $1.17$7.84 billion at SeptemberJune 30, 2017.2023. The increase was primarily the result of robustthe above-mentioned loan originations in 2023 combined with increased levels of loans retained as held for investment.
Total deposits were $9.88 billion at June 30, 2023, an increase of $994.2 million, or 11.2%, from $8.88 billion at December 31, 2022. The increase in total deposits from the prior period was to support growth in the loan and lease growth from origination activities during the first three quarters of 2017portfolio combined with greater retentionstrong deposit inflows. At June 30, 2023, the Bank’s total uninsured deposits were approximately $1.4 billion, or 14.3%, of loans on the consolidated balance sheet.total deposits.
Premises and equipment, net increased $64.6Borrowings decreased to $28.3 million or 99.9%, during the first nine months of 2017. This increase was primarily driven by construction of a new aircraft hangar and the replacement of two older aircraft with two new ones better suited to service the Company's growing nationwide customer base and the addition of solar panels to meet leasing commitments.
Servicing assets increased $1.4 million, or 2.7%, during the first nine months of 2017,at June 30, 2023, from $52.0$83.2 million at December 31, 2016,2022. This decrease was principally due to $53.4 million at September 30, 2017. The increasepaying off the Company’s Fed Funds line of credit 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. The increase in other assets was primarily driven by the recognition of $8.9 million in income taxes receivable arising from investment tax credits generated from the investment in solar panel leasing activities combined with the first quarter 2017 acquisitionof 2023. See Note 8. Borrowings in the accompanying Notes to Unaudited Condensed Consolidated Financial Statements for a discussion of current sources of available debt capacity.
Regulatory Impact of Asset Growth
General. In the first quarter of 2023, the Company and the Bank each first exceeded $10 billion in total assets. As of June 30, 2023, the Company and the Bank each had total assets of $10.82 billion and $10.72 billion, respectively. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and its implementing regulations impose various additional requirements on bank holding companies and banks with $10 billion or more in total consolidated assets. As a general matter, the Company and the Bank are not immediately subject to these additional requirements when they exceed $10 billion in assets; instead, the Company and the Bank will be subject to these various requirements over various dates, as described below.
Consumer Financial Laws. Under the Dodd-Frank Act, the Consumer Financial Protection Bureau (CFPB) has near-exclusive supervision authority, including examination authority, to assess compliance with federal consumer financial laws for a bank and its affiliates if the bank has total assets of more than $10 billion. This provision becomes applicable to a bank following the fourth consecutive quarter where the total assets of the nationwide title insurance business. As a resultbank, as reported in its quarterly Call Report, exceed $10 billion and afterwards remains applicable to the bank unless the bank has reported total assets of $10 billion or less in its quarterly Call Report for four consecutive quarters.
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Deposit Insurance Assessments. Also under the Dodd-Frank Act, the minimum ratio of net worth to insured deposits of the titlefederal Deposit Insurance Fund administered by the FDIC was increased from 1.15 percent to 1.35 percent and the FDIC is required, in setting deposit insurance acquisition, other assets includes goodwill and intangibleassessments, to offset the effect of the increase on institutions with assets of $7.3 millionless than $10 billion, which results in institutions with assets greater than $10 billion paying higher assessments. In addition, following the fourth consecutive quarter where the total assets of a bank exceeds $10 billion, as reported in its quarterly Call Report, the FDIC utilizes a different method for determining deposit insurance assessments. This large bank method is based on a bank’s ability to withstand asset- and $5.3 million, respectively.funding-related stress, its regulatory ratings, and potential losses to the FDIC in the event of the bank’s failure, subject to discretionary adjustments by the FDIC.
Total deposits were $2.01Volcker Rule. Under provisions of the Dodd-Frank Act referred to as the “Volcker Rule,” certain limitations are placed on the ability of insured depository institutions and their affiliates to engage in sponsoring, investing in and transacting with certain investment funds, known as “covered funds” under the rule. There are a number of exclusions from the definition of “covered funds,” including for investments in Small Business Investment Companies, or SBICs, and certain qualifying venture capital funds. The Volcker Rule also places restrictions on proprietary trading, which could impact certain hedging activities.
Limits on Interchange Fees. The Bank also may be affected by the Durbin Amendment to the Dodd-Frank Act regarding limits on debit card interchange fees. The Durbin Amendment gave the Federal Reserve Board the authority to establish rules regarding interchange fees charged for electronic debit transactions by a payment card issuer that, together with its affiliates, has assets of $10 billion at September 30, 2017, an increaseor more, as of $527.8 million, or 35.5%, from $1.49 billion at December 31 2016. The increase in deposits was driven byof the preceding calendar year, and to enforce a new deposit savings productstatutory requirement that such fees be reasonable and success of deposit gathering campaigns to support the growth in loan and lease originations.
Long term borrowings decreased $971 thousand, or 3.5%, during the first nine months of 2017, from $27.8 million at December 31, 2016 to $26.9 million at September 30, 2017. The decrease in long term borrowings was primarily the result of debt reduction following a successful capital raise in the third quarter.
Other liabilities increased $8.3 million, or 42.8%, during the first nine months of 2017, from $19.5 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 relatedproportional to the acquisitionactual cost of a transaction to the issuer. The Federal Reserve Board has adopted rules under this provision that limit the swipe fees that a debit card issuer can charge a merchant for a transaction to the sum of 21 cents and five basis points times the value 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.transaction, plus up to one cent for fraud prevention costs.
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 at September 30, 2017 compared to a book value per share of $6.51 at December 31, 2016. Average equity to average assets was 12.2% for the nine months ended September 30, 2017 compared to 14.6% for the year ended December 31, 2016. 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 nine months ended September 30, 2017 of $28.8 million combined with stock based compensation expense of $5.7 million and $565 thousand related to the issuance of stock in the title insurance company acquisition, partially offset by cash withheld in lieu of issuing restricted stock upon vesting of $4.8 million and $2.6 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 and leases 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 or lease is placed on nonaccrual status, any interest previously accrued as income but not actually collected is reversed and recorded as a reduction of loan or lease interest and fee income. Typically, collections of interest and principal received on a nonaccrual loan or lease are applied to the outstanding principal as determined at the time of collection of the loan.loan or lease. In respect to the Company's adoption of ASU No. 2022-02 on January 1, 2023, as described more fully in Note 2 in the accompanying Unaudited Condensed Consolidated Financial Statements, the prior period discussed below has been adjusted to exclude previously disclosed troubled debt restructurings for comparative purposes.
Nonperforming assets, excluding loans measured at fair value, at June 30, 2023 were $111.2 million, which represented a $37.8 million, or 51.5%, increase from December 31, 2022. These nonperforming assets at June 30, 2023 were all nonaccrual loans and leases. At June 30, 2023, there were no foreclosed assets. Of the $111.2 million of nonperforming assets, $66.3 million carried a government guarantee, leaving an unguaranteed exposure of $44.9 million in total nonperforming assets at June 30, 2023. This represents an increase of $26.1 million, or 139.0%, from an unguaranteed exposure of $18.8 million at December 31, 2022.

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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 restructuringsexcluding loans measured at fair value, at the dates indicated.
June 30, 2023 (1)
December 31, 2022 (1)
Nonaccrual loans and leases:
Total nonperforming loans and leases (all on nonaccrual)$111,221 $73,392 
Foreclosed assets— — 
Total nonperforming assets$111,221 $73,392 
Allowance for credit losses on loans and leases$120,116 $96,566 
Total nonperforming loans and leases to total loans and leases held for investment1.50 %1.07 %
Total nonperforming loans and leases to total assets1.07 %0.78 %
Allowance for credit losses on loans and leases to loans and leases held for investment1.62 %1.41 %
Allowance for credit losses on loans and leases to total nonperforming loans and leases108.00 %131.58 %
 September 30, 2017 December 31, 2016
Nonperforming assets:   
Total nonperforming loans (all on nonaccrual)$22,420
 $23,781
Total accruing loans past due 90 days or more—
 —
Foreclosed assets2,231
 1,648
Total troubled debt restructurings8,527
 9,856
Less nonaccrual troubled debt restructurings(6,078) (7,688)
Total performing troubled debt restructurings2,449
 2,168
Total nonperforming assets and troubled debt restructurings$27,100
 $27,597
Total nonperforming loans to total loans and leases held for investment1.92% 2.62%
Total nonperforming loans to total assets0.92% 1.36%
Total nonperforming assets and troubled debt restructurings to total assets1.11% 1.57%
(1)Excludes loans measured at fair value.
June 30, 2023 (1)
December 31, 2022 (1)
Nonaccrual loans and leases guaranteed by U.S. government:
Total nonperforming loans and leases guaranteed by the U.S government (all on nonaccrual)$66,322 $54,608 
Foreclosed assets guaranteed by the U.S. government— — 
Total nonperforming assets guaranteed by the U.S. government$66,322 $54,608 
Allowance for credit losses on loans and leases$120,116 $96,566 
Total nonperforming loans and leases not guaranteed by the U.S. government to total held for investment loans and leases0.61 %0.27 %
Total nonperforming loans and leases not guaranteed by the U.S. government to total assets0.43 %0.20 %
Allowance for credit losses on loans and leases to total nonperforming loans and leases not guaranteed by the U.S. government267.52 %514.09 %
 September 30, 2017 December 31, 2016
Nonperforming assets guaranteed by U.S. government:   
Total nonperforming loans guaranteed by the SBA (all on nonaccrual)$19,121
 $18,997
Total accruing loans past due 90 days or more guaranteed by the SBA—
 —
Foreclosed assets guaranteed by the SBA1,785
 1,402
Total troubled debt restructurings guaranteed by the SBA5,427
 6,723
Less nonaccrual troubled debt restructurings guaranteed by the SBA(5,340) (6,602)
Total performing troubled debt restructurings guaranteed by SBA87
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Total nonperforming assets and troubled debt restructurings guaranteed by the SBA$20,993
 $20,520
Total nonperforming loans not guaranteed by the SBA to total held for investment loans and leases0.28% 0.53%
Total nonperforming loans not guaranteed by the SBA to total assets0.14% 0.27%
Total nonperforming assets and troubled debt restructurings not guaranteed by the SBA to total assets0.25% 0.40%
(1)Excludes loans measured at fair value.
Total nonperforming assets, and troubled debt restructuringsincluding loans measured at Septemberfair value, at June 30, 20172023 were $27.1$168.8 million, which represented a $497 thousand,$48.4 million, or 1.8%40.2%, decreaseincrease from December 31, 2016. Total nonperforming assets at September 30, 2017 were comprised of $22.4 million in nonaccrual loans and $2.2 million in foreclosed assets.2022. Of the $27.1$168.8 million of nonperforming assets, and troubled debt restructurings ("TDRs"), $21.0$113.2 million carried an SBAa government guarantee, leaving an unguaranteed exposure of $6.1$55.6 million in total nonperforming assets and TDRs at SeptemberJune 30, 2017. The2023. This represents an increase of $29.5 million, or 113.4%, from an unguaranteed exposure of $26.0 million at December 31, 2022.
See the below discussion related to the change in potential problem and impaired loans and leases for management’s overall observations regarding growth in total nonperforming assetsloans and TDRs at December 31, 2016 was $7.1 million. Unguaranteed exposure relating to nonperforming assets and TDRs at September 30, 2017 decreased by $970 thousand, or 13.7%, compared to December 31, 2016.leases.
As a percentage of the Bank’s total capital, nonperforming loans and leases, excluding loans measured at fair value, represented 10.2%12.8% at SeptemberJune 30, 2017,2023, compared to nonperforming loans of 15.3% of the Bank’s total capital9.0% at December 31, 2016.2022. Adjusting the ratio to include only the unguaranteed portion of nonperforming loans and leases at historical cost to reflect management’s belief that the greater magnitude of risk resides in this portion, the ratios at Septemberboth June 30, 20172023 and December 31, 20162022 were 1.5%5.2% and 3.1%2.3%, respectively.

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As of SeptemberJune 30, 20172023, and December 31, 2016,2022, potential problem (also referred to as criticized) and impairedclassified loans and leases, excluding loans measured at fair value, totaled $66.0$556.6 million and $64.1$424.7 million, respectively.The following is a discussion of these loans and leases. Risk Grades 5 through 8 represent the spectrum of criticized and impaired loans.classified loans and leases. For a complete description of the risk grading system, see Note 3. Loans and Leases Held for Investment and Credit Quality in the Company’s 2022 Form 10-K. At SeptemberJune 30, 2017,2023, the portion of criticized and classified loans and leases guaranteed by the SBA or USDA totaled $28.2$227.1 million resulting inand total portfolio unguaranteed exposure risk of $37.8was $329.5 million, or 3.3%7.0% of total held for investment unguaranteed exposure.exposure carried at historical cost. This compares to the December 31, 20162022 portion of criticized and classified loans and leases guaranteed by the SBA or USDA which totaled $29.0$195.8 million resulting inand total portfolio unguaranteed exposure risk of $35.1was $228.9 million, or 4.0%5.5% of total held for investment unguaranteed exposure.exposure carried at historical cost. As of SeptemberJune 30, 20172023, loans in Veterinary, Healthcare and Independent Pharmacies industryleases carried at historical cost within the following verticals comprise the largest portion of the total potential problem and impairedclassified loans and leases: Wine and Craft Beverage at 28.5%12.3%, 30.8%Senior Housing at 12.2%, Sponsor Finance at 12.1% (principally related to Search Fund Lending), General Lending at 10.1%, Healthcare at 5.0%, Senior Care at 4.7%, Fitness Centers at 4.6%, Hotels at 4.6%, Venture Banking at 4.4% and 20.4%, respectively.Agriculture at 4.0%. As of December 31, 20162022, loans inand leases carried at historical cost within the Healthcare and Veterinary industriesfollowing verticals comprise the largest portion of the total potential problem and impairedclassified loans and leases: Wine and Craft Beverage at 30.8%11.5%, General Lending at 10.3%, Senior Housing at 10.2%, Sponsor Finance at 7.8%, Healthcare at 6.4%, Hotels at 5.9%, Fitness Centers at 5.1%, Agriculture at 4.5% and 32.9%, respectively.Senior Care at 4.0%. Of the above listed verticals, Senior Housing, Sponsor Finance and Venture Banking are within the Company’s Specialty Lending division while Hotels are within the Energy & Infrastructure division, the remainder of the above listed verticals are within the Small Business Banking division. The majority of the $131.9 million increase in potential problem and classified loans and leases in the first six months of 2023 was comprised of several relationships that did not have a government guarantee. The Company believes that its underwriting and credit quality standards have improved as the business has matured.remained high and continues to consider changing economic conditions in a rising interest rate environment.
The Bank does not classify loansLoans and leases that experience insignificant payment delays and payment shortfalls as impaired.are generally not individually evaluated for the purpose of estimating the allowance for credit losses. The Bank generally 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, creditCredit personnel 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 lenderAt June 30, 2023, the Company has over approximately 350 borrowershad a total of $21.7 million in loans modified in the affected areas. As a resultfirst half of these unfortunate disasters, Live Oak has actively reached out2023 to eachborrowers experiencing financial difficulty, all of these borrowers to workwhich remained current with any that have been impacted. At this time, there have been a limited number of short-term$4.5 million on principal 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.deferral.
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. Management implements a proactive approach to identifying and classifying loans and leases as special mention (also referred to as criticized), Risk Grade 5. At SeptemberJune 30, 20172023, and December 31, 2016,2022, Risk Grade 5 loans and leases, excluding loans measured at fair value, totaled $30.5$404.3 million and $32.1$286.5 million, respectively.respectively, for a six month increase of $117.8 million. 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, 2016and leases, exclusive of loans measured at fair value, during the first half of 2023 was principally confined to September 30, 2017 in two verticals; Agricultureeight verticals: Sponsor Finance ($1.135.9 million or 95.0%30.4%, principally related to Search Fund Lending), Wine and Craft Beverage ($19.7 million or 16.7%), Venture Banking ($17.1 million or 14.5%), Bioenergy ($13.5 million or 11.4%), Senior Housing ($12.5 million or 10.6%), Conventional Financing ($10.3 million or 8.7%), General Lending ($6.4 million or 5.4%), and Senior Care ($6.1 million or 5.2%). Of the above listed verticals, Sponsor Finance, Senior Housing, Venture Banking and Conventional Financing are within the Company’s Specialty Lending division while Bioenergy is within the Energy & Infrastructure division, the remainder of increase)the above listed verticals are within the Small Business Banking division.
At June 30, 2023, approximately 97.5% of loans and Investment Advisors ($464 thousand or 20.7% of decrease). The overall decrease in Risk Grade 5 loans from December 31, 2016 to September 30, 2017 was the result of routine credit monitoring in the ongoing risk grade management process.  At September 30, 2017, approximately 99.9% of loansleases classified as Risk Grade 5 are performing with no currentrelationships having payments past due.due more than 30 days. While the level of nonperforming assets fluctuates in response to changing economic and market conditions, in light of the relative size and composition of the loan and lease 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 As government payment assistance began to expire toward the end of 2020, borrowers with continuing difficulties arising from the pandemic were provided additional relief through payment deferrals. At June 30, 2023, the Company had $9.5 million in unguaranteed loans on SBA payment assistance. Management monitors these borrowers closely 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 chargedhas observed financial conditions continuing 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 collectibility 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.
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 accountingimprove.

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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 reservesAllowance for impaired loans or leases; (ii) the general reserve component, which addresses reserves for pools of homogeneous loansCredit Losses on 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.Leases
The ALLLACL of $18.2$96.6 million at December 31, 20162022, increased by $2.8$23.6 million, or 15.5%24.4%, to $21.0$120.1 million at SeptemberJune 30, 2017.2023. The ALLL,ACL as a percentage of loans and leases held for investment at historical cost amounted to 1.8% at September 30, 20171.4% and 2.0%1.6% at December 31, 2016.2022 and June 30, 2023, respectively. The declining levelincrease in the ACL during the first six months of 2023 was primarily the allowance forresult of loan and lease losses 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 loansgrowth, combined with the migration to Company-specific loss rates for maturing verticals which was partially offset by an increase in reserves due to loanportfolio trends and lease volume and the effect of higher net charge-offs, as addressedchanges in the Provisionmacroeconomic outlook. See also the above section captioned “Provision for Loan and Lease Losses sectionCredit Losses” in “Results of ResultsOperations” for related information.
Actual past due held for investment loans and leases, inclusive of Operations. General reservesloans measured at fair value, have increased by $40.6 million since December 31, 2022. Total loans and leases 90 or more days past due increased $41.1 million, or 72.7%, compared to December 31, 2022. This increase was comprised of a $11.5 million increase in unguaranteed exposure combined with a $29.7 million increase in the guaranteed portion of past due loans compared to December 31, 2022. At June 30, 2023 and December 31, 2022, total held for investment unguaranteed loans and leases past due as a percentage of non-impaired loans amounted to 1.56% at September 30, 2017 and 1.70% December 31, 2016. See the aforementioned Provisiontotal held for Loan and Lease Losses section of this section for a discussion of the Company's charge-off experience.
Actual past dueinvestment unguaranteed loans and leases, have decreased sinceinclusive of loans measured at fair value, was 0.9% and 0.7%, respectively. Total unguaranteed loans and leases past due were comprised of $35.8 million carried at historical cost, an increase of $14.6 million, and $11.8 million measured at fair value, an increase of $2.2 million, as of June 30, 2023 compared to December 31, 2016 as management2022. Management continues to actively monitor and work to improve asset quality. Management believes the ALLLACL of $21.0$120.1 million at SeptemberJune 30, 20172023 is appropriate in light of the risk inherent in the loan and lease portfolio. Management’s judgments are based on numerous assumptions about current and expected events that it believes to be reasonable, but which may or may not be valid. Thus, there can beAccordingly, 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,ACL, thus adversely affecting the Company’s operating results. Additional information on the ALLLACL is presented in Note 6 -5. Loans and Leases Held for Investment and Allowance for Loan and Lease LossesCredit Quality of the Notes to the Unaudited Condensed 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, 2017,2023, the total amount of these four items was $589.1 million,$4.59 billion, or 25.1%42.4% of total assets an increase of $93.3 million from $495.8 million, or 28.2%compared to 40.7% of total assets, at December 31, 2016.2022.
Loans and other assets are funded primarily by loan sales, wholesale deposits and core deposits. To date, an increasing retail deposit base and an increaseda stable amount of long-term brokered deposits have been adequate to meet loan obligations, while maintaining the desired level of immediate liquidity. Additionally,The Company maintains an investment securities portfolio that is available for both immediate and secondary contingent liquidity purposes.purposes, whether via pledging to the Federal Home Loan Bank, Federal Reserve Bank Term Funding Program or through liquidation. Additionally, the Company maintains a guaranteed loan portfolio that is also a contingent liquidity source, whether via pledging to the Federal Reserve Discount Window or through liquidation.
At SeptemberJune 30, 2017,2023, 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 million$1.13 billion available to pledge 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.
Contractual Obligations
The following table presents the Company’sCompany has entered into significant fixed and determinable contractual obligations by payment date asfor future payments. Other than normal changes in the ordinary course of September 30, 2017. The paymentthe Company’s operations, there have been no significant changes in the types of contractual obligations or amounts represent those amounts contractually due since December 31, 2022. See the section titled “Liquidity Management” in Part II, Item 7 of the Company’s 2022 Form 10-K for additional discussion of contractual obligations.
Off-Balance Sheet Arrangements
In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with GAAP, are not recorded in the consolidated financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the recipient. The table excludes liabilities recorded where management cannot reasonably estimateform of commitments to extend credit and standby letters of credit. For more information, see Note 10. Commitments and Contingencies in the timing of any payments that may be required in connection with these liabilities.accompanying notes to Unaudited Condensed Consolidated Financial Statements.

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 Payments Due by Period
 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
 $—
 $—
 $—
 $—
Time deposits1,183,944
 860,718
 209,019
 114,207
 —
Long term borrowings26,872
 844
 5,472
 20,556
 —
Operating lease obligations1
3,037
 941
 1,345
 463
 288
Total$2,042,800
 $862,503
 $215,836
 $135,226
 $288
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 September 30, 2017 and December 31, 2016, the Company had unfunded commitments to provide capital contributions for on-balance sheet investments in the amount of $4.4 million and $4.9 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. ThisAs of June 30, 2023, the balance sheet’s total cumulative gap position was 5.0%. For further information, see Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The interest rate gap method, however, addresses only the magnitude of asset and liability repricing timing differences as of the report date and does not address earnings, market value, changes in account behaviors based on the interest rate environment, or market value.growth. Therefore, management also uses an earnings simulation model to prepare, on a regular basis, earnings projections based on a range of instantaneous parallel interest rate scenariosshocks applied to more accuratelya static balance sheet and non-parallel interest rate shocks applied to a dynamic balance sheet to measure interest rate risk.
The As of June 30, 2023, the Company’s interest rate risk profile under the instantaneous parallel interest rate shock scenarios applied to a static balance sheet is asset-sensitive with a total cumulative gap position of 5.92% at September 30, 2017. The cash on hand from the August 2017 capital raiseslightly asset-sensitive. For more information, see Item 3. Quantitative and growth in savings deposits during the quarter has increased the asset-liability sensitivity of the Company in the current period. Qualitative Disclosures About Market Risk.
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 match 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, rates on cash accounts that adjusts as the federal funds rate changes and the longer duration of indeterminate term deposits. Note that the Company regularly models various forecasted rate projections with non-parallel shifts that are reflective of potential current rate environment outcomes. Under these scenarios, the Company’s interest rate risk profile may increase in asset sensitivity, decrease in asset sensitivity, or depending on the scenario and timing of anticipated rate changes, may transition to a liability-sensitive interest rate risk profile. The Company believes that regular modeling of various interest rate outcomes allows it to assess and manage potential risks from various rate shifts.
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 the following: to provide adequate capital to support the Company’s risk profile consistent with the risk appetite approved by the Board of Directors; to provide financial flexibility to support future growth and client needs; to comply with relevant laws, regulations, and supervisory guidance; to achieve optimal credit ratings for the Company and its subsidiaries; and to 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, 20172023, and December 31, 2016,2022, are presented in the table below.
ActualMinimum Capital
Requirement
Minimum To Be
Well Capitalized
Under Prompt
Corrective Action
Provisions (1)
AmountRatioAmountRatioAmountRatio
Consolidated - June 30, 2023
Common Equity Tier 1 (to Risk-Weighted Assets)$911,721 11.55 %$355,139 4.50 %N/AN/A
Total Capital (to Risk-Weighted Assets)1,010,695 12.81 631,358 8.00 N/AN/A
Tier 1 Capital (to Risk-Weighted Assets)911,721 11.55 473,519 6.00 N/AN/A
Tier 1 Capital (to Average Assets)911,721 8.46 430,986 4.00 N/AN/A
Bank - June 30, 2023
Common Equity Tier 1 (to Risk-Weighted Assets)$770,449 10.14 %$342,051 4.50 %$494,074 6.50 %
Total Capital (to Risk-Weighted Assets)865,832 11.39 608,091 8.00 760,113 10.00 
Tier 1 Capital (to Risk-Weighted Assets)770,449 10.14 456,068 6.00 608,091 8.00 
Tier 1 Capital (to Average Assets)770,449 7.23 426,493 4.00 533,116 5.00 
Consolidated - December 31, 2022
Common Equity Tier 1 (to Risk-Weighted Assets)$888,235 12.47 %$320,446 4.50 %N/AN/A
Total Capital (to Risk-Weighted Assets)977,360 13.73 569,681 8.00 N/AN/A
Tier 1 Capital (to Risk-Weighted Assets)888,235 12.47 427,261 6.00 N/AN/A
Tier 1 Capital (to Average Assets)888,235 9.26 383,499 4.00 N/AN/A
Bank - December 31, 2022
Common Equity Tier 1 (to Risk-Weighted Assets)$730,092 10.70 %$307,179 4.50 %$443,703 6.50 %
Total Capital (to Risk-Weighted Assets)815,577 11.95 546,096 8.00 682,620 10.00 
Tier 1 Capital (to Risk-Weighted Assets)730,092 10.70 409,572 6.00 546,096 8.00 
Tier 1 Capital (to Average Assets)730,092 7.70 379,396 4.00 474,245 5.00 
 Actual 
Minimum
Capital
Requirement
 
Minimum
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions (1)
 Amount Ratio Amount Ratio Amount Ratio
Consolidated - September 30, 2017           
Common Equity Tier 1 (to Risk-Weighted Assets)$323,780
 17.72% $82,232
 4.50% N/A
 N/A
Total Capital (to Risk-Weighted Assets)$344,807
 18.87% $146,191
 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
Tier 1 Capital (to Average Assets)$323,780
 13.95% $92,863
 4.00% N/A
 N/A
Bank - September 30, 2017           
Common Equity Tier 1 (to Risk-Weighted Assets)$198,353
 11.26% $79,287
 4.50% $114,525
 6.50%
Total Capital (to Risk-Weighted Assets)$219,651
 12.47% $140,954
 8.00% $176,193
 10.00%
Tier 1 Capital (to Risk-Weighted Assets)$198,353
 11.26% $105,716
 6.00% $140,954
 8.00%
Tier 1 Capital (to Average Assets)$198,353
 8.78% $90,382
 4.00% $112,978
 5.00%
Consolidated - December 31, 2016           
Common Equity Tier 1 (to Risk-Weighted Assets)$206,670
 15.31% $60,732
 4.50% N/A
 N/A
Total Capital (to Risk-Weighted Assets)$223,559
 16.56% $107,968
 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
Tier 1 Capital (to Average Assets)$206,670
 12.00% $68,919
 4.00% N/A
 N/A
Bank - December 31, 2016           
Common Equity Tier 1 (to Risk-Weighted Assets)$139,078
 10.68% $58,579
 4.50% $84,615
 6.50%
Total Capital (to Risk-Weighted Assets)$155,423
 11.94% $104,141
 8.00% $130,177
 10.00%
Tier 1 Capital (to Risk-Weighted Assets)$139,078
 10.68% $78,106
 6.00% $104,141
 8.00%
Tier 1 Capital (to Average Assets)$139,078
 8.41% $66,142
 4.00% $82,678
 5.00%
(1)Prompt corrective action provisions are not applicable at the bank holding company level.
(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 Condensed Consolidated Financial Statements in this report and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, 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 theThe Company’s most critical accounting policies and estimates are listed belowbelow. These estimates require the Company to make difficult, subjective or complex judgments about matters that are inherently uncertain.
Determination•Allowance for credit losses;
•Valuation of loans accounted for under the allowance for loan losses;fair value option;
•Valuation of servicing assets; and
Valuation
59
Table of foreclosed assets; andContents
Valuation of earn-out contingent liability.•Income taxes
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 a significant market risk and can result from timing and volume differences in the exposure to adverserepricing of rate-sensitive assets and liabilities, widening or tightening of credit spreads, changes in the general level of market interest rates and changes in the shape and level of market yield curves. The Company manages the interest rate sensitivity of interest-bearing liabilities and interest-earning assets in an effort to minimize the adverse effects of changes in the interest rate environment. Management of interest rate risk is carried out primarily through strategies involving available-for-sale securities, loan and lease portfolio, and available funding sources.
The Company has an Asset/Liability Committee to support prudent oversight of interest rate risk management. The Asset/Liability Committee monitors the volume, maturities, pricing and mix of assets and funding sources with the objective of managing assets and funding sources to provide results that are consistent with liquidity, growth, risk limits and profitability goals. Adherence to relevant policies is monitored on an ongoing basis by the Asset/Liability Committee.
The Company has a total cumulative gap in interest-earning assets and interest-bearing liabilities of 5.0% as of June 30, 2023, indicating that, overall, over the expected life of the instruments, assets will reprice before liabilities.
The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest rate sensitive.” An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The Company analyzes interest rate sensitivity position to manage the risk associated with interest rate movements through the use of two simulation models: economic value of equity (“EVE”) and net interest income (“NII”) simulations. These simulations project both short-term and long-term interest rate risk under a variety of instantaneous parallel rate shocks applied to a static balance sheet. The EVE simulation provides a long-term view of interest rate risk because it analyzes all of the Company’s future cash flows. EVE is defined as the present value of the Company’s assets, less the present value of its liabilities, adjusted for any off-balance sheet items. The results show a theoretical change in the economic value of shareholders’ equity as interest rates change.
EVE and NII simulations are completed regularly and presented to the Asset/Liability Committee. The simulations provide an estimate of the impact of changes in interest rates on equity and net interest income under a range of assumptions. The numerous assumptions used in the simulation process are provided to the Asset/Liability Committee on at least an annual basis. Changes to these assumptions can significantly affect the results of the simulation. The simulation incorporates assumptions regarding the potential timing in the repricing of certain assets and liabilities when market rates change and the changes in spreads between different market rates. The simulation analysis incorporates management’s current assessment of the risk that pricing margins will change adversely over time due to competition or other factors.
Simulation analysis is only an estimate of interest rate risk exposure at a particular point in time. The Company regularly models various forecasted rate projections with non-parallel shifts that are reflective of potential current rate environment outcomes. Under these scenarios, the Company’s interest rate risk profile may increase in asset sensitivity, decrease in asset sensitivity, or depending on the scenario and timing of anticipated rate changes, may transition to a liability sensitive interest rate risk profile. The Company believes that regular modeling of various interest rate outcomes allows it to assess and manage potential risks from various rate shifts.
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The table below sets forth an approximation of the Company’s NII sensitivity exposure for the 12-month periods ending June 30, 2024 and 2025, and the Company’s EVE sensitivity at June 30, 2023. The simulation uses projected repricing of assets and liabilities at June 30, 2023, on the basis of contractual maturities, anticipated repayments and scheduled rate adjustments. Critical model assumptions such as loan and investment prepayment rates, deposit decay rates, changes in deposit pricing, both in amount and timing, relative to changes in interest rates. Consistency of netmarket rates (commonly referred to as deposit betas and lags, respectively) and assumed replacement pricing can have a significant impact on interest income simulation. A static balance sheet is largely dependent uponmaintained to remove volume considerations and to place the effective managementfocal point on the rate sensitivity 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 throughbalance sheet. While management ofbelieves such assumptions to be reasonable, actual future activity may differ from the balance sheet composition, maturities, liquidity,results shown below as it will include growth considerations, non-parallel rate movements, and interest rate risk exposures arising from changing economic conditions, interest rates and customer preferences.
To identify and manage its interest rate risk,management actions to mitigate 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 effectimpacts of changing interest rates on the prepayment rates of certain assets and liabilities. The model also includes management projections for activity levels in eachbalance sheet’s earnings profile.
Estimated Increase/Decrease
in Net Interest Income		Estimated
Percentage Change in EVE
Basis Point ("bp") Change in
Interest Rates		12 Months Ending June 30, 202412 Months Ending June 30, 2025As of June 30, 2023
+4001.0%(4.0)%(28.0)%
+3000.9(2.9)(21.2)
+2000.7(1.8)(14.2)
+1000.3(0.9)(7.1)
-100(0.9)—6.8
-200(1.9)(0.4)13.5
-300(3.0)(0.9)20.1
Rates are increased instantaneously at the beginning of the product lines offered byprojection. The Company's asset/liability profile is slightly asset sensitive in year one, as the Bank. AssumptionsCompany’s variable rate loan portfolio reprices the full amount of the assumed change in interest rates, while the retail savings and short-term retail certificates of deposits portfolio will reprice with an assumed beta. The Company is slightly liability sensitive in year two from a net interest income perspective as the company's interest rate increases on new and existing deposits are inherently uncertain,repricing more rapidly than the company's total loan and lease portfolio. Interest rates do not normally move all at once or evenly over time, but management believes that the measurementanalysis is useful to understanding the potential direction and magnitude 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 resultschanges due to timing, magnitude,changing interest rates.
The EVE analysis shows that the Company would theoretically lose market value in a rising rate environment. The favorable EVE change resulting from the loan and frequencylease portfolio in a rising rate analysis is more than offset by the devaluation of interestthe interest-bearing liabilities. This is largely driven by the Company’s longer asset duration, primarily consisting of investments and loans, versus the shorter duration of its funding portfolio, primarily consisting of retail savings and short-term retail certificates of deposits. Increased fixed rate changes as well as changesloan production since 2020, given the historical low market rate environment, has also been a significant driver in market conditions and management strategies.the model results.
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, 2017,2023, 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, 20172023, 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.
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Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three months quarter ended SeptemberJune 30, 20172023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.


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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of operations, the Company is party to variousat times involved in legal proceedings. The Company is not involved in, nor has it terminated duringIn the three and nine months ended Septemberopinion of management, as of June 30, 2017, any2023, there are no material pending legal proceedings other than nonmaterial proceedings occurring into which the ordinary courseCompany or any of business.its subsidiaries is a party or of which any of their property is the subject.
Item 1A. Risk Factors
See “Risk Factors”There have been no material changes in Part 1, Item 1A of ourthe Company’s risk factors from those disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, and "Risk Factors"2022, with the exception of the additional risk factor disclosed in Part II, Item 1A of ourthe Company's 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 previously disclosed in these filings.March 31, 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.On May 17, 2022, the Board of Directors of the Company authorized the repurchase of up to $50,000,000 in shares of the Company’s voting common stock from time to time through December 31, 2023 (the “Repurchase Program”). The Repurchase Program enables the Company to acquire shares through open market purchases or privately negotiated transactions, including through a Rule 10b5-1 plan, at the discretion of management and on terms (including quantity, timing, and price) that management determines to be advisable. Actions in connection with the repurchase program will be subject to various factors, including the Company’s capital and liquidity positions, regulatory and accounting considerations, the Company’s financial and operational performance, alternative uses of capital, the trading price of the Company’s common stock, and market conditions. The repurchase program does not obligate the Company to acquire a specific dollar amount or number of shares and may be extended, modified, or discontinued at any time. As of June 30, 2023, the Company had not made any purchases of shares under the Repurchase Program.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
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Item 6. ExhibitsExhibits.

Exhibits to this report are listed in the Index to Exhibits section of this report.
INDEX TO EXHIBITS
Exhibit

No.
Description of Exhibit
3.1
Amended and Restated Articles of Incorporation of Live Oak Bancshares, Inc. (incorporated by reference to Exhibit 3.1 of the registration statement on Form S-1, filed on June 19, 2015)
3.2
Amended Bylaws of Live Oak Bancshares, Inc. (incorporated by reference to Exhibit 3.2 of the amended registration statement on Form S-1, filed on June 19,July 13, 2015)
4.1
Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 of the registration statement on Form S-1, filed on June 19, 2015)
4.210.1
Registration and Other RightsForm of 2023 RSU Award Agreement for non-employee directors* #
10.2.1
Amendment to Software Service Agreement dated June 5, 2023, between Live Oak Bancshares,Banking Company and nCino, Inc. and Wellington purchasers (incorporated by reference to Exhibit 4.2 of the registration statement on Form S-1, filed on June 19, 2015)*
31.110.2.2
Amendment to Software Service Agreement dated June 5, 2023, between Live Oak Banking Company and nCino, Inc.*
10.2.3
Amendment to Software Service Agreement dated June 8, 2023, between Live Oak Banking Company and nCino, Inc.*
10.2.4
Amendment to Software Service Agreement dated July 14, 2023, between Live Oak Banking Company and nCino, Inc.*
10.2.5
Amendment to Software Service Agreement dated July 21, 2023, between Live Oak Banking Company and nCino, Inc.*
31.1
Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2
Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
101
Interactive data files pursuant to Rule 405 of Regulation S-T:S-T, formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets as of SeptemberJune 30, 20172023 and December 31, 2016;2022; (ii) Condensed Consolidated Statements of Income for the Three and NineSix Months Ended SeptemberJune 30, 20172023 and 2016;2022; (iii) Condensed Consolidated Statements of Comprehensive Income for the Three and NineSix Months Ended SeptemberJune 30, 20172023 and 2016;2022; (iv) Condensed Consolidated Statements of Changes in Shareholders’ Equity for the NineThree and Six Months Ended SeptemberJune 30, 20172023 and 2016;2022; (v) Condensed Consolidated Statements of Cash Flows for the NineSix Months Ended SeptemeberJune 30, 20172023 and 2016;2022; and (vi) Notes to Unaudited Condensed Consolidated Financial Statements*
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
*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.

**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.
#    Denotes management contract or compensatory plan.

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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 2, 2023Live Oak Bancshares, Inc.
By:
(Registrant)/s/ William C. Losch III
William C. Losch III
Date: November 6, 2017By:
/s/  S. Brett Caines
S. Brett Caines
Chief Financial Officer

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