☐

Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨☐ NO ý☒

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Voting Common Stock, no par value per share	LOB	The NASDAQ Stock Market LLC

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 5, 2019, there were ~~35,233,241~~35,590,365 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 ~~September~~June 30, ~~2017~~

2019

TABLE OF CONTENTS

			Page
PART I. FINANCIAL INFORMATION
		~~Page~~
~~PART I. FINANCIAL INFORMATION~~
Item 1.		Financial Statements (Unaudited)		1
		Condensed Consolidated Balance Sheets as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018		1
		Condensed Consolidated Statements of Income for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018		2
		Condensed Consolidated Statements of Comprehensive Income for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018	4	3
		Condensed Consolidated Statements of Changes in Shareholders’ Equity for the ~~Nine~~Three and Six Months Ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018	5	4
		Condensed Consolidated Statements of Cash Flows for the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018		6
		Notes to Unaudited Condensed Consolidated Financial Statements		8
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	47	45
Item 3.		Quantitative and Qualitative Disclosures about Market Risk	67	64
Item 4.		Controls and Procedures	67	64
		PART II. OTHER INFORMATION
Item 1.		Legal Proceedings	68	65
Item 1A.		Risk Factors	68	65
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	68	65
Item 3.		Defaults Upon Senior Securities	68	65
Item 4.		Mine Safety Disclosures	68	65
Item 5.		Other Information	68	65
Item 6.	~~Exhibits~~	68Exhibits		66
	~~Signatures~~	70
	Index to Exhibits		66
		XSignatures		67

~~Table of Contents~~

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Live Oak Bancshares, Inc.

Condensed Consolidated Balance Sheets

As of ~~September~~June 30, ~~2017~~2019 (unaudited) and December 31, 2016*

2018*

(Dollars in thousands)

	June 30, 2019			December 31, 2018
Assets
Cash and due from banks	$	115,292		$	316,823
Federal funds sold		68,153			—
Certificates of deposit with other banks		7,250			7,250
Investment securities available-for-sale		576,275			380,490
Loans held for sale		857,837			687,393
Loans and leases held for investment		2,225,473			1,843,419
Allowance for loan and lease losses		(38,048	)		(32,434	)
Net loans and leases		2,187,425			1,810,985
Premises and equipment, net		281,126			262,524
Foreclosed assets		6,044			1,094
Servicing assets		41,687			47,641
Operating lease right-of-use assets		1,996			—
Other assets		131,216			156,249
Total assets	$	4,274,301		$	3,670,449
Liabilities and Shareholders’ Equity
Liabilities
Deposits:
Noninterest-bearing	$	55,416		$	53,993
Interest-bearing		3,666,181			3,095,590
Total deposits		3,721,597			3,149,583
Short term borrowings		1,345			1,441
Long term borrowings		16			16
Operating lease liabilities		2,162			—
Other liabilities		30,195			25,849
Total liabilities		3,755,315			3,176,889
Shareholders’ equity
Preferred stock, no par value, 1,000,000 authorized, none issued or outstanding at June 30, 2019 and December 31, 2018		—			—
Class A common stock, no par value, 100,000,000 shares authorized, 35,577,386 and 35,512,262 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively		284,987			278,945
Class B common stock, no par value, 10,000,000 shares authorized, 4,643,530 shares issued and outstanding at June 30, 2019 and December 31, 2018		49,168			49,168
Retained earnings		171,954			167,124
Accumulated other comprehensive income (loss)		12,877			(1,677	)
Total shareholders’ equity		518,986			493,560
Total liabilities and shareholders’ equity	$	4,274,301		$	3,670,449

September 30,
2017 December 31,
2016*
Assets
Cash and due from banks $ 260,907
$ 238,008
Certificates of deposit with other banks 3,250
7,250
Investment securities available-for-sale 76,575
71,056
Loans held for sale 692,586
394,278
Loans and leases held for investment 1,169,887
907,566
Allowance for loan and lease losses (21,027 ) (18,209 )
Net loans and leases 1,148,860
889,357
Premises and equipment, net 129,233
64,661
Foreclosed assets 2,231
1,648
Servicing assets 53,392
51,994
Other assets 65,155
37,009
Total assets $ 2,432,189
$ 1,755,261
Liabilities and Shareholders’ Equity
Liabilities
Deposits:
Noninterest-bearing $ 55,260
$ 27,990
Interest-bearing 1,957,631
1,457,086
Total deposits 2,012,891
1,485,076
Long term borrowings 26,872
27,843
Other liabilities 27,835
19,495
Total liabilities 2,067,598
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, respectively 266,336
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, respectively 49,168
50,015
Retained earnings 49,707
23,518
Accumulated other comprehensive loss (620 ) (652 )
Total equity 364,591
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

~~Table of Contents~~

Live Oak Bancshares, Inc.

Condensed Consolidated Statements of Income

For the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018 (unaudited)

(Dollars in thousands, except per share data)

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Interest income
Loans and fees on loans	$	49,914		$	36,267		$	94,880		$	68,958
Investment securities, taxable		4,116			2,530			7,433			3,647
Other interest earning assets		1,108			2,179			2,747			3,394
Total interest income		55,138			40,976			105,060			75,999
Interest expense
Deposits		21,203			13,927			40,520			24,345
Borrowings		—			1			—			130
Total interest expense		21,203			13,928			40,520			24,475
Net interest income		33,935			27,048			64,540			51,524
Provision for loan and lease losses		3,463			2,087			6,205			6,479
Net interest income after provision for loan and lease losses		30,472			24,961			58,335			45,045
Noninterest income
Loan servicing revenue		7,063			6,965			14,473			13,863
Loan servicing asset revaluation		(403	)		(3,670	)		(2,649	)		(8,758	)
Net gains on sales of loans		6,015			23,061			10,213			47,479
Equity method investments income (loss)		(1,736	)		(673	)		(3,750	)		(1,037	)
Gain on sale of investment securities available-for-sale		—			—			5			—
Lease income		2,369			1,920			4,694			3,528
Construction supervision fee income		386			597			1,165			1,376
Title insurance income		—			996			—			2,296
Other noninterest income		1,007			1,417			3,577			2,622
Total noninterest income		14,701			30,613			27,728			61,369
Noninterest expense
Salaries and employee benefits		21,990			22,146			43,845			42,355
Travel expense		1,541			2,041			2,741			3,884
Professional services expense		1,621			1,119			3,803			2,417
Advertising and marketing expense		1,665			1,868			3,029			3,530
Occupancy expense		1,848			1,882			3,457			3,739
Data processing expense		1,947			2,906			4,346			5,743
Equipment expense		4,239			3,368			7,564			6,445
Other loan origination and maintenance expense		1,708			1,414			3,347			2,743
Renewable energy tax credit investment impairment		602			—			602			—
FDIC insurance		699			1,010			1,334			1,582
Title insurance closing services expense		—			372			—			798
Other expense		1,716			2,704			3,709			5,666
Total noninterest expense		39,576			40,830			77,777			78,902
Income before taxes		5,597			14,744			8,286			27,512
Income tax expense		662			491			979			806
Net income	$	4,935		$	14,253		$	7,307		$	26,706
Basic earnings per share	$	0.12		$	0.36		$	0.18		$	0.67
Diluted earnings per share	$	0.12		$	0.34		$	0.18		$	0.64

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, taxable 325
337
964
840
Other interest earning assets 870
264
1,682
650
Total interest income 28,172
15,562
72,936
40,358
Interest expense
Deposits 6,758
3,689
16,893
9,376
Borrowings 389
242
985
725
Total interest expense 7,147
3,931
17,878
10,101
Net interest income 21,025
11,631
55,058
30,257
Provision for loan and lease losses 2,426
3,806
5,481
8,692
Net interest income after provision for loan and lease losses 18,599
7,825
49,577
21,565
Noninterest income
Loan servicing revenue 6,490
5,860
18,587
15,725
Loan servicing asset revaluation (3,691 ) (3,421 ) (6,864 ) (5,051 )
Net gains on sales of loans 18,148
21,833
55,276
52,813
Gain on sale of investment securities available-for-sale —
1
—
1
Construction supervision fee income 362
502
1,077
1,799
Title insurance income 1,968
—
5,803
—
Other noninterest income 1,783
657
3,601
1,925
Total noninterest income 25,060
25,432
77,480
67,212
Noninterest expense
Salaries and employee benefits 19,037
17,471
55,687
45,875
Travel expense 2,289
2,218
6,035
6,394
Professional services expense 1,068
907
4,228
2,345
Advertising and marketing expense 1,516
1,097
4,977
3,425
Occupancy expense 1,473
1,058
4,018
3,306
Data processing expense 1,982
1,252
5,536
3,864
Equipment expense 2,228
611
5,005
1,696
Other loan origination and maintenance expense 1,601
806
3,587
2,001
FDIC insurance 858
210
2,308
507
Title insurance closing services expense 687
—
1,877
—
Other expense 3,117
1,588
8,883
4,648
Total noninterest expense 35,856
27,218
102,141
74,061
Income before taxes 7,803
6,039
24,916
14,716
Income tax (benefit) expense (5,059 ) 2,561
(3,853 ) 6,432
Net income 12,862
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~~

See Notes to Unaudited Condensed Consolidated Financial Statements

~~Table of Contents~~

Live Oak Bancshares, Inc.

Condensed Consolidated Statements of Comprehensive Income

For the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018 (unaudited)

(Dollars in thousands)

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Net income	$	4,935		$	14,253		$	7,307		$	26,706
Other comprehensive income (loss) before tax:
Net unrealized gain (loss) on investment securities arising during the period		15,637			(1,965	)		19,155			(4,920	)
Reclassification adjustment for gain on sale of securities available-for-sale included in net income		—			—			(5	)		—
Other comprehensive income (loss) before tax		15,637			(1,965	)		19,150			(4,920	)
Income tax (expense) benefit		(3,753	)		471			(4,596	)		1,181
Other comprehensive income (loss), net of tax		11,884			(1,494	)		14,554			(3,739	)
Total comprehensive income	$	16,819		$	12,759		$	21,861		$	22,967

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

See Notes to Unaudited Condensed Consolidated Financial Statements

~~Table of Contents~~

Live Oak Bancshares, Inc.

Condensed Consolidated Statements of Changes in Shareholders’ Equity

For the ~~nine~~three and six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018 (unaudited)

(Dollars in thousands)

	Three Months Ended
	Common stock										Accumulated other
	Shares							Retained			comprehensive			Total
	Class A		Class B		Amount			earnings			income (loss)			equity
Balance at March 31, 2019		35,531,549		4,643,530	$	331,162		$	168,225		$	993		$	500,380
Net income		—		—		—			4,935			—			4,935
Other comprehensive income		—		—		—			—			11,884			11,884
Issuance of restricted stock		19,346		—		—			—			—			—
Withholding cash issued in lieu of restricted stock issuance		—		—		(81	)		—			—			(81	)
Stock option exercises		26,491		—		158			—			—			158
Stock option based compensation expense		—		—		400			—			—			400
Restricted stock expense		—		—		2,516			—			—			2,516
Cash dividends ($0.03 per share)		—		—		—			(1,206	)		—			(1,206	)
Balance at June 30, 2019		35,577,386		4,643,530	$	334,155		$	171,954		$	12,877		$	518,986

Balance at March 31, 2018		35,330,618		4,643,530	$	320,619		$	131,739		$	(3,522	)	$	448,836
Net income		—		—		—			14,253			—			14,253
Other comprehensive loss		—		—		—			—			(1,494	)		(1,494	)
Issuance of restricted stock		21,844		—		—			—			—			—
Withholding cash issued in lieu of restricted stock issuance		—		—		(184	)		—			—			(184	)
Stock option exercises		90,417		—		561			—			—			561
Stock option based compensation expense		—		—		346			—			—			346
Restricted stock expense		—		—		1,869			—			—			1,869
Cash dividends ($0.03 per share)		—		—		—			(1,201	)		—			(1,201	)
Balance at June 30, 2018		35,442,879		4,643,530	$	323,211		$	144,791		$	(5,016	)	$	462,986

Common stock
Retained
earnings

Accumulated
other
comprehensive
income (loss)

Non-
controlling
interest

Total
equity
Shares
Class A Class B Amount
Balance at December 31, 2015 29,449,369
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 stock 16,745
—
—
—
—
—
—
Stock option exercises 25,406
—
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, 2016 29,491,520
4,723,530
$ 195,299
$ 18,723
$ 130
$ —
$ 214,152
Balance at December 31, 2016 29,530,072
4,723,530
$ 199,981
$ 23,518
$ (652 ) $ —
$ 222,847
Net income —
—
—
28,769
—
—
28,769
Other comprehensive income —
—
—
—
32
—
32
Issuance of restricted stock 306,902
—
—
—
—
—
—
Withholding cash issued in lieu of restricted stock issuance —
—
(4,891 ) —
—
—
(4,891 )
Employee stock purchase program 22,634
—
445
—
—
—
445
Stock option exercises 76,285
—
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 sale 80,000
(80,000 ) —
—
—
—
—
Issuance of common stock in connection with secondary offering, net of issue costs 5,175,000
—
113,096
—
—
—
113,096
Dividends (distributions to shareholders) —
—
—
(2,580 ) —
—
(2,580 )
Balance at September 30, 2017 35,218,617
4,643,530
$ 315,504
$ 49,707
$ (620 ) $ —
$ 364,591

See Notes to Unaudited Condensed 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, 2019 and 2018 (unaudited)

(Dollars in thousands)

	Six Months Ended
	Common stock										Accumulated other
	Shares							Retained			comprehensive			Total
	Class A		Class B		Amount			earnings			income (loss)			equity
Balance at December 31, 2018		35,512,262		4,643,530	$	328,113		$	167,124		$	(1,677	)	$	493,560
Net income		—		—		—			7,307			—			7,307
Other comprehensive income		—		—		—			—			14,554			14,554
Issuance of restricted stock		21,486		—		—			—			—			—
Withholding cash issued in lieu of restricted stock issuance		—		—		(86	)		—			—			(86	)
Employee stock purchase program		14,059		—		182			—			—			182
Stock option exercises		29,579		—		172			—			—			172
Stock option based compensation expense		—		—		870			—			—			870
Restricted stock expense		—		—		4,904			—			—			4,904
Cumulative effect of accounting change for Accounting Standards Update 2016-02		—		—		—			(66	)		—			(66	)
Cash dividends ($0.06 per share)		—		—		—			(2,411	)		—			(2,411	)
Balance at June 30, 2019		35,577,386		4,643,530	$	334,155		$	171,954		$	12,877		$	518,986

Balance at December 31, 2017		35,252,053		4,643,530	$	317,725		$	120,241		$	(1,033	)	$	436,933
Net income		—		—		—			26,706			—			26,706
Other comprehensive loss		—		—		—			—			(3,739	)		(3,739	)
Issuance of restricted stock		39,133		—		—			—			—			—
Withholding cash issued in lieu of restricted stock issuance		—		—		(495	)		—			—			(495	)
Employee stock purchase program		7,022		—		165			—			—			165
Stock option exercises		144,671		—		1,252			—			—			1,252
Stock option based compensation expense		—		—		809			—			—			809
Restricted stock expense		—		—		3,755			—			—			3,755
Reclassification of accumulated other comprehensive income due to tax rate change		—		—		—			244			(244	)		—
Cash dividends ($0.06 per share)		—		—		—			(2,400	)		—			(2,400	)
Balance at June 30, 2018		35,442,879		4,643,530	$	323,211		$	144,791		$	(5,016	)	$	462,986

See Notes to Unaudited Condensed Consolidated Financial Statements

Live Oak Bancshares, Inc.

Condensed Consolidated Statements of Cash Flows

For the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018 (unaudited)

(Dollars in thousands)

	Six Months Ended June 30,
	2019			2018
Cash flows from operating activities
Net income	$	7,307		$	26,706
Adjustments to reconcile net income to net cash used by operating activities:
Depreciation and amortization		9,101			7,823
Provision for loan and lease losses		6,205			6,479
Amortization of premium on securities, net of accretion		254			353
Change in discount on unguaranteed loans		(3,431	)		3,501
Deferred tax (benefit) expense		(417	)		807
Originations of loans held for sale		(455,456	)		(621,290	)
Proceeds from sales of loans held for sale		168,981			613,911
Net gains on sale of loans held for sale		(10,213	)		(47,479	)
Net loss on sale of foreclosed assets		4			1
Net decrease (increase) in servicing assets		5,954			(391	)
Gain on sale of securities available-for-sale		(5	)		—
Net gain on disposal of long-lived asset		(357	)		—
Net loss on disposal of property and equipment		109			—
Renewable energy tax credit investment impairment		602			—
Stock option based compensation expense		870			809
Restricted stock expense		4,904			3,755
Stock based compensation expense tax (shortfall) benefit		(76	)		24
Business combination contingent consideration fair value adjustment		—			(260	)
Changes in assets and liabilities:
Lease right-of-use assets and liabilities, net		102			—
Other assets		13,704			(7,445	)
Other liabilities		154			909
Net cash used by operating activities		(251,704	)		(11,787	)
Cash flows from investing activities
Purchases of securities available-for-sale		(205,829	)		(316,588	)
Proceeds from sales, maturities, calls, and principal paydown of securities available-for-sale		28,945			19,727
Proceeds from SBA reimbursement/sale of foreclosed assets		393			212
Maturities of certificates of deposits with other banks		—			750
Loan and lease originations and principal collections, net		(258,028	)		(217,743	)
Proceeds from sale of long-lived asset		10,895			—
Purchases of premises and equipment, net		(27,823	)		(61,217	)
Net cash used by investing activities		(451,447	)		(574,859	)

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 amortization 7,020
3,201
Provision for loan losses 5,481
8,692
Amortization of premium on securities, net of accretion 355
135
Amortization of discount on unguaranteed loans, net 1,263
773
Deferred tax expense (benefit) 413
(510 )
Originations of loans held for sale (884,741 ) (701,415 )
Proceeds from sales of loans held for sale 648,300
555,192
Net gains on sale of loans held for sale (55,276 ) (52,813 )
Net loss on sale of foreclosed assets 30
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 equipment 213
—
Stock option based compensation expense 1,496
1,752
Restricted stock expense 4,210
5,893
Stock based compensation expense excess tax benefits 1,073
—
Business combination contingent consideration fair value adjustment 350
—
Changes in assets and liabilities:
Other assets (17,661 ) (858 )
Other liabilities 3,875
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-sale 7,187
8,764
Proceeds from sale/collection of foreclosed assets 50
680
Business combination, net of cash acquired (7,696 ) —
Maturities of certificates of deposit with other banks 4,000
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 )

See Notes to Unaudited Condensed Consolidated Financial Statements

~~Table of Contents~~

Live Oak Bancshares, Inc.

Condensed Consolidated Statements of Cash Flows (Continued)

For the ~~nine~~three and six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018 (unaudited)

(Dollars in thousands)

	Six Months Ended June 30,
	2019			2018
Cash flows from financing activities
Net increase in deposits	$	572,014		$	708,973
Proceeds from long term borrowings		—			18
Repayment of long term borrowings		(2	)		(23,197	)
Repayment of short term borrowings		(96	)		—
Stock option exercises		172			1,252
Employee stock purchase program		182			165
Withholding cash issued in lieu of restricted stock		(86	)		(495	)
Shareholder dividend distributions		(2,411	)		(2,400	)
Net cash provided by financing activities		569,773			684,316
Net (decrease) increase in cash and cash equivalents		(133,378	)		97,670
Cash and cash equivalents, beginning		316,823			295,271
Cash and cash equivalents, ending	$	183,445		$	392,941

Supplemental disclosures of cash flow information
Interest paid	$	39,391		$	24,308
Income tax received		(12,439	)		(542	)

Supplemental disclosures of noncash operating, investing, and financing activities
Unrealized holding gains (losses) on available-for-sale securities, net of taxes	$	14,554		$	(3,739	)
Transfers from loans and leases to foreclosed real estate and other repossessions		5,058			346
Net transfers from SBA receivable to foreclosed real estate		289			311
Right-of-use assets obtained in exchange for lessee operating lease liabilities		2,241			—
Transfer of loans held for sale to loans and leases held for investment		146,305			19,774
Transfer of loans and leases held for investment to loans held for sale		23,321			51,614

Nine Months Ended
September 30,
2017 2016
Cash flows from financing activities
Net increase in deposits 527,815
598,229
Proceeds from long term borrowings 16,900
—
Repayment of long term borrowings (25,971 ) (301 )
Proceeds from short term borrowings 23,100
—
Repayment of short term borrowings (15,000 ) —
Stock option exercises 602
147
Employee stock purchase program 445
—
Withholding cash issued in lieu of restricted stock (4,891 ) —
Sale of common stock, net of issuance costs 113,096
—
Shareholder dividend distributions (2,580 ) (2,052 )
Net cash provided by financing activities 633,516
596,023
Net increase in cash and cash equivalents 22,899
252,878
Cash and cash equivalents, beginning 238,008
102,607
Cash and cash equivalents, ending $ 260,907
$ 355,485

Supplemental disclosure of cash flow information
Interest paid $ 17,927
$ 10,120
Income tax 7,094
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 repossessions 663
406
Transfers from foreclosed real estate to SBA receivable —
96
Transfer of loans held for sale to loans held for investment 5,713
339,322
Transfer of loans held for investment to loans held for sale 18,990
2,296
Contingent consideration in acquisition of controlling interest in equity method investment —
24
Transfers from short term borrowings to long term borrowings 8,100
—
Business combination:
Assets acquired (excluding goodwill) 5,766
—
Liabilities assumed 4,681
—
Purchase price 8,363
—
Goodwill recorded 7,278
—

See Notes to Unaudited Condensed Consolidated Financial Statements

~~Table of Contents~~

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1. Basis of Presentation

Nature of Operations

Live Oak Bancshares, Inc. (the “Company” or “LOB”) is a bank holding company headquartered in Wilmington, North Carolina incorporated under the laws of North Carolina in December 2008. The Company conducts business operations primarily through its commercial bank subsidiary, Live Oak Banking Company (the “Bank”). The Bank was organized and incorporated under the laws of the State of North Carolina on February 25, 2008 and commenced operations on May 12, 2008. The Bank specializes in providing lending services to small businesses ~~nationwide in targeted industries, which we refer to as verticals.~~nationwide. The Bank identifies and grows lending to credit-worthy borrowers both within ~~credit-worthy~~specific industries, also called verticals, through expertise within those industries, and more broadly to select borrowers outside of those industries. A significant portion of the loans originated by the Bank are guaranteed by the Small Business Administration (“SBA”) under the 7(a) Loan Program and ~~to a lesser extent by~~ the U.S. Department of Agriculture ("USDA") Rural Energy for America Program ("REAP") ~~and~~, Business & Industry ("B&I") and Water & Waste Disposal (“WEP”) loan programs. On July 28, 2015 the Company completed its initial public offering with a secondary offering completed in August of 2017.

In 2010, the Bank formed Live Oak Number One, Inc., a wholly-owned subsidiary, to hold properties foreclosed on by the Bank.

In addition to the Bank, the Company owns Live Oak Grove, LLC, opened in September 2015 for the purpose of providing Company employees and business visitors an on-site restaurant location; Government Loan Solutions, Inc. (“GLS”), a management and technology consulting firm that specializes in the settlement, accounting, and securitization processes for government guaranteed loans, including loans originated under the SBA 7(a) loan program and USDA-guaranteed loans; and 504 Fund Advisors, LLC (“504FA”), formed to serve as the investment adviser to the 504 Fund, a closed-end mutual fund organized to invest in SBA section 504 loans.

~~The Company acquired control over~~ As of May 1, 2019, 504FA ~~previously carried~~exited as ~~an equity method investment, on February 2, 2015 by increasing its ownership from 50.0% to 91.3%. The acquisition of an additional 41.3% of ownership occurred in exchange~~advisor 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.

504 Fund.

In August 2016, the Company formed Live Oak Ventures, Inc. (formerly known as “Canapi, Inc.”) for the purpose of investing in businesses that align with the Company's strategic initiative to be a leader in financial technology.

In November 2016, the Company formed Live Oak Clean Energy Financing LLC (“LOCEF”) for the purpose of providing financing to entities for renewable energy applications.

During the first quarter of 2019, LOCEF became a wholly-owned subsidiary of the Bank.

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~~Effective August 1, 2018, Reltco was sold.

In June 2018, the Bank formed Live Oak Private Wealth, LLC for the purpose of providing high-net-worth individuals and families with strategic wealth and investment management services.

In September 2018, the Company formed Canapi Advisors, LLC for the purpose of providing investment advisory services to a ~~further discussion~~series of ~~this transaction.~~

new funds focused on providing venture capital to new and emerging financial service technology companies.

The Company ~~earns~~generates revenue primarily from net interest income and the origination and sale of ~~SBA and USDA-guaranteed~~government guaranteed loans. Income from the retention of loans ~~and net~~is comprised of interest income. Income from the sale of loans is comprised of loan servicing revenue and revaluation of related servicing assets along with net gains on ~~the sale~~sales 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 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.

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 ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, ~~2017.~~2019. The consolidated balance sheet as of December 31, ~~2016~~2018 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,~~2018, filed with the Securities Exchange Commission on ~~March 9, 2017~~February 27, 2019 (SEC File No. 001-37497) (the ~~"2016~~"2018 Annual Report"). A summary description of the significant accounting policies followed by the Company is set forth in Note 1 of the Notes to Consolidated Financial Statements in the Company’s ~~2016~~2018 Annual Report. These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes in the Company's ~~2016~~2018 Annual Report.

~~Table of Contents~~

~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Consolidated Financial Statements~~

The preparation of financial statements in conformity with United States generally accepted accounting principles, or GAAP, requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates.

Amounts in all tables in the Notes to Unaudited 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

Management has determined that the Company has one significant operating segment, which is providing a lending platform for small businesses nationwide. In determining the appropriateness of segment definition, the Company considers the materiality of a potential segment, the components of the business about which financial information is available, and components for which management regularly evaluates relative to resource allocation and performance assessment.

~~Equipment Leasing~~

The Company purchases new equipment for the purpose of leasing such equipment to customers within its verticals. Equipment purchased to fulfill commitments to commercial renewable energy projects is rented out under operating leases while leases of equipment outside of the renewable energy vertical are generally direct financing leases. Accordingly, leased assets under operating leases are included in premises and equipment while leased assets under direct financing leases are included in loans and leases held for investment.

~~Direct Financing Leases~~

Interest income on direct financing leases is recognized when earned. Unearned interest is recognized over the lease term on a basis which results in a constant rate of return on the unrecovered lease investment. The term of each lease is generally 4-6 years which is consistent with the useful life of the equipment with no residual value. As of September 30, 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:~~

~~Table of Contents~~

~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Consolidated Financial Statements~~

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

~~Table of Contents~~

~~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.

Accounting Change

On January 1, 2019, the Company adopted Accounting Standards Update ("ASU") No. 2016-02 “Leases (Topic 842),” (“ASU 2016-02”) and all subsequent ASUs that modified Topic 842. The Company elected to apply certain practical expedients provided under ASU 2016-02 whereby the Company will not reassess (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for any existing leases. The Company has also applied the practical expedient to use hindsight in determining the lease term and in assessing impairment of the right-of-use assets. The Company does not apply the recognition and measurement requirements to any short-term leases (as defined by ASU 2016-02). The Company accounts for lease and non-lease components separately because such amounts are readily determinable under the lease contracts. The Company utilized the modified-retrospective transition approach prescribed by ASU 2018-11, “Leases (Topic 842) Targeted Improvements” (“ASU 2018-11”). The implementation of the new standard resulted in the Company recording $2.2 million of operating lease right-of-use ("ROU") assets, $2.4 million of operating lease liabilities and a cumulative effect adjustment to opening retained earnings of $66 thousand. The Company also recorded $18 thousand of finance ROU assets and finance lease liabilities.

The Company determines if an arrangement is or contains a lease at inception. If it is determined to be or contain a lease, then the lease is classified as an operating or finance lease.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Right-of-use ("ROU") assets represent the Company's right to use an underlying asset for the lease term. Lease liabilities represent the Company's obligation to make lease payments arising from the lease. ROU assets and liabilities are measured on commencement date based on the present value of the lease payments over the lease term, discounted using the discount rate for the lease at commencement. The discount rate shall be the rate implicit in the lease, however, if that is not readily determinable, the Company will use its incremental borrowing rate. The ROU asset also includes any lease payments made before the commencement date and initial direct costs and excludes any lease incentives received. The lease terms may include options to extend or terminate the lease when it is reasonably certain that the option will be exercised. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

Operating leases are included in operating lease right-of-use assets and operating lease liabilities in the consolidated balance sheets. Finance leases are included in other assets and long term borrowings in the consolidated balance sheets. Lease expense for operating leases and finance leases is included in occupancy expense in the consolidated statements of income and interest expense for finance leases is included in other interest expense in the consolidated statements of income.

Note 2. Recent Accounting Pronouncements

In ~~May 2014,~~June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. ~~2014-09, “Revenue from Contracts with Customers~~2016-13, “Financial Instruments – Credit Losses (Topic 606)” (“ASU 2014-09”). This standard is intended to clarify the principles for recognizing revenue and to develop a common revenue standard for GAAP. The Company's revenue is comprised of loan servicing revenue, net gains on sales of loans and net interest income on financial assets and financial liabilities, all of which are explicitly excluded from the scope of ASU 2014-09, and non-interest income. The Company's revenue streams included in non-interest income that are within the scope of the guidance are primarily related to sales of foreclosed assets, construction supervision fees, title insurance income and trust fiduciary fees. The Company does not expect the adoption of ASU 2014-09 to have a material effect on the consolidated financial statements. The Company expects to 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.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). The FASB issued this ASU to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet by lessees for those leases classified as operating leases under current GAAP and disclosing key information about leasing arrangements. The amendments in this ASU are effective for the Company on January 1, 2019. The impact of this standard will depend on the Company's lease portfolio at the time of the adoption and the Company is currently assessing the effect that the adoption of this standard will have on the consolidated financial statements.

~~In March 2016, the FASB issued ASU No. 2016-09, “Compensation-Stock Compensation (Topic 718)~~326): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 simplifies the accounting for share-based payment transactions for items including income tax consequences, classification of awards as equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 was effective and adopted by the Company on January 1, 2017. Starting in the first quarter of 2017, stock-based compensation excess tax benefits or deficiencies are reflected in the Consolidated Statements of Income as a component of the income tax expense, where as they previously were recognized in equity. Additionally, the Consolidated Statements of Cash

Flows now present excess tax benefits as an operating activity while any cash paid in lieu of shares for tax-withholding being classified as a financing activity. There were no excess tax benefits in the prior period presented for reclassification. Finally, the Company will continue to incorporate actual forfeitures as they occur in the accrual of compensation expense. As a result of the adoption of ASU 2016-09, the Consolidated Statement of Cash Flows for the nine months ended September 30, 2017 was adjusted as follows: a $1.1 million increase to net cash provided by operating activities and a $4.8 million increase to net cash used in financing activities. The adoption of ASU 2016-09 further resulted in a $0.03 increase in basic and diluted EPS for the nine months ended September 30, 2017. See Note 9 for information regarding the additional impact on our consolidated financial statements.

~~In June 2016, the FASB issued ASU No. 2016-13, “Measurement~~Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). This new guidance replaces the incurred loss impairment methodology in current standards with an expected credit loss methodology and requires consideration of a broader range of information to determine credit loss estimates. ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 will be effective for the Company on January 1, 2020. The Company is currently evaluating the potential impact of ASU 2016-13 on the consolidated financial statements. In that regard, a cross-functional working group has been formed, under the direction of the Company's Chief Financial Officer and Chief Credit Officer. The working group is comprised of individuals from various functional areas including credit, risk management, finance and information technology, among others. ~~The Company is currently developing an implementation plan to include assessment of processes, portfolio segmentation,~~Implementation efforts continue with model development, ongoing system requirements evaluation and the identification of data and resource needs, among other things. The Company ishas also ~~currently evaluating selected~~engaged a third-party vendor ~~solutions~~solution 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,~~June 2018, the FASB issued ASU No. ~~2017-01, “Business Combinations~~2018-07, “Compensation - Stock Compensation (Topic ~~805) - Clarifying the Definition of a Business”~~718) Improvements to Nonemployee Share-Based Payment Accounting” (“ASU ~~2017-01”~~2018-07”). ASU ~~2017-01~~2018-07 amends Accounting Standard Codification 718 to largely align accounting for share-based payment awards issued to employees and nonemployees. Under the new guidance, existing employee guidance will generally apply to nonemployee share-based transactions, except for specific guidance on inputs into option pricing models and the attribution of cost. The Company adopted the standard on January 1, 2019 with no material effect on its consolidated financial statements.

In March 2019, the FASB issued ASU 2019-01, “Leases (Topic 842): Codification Improvements” (“ASU 2019-01”). ASU 2019-01 provides updates to Topic 842 including: (i) guidance on how to determine fair value of leased items for lessors who are not dealers or manufacturers, (ii) cash flow presentation for lessors of sales-type and direct financing leases and (iii) 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 bethat certain transition disclosures. The amendments are effective for the Company on January 1, ~~2018.~~ 2020. The Company does not expect ~~this amendment~~these amendments to have a material effect on its consolidated financial statements.

In ~~January 2017,~~April 2019, the FASB issued ASU No. ~~2017-04, “Intangibles - Goodwill~~2019-04, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and ~~Other (Topic 350) - Simplifying the Test for Goodwill Impairment”~~Hedging, and Topic 825, Financial Instruments” (“ASU ~~2017-04”~~2019-04”). ASU ~~2017-04 removes Step 2 from the goodwill impairment test. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not~~2019-04 provides clarification and minor improvements related to ~~exceed the carrying amount~~ASU 2016-01 “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of ~~goodwill.~~ Financial Assets and Financial Liabilities,” ASU ~~2017-04~~2016-13 “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” and ASU 2017-12 “Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities.” The standard 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~~permitted. The Company does not ~~expected~~expect this standard to have a material ~~impact~~effect on its consolidated financial statements.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

In ~~February 2017,~~May 2019, the FASB issued ASU No. ~~2017-05, “Other Income - Gains and~~2019-05, “Financial Instruments – Credit Losses ~~from~~(Topic 326): Targeted Transition Relief” (“ASU 2019-05”). ASU 2019-05 allows entities an option to irrevocably elect the ~~Derecognition~~fair value option for eligible instruments upon adoption of Nonfinancial Assets (Subtopic 610-20) - Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets” (“ASU 2017-05”). ASU 2017-05 clarifies the scope of Subtopic 610-20 and adds guidance on nonfinancial asset derecognition as well as the accounting for partial sales of nonfinancial assets.Topic 326. The amendments ~~conform the derecognition guidance on nonfinancial assets with the model for transactions in the new revenue standard. ASU 2017-05 will be~~are effective for the Company on January 1, ~~2018 and is not expected~~2020. See discussion of ASU 2016-13 above for impact to ~~have a significant impact on its~~the 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.

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

~~Table of Contents~~

~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Consolidated Financial Statements~~

management activities and to reduce the complexity of and simplify the application of hedge accounting. ASU 2017-12 will be effective for the Company on January 1, 2019 and is not expected to have a significant impact on its consolidated financial statements.

Note 3. Earnings Per Share

Basic and diluted earnings per share are computed based on the weighted average number of shares outstanding during each period. Diluted earnings per share reflects the potential dilution that could occur, upon the exercise of stock options or upon the vesting of restricted stock grants, any of which would result in the issuance of common stock that would then be shared in the net income of the Company.

	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Basic earnings per share:
Net income available to common shareholders	$	4,935	$	14,253	$	7,307	$	26,706
Weighted-average basic shares outstanding		40,196,662		40,027,336		40,178,491		39,977,336
Basic earnings per share	$	0.12	$	0.36	$	0.18	$	0.67
Diluted earnings per share:
Net income available to common shareholders, for diluted earnings per share	$	4,935	$	14,253	$	7,307	$	26,706
Total weighted-average basic shares outstanding		40,196,662		40,027,336		40,178,491		39,977,336
Add effect of dilutive stock options and restricted stock grants		801,879		1,592,311		801,879		1,538,997
Total weighted-average diluted shares outstanding		40,998,541		41,619,647		40,980,370		41,516,333
Diluted earnings per share	$	0.12	$	0.34	$	0.18	$	0.64
Anti-dilutive shares		1,578,197		—		1,578,197		9,102

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 outstanding 37,366,041
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 outstanding 37,366,041
34,206,943
35,485,371
34,191,014
Add effect of dilutive stock options and restricted stock grants 1,278,636
794,874
1,244,683
812,408
Total weighted-average diluted shares outstanding 38,644,677
35,001,817
36,730,054
35,003,422
Diluted earnings per share $ 0.33
$ 0.10
$ 0.78
$ 0.24
Anti-dilutive shares 243,199
1,778,995
250,698
1,778,995

~~Table of Contents~~

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

~~Note 4. Business Combination~~

On February 1, 2017, the Company completed its acquisition of Reltco Inc. and National Assurance Title, Inc. (collectively referred to as "Reltco"), two nationwide title agencies under common control based in Tampa, Florida. The acquisition continues the Company's growth strategy, including vertically integrating with complementary services to deliver a high-quality customer experience with speed.

On the acquisition date, the fair value of Reltco included $5.8 million in assets and $4.7 million in liabilities. The total acquisition gross consideration at the time of the transaction, including earn-out contingent consideration was approximately $15.8 million. The acquisition was valued at $12.7 million after consideration of the applicable fair value adjustments to the earn-out, resulting in the Company paying $7.8 million in cash and issuing 27,724 shares of its common stock at closing in addition to an earn-out of up to 184,012 shares of its stock and $3.8 million in cash, in exchange for all of the outstanding shares of Reltco. The earn-out was recorded as a $4.3 million contingent liability on the acquisition date and is earned proportionally based on the ratio of the new subsidiary's actual future aggregate net income after tax divided by a target net income after tax of approximately $6.0 million over the four year earn-out period. Fair value measurement of the earn-out was calculated using the Monte Carlo Simulation. The Monte Carlo Simulation simulates 100,000 trials to assess the expected market price as of the earn-out measurement date at the end of each of the next four years based on the Cox, Ross & Rubinstein option pricing methodology. The Monte Carlo Simulation utilized various assumptions that include a risk free rate of return through the end of each measurement period equivalent to that of a U.S. Treasury, expected volatility of 30.00% over four years and a dividend yield of 0.40%.

The merger was accounted for in accordance with the acquisition method of accounting, and the identifiable assets acquired and liabilities assumed were recorded at their estimated fair values as of the acquisition date separately from goodwill. The estimated fair values of assets acquired and liabilities assumed are based on the information available at the date of the acquisition. Management continues to evaluate these fair values, which are subject to revision as additional information becomes available. During the one year measurement period, contingent consideration is recorded at fair value based on the terms of the purchase agreement with subsequent quarterly changes in fair value recorded through earnings. For the nine months ended September 30, 2017 the Company recorded expense of $350 thousand, related to the increased fair value of contingent consideration using the Monte Carlo Simulation. There was no expense recorded for this contingent consideration during the three months ended September 30, 2017. The assumptions utilized include a risk free rate of return through the end of each measurement period equivalent to that of a U.S. Treasury, expected volatility of 30.00% over the remaining 3.25 years and a dividend yield of 0.51%.

~~Table of Contents~~

~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Consolidated Financial Statements~~

~~The following table summarizes the allocation of the purchase price on the date of acquisition to assets acquired and the liabilities assumed based on their estimated fair values:~~

Fair value of assets acquired
Cash $ 102
Accounts receivable 159
Intangible assets 5,505
Total assets acquired 5,766
Fair value of liabilities assumed
Contingent consideration 4,300
Accounts payable and other liabilities 381
Total liabilities assumed 4,681
Net assets acquired $ 1,085
Purchase price
Common shares issued 27,724
Purchase price per share of the Company’s common stock $ 20.38
Company common stock issued 565
Cash 7,798
Total purchase price 8,363
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 stockholders 12,862
4,183
28,807
9,952
Basic earnings per share 0.34
0.12
0.81
0.29
Diluted earnings per share 0.33
0.12
0.78
0.28

Note 5.4. Investment Securities

The carrying amount of investment securities and their approximate fair values are reflected in the following table:

June 30, 2019	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
US treasury securities	$	4,979	$	36	$	—	$	5,015
US government agencies		48,303		613		11		48,905
Mortgage-backed securities		497,529		16,479		659		513,349
Municipal bonds		8,521		492		7		9,006
Total	$	559,332	$	17,620	$	677	$	576,275

December 31, 2018
US treasury securities	$	4,969	$	—	$	3	$	4,966
US government agencies		31,121		48		225		30,944
Mortgage-backed securities		345,606		1,340		3,365		343,581
Municipal bond		1,000		—		1		999
Total	$	382,696	$	1,388	$	3,594	$	380,490

~~Table of Contents~~

~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Consolidated Financial Statements~~

Amortized
Cost

Unrealized
Gains

Unrealized
Losses

Fair
Value
September 30, 2017
US government agencies $ 17,829
$ 11
$ 35
$ 17,805
Residential mortgage-backed securities 57,685
—
936
56,749
Mutual fund 2,070
—
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 securities 52,301
3
1,031
51,273
Mutual fund 2,012
—
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~~June 30, ~~2017.The~~2019 and 2018. During the six months ended June 30, 2019, $900 thousand of one municipal bond was sold resulting in a net gain of $5 thousand. There were no sales of securities during the six months ended June 30, 2018.

The following tables show gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position.

	Less Than 12 Months				12 Months or More				Total
June 30, 2019	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
US government agencies	$	—	$	—	$	6,471	$	11	$	6,471	$	11
Mortgage-backed securities		—		—		44,567		659		44,567		659
Municipal bonds		93		7		—		—		93		7
Total	$	93	$	7	$	51,038	$	670	$	51,131	$	677

	Less Than 12 Months				12 Months or More				Total
December 31, 2018	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
US treasury securities	$	4,966	$	3	$	—	$	—	$	4,966	$	3
US government agencies		—		—		16,268		225		16,268		225
Mortgage-backed securities		164,836		1,177		51,371		2,188		216,207		3,365
Municipal bond		999		1		—		—		999		1
Total	$	170,801	$	1,181	$	67,639	$	2,413	$	238,440	$	3,594

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 securities 28,397
461
21,767
475
50,164
936
Mutual fund 2,021
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 securities 49,109
1,017
1,635
14
50,744
1,031
Mutual fund 1,960
52
—
—
1,960
52
Total $ 57,577
$ 1,101
$ 1,635
$ 14
$ 59,212
$ 1,115

At ~~September~~June 30, ~~2017,~~2019, there were ~~twelve residential~~twenty-five mortgage-backed securities and ~~one~~three US government ~~agency security~~agencies in unrealized loss positions for greater than 12 months and ~~fourteen residential mortgage-backed securities, two US government agency securities and the 504 Fund mutual fund investment~~one municipal bond in an unrealized loss ~~position~~positions for less than 12 months. Unrealized losses at December 31, ~~2016~~2018 were comprised of ~~two residential~~thirty-one mortgage-backed securities and six US government agencies in unrealized loss positions for greater than 12 months and ~~three US government agency securities, twenty-two residential~~twenty-five mortgage-backed securities, one US treasury security and ~~the 504 Fund mutual fund investment~~one municipal bond in an unrealized loss ~~position~~positions for less than 12 months.

These unrealized losses are primarily the result of volatility in the market and are related to market interest rates. Since none of the unrealized losses relate to marketability of the securities or the issuer’s ability to honor redemption obligations and the Company has the intent and ability to hold the securities for a sufficient period of time to recover unrealized losses, none of the securities are deemed to be other than temporarily impaired.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

All ~~residential~~ mortgage-backed securities in the Company’s portfolio at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018 were backed by USU.S. government sponsored enterprises (“GSEs”).

~~Table of Contents~~

~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Consolidated Financial Statements~~

The following is a summary of investment securities by maturity:

	June 30, 2019
	Amortized cost		Fair value
US treasury securities
One to five years	$	4,979	$	5,015
Total		4,979		5,015
US government agencies
Within one year		6,483		6,471
One to five years		29,909		30,345
Five to ten years		11,911		12,089
Total		48,303		48,905
Mortgage-backed securities
One to five years		2,743		2,760
Five to ten years		150,463		156,698
After 10 years		344,323		353,891
Total		497,529		513,349
Municipal bonds
After 10 years		8,521		9,006
Total		8,521		9,006

Total	$	559,332	$	576,275

September 30, 2017
Available-for-Sale

Amortized
cost

Fair
value
US government agencies
Within one year $ 11,302
$ 11,312
One to five years 6,527
6,492
Total 17,829
17,804

Residential mortgage-backed securities
Five to ten years 7,264
7,200
After 10 years 50,421
49,550
Total 57,685
56,750

Total $ 75,514
$ 74,554

The table above reflects contractual maturities. Actual results will differ as the loans underlying the mortgage-backed securities may repay sooner than scheduled. ~~This table excludes the 504 Fund mutual fund investment.~~

There were no investment securities pledged at June 30, 2019. At December 31, ~~2016, an~~2018, investment security with a fair market value of $1.5 million was pledged to secure a line of credit with the Company’s correspondent bank. At September 30, 2017, the security pledged to secure a line of credit with the Company's correspondent bank was released. At September 30, 2017 and December 31, 2016, an investment securitysecurities with a fair market value of $100 thousand was pledged to the Ohio State Treasurer to allow the Company's trust department to conduct business in the ~~state~~State of Ohio and ~~investment securities with a fair market value of~~ $2.5 million ~~and $1.2 million, respectively,~~ were pledged to the Company's trust department for uninsured trust assets held by the trust department.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 6.5. Loans and Leases Held for Investment and Allowance for Loan and Lease Losses

Loan and Lease Portfolio Segments

The following describes the risk characteristics relevant to each of the portfolio segments. Each loan and lease category is assigned a risk grade during the origination and closing process based on criteria described later in this section.

Commercial and Industrial

Commercial and industrial loans (C&I) receive similar underwriting treatment as commercial real estate loans in that the repayment source is analyzed to determine its ability to meet cash flow coverage requirements as set forth by Bank policies. Repayment of the Bank’s C&I loans generally comes from the generation of cash flow as the result of the borrower’s business operations. This business cycle itself brings a certain level of risk to the portfolio. In some instances, these loans may carry a higher degree of risk due to a variety of reasons – illiquid collateral, specialized equipment, highly depreciable assets, uncollectable accounts receivable, revolving balances, or simply being unsecured. As a result of these characteristics, the SBA guarantee on these loans is an important factor in mitigating risk.

Construction and Development

Construction and development loans are for the purpose of acquisition and development of land to be improved through the construction of commercial buildings. Such loans are usually paid off through the conversion to permanent financing for the long-term benefit of the borrower’s ongoing operations. At the completion of the project, if the loan is converted to permanent financing or if scheduled loan amortization begins, it is then reclassified to the “Commercial Real Estate” segment. Underwriting of construction and development loans typically includes analysis of not only the borrower’s financial condition and ability to meet the required debt obligations, but also the general market conditions associated with the area and type of project being funded.

~~Table of Contents~~

~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Consolidated Financial Statements~~

Commercial Real Estate

Commercial real estate loans are extensions of credit secured by owner occupied and non-owner occupied collateral. Underwriting generally involves intensive analysis of the financial strength of the borrower and guarantor, liquidation value of the subject collateral, the associated unguaranteed exposure, and any available secondary sources of repayment, with the greatest emphasis given to a borrower’s capacity to meet cash flow coverage requirements as set forth by Bank policies. Such repayment of commercial real estate loans is commonly derived from the successful ongoing operations of the business occupying the property. These typically include small businesses and professional practices.

Commercial Land

Commercial land loans are extensions of credit secured by farmland. Such loans are often for land improvements related to agricultural endeavors that may include construction of new specialized facilities. These loans are usually repaid through the conversion to permanent financing, or if scheduled loans amortization begins, for the long-term benefit of the borrower’s ongoing operations. Underwriting generally involves intensive analysis of the financial strength of the borrower and guarantor, liquidation value of the subject collateral, the associated unguaranteed exposure, and any available secondary sources of repayment, with the greatest emphasis given to a borrower’s capacity to meet cash flow coverage requirements as set forth by Bank policies.

Each of the loan types referenced in the sections above is further segmented into verticals in which the Bank chooses to operate. The Bank chooses to finance businesses operating in specific industries because of certain similarities. The similarities range from historical default and loss characteristics to business operations. However, there are differences that create the necessity to underwrite these loans according to varying criteria and guidelines. When underwriting a loan, the Bank considers numerous factors such as cash flow coverage, the credit scores of the guarantors, revenue growth, practice ownership experience and debt service capacity. Minimum guidelines have been set with regard to these various factors and deviations from those guidelines require compensating strengths when considering a proposed loan.

~~Table of Contents~~

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Loans and leases consist of the following:

	June 30, 2019			December 31, 2018
Commercial & Industrial
Agriculture	$	6,305		$	6,400
Funeral Home & Cemetery		22,709			17,378
Healthcare		46,344			51,082
Independent Pharmacies		110,956			108,783
Registered Investment Advisors		92,901			94,338
Veterinary Industry		47,744			45,604
Other Industries		402,962			295,163
Total		729,921			618,748
Construction & Development
Agriculture		40,258			43,454
Funeral Home & Cemetery		10,840			9,874
Healthcare		92,296			81,619
Independent Pharmacies		1,193			2,149
Registered Investment Advisors		2,138			1,232
Veterinary Industry		22,694			14,094
Other Industries		155,313			96,482
Total		324,732			248,904
Commercial Real Estate
Agriculture		49,532			53,085
Funeral Home & Cemetery		86,830			71,344
Healthcare		221,195			188,531
Independent Pharmacies		26,877			20,597
Registered Investment Advisors		8,152			7,905
Veterinary Industry		135,470			136,721
Other Industries		354,321			260,847
Total		882,377			739,030
Commercial Land
Agriculture		288,467			243,798
Total		288,467			243,798
Total Loans		2,225,497			1,850,480
Net Deferred Costs		9,767			5,960
Discount on SBA 7(a) Unguaranteed		(9,791	)		(13,021	)
Loans, Net of Unearned	$	2,225,473		$	1,843,419

September 30,
2017 December 31,
2016
Commercial & Industrial
Agriculture $ 2,698
$ 1,714
Death Care Management 12,101
9,684
Healthcare 41,454
37,270
Independent Pharmacies 97,171
83,677
Registered Investment Advisors 91,241
68,335
Veterinary Industry 45,570
38,930
Other Industries 142,115
94,836
Total 432,350
334,446
Construction & Development
Agriculture 34,636
32,372
Death Care Management 4,744
3,956
Healthcare 46,814
30,467
Independent Pharmacies 1,696
2,013
Registered Investment Advisors 329
294
Veterinary Industry 13,265
11,514
Other Industries 45,052
31,715
Total 146,536
112,331
Commercial Real Estate
Agriculture 14,689
5,591
Death Care Management 61,462
52,510
Healthcare 121,331
114,281
Independent Pharmacies 18,508
15,151
Registered Investment Advisors 13,550
11,462
Veterinary Industry 110,028
102,906
Other Industries 106,418
46,245
Total 445,986
348,146
Commercial Land
Agriculture 146,814
113,569
Total 146,814
113,569
Total Loans and Leases¹
1,171,686
908,492
Net Deferred Costs 8,038
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 ~~$40.4~~$498.8 million and ~~$37.7~~$305.4 million of U.S. government guaranteed loans as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016,~~2018, respectively.

2
2	The Company measures the carrying value of the retained portion of loans sold at fair value under ASC Subtopic 825-10. The value of these retained loan balances is discounted based on the estimates derived from comparable unguaranteed loan sales.

~~Table of Contents~~

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Credit Risk Profile

The Bank uses internal loan and lease reviews to assess the performance of individual loans and leases by industry segment. An independent review of the loan and lease portfolio is performed annually by an external firm. The goal of the Bank’s annual review of select borrowers' financial performance is to validate the adequacy of the risk grade assigned.

The Bank uses a grading system to rank the quality of each loan and lease. The grade is periodically evaluated and adjusted as performance dictates. Loan and lease grades 1 through 4 are passing grades and grade 5 is special mention. Collectively, grades 6 through 8 represent classified loans and leases in the Bank’s portfolio. The following guidelines govern the assignment of these risk grades:

Exceptional (1 Rated): These loans and leases are of the highest quality, with strong, well-documented sources of repayment. ~~Debt service coverage (“DSC”) is over 1.75X based on historical results. Secondary source~~These loans and leases will typically have multiple demonstrated sources of repayment ~~is strong,~~ with ~~a loan~~no significant identifiable risk 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~~collection, exhibit well-qualified management, and have ~~credit scores above 740.~~

liquid financial statements relative to both direct and indirect obligations.

Quality (2 Rated): These loans and leases are of ~~good~~very high credit quality, with ~~good,~~strong, well-documented sources of repayment. ~~DSC is over 1.25X based on historical or pro-forma results. Secondary source~~These loans and leases exhibit very strong, well defined primary and secondary sources of repayment, ~~is good,~~ with ~~a LTV~~no significant identifiable risk of ~~75% or less if secured solely by CRE. Discounted collateral coverage should exceed 100%. Guarantors~~collection and have ~~credit scores above 700.~~

~~Acceptable~~internally generated cash flow that more than adequately covers current maturities of long-term debt.

Satisfactory (3 rated): These loans and leases ~~are of acceptable quality, with acceptable~~exhibit satisfactory credit risk and have excellent sources of ~~repayment. DSC~~repayment, with no significant identifiable risk of ~~over 1.00X based on~~collection. These loans and leases have documented historical cash flow that meets or ~~pro-forma results. Companies~~exceeds required minimum Bank guidelines, or that ~~do not meet these credit metrics must~~can be ~~evaluated~~supplemented with verifiable cash flow from other sources. They have adequate secondary sources to ~~determine if they should be graded below this level.~~

liquidate the debt, including combinations of liquidity, liquidation of collateral, or liquidation value to the net worth of the borrower or guarantor.

Acceptable (4 rated): These loans and leases ~~are considered very weak pass.~~show signs of weakness in either adequate sources of repayment or collateral but have demonstrated mitigating factors that minimize the risk of delinquency or loss. These loans and leases ~~are riskier than a 3-rated credit, but~~may have unproved, insufficient or marginal primary sources of repayment that appear sufficient to service the debt at this time. Repayment weaknesses may be due to ~~various mitigating factors are not considered a Special mention~~minor operational issues, financial trends, or ~~worse. The mitigating factors must clearly be identified~~reliance on projected performance. They may also contain marginal or unproven secondary sources to ~~offset further downgrade. Examples~~liquidate the debt, including combinations of ~~loans~~liquidation of collateral 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~~liquidation value to the net worth of ~~repayment.~~

the borrower or guarantor.

Special mention (5 rated): These loans and leases ~~are considered as emerging problems, with potentially unsatisfactory characteristics.~~show signs of weaknesses in either adequate sources of repayment or collateral. These loans and leases ~~require greater management attention. A loan~~ may contain underwriting guideline tolerances and/or ~~lease may be put into this category if~~exceptions with no mitigating factors; and/or instances where adverse economic conditions develop subsequent to origination that do not jeopardize liquidation of the ~~Bank is unable to obtain financial reporting from a company to fully evaluate its position.~~

debt but substantially increase the level of risk.

Substandard (6 rated): Loans and leases graded Substandard are inadequately protected by current sound net worth, paying capacity of the ~~borrower,~~obligor, or pledged collateral. ~~They typically~~Loans and leases classified as Substandard must have ~~unsatisfactory characteristics causing more than acceptable levels of risk, and have one~~a well-defined weakness or ~~more well-defined~~ weaknesses that ~~could~~ jeopardize the ~~repayment~~liquidation of the ~~debt.~~

debt; are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. These loans and leases are consistently not meeting the repayment schedule.

Doubtful (7 rated): Loans and leases graded Doubtful have all the weaknesses inherent in those classified as Substandard, plus the added characteristic that the weaknesses ~~that~~ make collection or liquidation in full ~~questionable. Loans~~on the basis of currently existing facts, conditions, and ~~leases graded Doubtful must be~~values highly questionable and improbable. The ability of the borrower to service the debt is extremely weak, overdue status is constant, the debt has been placed on non-accrual ~~status.~~

status, and no definite repayment schedule exists. Once the loss position is determined, the amount is charged off.

Loss (8 rated): Loss rated loans and leases are considered uncollectible and of such little value that their continuance as ~~an active Bank asset~~assets is not warranted. ~~The~~This classification does not mean that the asset ~~should be charged~~has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this credit even though partial recovery may be ~~possible~~affected in the future.

~~Table of Contents~~

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

The following tables summarize the risk grades of each category:

Risk Grades
1 - 4

Risk Grade
5

Risk Grades
6 - 8
Total
September 30, 2017
Commercial & Industrial
Agriculture $ 2,470
$ 228
$ —
$ 2,698
Death Care Management 11,976
118
7
12,101
Healthcare 32,350
1,716
7,388
41,454
Independent Pharmacies 87,173
6,523
3,475
97,171
Registered Investment Advisors 87,940
2,566
735
91,241
Veterinary Industry 41,738
1,833
1,999
45,570
Other Industries 142,096
19
—
142,115
Total 405,743
13,003
13,604
432,350
Construction & Development
Agriculture 34,636
—
—
34,636
Death Care Management 4,744
—
—
4,744
Healthcare 44,937
704
1,173
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 144,659
704
1,173
146,536
Commercial Real Estate
Agriculture 14,689
—
—
14,689
Death Care Management 54,684
4,288
2,490
61,462
Healthcare 111,943
5,050
4,338
121,331
Independent Pharmacies 15,043
1,843
1,622
18,508
Registered Investment Advisors 13,406
144
—
13,550
Veterinary Industry 95,055
2,680
12,293
110,028
Other Industries 105,738
680
—
106,418
Total 410,558
14,685
20,743
445,986
Commercial Land
Agriculture 144,687
2,104
23
146,814
Total 144,687
2,104
23
146,814
Total¹
$ 1,105,647
$ 30,496
$ 35,543
$ 1,171,686

~~Table of Contents~~

	Risk Grades 1 - 4		Risk Grade 5		Risk Grades 6 - 8		Total¹
June 30, 2019
Commercial & Industrial
Agriculture	$	5,760	$	545	$	—	$	6,305
Funeral Home & Cemetery		20,811		1,898		—		22,709
Healthcare		34,936		2,888		8,520		46,344
Independent Pharmacies		99,284		6,502		5,170		110,956
Registered Investment Advisors		88,782		2,050		2,069		92,901
Veterinary Industry		44,419		1,016		2,309		47,744
Other Industries		382,016		15,437		5,509		402,962
Total		676,008		30,336		23,577		729,921
Construction & Development
Agriculture		40,258		—		—		40,258
Funeral Home & Cemetery		10,840		—		—		10,840
Healthcare		88,885		3,411		—		92,296
Independent Pharmacies		1,193		—		—		1,193
Registered Investment Advisors		2,138		—		—		2,138
Veterinary Industry		22,694		—		—		22,694
Other Industries		142,116		13,197		—		155,313
Total		308,124		16,608		—		324,732
Commercial Real Estate
Agriculture		46,841		466		2,225		49,532
Funeral Home & Cemetery		79,149		5,720		1,961		86,830
Healthcare		191,816		8,377		21,002		221,195
Independent Pharmacies		17,303		2,411		7,163		26,877
Registered Investment Advisors		8,114		38		—		8,152
Veterinary Industry		119,320		3,362		12,788		135,470
Other Industries		336,073		8,914		9,334		354,321
Total		798,616		29,288		54,473		882,377
Commercial Land
Agriculture		263,961		10,749		13,757		288,467
Total		263,961		10,749		13,757		288,467
Total	$	2,046,709	$	86,981	$	91,807	$	2,225,497

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

	Risk Grades 1 - 4		Risk Grade 5		Risk Grades 6 - 8		Total¹
December 31, 2018
Commercial & Industrial
Agriculture	$	6,187	$	213	$	—	$	6,400
Funeral Home & Cemetery		17,085		287		6		17,378
Healthcare		38,908		2,502		9,672		51,082
Independent Pharmacies		93,976		5,734		9,073		108,783
Registered Investment Advisors		88,614		2,381		3,343		94,338
Veterinary Industry		42,175		1,190		2,239		45,604
Other Industries		272,771		18,463		3,929		295,163
Total		559,716		30,770		28,262		618,748
Construction & Development
Agriculture		43,454		—		—		43,454
Funeral Home & Cemetery		9,874		—		—		9,874
Healthcare		79,814		1,805		—		81,619
Independent Pharmacies		2,149		—		—		2,149
Registered Investment Advisors		1,232		—		—		1,232
Veterinary Industry		14,094		—		—		14,094
Other Industries		96,482		—		—		96,482
Total		247,099		1,805		—		248,904
Commercial Real Estate
Agriculture		52,518		567		—		53,085
Funeral Home & Cemetery		64,487		3,711		3,146		71,344
Healthcare		161,026		7,696		19,809		188,531
Independent Pharmacies		12,509		2,495		5,593		20,597
Registered Investment Advisors		7,780		125		—		7,905
Veterinary Industry		117,879		4,205		14,637		136,721
Other Industries		255,651		5,196		—		260,847
Total		671,850		23,995		43,185		739,030
Commercial Land
Agriculture		223,826		8,914		11,058		243,798
Total		223,826		8,914		11,058		243,798
Total	$	1,702,491	$	65,484	$	82,505	$	1,850,480

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 Management 9,452
121
111
9,684
Healthcare 28,723
681
7,866
37,270
Independent Pharmacies 73,948
6,542
3,187
83,677
Registered Investment Advisors 65,297
2,246
792
68,335
Veterinary Industry 34,407
1,967
2,556
38,930
Other Industries 94,736
100
—
94,836
Total 308,219
11,715
14,512
334,446
Construction & Development
Agriculture 32,061
—
311
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 9,725
1,789
—
11,514
Other Industries 31,715
—
—
31,715
Total 110,231
1,789
311
112,331
Commercial Real Estate
Agriculture 5,591
—
—
5,591
Death Care Management 46,427
4,314
1,769
52,510
Healthcare 103,097
7,142
4,042
114,281
Independent Pharmacies 12,654
1,968
529
15,151
Registered Investment Advisors 11,462
—
—
11,462
Veterinary Industry 88,168
3,995
10,743
102,906
Other Industries 46,245
—
—
46,245
Total 313,644
17,419
17,083
348,146
Commercial Land
Agriculture 112,333
1,138
98
113,569
Total 112,333
1,138
98
113,569
Total¹
$ 844,427
$ 32,061
$ 32,004
$ 908,492

Total loans and leases include ~~$40.4~~$498.8 million of U.S. government guaranteed loans as of ~~September~~June 30, ~~2017,~~2019, segregated by risk grade as follows: Risk Grades 1 – 4 = ~~$12.1~~$410.8 million, Risk Grade 5 = ~~$3.7~~$24.6 million, Risk Grades 6 – 8 = ~~$24.6~~$63.4 million. As of December 31, ~~2016,~~2018, total loans and leases include ~~$37.7~~$305.4 million of U.S. government guaranteed loans, segregated by risk grade as follows: Risk Grades 1 – 4 = ~~$8.7~~$236.1 million, Risk Grade 5 = ~~$7.7~~$10.1 million, Risk Grades 6 – 8 = ~~$21.3~~$59.2 million.

~~Table of Contents~~

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Past Due Loans and Leases

Loans and leases are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans and leases less than 30 days past due and accruing are included within current loans and leases shown below. The following tables show an age analysis of past due loans and leases as of the dates presented.

Less Than 30
Days Past
Due & Not
Accruing

30-89 Days
Past Due
& Accruing

30-89 Days
Past Due &
Not Accruing

Greater
Than 90
Days Past
Due
Total Not
Accruing
& Past Due Current Total Loans and Leases 90
Days or More
Past Due &
Still Accruing
September 30, 2017
Commercial & Industrial
Agriculture $ —
$ —
$ —
$ —
$ —
$ 2,698
$ 2,698
$ —
Death Care Management —
—
—
—
—
12,101
12,101
—
Healthcare 535
76
16
6,152
6,779
34,675
41,454
—
Independent Pharmacies 331
44
—
2,274
2,649
94,522
97,171
—
Registered Investment Advisors —
—
—
—
—
91,241
91,241
—
Veterinary Industry 224
29
536
796
1,585
43,985
45,570
—
Other Industries —
—
—
—
—
142,115
142,115
—
Total 1,090
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
—
Healthcare 40
—
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 Industry 1,906
3,915
132
2,749
8,702
101,326
110,028
—
Other Industries —
7,750
—
—
7,750
98,668
106,418
—
Total 1,946
11,963
2,985
6,602
23,496
422,490
445,986
—
Commercial Land
Agriculture 23
—
—
—
23
146,791
146,814
—
Total 23
—
—
—
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~~

	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 Loans		Current Loans		Total Loans		Loans 90 Days or More Past Due & Still Accruing
June 30, 2019
Commercial & Industrial
Agriculture	$	—	$	—	$	—	$	—	$	—	$	6,305	$	6,305	$	—
Funeral Home & Cemetery		—		—		—		—		—		22,709		22,709		—
Healthcare		906		—		623		5,498		7,027		39,317		46,344		—
Independent Pharmacies		—		—		—		5,170		5,170		105,786		110,956		—
Registered Investment Advisors		1,201		—		399		209		1,809		91,092		92,901		—
Veterinary Industry		—		—		576		1,031		1,607		46,137		47,744		—
Other Industries		557		1,192		2,804		2,148		6,701		396,261		402,962		—
Total		2,664		1,192		4,402		14,056		22,314		707,607		729,921		—
Construction & Development
Agriculture		—		—		—		—		—		40,258		40,258		—
Funeral Home & Cemetery		—		—		—		—		—		10,840		10,840		—
Healthcare		—		—		—		—		—		92,296		92,296		—
Independent Pharmacies		—		—		—		—		—		1,193		1,193		—
Registered Investment Advisors		—		—		—		—		—		2,138		2,138		—
Veterinary Industry		—		—		—		—		—		22,694		22,694		—
Other Industries		—		—		��		—		—		155,313		155,313		—
Total		—		—		—		—		—		324,732		324,732		—
Commercial Real Estate
Agriculture		—		—		—		2,226		2,226		47,306		49,532		—
Funeral Home & Cemetery		137		—		—		1,824		1,961		84,869		86,830		—
Healthcare		—		1,034		—		7,076		8,110		213,085		221,195		—
Independent Pharmacies		—		—		—		5,831		5,831		21,046		26,877		—
Registered Investment Advisors		—		—		—		—		—		8,152		8,152		—
Veterinary Industry		634		—		3,682		3,023		7,339		128,131		135,470		—
Other Industries		—		—		—		6,568		6,568		347,753		354,321		—
Total		771		1,034		3,682		26,548		32,035		850,342		882,377		—
Commercial Land
Agriculture		10,010		714		3,340		—		14,064		274,403		288,467		—
Total		10,010		714		3,340		—		14,064		274,403		288,467		—
Total¹	$	13,445	$	2,940	$	11,424	$	40,604	$	68,413	$	2,157,084	$	2,225,497	$	—

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

	Less Than 30 Days Past Due & Not Accruing		30-89 Days Past Due & Accruing		30-89 Days Past Due & Not Accruing		Greater Than 90 Days Past Due		Total Not Accruing & Past Due Loans		Current Loans		Total Loans		Loans 90 Days or More Past Due & Still Accruing
December 31, 2018
Commercial & Industrial
Agriculture	$	—	$	—	$	—	$	—	$	—	$	6,400	$	6,400	$	—
Funeral Home & Cemetery		—		—		—		—		—		17,378		17,378		—
Healthcare		41		1,027		665		6,821		8,554		42,528		51,082		—
Independent Pharmacies		1,399		29		—		7,570		8,998		99,785		108,783		—
Registered Investment Advisors		—		232		320		2,741		3,293		91,045		94,338		—
Veterinary Industry		—		—		600		906		1,506		44,098		45,604		—
Other Industries		2,669		166		—		504		3,339		291,824		295,163		—
Total		4,109		1,454		1,585		18,542		25,690		593,058		618,748		—
Construction & Development
Agriculture		—		—		—		—		—		43,454		43,454		—
Funeral Home & Cemetery		—		—		—		—		—		9,874		9,874		—
Healthcare		—		—		—		—		—		81,619		81,619		—
Independent Pharmacies		—		—		—		—		—		2,149		2,149		—
Registered Investment Advisors		—		—		—		—		—		1,232		1,232		—
Veterinary Industry		—		—		—		—		—		14,094		14,094		—
Other Industries		—		—		—		—		—		96,482		96,482		—
Total		—		—		—		—		—		248,904		248,904		—
Commercial Real Estate
Agriculture		—		—		—		—		—		53,085		53,085		—
Funeral Home & Cemetery		248		—		—		2,762		3,010		68,334		71,344		—
Healthcare		42		1,668		—		7,417		9,127		179,404		188,531		—
Independent Pharmacies		—		3,400		—		2,193		5,593		15,004		20,597		—
Registered Investment Advisors		—		—		—		—		—		7,905		7,905		—
Veterinary Industry		1,644		3,757		2,899		5,191		13,491		123,230		136,721		—
Other Industries		—		10,743		—		—		10,743		250,104		260,847		—
Total		1,934		19,568		2,899		17,563		41,964		697,066		739,030		—
Commercial Land
Agriculture		6,277		—		—		4,781		11,058		232,740		243,798		—
Total		6,277		—		—		4,781		11,058		232,740		243,798		—
Total¹	$	12,320	$	21,022	$	4,484	$	40,886	$	78,712	$	1,771,768	$	1,850,480	$	—

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 Pharmacies 42
293
408
2,349
3,092
80,585
83,677
—
Registered Investment Advisors —
—
—
—
—
68,335
68,335
—
Veterinary Industry 32
151
646
1,441
2,270
36,660
38,930
—
Other Industries —
—
—
—
—
94,836
94,836
—
Total 74
716
1,550
9,710
12,050
322,396
334,446
—
Construction & Development
Agriculture 231
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
—
Total 231
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 Industry 898
3,981
737
5,158
10,774
92,132
102,906
—
Other Industries —
—
—
—
—
46,245
46,245
—
Total 898
3,981
4,105
7,155
16,139
332,007
348,146
—
Commercial Land
Agriculture 58
40
—
—
98
113,471
113,569
—
Total 58
40
—
—
98
113,471
113,569
—
Total¹
$ 1,261
$ 4,817
$ 5,655
$ 16,865
$ 28,598
$ 879,894
$ 908,492
$ —

Total loans and leases include ~~$40.4~~$498.8 million of U.S. government guaranteed loans as of ~~September~~June 30, ~~2017,~~2019, of which ~~$14.3~~$30.5 million is greater than 90 days past due, ~~$5.0~~$9.0 million is 30-89 days past due and ~~$21.1~~$459.3 million is included in current loans and leases as presented above. As of December 31, ~~2016,~~2018, total loans and leases include ~~$37.7~~$305.4 million of U.S. government guaranteed loans, of which ~~$13.7~~$33.4 million is greater than 90 days past due, ~~$6.8~~$9.0 million is 30-89 days past due and ~~$17.2~~$263.0 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

Nonaccrual Loans and Leases

Loans and leases that become 90 days delinquent, or in cases where there is evidence that the borrower’s ability to make the required payments is impaired, are placed in nonaccrual status and interest accrual is discontinued. If interest on nonaccrual loans and leases had been accrued in accordance with the original terms, interest income would have increased by approximately ~~$302 thousand~~$1.1 million and ~~$165~~$588 thousand for the three months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, respectively, and for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018 interest income would have increased approximately ~~$831 thousand~~$2.2 million and ~~$451 thousand,~~$1.0 million, respectively. All nonaccrual loans and leases are included in the held for investment portfolio.

Nonaccrual loans and leases as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018 are as follows:

June 30, 2019	Loan Balance		Guaranteed Balance		Unguaranteed Exposure
Commercial & Industrial
Healthcare	$	7,027	$	6,097	$	930
Independent Pharmacies		5,170		4,105		1,065
Registered Investment Advisors		1,809		1,409		400
Veterinary Industry		1,607		1,458		149
Other Industries		5,509		3,806		1,703
Total		21,122		16,875		4,247
Commercial Real Estate
Agriculture		2,226		1,669		557
Funeral Home & Cemetery		1,961		1,368		593
Healthcare		7,076		4,708		2,368
Independent Pharmacies		5,831		5,084		747
Veterinary Industry		7,339		6,157		1,182
Other Industries		6,568		3,747		2,821
Total		31,001		22,733		8,268
Commercial Land
Agriculture		13,350		7,513		5,837
Total		13,350		7,513		5,837
Total	$	65,473	$	47,121	$	18,352

December 31, 2018	Loan Balance		Guaranteed Balance		Unguaranteed Exposure
Commercial & Industrial
Healthcare	$	7,527	$	6,517	$	1,010
Independent Pharmacies		8,969		7,896		1,073
Registered Investment Advisors		3,061		2,427		634
Veterinary Industry		1,506		1,361		145
Other Industries		3,173		2,147		1,026
Total		24,236		20,348		3,888
Commercial Real Estate
Funeral Home & Cemetery		3,010		2,260		750
Healthcare		7,459		4,963		2,496
Independent Pharmacies		2,193		1,863		330
Veterinary Industry		9,734		8,271		1,463
Total		22,396		17,357		5,039
Commercial Land
Agriculture		11,058		5,497		5,561
Total		11,058		5,497		5,561
Total	$	57,690	$	43,202	$	14,488

September 30, 2017 Loan and Lease Balance
Guaranteed
Balance

Unguaranteed
Exposure
Commercial & Industrial
Healthcare $ 6,703
$ 5,712
$ 991
Independent Pharmacies 2,605
2,253
352
Registered Investment Advisors —
—
—
Veterinary Industry 1,556
1,517
39
Total 10,864
9,482
1,382
Commercial Real Estate

Death Care Management 1,576
1,246
330
Healthcare 3,548
2,749
799
Independent Pharmacies 1,622
1,622
—
Veterinary Industry 4,787
3,999
788
Total 11,533
9,616
1,917
Commercial Land

Agriculture 23
23
—
Total 23
23
—
Total $ 22,420
$ 19,121
$ 3,299

~~Table of Contents~~

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 2016 Loan and Lease Balance
Guaranteed
Balance

Unguaranteed
Exposure
Commercial & Industrial
Healthcare $ 6,416
$ 5,152
$ 1,264
Independent Pharmacies 2,799
2,204
595
Veterinary Industry 2,119
2,079
40
Total 11,334
9,435
1,899
Construction & Development
Agriculture 231
173
58
Total 231
173
58
Commercial Real Estate
Death Care Management 1,611
1,263
348
Healthcare 3,225
2,731
494
Independent Pharmacies 529
—
529
Veterinary Industry 6,793
5,395
1,398
Total 12,158
9,389
2,769
Commercial Land
Agriculture 58
—
58
Total 58
—
58
Total $ 23,781
$ 18,997
$ 4,784

~~Table of Contents~~

~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Consolidated Financial Statements~~

Allowance for Loan and Lease Loss Methodology

The methodology and the estimation process for calculating the Allowance for Loan and Lease Losses (“ALLL”) is described below:

Estimated credit losses should meet the criteria for accrual of a loss contingency, i.e., a provision to the ALLL, set forth in GAAP. The Company’s methodology for determining the ALLL is based on the requirements of GAAP, the Interagency Policy Statement on the Allowance for Loan and Lease Losses and other regulatory and accounting pronouncements. The ALLL is determined by the sum of three separate components: (i) the impaired loan and lease component, which addresses specific reserves for impaired loans and leases; (ii) the general reserve component, which addresses reserves for pools of homogeneous loans and leases; and (iii) an unallocated reserve component (if any) based on management’s judgment and experience. The loan and lease pools and impaired loans and leases are mutually exclusive; any loan or lease that is impaired is excluded from its homogenous pool for purposes of that pool’s reserve calculation, regardless of the level of impairment.

The ALLL policy for pooled loans and leases is governed in accordance with banking regulatory guidance for homogenous pools of non-impaired loans and leases that have similar risk characteristics. The Company follows a consistent and structured approach for assessing the need for reserves within each individual loan and lease pool.

Loans and leases are considered impaired when, based on current information and events, it is probable that the creditor will be unable to collect all interest and principal payments due according to the originally contracted, or reasonably modified, terms of the loan or lease agreement. The Company has determined that loans and leases that meet the criteria defined below must be reviewed quarterly to determine if they are impaired.

•

All commercial loans and leases classified substandard or worse.

~~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 90 days or more and still accruing interest.

~~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).

~~Any loan or lease which has been modified such that it meets the definition of a Troubled Debt Restructuring (TDR).~~

The Company’s policy for impaired loan and lease accounting subjects all loans and leases to impairment recognition; however, loan and lease relationships with unguaranteed credit exposure of less than $100,000 are generally not evaluated on an individual basis for impairment and instead are evaluated collectively using a methodology based on historical specific reserves on similar sized loans and leases. Any loan or lease not meeting the above criteria and determined to be impaired is subjected to an impairment analysis, which is a calculation of the probable loss on the loan or lease. This portion is the loan's or lease’s “impairment,” and is established as a specific reserve against the loan or lease, or charged against the ALLL.

Individual specific reserve amounts imply probability of loss and may not be carried in the reserve indefinitely. When the amount of the actual loss becomes reasonably quantifiable, the amount of the loss is charged off against the ALLL, whether or not all liquidation and recovery efforts have been completed. If the total amount of the individual specific reserve that will eventually be charged off cannot yet be sufficiently quantified but some portion of the impairment can be viewed as a confirmed loss, then the confirmed loss portion should be charged off against the ALLL and the individual specific reserve reduced by a corresponding amount.

For impaired loans or leases, the reserve amount is calculated on a loan or lease-specific basis. The Company utilizes two methods of analyzing impaired loans and leases not guaranteed by the SBA:

•

The Fair Market Value of Collateral method utilizes the value at which the collateral could be sold considering the appraised value, appraisal discount rate, prior liens and selling costs. The amount of the reserve is the deficit of the estimated collateral value compared to the loan or lease balance.

~~The Present Value of Future Cash Flows method takes into account the amount and timing of cash flows and the effective interest rate used to discount the cash flows.~~

~~Table of Contents~~

•

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.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

The following table details activity in the allowance for loan and lease losses by portfolio segment allowance for the periods presented:

Three Months Ended	Construction & Development			Commercial Real Estate			Commercial & Industrial			Commercial Land			Total
June 30, 2019
Beginning Balance	$	2,236		$	10,623		$	16,543		$	5,709		$	35,111
Charge offs		—			(1	)		(416	)		(178	)		(595	)
Recoveries		—			13			56			—			69
Provision		688			1,954			724			97			3,463
Ending Balance	$	2,924		$	12,589		$	16,907		$	5,628		$	38,048
June 30, 2018
Beginning Balance	$	2,428		$	11,244		$	12,201		$	2,177		$	28,050
Charge offs		—			(419	)		(549	)		—			(968	)
Recoveries		—			29			152			—			181
Provision		(201	)		554			1,573			161			2,087
Ending Balance	$	2,227		$	11,408		$	13,377		$	2,338		$	29,350

Six Months Ended	Construction & Development		Commercial Real Estate			Commercial & Industrial			Commercial Land			Total
June 30, 2019
Beginning Balance	$	2,042	$	11,044		$	14,562		$	4,786		$	32,434
Charge offs		—		(1	)		(638	)		(178	)		(817	)
Recoveries		—		23			198			5			226
Provision		882		1,523			2,785			1,015			6,205
Ending Balance	$	2,924	$	12,589		$	16,907		$	5,628		$	38,048
June 30, 2018
Beginning Balance	$	2,030	$	9,180		$	10,751		$	2,229		$	24,190
Charge offs		—		(419	)		(1,221	)		—			(1,640	)
Recoveries		—		33			288			—			321
Provision		197		2,614			3,559			109			6,479
Ending Balance	$	2,227	$	11,408		$	13,377		$	2,338		$	29,350

Three months ended
Construction &
Development

Commercial
Real Estate

Commercial
& Industrial

Commercial
Land
Total
September 30, 2017
Beginning Balance $ 1,603
$ 7,494
$ 8,351
$ 2,112
$ 19,560
Charge offs —
(665 ) (343 ) —
(1,008 )
Recoveries —
4
39
6
49
Provision 36
1,565
827
(2 ) 2,426
Ending Balance $ 1,639
$ 8,398
$ 8,874
$ 2,116
$ 21,027
September 30, 2016
Beginning Balance $ 1,208
$ 4,079
$ 5,601
$ 1,421
$ 12,309
Charge offs —
—
(939 ) —
(939 )
Recoveries —
1
1
—
2
Provision 225
261
2,907
413
3,806
Ending Balance $ 1,433
$ 4,341
$ 7,570
$ 1,834
$ 15,178

Nine months ended Construction &
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
Provision 369
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~~

June 30, 2019	Construction & Development		Commercial Real Estate		Commercial & Industrial		Commercial Land		Total
Allowance for loan and lease losses:
Loans and leases individually evaluated for impairment	$	—	$	3,610	$	3,128	$	4,721	$	11,459
Loans and leases collectively evaluated for impairment		2,924		8,979		13,779		907		26,589
Total allowance for loan and lease losses	$	2,924	$	12,589	$	16,907	$	5,628	$	38,048
Loans and leases receivable¹:
Loans and leases individually evaluated for impairment	$	—	$	57,444	$	24,473	$	35,192	$	117,109
Loans and leases collectively evaluated for impairment		324,732		824,933		705,448		253,275		2,108,388
Total loans and leases receivable	$	324,732	$	882,377	$	729,921	$	288,467	$	2,225,497

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 2018	Construction & Development		Commercial Real Estate		Commercial & Industrial		Commercial Land		Total
Allowance for loan and lease losses:
Loans and leases individually evaluated for impairment	$	118	$	2,424	$	2,598	$	3,951	$	9,091
Loans and leases collectively evaluated for impairment		1,924		8,620		11,964		835		23,343
Total allowance for loan and lease losses	$	2,042	$	11,044	$	14,562	$	4,786	$	32,434
Loans and leases receivable¹:
Loans and leases individually evaluated for impairment	$	5,027	$	46,731	$	28,659	$	21,997	$	102,414
Loans and leases collectively evaluated for impairment		243,877		692,299		590,089		221,801		1,748,066
Total loans and leases receivable	$	248,904	$	739,030	$	618,748	$	243,798	$	1,850,480

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

1
1	Loans and leases receivable includes ~~$40.4~~$498.8 million of U.S. government guaranteed loans as of ~~September~~June 30, ~~2017,~~2019, of which ~~$24.7~~$79.3 million are impaired. As of December 31, ~~2016,~~2018, loans and leases receivable includes ~~$37.7~~$305.4 million of U.S. government guaranteed loans, of which ~~$22.1~~$72.4 million are considered impaired.

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 September 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.~~

~~Table of Contents~~

~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Consolidated Financial Statements~~

Loans and leases classified as impaired as of the dates presented are summarized in the following tables.

September 30, 2017
Recorded
Investment

Guaranteed
Balance

Unguaranteed
Exposure
Commercial & Industrial
Death Care Management $ 8
$ —
$ 8
Healthcare 7,384
5,712
1,672
Independent Pharmacies 4,282
2,514
1,768
Registered Investment Advisors 743
—
743
Veterinary Industry 2,407
1,605
802
Total 14,824
9,831
4,993
Construction & Development
Healthcare 1,151
880
271
Total 1,151
880
271
Commercial Real Estate
Death Care Management 2,486
1,246
1,240
Healthcare 4,334
2,999
1,335
Independent Pharmacies 1,622
1,622
—
Veterinary Industry 13,700
8,051
5,649
Total 22,142
13,918
8,224
Commercial Land
Agriculture 23
23
—
Total 23
23
—
Total $ 38,140
$ 24,652
$ 13,488

December 31, 2016
Recorded
Investment

Guaranteed
Balance

Unguaranteed
Exposure
Commercial & Industrial
Death Care Management $ 111
$ —
$ 111
Healthcare 7,923
5,453
2,470
Independent Pharmacies 3,514
2,495
1,019
Registered Investment Advisors 796
—
796
Veterinary Industry 2,882
2,199
683
Total 15,226
10,147
5,079
Construction & Development
Agriculture 300
233
67
Total 300
233
67
Commercial Real Estate
Death Care Management 1,768
1,264
504
Healthcare 4,044
2,985
1,059
Independent Pharmacies 528
—
528
Veterinary Industry 13,561
7,518
6,043
Total 19,901
11,767
8,134
Commercial Land
Agriculture 91
—
91
Total 91
—
91
Total $ 35,518
$ 22,147
$ 13,371

~~Table of Contents~~

June 30, 2019	Recorded Investment		Guaranteed Balance		Unguaranteed Exposure
Commercial & Industrial
Agriculture	$	7	$	—	$	7
Healthcare		9,096		6,530		2,566
Independent Pharmacies		5,457		4,105		1,352
Registered Investment Advisors		2,076		1,409		667
Veterinary Industry		2,357		1,876		481
Other Industries		5,480		3,806		1,674
Total		24,473		17,726		6,747
Commercial Real Estate
Agriculture		2,226		1,669		557
Funeral Home & Cemetery		1,958		1,368		590
Healthcare		22,879		14,206		8,673
Independent Pharmacies		7,168		6,082		1,086
Veterinary Industry		13,846		9,466		4,380
Other Industries		9,367		5,821		3,546
Total		57,444		38,612		18,832
Commercial Land
Agriculture		35,192		22,980		12,212
Total		35,192		22,980		12,212
Total	$	117,109	$	79,318	$	37,791

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 2018	Recorded Investment		Guaranteed Balance		Unguaranteed Exposure
Commercial & Industrial
Agriculture	$	7	$	—	$	7
Funeral Home & Cemetery		6		—		6
Healthcare		9,668		7,229		2,439
Independent Pharmacies		9,356		7,896		1,460
Registered Investment Advisors		3,347		2,427		920
Veterinary Industry		2,326		1,819		507
Other Industries		3,949		2,304		1,645
Total		28,659		21,675		6,984
Construction & Development
Agriculture		5,027		3,704		1,323
Total		5,027		3,704		1,323
Commercial Real Estate
Agriculture		1,798		1,299		499
Funeral Home & Cemetery		3,143		2,261		882
Healthcare		20,442		14,559		5,883
Independent Pharmacies		5,633		4,079		1,554
Veterinary Industry		15,715		11,613		4,102
Total		46,731		33,811		12,920
Commercial Land
Agriculture		21,997		13,177		8,820
Total		21,997		13,177		8,820
Total	$	102,414	$	72,367	$	30,047

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
$ —
Healthcare 6,675
709
7,384
8,034
681
Independent Pharmacies 2,622
1,660
4,282
4,697
76
Registered Investment Advisors 668
75
743
735
521
Veterinary Industry 2,033
374
2,407
2,800
173
Total 11,998
2,826
14,824
16,273
1,451
Construction & Development
Healthcare 1,151
—
1,151
1,173
53
Total 1,151
—
1,151
1,173
53
Commercial Real Estate
Death Care Management 1,867
619
2,486
2,625
187
Healthcare 3,759
575
4,334
4,352
261
Independent Pharmacies 1,622
—
1,622
2,163
9
Veterinary Industry 11,506
2,194
13,700
14,787
1,408
Total 18,754
3,388
22,142
23,927
1,865
Commercial Land
Agriculture 23
—
23
58
—
Total 23
—
23
58
—
Total Impaired Loans and Leases $ 31,926
$ 6,214
$ 38,140
$ 41,431
$ 3,369

~~Table of Contents~~

	June 30, 2019
	Recorded Investment
	With a Recorded Allowance		With No Recorded Allowance		Total		Unpaid Principal Balance		Related Allowance Recorded
Commercial & Industrial
Agriculture	$	7	$	—	$	7	$	6	$	7
Funeral Home & Cemetery		—		—		—		—		—
Healthcare		9,039		57		9,096		9,827		870
Independent Pharmacies		5,161		296		5,457		5,763		833
Registered Investment Advisors		2,076		—		2,076		2,138		432
Veterinary Industry		2,180		177		2,357		2,667		57
Other Industries		5,480		—		5,480		5,655		929
Total		23,943		530		24,473		26,056		3,128
Commercial Real Estate
Agriculture		2,226		—		2,226		2,226		13
Funeral Home & Cemetery		1,821		137		1,958		1,961		87
Healthcare		20,754		2,125		22,879		22,873		1,266
Independent Pharmacies		7,168		—		7,168		7,453		43
Veterinary Industry		13,146		700		13,846		14,650		1,277
Other Industries		9,367		—		9,367		9,334		924
Total		54,482		2,962		57,444		58,497		3,610
Commercial Land
Agriculture		35,192		—		35,192		34,988		4,721
Total		35,192		—		35,192		34,988		4,721
Total Impaired Loans and Leases	$	113,617	$	3,492	$	117,109	$	119,541	$	11,459

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

	December 31, 2018
	Recorded Investment
	With a Recorded Allowance		With No Recorded Allowance		Total		Unpaid Principal Balance		Related Allowance Recorded
Commercial & Industrial
Agriculture	$	—	$	7	$	7	$	6	$	—
Funeral Home & Cemetery		—		6		6		6		—
Healthcare		9,604		64		9,668		10,432		827
Independent Pharmacies		9,032		324		9,356		10,564		478
Registered Investment Advisors		3,347		—		3,347		3,839		811
Veterinary Industry		2,160		166		2,326		2,593		65
Other Industries		3,496		453		3,949		4,097		417
Total		27,639		1,020		28,659		31,537		2,598
Construction & Development
Agriculture		5,027		—		5,027		4,939		118
Total		5,027		—		5,027		4,939		118
Commercial Real Estate
Agriculture		1,798		—		1,798		1,732		93
Funeral Home & Cemetery		2,859		284		3,143		3,281		30
Healthcare		20,211		231		20,442		20,461		1,145
Independent Pharmacies		5,184		449		5,633		5,884		220
Veterinary Industry		15,606		109		15,715		16,677		936
Total		45,658		1,073		46,731		48,035		2,424
Commercial Land
Agriculture		21,997		—		21,997		22,147		3,951
Total		21,997		—		21,997		22,147		3,951
Total Impaired Loans and Leases	$	100,321	$	2,093	$	102,414	$	106,658	$	9,091

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
Healthcare 7,259
664
7,923
8,120
778
Independent Pharmacies 3,184
330
3,514
3,610
327
Registered Investment Advisors 796
—
796
792
514
Veterinary Industry 2,754
128
2,882
3,369
106
Total 14,001
1,225
15,226
16,002
1,726
Construction & Development
Agriculture 300
—
300
311
13
Total 300
—
300
311
13
Commercial Real Estate
Death Care Management 1,580
188
1,768
1,904
34
Healthcare 3,514
530
4,044
4,042
47
Independent Pharmacies 528
—
528
529
284
Veterinary Industry 11,193
2,368
13,561
14,283
1,273
Total 16,815
3,086
19,901
20,758
1,638
Commercial Land
Agriculture 91
—
91
161
15
Total 91
—
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 Condensed 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
$ —
Healthcare 7,076
11
6,345
38
Independent Pharmacies 4,266
26
1,946
18
Registered Investment Advisors 894
14
742
7
Veterinary Industry 2,511
11
2,501
13
Total 14,789
63
11,543
76
Construction & Development
Healthcare 602
2
—
—
Total 602
2
—
—
Commercial Real Estate
Death Care Management 2,512
13
1,801
2
Healthcare 3,079
11
1,012
12
Independent Pharmacies 1,985
—
551
2
Veterinary Industry 13,950
132
12,218
87
Total 21,526
156
15,582
103
Commercial Land
Agriculture 23
—
156
—
Total 23
—
156
—
Total $ 36,940
$ 221
$ 27,281
$ 179

~~Table of Contents~~

	Three Months Ended June 30, 2019				Three Months Ended June 30, 2018
	Average Balance		Interest Income Recognized		Average Balance		Interest Income Recognized
Commercial & Industrial
Agriculture	$	6	$	—	$	—	$	—
Funeral Home & Cemetery		—		—		7		—
Healthcare		9,280		34		5,094		19
Independent Pharmacies		5,459		5		7,978		7
Registered Investment Advisors		2,083		5		2,818		12
Veterinary Industry		2,394		13		2,930		18
Other Industries		5,904		7		1,373		5
Total		25,126		64		20,200		61
Construction & Development
Agriculture		—		—		2,526		—
Healthcare		—		—		1,799		28
Total		—		—		4,325		28
Commercial Real Estate
Agriculture		2,228		—		—		—
Funeral Home & Cemetery		1,967		—		3,122		27
Healthcare		23,057		259		12,852		64
Independent Pharmacies		7,198		25		2,836		1
Veterinary Industry		13,984		105		16,135		98
Other Industries		9,357		52		—		—
Total		57,791		441		34,945		190
Commercial Land
Agriculture		32,435		280		5,138		25
Total		32,435		280		5,138		25
Total	$	115,352	$	785	$	64,608	$	304

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

	Six Months Ended June 30, 2019				Six Months Ended June 30, 2018
	Average Balance		Interest Income Recognized		Average Balance		Interest Income Recognized
Commercial & Industrial
Agriculture	$	6	$	—	$	—	$	—
Funeral Home & Cemetery		—		—		7		—
Healthcare		9,421		65		5,188		31
Independent Pharmacies		5,385		15		8,038		27
Registered Investment Advisors		2,103		10		2,825		24
Veterinary Industry		2,417		27		2,917		38
Other Industries		5,745		24		1,373		5
Total		25,077		141		20,348		125
Construction & Development
Agriculture		—		—		2,509		5
Healthcare		—		—		1,579		51
Total		—		—		4,088		56
Commercial Real Estate
Agriculture		2,228		—		—		—
Funeral Home & Cemetery		1,974		2		3,133		64
Healthcare		23,198		487		12,486		80
Independent Pharmacies		6,663		67		2,836		1
Veterinary Industry		14,412		206		16,159		235
Other Industries		9,357		61		—		—
Total		57,832		823		34,614		380
Commercial Land
Agriculture		31,825		518		5,138		25
Total		31,825		518		5,138		25
Total	$	114,734	$	1,482	$	64,188	$	586

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
$ —
Healthcare 4,996
25
5,777
60
Independent Pharmacies 7,998
52
1,927
51
Registered Investment Advisors 1,438
28
588
13
Veterinary Industry 4,329
24
2,715
29
Total 19,074
132
11,016
153
Construction & Development
Healthcare 120
2
—
—
Total 120
2
—
—
Commercial Real Estate
Death Care Management 2,030
30
1,811
5
Healthcare 2,940
24
1,013
27
Independent Pharmacies 149
—
551
2
Veterinary Industry 13,069
278
12,266
249
Total 18,188
332
15,641
283
Commercial Land
Agriculture 199
—
355
—
Total 199
—
355
—
Total $ 37,581
$ 466
$ 27,012
$ 436

~~Table of Contents~~

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

There were no TDRs modified during the three months ended June 30, 2019 and 2018.

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

	Six Months Ended June 30, 2019						Six Months Ended June 30, 2018
	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
Interest Only
Construction and Development
Healthcare		—	$	—	$	—		1	$	612	$	612
Total Interest Only		—		—		—		1		612		612
Extended Amortization
Commercial Land
Agriculture		1		3,489		3,489		—		—		—
Total Extend Amortization		1		3,489		3,489		—		—		—
Payment Deferral
Commercial & Industrial
Healthcare		1		144		144		—		—		—
Commercial Real Estate
Healthcare		1		1,853		1,853		—		—		—
Total Payment Deferral		2		1,997		1,997		—		—		—
Total		3	$	5,486	$	5,486		1	$	612	$	612

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 Industry 2

559

559

—

—

—
Total Payment Deferral 2

559

559

1

440

440
Total 2

$ 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 Pharmacies 1

262

262

—

—

—
Total Payment Deferral and Extended Amortization 1

262

262

—

—

—
Payment Deferral

Commercial & Industrial

Healthcare —

—

—

1

440

440
Veterinary Industry 2

559

559

1

420

420
Total Payment Deferral 2

559

559

2

860

860
Total 3

$ 821

$ 821

2

$ 860

$ 860

Concessions made to improve a loan ~~and~~or lease’s performance have varying degrees of success. No ~~TDRS~~TDRs that were modified within the twelve months ended ~~September~~June 30, ~~2017~~2019 and 2018 subsequently defaulted during the three ~~or nine~~and six months ended ~~September~~June 30, ~~2017.~~

2019 and 2018.

~~Table of Contents~~

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 6. Leases

Lessor Equipment Leasing

The Company purchases new equipment for the purpose of ~~September 30, 2016, one TDR that~~leasing such equipment to customers within its verticals. Equipment purchased to fulfill commitments to commercial renewable energy projects is rented out under operating leases while leases of equipment outside of the renewable energy vertical are generally direct financing leases. Accordingly, leased assets under operating leases are included in premises and equipment while leased assets under direct financing leases are included in loans and leases held for investment.

Direct Financing Leases

Interest income on direct financing leases is recognized when earned. Unearned interest is recognized over the lease term on a basis which results in a constant rate of return on the unrecovered lease investment. The term of each lease is generally 3-7 years which is consistent with the useful life of the equipment with no residual value. The gross lease payments receivable and the net investment included in accounts receivable for such leases are as follows:

	June 30, 2019			December 31, 2018
Gross direct finance lease payments receivable	$	15,587		$	12,541
Less – unearned interest		(3,063	)		(2,635	)
Net investment in direct financing leases	$	12,524		$	9,906

Future minimum lease payments under finance leases are as follows:

As of June 30, 2019	Amount
2019	$	1,544
2020		3,061
2021		3,007
2022		2,744
2023		2,286
Thereafter		2,945
Total	$	15,587

Interest income of $267 thousand and $73 thousand was ~~modified within~~recognized in the ~~twelve~~three months ended ~~September~~June 30, ~~2016 subsequently defaulted during~~2019 and 2018, respectively. Interest income of $501 thousand and $120 thousand was recognized in the ~~nine~~six months ended ~~September~~June 30, ~~2016. This TDR was~~2019 and 2018, 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 the then current fair market value.

Rental revenue from operating leases is recognized on a ~~commercial~~straight-line basis over the term of the lease. Rental equipment is recorded at cost and ~~industrial veterinary loan~~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 ~~was previously modified for payment deferral. The recorded investment for this TDR~~do not extend the lives of the rental equipment are charged to direct operating expenses at ~~September 30, 2016 was $311 thousand.~~

the time the costs are incurred.

~~Table of Contents~~

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

As of June 30, 2019 and December 31, 2018, the Company had a net investment of $147.4 million and $148.8 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 $162.6 million and $159.2 million and accumulated depreciation was $15.2 million and $10.4 million as of June 30, 2019 and December 31, 2018, respectively. Depreciation expense recognized on these assets for the three months ended June 30, 2019 and 2018 was $2.4 million, and $2.0 million, respectively. Depreciation expense recognized on these assets for the six months ended June 30, 2019 and 2018 was $4.8 million and $3.7 million, respectively.

Lease income of $2.4 million and $1.9 million was recognized in the three months ended June 30, 2019 and 2018, respectively. Lease income of $4.7 million and $3.5 million was recognized in the six months ended June 30, 2019 and 2018, respectively.

A maturity analysis of future minimum lease payments under non-cancelable operating leases is as follows:

As of June 30, 2019	Amount
2019	$	3,889
2020		8,883
2021		8,930
2022		8,924
2023		8,956
Thereafter		48,267
Total	$	87,849

Lessee Lease Arrangements

The Company has operating leases for real property, land, copiers and other equipment. These leases have remaining lease terms of 1 year to 27 years, some of which include options to extend the leases for up to 20 years, and some of which include options to terminate the leases. The Company has concluded that it is reasonably certain it will exercise the options to extend for only one lease, which was therefore recognized as part of the ROU asset and lease liability.

The Company has a finance lease for fitness equipment and it has a remaining lease term of approximately 3.4 years. There are no options to extend or terminate this lease.

The components of lease expense are as follows:

	Three Months Ended June 30, 2019			Six Months Ended June 30, 2019
Operating lease cost	$	169		$	326
Short-term lease cost		166			375
Finance lease cost:
Amortization of right-of-use assets		1			2
Interest expense on lease liabilities		—			—
Sublease income		(9	)		(18	)
Total net lease cost	$	327		$	685

Supplemental disclosure for the consolidated balance sheet related to finance leases is as follows:

	June 30, 2019
Finance lease right-of-use asset	$	16
Finance lease liability		16

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

The weighted average remaining lease term and weighted average discount rate for leases are as follows:

	As of June 30, 2019
Weighted average remaining lease term (years)
Operating leases		15.30
Finance lease		3.42
Weighted average discount rate
Operating leases		3.50	%
Finance lease		3.10	%

A maturity analysis of operating and finance lease liabilities is as follows:

As of June 30, 2019	Operating Leases			Finance Leases
2019	$	343		$	3
2020		504			5
2021		297			5
2022		275			4
2023		143			—
Thereafter		1,285			—
Total lease payments		2,847			17
Less: imputed interest		(685	)		(1	)
Total lease liabilities	$	2,162		$	16

Note 7. Servicing Assets

Loans serviced for others are not included in the accompanying balance sheet. The unpaid principal balances of loans serviced for others requiring recognition of a servicing asset were ~~$2.36~~$2.39 billion and ~~$2.22~~$2.63 billion at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016,~~2018, respectively.

The unpaid principal balance for all loans serviced for others was $3.05 billion and $3.22 billion at June 30, 2019 and December 31, 2018, respectively.

The following summarizes the activity pertaining to servicing rights:

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Balance at beginning of period	$	44,324		$	53,120		$	47,641		$	52,298
Additions, net		608			4,202			1,331			9,076
Fair value changes:
Due to changes in valuation inputs or assumptions		260			(552	)		(489	)		(553	)
Decay due to increases in principal paydowns or runoff		(3,505	)		(4,081	)		(6,796	)		(8,132	)
Balance at end of period	$	41,687		$	52,689		$	41,687		$	52,689

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, net 3,527
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

The fair value of servicing rights was determined using a weighted average discount ~~rates ranging from 10.1% to 14.5%~~rate of 13.4% on ~~September~~June 30, ~~2017~~2019 and ~~8.1% to 14.1%~~13.0% on ~~September~~June 30, ~~2016.~~2018. The fair value of servicing rights was determined using a weighted average prepayment ~~speeds ranging from 3.1% to 10.0%~~speed of 14.1% on ~~September~~June 30, ~~2017~~2019 and ~~2.9% to 9.8%~~9.6% on ~~September~~June 30, ~~2016,~~2018, depending on the stratification of the specific right. Changes to fair value are reported in loan servicing asset revaluation within the consolidated statements of income.

The fair value of servicing rights is highly sensitive to changes in underlying assumptions. Changes in prepayment speed assumptions have the most significant impact on the fair value of servicing rights. Generally, as interest rates rise on variable rate loans, loan prepayments increase due to an increase in refinance activity, which results in a decrease in the fair value of servicing assets. Measurement of fair value is limited to the conditions existing and the assumptions used as of a particular point in time, and those assumptions may not be appropriate if they are applied at a different time.

~~Table of Contents~~

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 8. Borrowings

Total outstanding short and long term borrowings consisted of the following:

	June 30, 2019		December 31, 2018
Short term borrowings
On September 18, 2014, the Company entered into a note payable revolving line of credit of $8.1 million with an unaffiliated commercial bank. On April 18, 2017, the Company renewed and increased the revolving line of credit to $25 million. The note was unsecured and accrued interest at Prime minus 0.50% for a term of 24 months. Payments were interest only with all principal and accrued interest due on April 30, 2019. The terms of this loan required the Company to maintain minimum capital, liquidity and Texas ratios. This line of credit was paid in full on August 25, 2017. This line of credit matured on April 30, 2019 and there is no available credit at June 30, 2019.	$	—	$	—
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. One of the loans with an outstanding balance of $1.3 million was paid in full on August 17, 2018. Interest accrues at prime plus 1% with monthly principal and interest payments over a term of 60 months. The interest rate at June 30, 2019 is 6.50%. The maturity date is October 5, 2019. The pledged collateral is classified in other assets with a fair value of $1.3 million at June 30, 2019. The underlying loan carries a risk grade of 3 and is current with no delinquency.		1,345		1,441
On October 20, 2017, the Company entered into a revolving line of credit of $20 million with an unaffiliated commercial bank. On October 2, 2018, the Company renewed the revolving $20 million line of credit. The note is unsecured and accrues interest at LIBOR plus 1.750% for a term of 12 months. Payments are interest only with all principal and accrued interest due on October 18, 2019. The terms of this loan require the Company to maintain minimum capital and debt service coverage ratios. No advances have been made to this line of credit and there is $20 million of available credit at June 30, 2019.		—		—
Total short term borrowings	$	1,345	$	1,441

	June 30, 2019		December 31, 2018
Long term borrowings
In October 2017, the Company entered into a capital lease of $19 thousand with an unaffiliated equipment lease company, secured by fitness equipment which is included in other assets on the consolidated balance sheet. Payments are principal and interest due monthly starting December 15, 2017 over a term of 60 months. At the end of the lease term there is a $1.00 bargain purchase option. As of January 1, 2019, this borrowing was revised in accordance with ASU 2016-02.	$	16	$	16
Total long term borrowings	$	16	$	16

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 funds through unsecured federal funds lines of credit with various correspondent banks, which totaled ~~$47.5 million and $26.5~~$72.5 million as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016, respectively.~~2018. These lines are intended for short-term borrowings and are subject to restrictions limiting the frequency and terms of advances. These lines of credit are payable on demand and bear interest based upon the daily federal funds rate. The Company had no outstanding balances on the lines of credit as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016.~~

The Company has $25 million available in an unsecured line of credit with a correspondent bank as of September 30, 2017. The line was increased from $8.1 million to $25 million on April 18, 2017. At December 31, 2016, there was $8.1 million available on this unsecured line of credit. The term is 24 months, maturing April 30, 2019, and interest accrues at Prime minus 0.50%. Payments are interest only with all principal and accrued interest due on April 30, 2019. The terms of the loan require the Company to maintain minimum capital, liquidity and Texas ratios. There was no outstanding balance on this line of credit as of September 30, 2017 and December 31, 2016.

2018.

~~Table of Contents~~

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

The Company has entered into a repurchase agreement with a third party for $5$5.0 million as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016.~~2018. 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~~June 30, ~~2017~~2019 and December 31, ~~2016.~~

2018.

On June 18, 2018, the Company entered into a borrowing agreement with the Federal Home Loan Bank of Atlanta. These borrowings must be secured with eligible collateral approved by the Federal Home Loan Bank of Atlanta. At June 30, 2019 and December 31, 2018, the Company had approximately $1.01 billion and $849.1 million, respectively, in borrowing capacity available under these agreements. There is no collateral pledged and no advances outstanding as of June 30, 2019 and December 31, 2018.

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~~$412.9 million and ~~$281.3~~$395.2 million as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016,~~2018, respectively. At ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016,~~2018, the Company had approximately ~~$175.0~~$234.9 million and ~~$142.7~~$218.0 million, respectively, in borrowing capacity available under these arrangements with no outstanding balance as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016.~~

2018.

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.~~2019. The Company's effective tax rate in the future will depend on the actual investment tax credits earned as a part of its financing renewable energy applications.

In the first quarter of 2017, share based compensation expense excess tax benefits of $874 thousand were reflected in the consolidated statements of income as a component of the provision for income taxes as a result of the adoption of ASU 2016-09. Please refer

Live Oak Bancshares, Inc.

Notes to ~~Note 2 for more details regarding the adoption of ASU 2016-09.~~

Unaudited Condensed Consolidated Financial Statements

Note 10. Fair Value of Financial Instruments

Fair Value Hierarchy

There are three levels of inputs in the fair value hierarchy that may be used to measure fair value. Financial instruments are considered Level 1 when valuation can be based on quoted prices in active markets for identical assets or liabilities. Level 2 financial instruments are valued using quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or models using inputs that are observable or can be corroborated by observable market data of substantially the full term of the assets or liabilities. Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable and when determination of the fair value requires significant management judgment or estimation.

Financial Instruments Measured at Fair Value

The following sections provide a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the fair value hierarchy:

Investment securities: Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, discounted cash flow or at net asset value per share. Level 2 securities would include USU.S. government agency securities, mortgage-backed securities, obligations of states and political subdivisions and certain corporate, asset backed mutual fund and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy.

Impaired loans: Impairment of a loan is based on the fair value of the collateral of the loan for collateral-dependent loans. Fair value of the loan’s collateral, when the loan is dependent on collateral, is determined by appraisals or independent valuation which is then adjusted for the cost related to liquidation of the collateral. For non-collateral dependent loans, impairment is determined by the present value of expected future cash flows. Impaired loans classified as Level 3 are based on management’s judgment and estimation.

Servicing assets: Servicing rights do not trade in an active, open market with readily observable prices. While sales of servicing rights do occur, the precise terms and conditions typically are not readily available. Accordingly, the Company estimates the fair value of servicing rights using discounted cash flow models incorporating numerous assumptions from the perspective of a market participant including servicing income, servicing costs, market discount rates and prepayment speeds. Due to the nature of the valuation inputs, servicing rights are classified within Level 3 of the valuation hierarchy.

Foreclosed assets: Foreclosed real estate is adjusted to fair value less selling costs upon transfer of the loans to foreclosed real estate. Subsequently, foreclosed real estate is carried at the lower of carrying value or fair value less selling costs. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. Given the lack of observable market prices for identical properties and market discounts applied to appraised values, the Company generally classifies foreclosed assets as nonrecurring Level 3.

Mutual fund: The following mutual fund is registered with the Securities and Exchange Commission as a closed-end, non-diversified management investment company and operates as an interval fund. The fund primarily invests in the unguaranteed portion of SBA504 First Lien Loans secured by owner-occupied commercial real estate. This investment is valued using quoted prices in markets that are not active and is classified as Level 2 within the valuation hierarchy.

~~Table of Contents~~

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

~~Contingent consideration liability:~~ ~~Contingent consideration associated with~~

Equity warrant assets: Fair value measurements of equity warrant assets of private companies are priced based on a Black-Scholes option pricing model to estimate the ~~acquisition of Reltco will be adjusted to fair~~asset value ~~quarterly until settled. The~~by using stated strike prices, option expiration dates, risk-free interest rates and option volatility assumptions. Option volatility assumptions used ~~to measure fair value~~in the Black-Scholes model are based on ~~internal metrics~~public companies that operate in similar industries as the companies in our private company portfolio. Option expiration dates are ~~unobservable and therefore~~modified to account for estimates to actual life relative to stated expiration. Values are further adjusted for a general lack of liquidity due to the ~~contingent consideration liability is classified~~private nature of the associated underlying company. The Company classifies equity warrant assets within Level 3 of the valuation hierarchy.

Recurring Fair Value

The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis.

June 30, 2019	Total		Level 1		Level 2		Level 3
Investment securities available-for-sale
US treasury securities	$	5,015	$	—	$	5,015	$	—
US government agencies		48,905		—		48,905		—
Mortgage-backed securities		513,349		—		513,349		—
Municipal bonds¹		9,006		—		8,913		93
Servicing assets²		41,687		—		—		41,687
Mutual fund		2,175		—		2,175		—
Equity warrant assets³		720		—		—		720
Total assets at fair value	$	620,857	$	—	$	578,357	$	42,500

December 31, 2018	Total		Level 1		Level 2		Level 3
Investment securities available-for-sale
US treasury securities	$	4,966	$	—	$	4,966	$	—
US government agencies		30,944		—		30,944		—
Mortgage-backed securities		343,581		—		343,581		—
Municipal bond¹		999		—		—		999
Servicing assets²		47,641		—		—		47,641
Mutual fund		2,099		—		2,099		—
Equity warrant assets³		527		—		—		527
Total assets at fair value	$	430,757	$	—	$	381,590	$	49,167

September 30, 2017 Total Level 1 Level 2 Level 3
Investment securities available-for-sale
US government agencies $ 17,804
$ —
$ 17,804
$ —
Residential mortgage-backed securities 56,750
—
56,750
—
Mutual fund 2,021
—
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, 2016 Total Level 1 Level 2 Level 3
Investment securities available-for-sale
US government agencies $ 17,823
$ —
$ 17,823
$ —
Residential mortgage-backed securities 51,273
—
51,273
—
Mutual fund 1,960
—
1,960
—
Servicing assets¹
51,994
—
—
51,994
Total assets at fair value $ 123,050
$ —
$ 71,056
$ 51,994

1	During the six months ended June 30, 2019, the Company sold $900 thousand of a municipal bond to a third party and recorded a fair value adjustment loss of $7 thousand. During the three months ended June 30, 2019, the Company recorded no fair value adjustment.

1 2	See Note 7 for a rollforward of recurring Level 3 fair values for servicing assets.

During the six months ended June 30, 2019, the Company recorded net gains on derivative instruments of $193 thousand. During the three months ended June 30, 2019, the Company recorded net losses on derivative instruments of $62 thousand. During the six months ended June 30, 2018, the Company entered into equity warrant assets ~~and various assumptions used in the~~with a fair value ~~measurement.~~


2	~~See Note 4 for~~of $399 thousand at the time of issuance. There was no activity ~~related to the recurring Level 3 fair value~~ for the ~~contingent consideration liability and various assumptions used in~~derivative instruments during the ~~fair value measurement.~~three months ended June 30, 2018.

Non-recurring Fair Value

The tables below present the recorded amount of assets and liabilities measured at fair value on a non-recurring basis.

June 30, 2019	Total		Level 1		Level 2		Level 3
Impaired loans	$	102,158	$	—	$	—	$	102,158
Foreclosed assets		6,044		—		—		6,044
Total assets at fair value	$	108,202	$	—	$	—	$	108,202

September 30, 2017 Total Level 1 Level 2 Level 3
Impaired loans and leases $ 28,557
$ —
$ —
$ 28,557
Foreclosed assets 2,231
—
—
2,231
Total assets at fair value $ 30,788
$ —
$ —
$ 30,788

December 31, 2016 Total Level 1 Level 2 Level 3
Impaired loans and leases $ 27,815
$ —
$ —
$ 27,815
Foreclosed assets 1,648
—
—
1,648
Total assets at fair value $ 29,463
$ —
$ —
$ 29,463

~~Table of Contents~~

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 2018	Total		Level 1		Level 2		Level 3
Impaired loans	$	91,230	$	—	$	—	$	91,230
Foreclosed assets		1,094		—		—		1,094
Total assets at fair value	$	92,324	$	—	$	—	$	92,324

Level 3 Analysis

For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018 the significant unobservable inputs used in the fair value measurements were as follows:

~~September~~

June 30, ~~2017~~2019

Level 3 Assets with Significant Unobservable Inputs	Fair Value		Valuation Technique	Significant Unobservable Inputs	Range
Municipal bond	$	93	Discounted expected cash flows	Discount rate Prepayment speed	4.76% 5.00%
Impaired loans	$	102,158	Discounted appraisals Discounted expected cash flows	Appraisal adjustments ⁽¹⁾ Interest rate & repayment term	0% to 48% Weighted average discount rate 6.77%
Foreclosed assets	$	6,044	Discounted appraisals	Appraisal adjustments ⁽¹⁾	9% to 37%
Equity warrant assets	$	720	Black-Scholes option pricing model	Volatility Risk-free interest rate Marketability discount Remaining life	20.90% 2.03% 20.00% 8 - 9 years

Level 3 Assets with Significant
Unobservable Inputs
Fair Value Valuation Technique
Significant
Unobservable
Inputs
Range
Impaired Loans and Leases $ 28,557
Discounted appraisals
Discounted expected cash flows
Appraisal adjustments (1)
Interest rate & repayment term
0% to 25% Weighted average discount rate 6.01%
Foreclosed Assets $ 2,231
Discounted appraisals
Appraisal adjustments (1)
10% to 35%

December 31, ~~2016~~2018

Level 3 Assets with Significant Unobservable Inputs	Fair Value		Valuation Technique	Significant Unobservable Inputs	Range
Municipal bond	$	999	Discounted expected cash flows	Discount rate Prepayment speed	5.14% 5.00%
Impaired loans	$	91,230	Discounted appraisals Discounted expected cash flows	Appraisal adjustments ⁽¹⁾ Interest rate & repayment term	8% to 48% Weighted average discount rate 6.58%
Foreclosed assets	$	1,094	Discounted appraisals	Appraisal adjustments⁽¹⁾	9% to 37%
Equity warrant assets	$	527	Black-Scholes option pricing model	Volatility Risk-free interest rate Marketability discount Remaining life	20.40% 2.69% 20.00% 9 - 10 years

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)
~~(1)~~	Appraisals may be adjusted by management for customized discounting criteria, estimated sales costs, and proprietary qualitative adjustments.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Estimated Fair Value of Other Financial Instruments

GAAP also requires disclosure of the fair value ~~information about~~of financial instruments carried at book value on the balance sheet. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

~~The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments not measured at fair value on the~~ consolidated balance ~~sheets:~~

~~Cash and due from banks: The carrying amounts reported in the balance sheet for cash and due from banks approximate their fair values.~~

~~Certificates of deposit with other banks: The fair value of certificates of deposit with other banks is estimated based on discounting cash flows using the rates currently offered for instruments of similar remaining maturities.~~

~~Loans held for sale:~~ The fair values of loans held for sale are based on quoted market prices, where available, and determined by discounting estimated cash flows using interest rates approximating the Company’s current origination rates for similar loans adjusted to reflect the inherent credit risk.

~~Loans and leases held for investment~~: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying amounts. The fair values for other loans and leases are estimated using discounted cash flow analysis, based on interest rates currently being offered for loans and leases with similar terms to borrowers of similar credit quality. Loan and lease fair value estimates include judgments regarding future expected loss experience and risk characteristics. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values, where applicable.

~~Accrued interest:~~ ~~The carrying amounts of accrued interest approximate fair value.~~

~~Table of Contents~~

~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Consolidated Financial Statements~~

~~Deposits~~: The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain 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.

sheets.

The carrying amounts and estimated fair values of the Company’s financial instruments are as follows:

June 30, 2019	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	$	115,292	$	115,292	$	—	$	—	$	115,292
Federal funds sold		68,153		68,153		—		—		68,153
Certificates of deposit with other banks		7,250		7,604		—		—		7,604
Investment securities, available-for-sale		576,275		—		576,182		93		576,275
Loans held for sale		857,837		—		—		881,747		881,747
Loans and leases, net of allowance for loan and lease losses		2,187,425		—		—		2,182,023		2,182,023
Servicing assets		41,687		—		—		41,687		41,687
Accrued interest receivable		19,791		19,791		—		—		19,791
Mutual fund		2,175		—		2,175		—		2,175
Equity warrant assets		720		—		—		720		720
Financial liabilities
Deposits		3,721,597		—		3,734,139		—		3,734,139
Accrued interest payable		1,990		1,990		—		—		1,990
Short term borrowings		1,345		—		—		1,347		1,347
Long term borrowings		16		—		—		16		16

December 31, 2018	Carrying Amount		Quoted Price In Active Markets for Identical Assets /Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value
Financial assets
Cash and due from banks	$	316,823	$	316,823	$	—	$	—	$	316,823
Certificates of deposit with other banks		7,250		7,442		—		—		7,442
Investment securities, available-for-sale		380,490		—		379,491		999		380,490
Loans held for sale		687,393		—		—		695,154		695,154
Loans and leases, net of allowance for loan and lease losses		1,810,985		—		—		1,807,528		1,807,528
Servicing assets		47,641		—		—		47,641		47,641
Accrued interest receivable		15,895		15,895		—		—		15,895
Mutual fund		2,099		—		2,099		—		2,099
Equity warrant assets		527		—		—		527		527
Financial liabilities
Deposits		3,149,583		—		3,117,941		—		3,117,941
Accrued interest payable		861		861		—		—		861
Short term borrowings		1,441		—		—		1,441		1,441
Long term borrowings		16		—		—		16		16

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 banks 3,250
3,251
—
—
3,251
Investment securities, available-for-sale 76,575
—
76,575
—
76,575
Loans held for sale 692,586
—
—
770,923
770,923
Loans and leases, net of allowance for loan and lease losses 1,148,860
—
—
1,151,601
1,151,601
Servicing assets 53,392
—
—
53,392
53,392
Accrued interest receivable 9,669
9,669
—
—
9,669
Financial liabilities
Deposits 2,012,891
—
1,996,493
—
1,996,493
Accrued interest payable 270
270
—
—
270
Long term borrowings 26,872
—
—
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 banks 7,250
7,236
—
—
7,236
Investment securities, available-for-sale 71,056
—
71,056
—
71,056
Loans held for sale 394,278
—
—
426,220
426,220
Loans and leases, net of allowance for loan and lease losses 889,357
—
—
873,158
873,158
Servicing assets 51,994
—
—
51,994
51,994
Accrued interest receivable 7,520
7,520
—
—
7,520
Financial liabilities
Deposits 1,485,076
—
1,469,173
—
1,469,173
Accrued interest payable 319
319
—
—
319
Long term borrowings 27,843
—
—
29,559
29,559

~~Table of Contents~~

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 11. Commitments and Contingencies

Litigation

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

Financial Instruments with Off-balance-sheet Risk

The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, credit risk in excess of the amount recognized in the balance sheet.

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as for on-balance-sheet instruments. A summary of the Company’s commitments is as follows:

	June 30, 2019		December 31, 2018
Commitments to extend credit	$	1,641,814	$	1,435,024
Standby letters of credit		12,285		2,150
Airplane purchase agreement commitments		—		10,450
Total unfunded off-balance-sheet credit risk	$	1,654,099	$	1,447,624

September 30,
2017 December 31,
2016
Commitments to extend credit $ 1,563,688
$ 1,342,271
Standby letters of credit 1,861
343
Solar purchase commitments 182,610
—
Airplane purchase agreement commitments —
21,500
Total unfunded off-balance-sheet credit risk $ 1,748,159
$ 1,364,114

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the party. Collateral held varies, but may include accounts receivable, inventory, property and equipment, residential real estate and income-producing commercial properties. In 2012, the Company began issuing commitment letters after approval of the loan by the Credit Department. Commitment letters generally expire ninety days after issuance.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held varies as specified above and is required in instances which the Company deems necessary.

As of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016,~~2018, the Company had unfunded commitments to provide capital contributions for ~~on-balance sheet~~on-balance-sheet investments in the amount of ~~$4.4~~$1.6 million and ~~$4.9~~$2.8 million, respectively.

Concentrations of Credit Risk

Although the Company is not subject to any geographic concentrations, a substantial amount of the Company’s loans, leases, and commitments to extend credit have been granted to customers in the agriculture, healthcare and veterinary verticals. The concentrations of credit by type of loan are set forth in Note 6.5. The distribution of commitments to extend credit approximates the distribution of loans outstanding. The Company does not have a significant number of credits to any single borrower or group of related borrowers whereby their retained unguaranteed exposure exceeds ~~$5.0~~$7.5 million, except for ~~seventeen~~16 relationships that have a retained unguaranteed exposure of ~~$144.6~~$193.0 million of which ~~$90.8~~$137.0 million of the unguaranteed exposure has been disbursed.

Additionally, the Company has future minimum lease payments due under non-cancelable operating leases totaling ~~$33.0~~$87.8 million, of which ~~$28.0~~$63.7 million is due from ~~two~~four relationships.

~~Table of Contents~~

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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

Note 12. Stock Plans

On March 20, 2015, the Company adopted the 2015 Omnibus Stock Incentive Plan which replaced the previously existing Amended Incentive Stock Option Plan and Nonstatutory Stock Option Plan. Subsequently on May 24, 2016, the 2015 Omnibus Stock Incentive Plan was amended to authorize awards covering a maximum of 7,000,000 common voting shares and has an expiration date of March 20, 2025. On May 15, 2018, the Amended and Restated 2015 Omnibus Stock Incentive Plan was amended to authorize awards covering a maximum of 8,750,000 common voting shares. Options or restricted shares granted under the Amended and Restated 2015 Omnibus Stock Incentive Plan (the "Plan") expire no more than 10 years from the date of grant. Exercise prices under the Plan are set by the Board of Directors at the date of grant, but shall not be less than 100% of fair market value of the related stock at the date of the grant. Options ~~or restricted shares~~ vest over a minimum of three years from the date of the grant.

Restricted stock grants vest in equal installments ranging from immediate vesting to over a seven year period from the date of the grant. Market Restricted Stock Units also have a restriction based on the passage of time and non-market-related performance criteria, but also have a restriction based on market price criteria related to the Company’s share price closing at or above a specified price defined at time of 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~~June 30, ~~2017~~2019 and ~~2016,~~2018, the Company recognized ~~$536~~$400 thousand and ~~$580~~$347 thousand in compensation expense for stock options, respectively. For the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, the Company recognized ~~$1.4 million~~$838 thousand and ~~$1.8 million~~$780 thousand in compensation expense for stock options, respectively.

Stock option activity under the Plan during the ~~nine~~six month periods ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018, is summarized below.

	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at December 31, 2018		2,656,855	$	11.27
Exercised		30,634		6.16
Forfeited		32,042		9.34
Granted		—		—
Outstanding at June 30, 2019		2,594,179	$	11.35	5.52 years	$	15,457,477
Exercisable at June 30, 2019		954,353	$	10.24	5.30 years	$	6,721,334

	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Terms	Aggregate Intrinsic Value
Outstanding at December 31, 2017		3,058,459	$	11.30
Exercised		144,671		8.66
Forfeited		134,623		14.11
Granted		—		—
Outstanding at June 30, 2018		2,779,165	$	11.30	6.54 years	$	53,786,948
Exercisable at June 30, 2018		727,697	$	9.83	6.27 years	$	15,148,795

Shares
Weighted
Average
Exercise Price

Weighted
Average
Remaining
Contractual
Term

Aggregate
Intrinsic
Value
Outstanding at December 31, 2016 3,478,208
$ 11.51

Exercised 76,285
7.89

Forfeited 203,671
14.12

Granted —
—

Outstanding at September 30, 2017 3,198,252
$ 11.43
7.31 years $ 38,411,802
Exercisable at September 30, 2017 703,425
$ 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, 2015 3,546,992
$ 11.17

Exercised 25,406
5.79

Forfeited 166,483
9.01

Granted 169,987
14.02

Outstanding at September 30, 2016 3,525,090
$ 11.44
8.30 years $ 14,212,513
Exercisable at September 30, 2016 478,141
$ 9.22
7.84 years $ 2,887,741

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

The following is a summary of non-vested stock option activity for the Company for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016.~~2018.

	Shares			Weighted Average Grant Date Fair Value
Non-vested at December 31, 2018		1,839,830		$	4.60
Granted		—			—
Vested		(167,962	)		2.85
Forfeited		(32,042	)		9.34
Non-vested at June 30, 2019		1,639,826			12.00

	Shares			Weighted Average Grant Date Fair Value
Non-vested at December 31, 2017		2,364,999		$	4.65
Granted		—			—
Vested		(178,908	)		2.95
Forfeited		(134,623	)		6.26
Non-vested at June 30, 2018		2,051,468			4.79

~~Table of Contents~~

~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Consolidated Financial Statements~~

Shares
Weighted
Average
Grant Date
Fair Value
Non-vested at December 31, 2016 3,016,100
$ 4.78
Granted —
—
Vested 317,602
4.17
Forfeited 203,671
6.03
Non-vested at September 30, 2017 2,494,827
$ 4.75

Shares
Weighted
Average
Grant Date
Fair Value
Non-vested at December 31, 2015 3,393,441
$ 4.56
Granted 169,987
6.58
Vested 349,996
4.22
Forfeited 166,483
3.13
Non-vested at September 30, 2016 3,046,949
$ 4.79

The total intrinsic value of options exercised at ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018, was ~~$1.1~~$326 thousand and $2.9 million, ~~and $223 thousand,~~ respectively.

At ~~September~~June 30, ~~2017,~~2019, unrecognized compensation costs relating to stock options amounted to ~~$9.8~~$5.1 million which will be recognized over a weighted average period of ~~2.93~~3.1 years.

The weighted average fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The expected volatility is based on historical volatility. The risk-free interest rates for periods within the contractual life of the awards are based on the U.S. Treasury yield curve in effect at the time of the grant. The expected life is based on historical exercise experience. The dividend yield assumption is based on the Company’s history and expectation of dividend payouts. There were no stock options granted during the three and ~~nine~~six months ended ~~September~~June 30, ~~2017.~~

2019 and 2018.

Restricted Stock

Restricted stock awards are authorized in the form of restricted stock awards or units ("RSU"s) and restricted stock awards or units with a market price condition ("Market RSU"s).

RSUs have a restriction based on the passage of time and may also have a restriction based on a non-market-related performance criteria. The fair value of the RSUs is based on the closing price on the date of the grant.

Market RSUs also have a restriction based on the passage of time and non-market-related performance criteria, but also have a restriction based on market price criteria related to the Company’s share price closing at or above a specified price ranging from $34.00 to ~~$38.00~~$55.00 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~~simulation method.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

RSU stock activity under the Plan during the ~~first nine~~six months of ~~2017~~2019 is summarized below.

	Shares			Weighted Average Grant Date Fair Value
Non-vested at December 31, 2018		388,187		$	23.85
Granted		69,621			16.02
Vested		(26,714	)		28.33
Forfeited		(4,918	)		23.96
Non-vested at June 30, 2019		426,176			22.29

Shares
Weighted
Average Grant
Date Fair Value
Non-vested at December 31, 2016 134,969
$ 14.96
Granted 62,721
23.85
Vested 38,205
15.40
Forfeited 7,485
13.96
Non-vested at September 30, 2017 152,000
$ 18.57

~~Table of Contents~~

~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Consolidated Financial Statements~~

For the three months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, the Company recognized ~~$191~~$556 thousand and ~~$3.1 million~~$921 thousand in compensation expense for RSUs, respectively. For the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, the Company recognized ~~$517 thousand~~$1.1 million and ~~$5.3~~$1.8 million in compensation expense for RSUs, respectively.

At ~~September~~June 30, ~~2017,~~2019, unrecognized compensation costs relating to RSUs amounted to ~~$2.5~~$8.2 million which will be recognized over a weighted average period of ~~4.55~~4.7 years.

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~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Consolidated Financial Statements~~

Market RSU stock activity under the Plan during the first ~~nine~~three months of ~~2017~~2019 is summarized below.

	Shares			Weighted Average Grant Date Fair Value
Non-vested at December 31, 2018		2,709,202		$	9.87
Granted		500,000			8.81
Vested		—			—
Forfeited		(22,347	)		9.28
Non-vested at June 30, 2019		3,186,855			8.45

Shares
Weighted
Average Grant
Date Fair Value
Non-vested at December 31, 2016 2,364,500
$ 8.28
Granted 233,791
—
Vested —
—
Forfeited 4,007
11.38
Non-vested at September 30, 2017 2,594,284
$ 8.79

The compensation expense for Market RSUs is measured based on their grant date fair value as calculated using the Monte Carlo ~~Simulation~~simulation and is recognized on a straight-line basis over the average vesting period. The Monte Carlo ~~Simulation~~simulation used 100,000 simulation paths to assess the expected date of achieving the market price criteria.

Related to the ~~100,733~~500,000 Market RSUs granted on ~~January 31, 2017 and the 3,058 Market RSUs granted on May 8, 2017,~~February 11, 2019, the share price simulation was based on the Cox, Ross & Rubinstein option pricing methodology for a period of ~~7.0~~10.0 years. The implied term of the restricted stock ~~was 4.1~~ranges from 4.5 to 5.8 years. The Monte Carlo Simulation used various assumptions that included a risk free rate of return of ~~2.28%~~2.62%, expected volatility of ~~30.00%~~37.6% and a dividend yield of ~~0.39%~~0.78%.

~~Related~~

On February 11, 2019, 75,000 Market RSUs granted on May 14, 2018 to one employee were modified to lengthen the ~~130,000~~vesting term from 7 to 10 years and change the target stock price from $48.00 to a range of $35.00 to $48.00 per share for at least twenty (20) consecutive trading days. Additionally, 410,000 Market RSUs granted on August 10, 2018 to eleven employees were modified to lengthen the vesting term from 7 ~~2017,~~to 10 years and change the ~~share price simulation was based on~~amount of Market RSUs that vest at various target stock prices to 20% per tier. As a result of modification, the ~~Cox, Ross & Rubinstein option pricing methodology~~Company recognized additional compensation expense of $166 thousand and $234 thousand 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%~~three and ~~a dividend yield of 0.33%.~~

six months periods ended June 30, 2019, respectively.

For the three months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, the Company recognized ~~$1.3~~$2.0 million and ~~$346~~$947 thousand in compensation expense for Market RSUs, respectively. For the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, the Company recognized ~~$3.7~~$3.8 million and ~~$577 thousand~~$1.9 million in compensation expense for Market RSUs, respectively.

~~All of the Company's Market RSUs had an effective grant date of May 24, 2016, November~~

At June 30, ~~2016, January 31, 2017, May 8, 2017 and August 7, 2017~~

~~At September 30, 2017,~~2019, unrecognized compensation costs relating to Market RSUs amounted to ~~$17.9~~$19.1 million which will be recognized over a weighted average period of ~~3.27~~3.3 years.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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~~There was no expense recognized in relation to the ESPP for the ~~nine months ended September 30, 2017 was $79 thousand. There were no ESPP purchases for the nine months ended September 30, 2016. For the~~ three months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018. For the six months ended June 30, 2019 and 2018, the Company recognized ~~$36~~$32 thousand and $0$29 thousand in 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 “Company” or “LOB”). This discussion should be read in conjunction with the financial statements and related notes included elsewhere in this quarterly report on Form 10-Q and with the Company's Annual Report on Form 10-K for the fiscal year ended December 31, ~~2016~~2018 (the ~~"2016~~"2018 Annual Report"). Results of operations for the periods included in this quarterly report on Form 10-Q are not necessarily indicative of results to be obtained during any future period.

Important Note Regarding Forward-Looking Statements

This quarterly report on Form 10-Q contains statements that management believes are forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. These statements generally relate to the Company’s financial condition, results of operations, plans, objectives, future performance or business. They usually can be identified by the use of forward-looking terminology, such as “believes,” “expects,” or “are expected to,” “plans,” “projects,” “goals,” “estimates,” “will,” “may,” “should,” “could,” “would,” “continues,” “intends to,” “outlook” or “anticipates,” or variations of these and similar words, or by discussions of strategies that involve risks and uncertainties. You should not place undue reliance on these statements, as they are subject to risks and uncertainties, including but not limited to, those described in this quarterly report on Form 10-Q.

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When considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements management may make. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information actually known to the Company at the time. Management undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Forward-looking statements contained in this quarterly report on Form 10-Q are based on current expectations, estimates and projections about the Company’s business, management’s beliefs and assumptions made by management. These statements are not guarantees of the Company’s future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in the forward-looking statements. These risks, uncertainties and assumptions include, without limitation:

•

deterioration in the financial condition of borrowers resulting in significant increases in the Company’s loan and lease losses and provisions for those losses and other adverse impacts to results of operations and financial condition;

•

changes in Small Business Administration ("SBA") rules, regulations and loan products, including specifically the Section 7(a) program, changes in SBA standard operating procedures or changes to the status of Live Oak Banking Company (the "Bank") as an SBA Preferred Lender;

•

changes in rules, regulations or procedures for other government loan programs, including those of the USDA;

~~changes in rules, regulations or procedures for other government loan programs, including those of the United States Department of Agriculture;~~

•

changes in interest rates that affect the level and composition of deposits, loan demand and the values of loan collateral, securities, and interest sensitive assets and liabilities;

~~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;

~~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;

~~changes in loan underwriting, credit review or loss reserve policies associated with economic conditions, examination conclusions, or regulatory developments;~~

•

a reduction in or the termination of the Company’s ability to use the technology-based platform that is critical to the success of the Company’s business model, including a failure in or a breach of the Company’s operational or security systems or those of its third-party service providers;

•

changes in financial market conditions, either internationally, nationally or locally in areas in which the Company conducts operations, including reductions in rates of business formation and growth, demand for the Company’s products and services, commercial and residential real estate development and prices, premiums paid in the secondary market for the sale of loans, and valuation of servicing rights;

•

changes in accounting principles, policies, and guidelines applicable to bank holding companies and banking;

~~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 lending programs and investment tax credits;~~

~~changes in political and economic conditions;~~

~~the impact of heightened regulatory scrutiny of financial products and services, primarily led by the Consumer Financial Protection Bureau;~~

~~the Company's ability to comply with any requirements imposed on it by regulators, and the potential negative consequences that may result;~~

operational, compliance and other factors, including conditions in local areas in which the Company conducts business such as inclement weather or a reduction in the availability of services or products for which loan proceeds will be used, that could prevent or delay closing and funding loans before they can be sold in the secondary market;

the effect of any mergers, acquisitions or other transactions, to which the Company or the Bank may from time to time be a party, including management’s ability to successfully integrate any businesses acquired;

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•

fluctuations in markets for equity, fixed-income, commercial paper and other securities, which could affect availability, market liquidity levels, and pricing;

other risk factors listed from time to time in reports that the Company files with the SEC, including in the Company’s 2016 Annual Report and the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2017;

•

~~the success at managing the risks involved in the foregoing.~~

•

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;

•

changes in political and economic conditions;

•

the impact of heightened regulatory scrutiny of financial products and services, primarily led by the Consumer Financial Protection Bureau;

•

the Company's ability to comply with any requirements imposed on it by regulators, and the potential negative consequences that may result;

•

other risk factors listed from time to time in reports that the Company files with the SEC, including in the Company’s 2018 Annual Report; and

•

the success at managing the risks involved in the foregoing.

Except as otherwise disclosed, forward-looking statements do not reflect: (i) the effect of any acquisitions, divestitures or similar transactions that have not been previously disclosed; (ii) any changes in laws, regulations or regulatory interpretations; or (iii) any change in current dividend or repurchase strategies, in each case after the date as of which such statements are made. All forward-looking statements speak only as of the date on which such statements are made, and the Company undertakes no obligation to update any statement, to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.

Amounts in all tables in Management’s Discussion and Analysis of Financial Condition and Results of Operations have been presented in thousands, except percentage, time period, stock option, share and per share data or where otherwise indicated.

Nature of Operations

LOB is a bank holding company headquartered in Wilmington, North Carolina incorporated under the laws of North Carolina in December 2008. The Company conducts business operations primarily through its commercial bank subsidiary, Live Oak Banking Company (the “Bank”). The Bank was incorporated in February 2008 as a North Carolina-chartered commercial bank. The Bank specializes in providing lending services to small businesses ~~nationwide in targeted industries.~~nationwide. The Bank identifies and grows within selected industry sectors, or verticals, by leveraging expertise within those industries, and more broadly to select borrowers outside of those industries. A significant portion of the loans originated by the Bank are guaranteed by the SBA under ~~its~~the 7(a) ~~program. In 2010,~~Loan Program and the ~~Bank formed Live Oak Number One, Inc.~~U.S. Department of Agriculture ("USDA") Rural Energy for America Program ("REAP"), ~~a wholly-owned subsidiary, to hold properties foreclosed on by the Bank.~~Business & Industry ("B&I") and Water & Waste Disposal (“WEP”) loan programs.

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.

During the fourth quarter of 2018, the Company began implementing a strategic decision to retain a larger portion of its loans eligible for sale on its balance sheet. Management believes this decision will reduce future earnings volatility and maximize long-term profitability. This strategic change had immediate impacts through the reclassification of $80.3 million in guaranteed loans from held-for-sale to held-for-investment status. Other effects of this change are reflected in the financial statements in the fourth quarter of 2018 and in the first half of 2019 with significantly fewer loans sold during the respective quarters and the consequential effect of increased net interest income and increased loans held for sale and held for investment along with lower gains on loan sales.

In ~~addition to~~2018, the Bank formed Live Oak Private Wealth, LLC, a registered investment advisor that provides high-net-worth individuals and families with strategic wealth and investment management services; and formed Canapi Advisors, LLC for the purpose of providing investment advisory services to a series of new funds focused on providing venture capital to new and emerging financial services technology companies. In 2017, the Bank entered into a joint venture, Apiture LLC (“Apiture”), with First Data Corporation for the purpose of creating next generation technology for financial institutions. In August 2018, the Company ~~owns~~ exited the title insurance business by financing the sale of its entire ownership interest in Reltco, Inc. and National Assurance Title, Inc. for $3.0 million. This divestiture was driven by lower expectations of future profitability for this business. The title insurance business was acquired in 2017. In 2016, the Company formed Live Oak Clean Energy Financing LLC ~~formed in November 2016,~~(“LOCEF”), for the purpose of providing financing to entities for renewable energy ~~applications;~~applications. During the three months ended March 31, 2019, LOCEF became a subsidiary of the Bank. In addition to the Bank, the Company owns Live Oak Ventures, Inc. (formerly known as "Canapi, Inc."), formed in August 2016 for the purpose of investing in businesses that align with the Company's strategic initiative to be a leader in financial technology; Live Oak Grove, LLC, ~~opened~~formed in ~~September~~February 2015 for the purpose of providing Company employees and business visitors an on-site restaurant location; Government Loan Solutions, Inc. (“GLS”), a management and technology consulting firm that specializes in the settlement, accounting, and securitization processes for government guaranteed loans, including loans originated under the SBA 7(a) loan program and ~~U.S. Department of Agriculture ("USDA")-guaranteed~~USDA-guaranteed loans; and 504 Fund Advisors, LLC (“504FA”), ~~which was~~ formed to serve as the investment advisor to The 504 Fund, a closed-end mutual fund organized to invest in SBA section 504 loans.

~~On February 1, 2017,~~ During the ~~Company~~six months ended June 30, 2019, 504FA completed the transfer of its ~~acquisition of Reltco Inc.~~advisory agreement and ~~National Assurance Title, Inc. (collectively referred~~no longer serves as the investment advisor to ~~as "Reltco" or "title insurance business"), two nationwide title agencies under common control based in Tampa, Florida.~~

The 504 Fund.

The Company generates revenue primarily from net interest income and the origination and sale of ~~SBA-guaranteed~~government guaranteed loans. Income from the retention of loans ~~and USDA guaranteed Rural Energy for America Program ("REAP") and Business & Industry ("B&I") loans and~~is comprised of interest income. Income from the sale of loans is comprised of loan servicing revenue and revaluation of related servicing assets ~~and~~along with net gains on sales of loans. Offsetting these revenues are the cost of funding sources, provision for loan and lease losses, any costs related to foreclosed assets and other operating costs such as salaries and employee benefits, travel, professional services, advertising and marketing and tax expense.

~~On July 23, 2015 the Company closed on its initial public offering with a secondary offering completed in August of 2017.~~

Business Outlook

Below is a discussion of management’s current expectations regarding company performance over the near-term based on market conditions, the regulatory environment and business strategies as of the time the Company filed this Report. Actual outcomes and results may differ materially from what is expressed or forecasted in these forward-looking statements. See “Important Note Regarding Forward-Looking Statements” in this Report for more information on forward-looking statements.

We believe our strategic decision to retain a larger portion of loans eligible for sale on our balance sheet will reduce future earnings volatility and maximize long-term profitability. As a result of this decision, we anticipate that gains on the sale of loans will comprise a diminishing component of our revenue in 2019. Management anticipates that the Company's held-for-sale and held-for-investment loan portfolios will continue to grow as a result of ongoing origination volumes and higher levels of loan retention intended to promote long-term recurring revenue and profitability, including the continued pursuit of potential opportunities in conventional lending outside of SBA or other government guarantee programs.

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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 ~~September~~June 30, ~~2017~~2019 compared with three months ended ~~September~~June 30, ~~2016~~

2018

For the three months ended ~~September~~June 30, ~~2017,~~2019, the Company reported net income of ~~$12.9~~$4.9 million, or ~~$0.33~~$0.12 per diluted share, as compared to ~~$3.5~~$14.3 million, or ~~$0.10~~$0.34 per diluted share, for the ~~three months ended September 30, 2016.~~second quarter of 2018. This ~~increase~~decrease in net income is primarily due to the following items:

•

The Company’s strategic shift in the latter part of 2018 to hold substantially more of its eligible-for-sale production on balance sheet resulted in lower net income in the near-term by decreasing net gains on sales of loans by $17.0 million, or 73.9%. The volume of guaranteed loan sales in the second quarter of 2019 declined to $71.9 million compared to $295.2 million in the second quarter of 2018;

Increased net interest income of $9.4 million, or 80.8%, predominately driven by significant growth in the loans and leases held for sale and held for investment portfolios combined with a much higher net interest margin;

•

The provision for loan and lease losses increased $1.4 million primarily due to portfolio growth from the second quarter of 2018;

~~Decreased provision for loan and lease losses of $1.4 million was driven largely by improvements in the performance of the loan portfolio;~~

•

The flow-through loss from investments accounted for under the equity method totaled $1.7 million compared to $673 thousand for the three months ended June 30, 2018; and

~~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;~~

•

Title insurance income decreased $1.0 million due to the Company’s sale of its title insurance business in August of 2018.

~~Revenues of $2.0 million from the title insurance company subsidiary acquired in the first quarter of 2017;~~

~~Increases in other noninterest income of $1.1 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~~

The primary factors partially offsetting the above ~~factors that contributed to increased levels of~~decrease in net income was a $3.7 million decrease in the net gains on sales of loans, $1.6 million increase in salaries and employee benefits, $1.6 million in equipment expense and $1.5 million in other expenses. The increase in salaries and employee benefits and other expenses were influenced by the growth of the overall business, including the addition of the title insurance subsidiary in the first quarter of 2017,were:

•

Increase in net interest income of $6.9 million, or 25.5%, predominately driven by the above referenced strategic growth in loan and lease portfolios combined with higher investment security holdings which benefited from rising interest rates; and

•

Net negative loan servicing revaluation decreased by $3.3 million, or 89.0%, compared to the second quarter of 2018 principally due to an improving secondary market for sold loans.

Six Months Ended June 30, 2019 compared to the same period of 2016. Equipment expense increased principally due to higher levels of depreciation related to aircraft acquired in the first quarter of 2017 and solar panels purchased for the renewable energy leasing initiative.

~~Nine~~with six months ended ~~September~~June 30, ~~2017 compared with nine~~2018

For the six months ended ~~September~~June 30, ~~2016~~

~~For the nine months ended September 30, 2017,~~2019, the Company reported net income of ~~$28.8~~$7.3 million, or ~~$0.78~~$0.18 per diluted share, as compared to ~~$8.3~~$26.7 million, or ~~$0.24~~$0.64 per diluted share, for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2018. This ~~increase~~decrease in net income is primarily ~~attributable~~due to the following items:

•

The Company’s above referenced strategic shift in the latter part of 2018 to hold substantially more of its eligible-for-sale production on balance sheet resulted in lower net income in the near-term by decreasing net gains on sales of loans by $37.3 million, or 78.5%. The volume of guaranteed loan sales in the first six months of 2019 declined to $134.9 million compared to $542.5 million in the first six months of 2018;

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;

•

The flow-through loss from investments accounted for under the equity method totaled $3.8 million compared to $1.0 for the six months ended June 30, 2018; and

Decreased provision for loan and lease losses of $3.2 million principally driven by the one-time transfer of $318.8 million in unguaranteed loans from held for sale to held for investment classification during the second quarter of 2016;

•

Title insurance income decreased $2.3 million due to the Company’s sale of its title insurance business in August of 2018.

~~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 million, or 4.7%, due to a higher year-to-date sale volume~~

The primary factors partially ~~offset by a decrease in the average net gain per loan sold;~~

~~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 million, or 159.9%, due to the ongoing operation of the renewable energy leasing business yielding investment tax credits.~~

~~Partially~~ offsetting the above ~~factors that contributed to increased levels of~~decrease in net income ~~was a $28.1 million increase in noninterest expense, largely comprised of the effects of continued investments to support growing levels of business and business diversification.~~were:

•

Increase in net interest income of $13.0 million, or 25.3%, predominately driven by the above referenced strategic growth in loan and lease portfolios combined with higher investment security holdings which benefited from rising interest rates; and

•

Net negative loan servicing revaluation decreased by $6.1 million, or 69.8%, principally due to an improving secondary market for sold loans.

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 ofit incurs on interest-bearing liabilities. The Company’s net interest income depends upon the volume of interest-earning assets and interest-bearing liabilities and the interest rates that the Company earns or pays on them. Net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as “volume changes.” It is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds, referred to as “rate changes.” Without a branch network, the Bank generates deposits over the Internet and in the community in which it is headquartered. Due to the nature of a branchless bank and the relatively low overhead required for deposit gathering, the rates that the Bank offers are generally above the industry average.

Three months ended ~~September~~June 30, ~~2017~~2019 compared with three months ended ~~September~~June 30, ~~2016~~

2018

For the three months ended ~~September~~June 30, ~~2017,~~2019, net interest income increased ~~$9.4~~$6.9 million, or ~~80.8%~~25.5%, to ~~$21.0~~$33.9 million compared to ~~$11.6~~$27.0 million for the three months ended ~~September~~June 30, ~~2016.~~2018. This increase was principally due to the significant growth in ~~average interest earning assets~~the combined held for sale and held for investment loan and lease portfolios along with higher investment security holdings reflecting the Company's ongoing initiative to ~~a lesser extent higher yields on these assets which outpaced~~grow recurring revenue sources and deploy liquidity while improving the ~~growth and change in the cost of interest bearing liabilities.~~asset-liability repricing mix. Average interest earning assets increased by ~~$746.9~~$542.1 million, or ~~53.8%~~17.3%, to ~~$2.13~~$3.68 billion for the three months ended ~~September~~June 30, ~~2017,~~2019, compared to ~~$1.39~~$3.14 billion for the three months ended ~~September~~June 30, ~~2016,~~2018, while the yield on average interest earning assets ~~rose sharply by seventy-nine~~increased seventy-seven basis points to ~~5.24%~~6.01%. The cost of funds on interest bearing liabilities for the three months ended ~~September~~June 30, ~~2017~~2019 increased ~~twenty~~fifty-five basis points to ~~1.43%~~2.41%, and the average balance of interest bearing liabilities increased by ~~$717.1~~$532.2 million, or ~~56.6%~~17.8%, over the same ~~period.~~period in 2018. As indicated in the rate/volume table below, the increase in interest ~~bearing liabilities~~earning assets outpaced the higher volume and ~~corresponding~~increased cost of ~~funds was outpaced by the positive effects of the increased volume of~~ interest ~~earning assets along with much higher yields,~~bearing liabilities, resulting in increased interest income of ~~$12.6~~$14.2 million and increased interest expense of ~~$3.2~~$7.3 million for the three months ended ~~September~~June 30, ~~2017~~2019 compared to the three months ended ~~September~~June 30, ~~2016.~~2018. For the three months ended ~~September~~June 30, ~~2017~~2018 compared to the three months ended ~~September~~June 30, ~~2016,~~2019, net interest margin increased ~~sharply~~ from ~~3.32%~~3.46% to ~~3.91%~~3.70%, respectively, principally due to the ~~aforementioned effects.~~

~~Nine~~volume of interest earnings assets outpacing the growth in the volume of interest bearing liabilities.

Six Months Ended June 30, 2019 compared with six months ended ~~September~~June 30, ~~2017 compared with nine~~2018

For the six months ended ~~September~~June 30, ~~2016~~

~~For the nine months ended September 30, 2017,~~2019, net interest income increased ~~$24.8~~$13.0 million, or ~~82.0%~~25.2%, to ~~$55.1~~$64.5 million compared to ~~$30.3~~$51.5 million for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2018. This increase was ~~also~~ principally due to the significant growth in ~~average interest earning assets~~the combined held for sale and held for investment loan and lease portfolios along with higher investment security holdings reflecting the Company's ongoing initiative to ~~a lesser extent higher yields on these assets outpacing~~grow recurring revenue sources and deploy liquidity while improving the ~~growth and change in the cost of interest bearing liabilities.~~asset-liability repricing mix. Average interest earning assets increased by ~~$702.0~~$642.9 million, or ~~58.4%~~22.1%, to ~~$1.90~~$3.55 billion for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019, compared to ~~$1.20~~$2.91 billion for the ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2018, while the yield on average interest earning assets increased ~~by sixty-four~~seventy basis points to ~~5.12%~~5.97%. The cost of funds on interest bearing liabilities for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 increased ~~by eleven~~sixty basis points to ~~1.34%~~2.39%, and the average balance of interest bearing liabilities increased by ~~$688.0~~$653.5 million, or ~~63.13%~~23.7%, ~~during~~over the same ~~period.~~period in 2018. As indicated in the rate/volume table below, the increase in interest ~~bearing liabilities~~earning assets and corresponding yields outpaced the higher volume and increased cost of ~~funds was outpaced by the positive effects of the increased volume of~~ interest ~~earning assets along with much higher yields,~~bearing liabilities, resulting in increased interest income of ~~$32.6~~$29.1 million and increased interest expense of ~~$7.8~~$16.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017. For the nine months ended September 30, 2017~~2019 compared to the ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2018. For the six months ended June 30, 2018 compared to the six months ended June 30, 2019, net interest margin increased ~~sharply~~ from ~~3.36%~~3.58% to ~~3.87%~~3.67%, respectively, principally due to the ~~aforementioned effects.~~

growth in the volume of interest earnings assets outpacing the growth in interest bearing liabilities.

~~Table of Contents~~

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,
	2019								2018
	Average Balance			Interest		Average Yield/Rate			Average Balance			Interest		Average Yield/Rate
Interest earning assets:
Federal funds sold and interest earning balances in other banks	$	184,986		$	1,108		2.40	%	$	505,351		$	2,179		1.73	%
Investment securities		566,159			4,116		2.92			383,154			2,530		2.65
Loans held for sale		839,724			14,333		6.85			744,789			11,937		6.43
Loans and leases held for investment⁽¹⁾		2,089,225			35,581		6.83			1,504,738			24,330		6.49
Total interest earning assets		3,680,094			55,138		6.01			3,138,032			40,976		5.24
Less: Allowance for loan and lease losses		(35,124	)							(27,930	)
Non-interest earning assets		474,706								424,100
Total assets	$	4,119,676							$	3,534,202
Interest bearing liabilities:
Interest bearing checking	$	—		$	—		—	%	$	36,926		$	100		1.09	%
Savings		989,512			5,235		2.12			998,521			4,061		1.63
Money market accounts		85,982			161		0.75			151,880			463		1.22
Certificates of deposit		2,452,159			15,807		2.59			1,806,063			9,303		2.07
Total deposits		3,527,653			21,203		2.41			2,993,390			13,927		1.87
Other borrowings		1,409			—		—			3,488			1		0.11
Total interest bearing liabilities		3,529,062			21,203		2.41			2,996,878			13,928		1.86
Non-interest bearing deposits		51,643								53,922
Non-interest bearing liabilities		26,580								21,217
Shareholders' equity		512,391								462,185
Total liabilities and shareholders' equity	$	4,119,676							$	3,534,202
Net interest income and interest rate spread				$	33,935		3.60	%				$	27,048		3.38	%
Net interest margin							3.70								3.46
Ratio of average interest-earning assets to average interest-bearing liabilities							104.28	%							104.71	%

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)
~~(1)~~	Average loan and lease balances include non-accruing loans.

~~Table of Contents~~

	Six Months Ended June 30,
	2019								2018
	Average Balance			Interest		Average Yield/Rate			Average Balance			Interest		Average Yield/Rate
Interest earning assets:
Federal funds sold and interest earning balances in other banks	$	233,904		$	2,747		2.37	%	$	430,107		$	3,394		1.59	%
Investment securities		514,038			7,433		2.92			283,083			3,647		2.60
Loans held for sale		794,919			26,934		6.83			736,323			23,085		6.32
Loans and leases held for investment(1)		2,006,255			67,946		6.83			1,456,659			45,873		6.35
Total interest earning assets		3,549,116			105,060		5.97			2,906,172			75,999		5.27
Less: Allowance for loan and lease losses		(33,801	)							(26,085	)
Non-interest earning assets		475,464								410,585
Total assets	$	3,990,779							$	3,290,672
Interest bearing liabilities:
Interest bearing checking	$	84		$	—		—	%	$	40,243		$	203		1.02	%
Savings		958,716			10,021		2.11			910,880			7,179		1.59
Money market accounts		84,648			269		0.64			160,370			983		1.24
Certificates of deposit		2,367,902			30,230		2.57			1,640,479			15,980		1.96
Total deposits		3,411,350			40,520		2.40			2,751,972			24,345		1.78
Other borrowings		1,436			—		—			7,336			130		3.57
Total interest bearing liabilities		3,412,786			40,520		2.39			2,759,308			24,475		1.79
Non-interest bearing deposits		49,246								55,252
Non-interest bearing liabilities		20,548								20,125
Shareholders' equity		508,199								455,987
Total liabilities and shareholders' equity	$	3,990,779							$	3,290,672
Net interest income and interest rate spread				$	64,540		3.58	%				$	51,524		3.48	%
Net interest margin							3.67								3.58
Ratio of average interest-earning assets to average interest-bearing liabilities							103.99	%							105.32	%

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)
~~(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,
	2019 vs. 2018									2019 vs. 2018
	Increase (Decrease) Due to									Increase (Decrease) Due to
	Rate			Volume			Total			Rate			Volume			Total
Interest income:
Federal funds sold and interest earning balances in other banks	$	579		$	(1,650	)	$	(1,071	)	$	1,279		$	(1,926	)	$	(647	)
Investment securities		317			1,269			1,586			628			3,158			3,786
Loans held for sale		825			1,571			2,396			1,938			1,911			3,849
Loans and leases held for investment		1,549			9,702			11,251			4,112			17,961			22,073
Total interest income		3,270			10,892			14,162			7,957			21,104			29,061
Interest expense:
Interest bearing checking		—			(100	)		(100	)		(102	)		(101	)		(203	)
Savings		1,216			(42	)		1,174			2,403			439			2,842
Money market accounts		(140	)		(162	)		(302	)		(362	)		(352	)		(714	)
Certificates of deposit		2,758			3,746			6,504			6,064			8,186			14,250
Other borrowings		(1	)		—			(1	)		(78	)		(52	)		(130	)
Total interest expense		3,833			3,442			7,275			7,925			8,120			16,045
Net interest income	$	(563	)	$	7,450		$	6,887		$	32		$	12,984		$	13,016

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 sale 640
4,286
4,926
1,343
5,670
7,013
Loans and leases held for investment 1,468
5,622
7,090
2,538
21,871
24,409
Total interest income 2,561
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 accounts 478
(41 ) 437
689
292
981
Certificates of deposit 81
1,818
1,899
(74 ) 5,744
5,670
Other borrowings 22
125
147
26
234
260
Total interest expense 581
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 Losses

The provision for loan and lease losses represents the amount necessary to be charged against the current period’s earnings to maintain the allowance for loan and lease losses at a level that is appropriate in relation to the estimated losses inherent in the loan and lease portfolio. A number of factors are considered in determining the required level of loan and lease loss reserves and the provision required to achieve the appropriate reserve level, including loan and lease growth, credit risk rating trends, nonperforming loan and lease levels, delinquencies, loan and lease portfolio concentrations and economic and market trends.

The provision for loan and lease losses for the third quarter of 2017 was $2.4 million compared to $3.8 million for the same period in 2016, a decrease of $1.4 million, or 36.3%, largely driven by lower levels of specific reserve requirements. For the nine months ended September 30, 2017 the provision was $5.5 million compared to $8.7 million for the same period in 2016, a decrease of $3.2 million, or 36.9%. The decrease in the provision for loan and lease losses for the nine months ended September 30, 2017 was principally driven by the one-time transfer in the second quarter of 2016 of $318.8 million in unguaranteed loans and leases from being classified as held for sale to held for investment. This reclassification resulted in a $4.0 million increase in the provision for loan and lease losses during the second quarter of 2016. Partially offsetting the effects of the 2016 loan reclassification were additional reserves recorded to accommodate robust loan and lease growth in 2017.

Loans and leases held for investment of $1.17 billion as of September 30, 2017 increased by $402.9 million, or 52.5%, compared to September 30, 2016. This growth was fueled by strong loan origination volume of $1.45 billion in the first three quarters of 2017.

Net charge-offs were $959 thousand, or 0.34% of average quarterly loans and leases held for investment on an annualized basis, for the three months ended September 30, 2017, compared to net charge-offs of $937 thousand, or 0.51%, for the three months ended September 30, 2016. Net charge-offs for the first nine months of 2017 and 2016 totaled $2.7 million and $929 thousand, respectively. Year-to-date net charge-offs as a percentage of year-to-date average loans held for investment were 0.26% and 0.18% at September 30, 2017 and 2016, respectively. Net charge-offs are a key element of historical experience in the Company's estimation of the allowance for loan and lease losses.

In addition, at September 30, 2017, nonperforming loans and leases not guaranteed by the SBA totaled $3.3 million, which was 0.28% of the held-for-investment loan and lease portfolio compared to $3.4 million, or 0.44%, of loans and leases held for investment at September 30, 2016.

~~Table of Contents~~

Losses inherent in loan relationships are mitigated if a portion of the loan is guaranteed by the SBA or USDA. A typical SBA 7(a) loan carries a 75% guarantee while USDA guarantees range from 60% to 80% depending on loan size, which ~~reduces~~serve 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 2019 the provision for loan and lease losses was $3.5 million compared to $2.1 million for the same period in 2018, an increase of $1.4 million, or 65.9%. The increase in the provision for loan and lease losses compared to the prior year quarter was primarily the result of a growing loan portfolio through robust loan originations and higher balance sheet retention rates.

Loans and leases held for investment were $2.23 billion as of June 30, 2019, increasing by $691.1 million, or 45.0%, compared to June 30, 2018. This growth was fueled by strong loan origination volumes and the above referenced strategic shift to retain substantially more loans on the balance sheet.

Net charge-offs were $526 thousand, or 0.10% of average quarterly loans and leases held for investment on an annualized basis, for the three months ended June 30, 2019, compared to $787 thousand, or 0.21%, for the three months ended June 30, 2018. For the six months ended June 30, 2019, net charge-offs totaled $591 thousand compared to $1.3 million for the six months ended June 30, 2018, a decrease of $728 thousand, or 55.2%. Net charge-offs are a key element of historical experience in the Company's estimation of the allowance for loan and lease losses.

In addition, at June 30, 2019, nonperforming loans and leases not guaranteed by the SBA totaled $18.4 million, which was 0.82% of the held-for-investment loan and lease portfolio compared to $11.5 million, or 0.75% of loans and leases held for investment at June 30, 2018.

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. Noninterest income also commonly includes equity method investments income (loss), lease income, construction supervision fee income and in prior periods title insurance income. Other less common elements of noninterest income include nonrecurring gains and losses on investments.

The following table shows the components of noninterest income and the dollar and percentage changes for the periods presented.

	Three Months Ended June 30,						2019/2018 Increase (Decrease)
	2019			2018			Amount			Percent
Noninterest income
Loan servicing revenue	$	7,063		$	6,965		$	98			1.41	%
Loan servicing asset revaluation		(403	)		(3,670	)		3,267			89.02
Net gains on sales of loans		6,015			23,061			(17,046	)		(73.92	)
Equity method investments income (loss)		(1,736	)		(673	)		(1,063	)		157.95
Lease income		2,369			1,920			449			23.39
Construction supervision fee income		386			597			(211	)		(35.34	)
Title insurance income		—			996			(996	)		(100.00	)
Other noninterest income		1,007			1,417			(410	)		(28.93	)
Total noninterest income	$	14,701		$	30,613		$	(15,912	)		(51.98	)%

	Six Months Ended June 30,						2019/2018 Increase (Decrease)
	2019			2018			Amount			Percent
Noninterest income
Loan servicing revenue	$	14,473		$	13,863		$	610			4.40	%
Loan servicing asset revaluation		(2,649	)		(8,758	)		6,109			69.75
Net gains on sales of loans		10,213			47,479			(37,266	)		(78.49	)
Equity method investments income (loss)		(3,750	)		(1,037	)		(2,713	)		261.62
Gain on sale of investment securities available-for-sale		5			—			5			100.00
Lease income		4,694			3,528			1,166			33.05
Construction supervision fee income		1,165			1,376			(211	)		(15.33	)
Title insurance income		—			2,296			(2,296	)		(100.00	)
Other noninterest income		3,577			2,622			955			36.42
Total noninterest income	$	27,728		$	61,369		$	(33,641	)		(54.82	)%

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 loans 18,148
21,833
(3,685 ) (16.88 )
Gain on sale of securities available-for-sale —
1
(1 ) (100.00 )
Construction supervision fee income 362
502
(140 ) (27.89 )
Title insurance income 1,968
—
1,968
100.00
Other noninterest income 1,783
657
1,126
171.39
Total noninterest income $ 25,060
$ 25,432
$ (372 ) (1.46 )%

Nine Months Ended
September 30, Increase (Decrease)
2017 2016 Amount Percent
Noninterest income
Loan servicing revenue $ 18,587
$ 15,725
$ 2,862
18.20 %
Loan servicing asset revaluation (6,864 ) (5,051 ) (1,813 ) 35.89
Net gains on sales of loans 55,276
52,813
2,463
4.66
Gain on sale of investment securities available-for-sale —
1
(1 ) (100.00 )
Construction supervision fee income 1,077
1,799
(722 ) (40.13 )
Title insurance income 5,803
—
5,803
100.00
Other noninterest income 3,601
1,925
1,676
87.06
Total noninterest income $ 77,480
$ 67,212
$ 10,268
15.28 %

For the three months ended ~~September~~June 30, ~~2017,~~2019, noninterest income decreased by ~~$372 thousand,~~$15.9 million, or ~~1.5%~~52.0%, compared to the three months ended ~~September~~June 30, ~~2016.~~2018. The ~~decline~~decrease from the prior year is primarily the result of the aforementioned strategic decision to sell fewer loans, resulting in net gains on sales of loans ~~decreasing $3.7 million~~declining to ~~$18.1~~$6.0 million in the second quarter of 2019 compared to $23.1 million in the second quarter of 2018, a reduction of $17.0 million, or 73.9%. The flow-through loss from investments accounted for under the equity method increased $1.1 million for the second quarter of 2019 compared to the second quarter of 2018. These flow-through losses reflect the Company’s pro-rata portion of operating results for certain strategic start-up investments. Also impacting the overall decrease in noninterest income was a decline in title insurance income of $996 thousand during the second quarter of 2019 compared to the second quarter of 2018 due to the sale of the title insurance business in 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 sale of guaranteed loans.2018. Partially offsetting the ~~effects~~overall decrease in noninterest income was a $3.3 million, or 89.0%, decrease in the net negative loan servicing revaluation principally due to improving secondary market premiums.

For the six months ended June 30, 2019, noninterest income decreased by $33.6 million, or 54.8%, compared to the six months ended June 30, 2018. The decrease from the prior year is also primarily the result of ~~lower~~the aforementioned strategic decision to sell fewer loans, resulting in net gains on sales of loans ~~were increased servicing revenue of $630 thousand, title insurance income of $2.0~~declining to $10.2 million ~~from~~for 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 noninterest income was primarily comprised of $682 thousand of operating lease income from renewable energy assets and trust management income of $236 thousand.

~~For the nine~~six months ended ~~September~~June 30, ~~2017, noninterest income increased by $10.3~~2019, compared to $47.5 million for the six months ended June 30, 2018, a reduction of $37.3 million, or ~~15.3%,~~78.5%. The flow-through loss from investments accounted for under the equity method increased $2.7 million for the six months ended June 30, 2019, compared to the ~~nine~~six months ended ~~September~~June 30, 2016. Increases in noninterest income were primarily the result of higher year-to-date levels in the serviced loan portfolio and the volume of loans sold in the secondary market which generated $2.9 million of increased servicing revenue and $2.5 million of increased net gains on sale of loans.2018. 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~~

~~Table of Contents~~

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 offsettingimpacting the overall ~~increase~~decrease in noninterest income was a ~~higher~~decline in title insurance income of $2.3 million during the six months ended June 30, 2019, compared to the six months ended June 30, 2018, due to the sale of the title insurance business in third quarter of 2018. Partially offsetting the overall decrease in noninterest income was a $6.1 million, or 69.8%, decrease in the net negative loan servicing revaluation ~~adjustment~~principally due to improving secondary market premiums, combined with increased lease income from solar panels of ~~$1.8 million.~~

$1.1 million, or 33.1%, related to growth in operating lease originations.

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,
	2019		2018		2019		2018
Amount of loans and leases originated	$	525,088	$	491,797	$	390,851	$	397,559
Guaranteed portions of loans sold		71,934		295,216		62,940		247,243
Outstanding balance of guaranteed loans sold ⁽¹⁾		2,870,108		2,951,379		2,952,774		2,812,108

	Six Months Ended June 30,				For years ended December 31,
	2019		2018		2018		2017		2016		2015
Amount of loans and leases originated	$	915,939	$	889,356	$	1,765,680	$	1,934,238	$	1,537,010	$	1,158,640
Guaranteed portions of loans sold		134,874		542,459		945,178		787,926		761,933		640,886
Outstanding balance of guaranteed loans sold⁽¹⁾		2,870,108		2,951,379		3,045,460		2,680,641		2,278,618		1,779,989

Three months ended September 30, Three months ended
June 30,
2017 2016 2017 2016
Amount of loans and leases originated $ 395,682
$ 381,050
$ 586,471
$ 356,865
Guaranteed portions of loans sold 163,843
210,610
203,714
135,555
Outstanding balance of guaranteed loans sold ⁽¹⁾
2,584,163
2,102,468
2,521,506
1,970,908

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 sold 576,272
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)
~~(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 Servicing Revaluation: The Company revalues its serviced loan portfolio at least quarterly. The revaluation considers the amortization of the portfolio, current market conditions for loan sale premiums, and current prepayment speeds. For the three months ended ~~September~~June 30, ~~2017,~~2019, there was a net negative loan servicing revaluation adjustment of ~~$3.7 million~~$403 thousand compared to a net negative ~~revaluation~~ adjustment of ~~$3.4~~$3.7 million for the three months ended ~~September~~June 30, ~~2016.~~2018. For the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, there was a net negative loan servicing revaluation adjustment of ~~$6.9~~$2.6 million compared to a net negative loan servicing revaluation adjustment of ~~$5.1~~$8.8 million for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2018. The ~~higher negative loan servicing~~lower revaluation amount for the ~~third~~ quarter ~~of 2017~~and year to date periods ended June 30, 2019 as compared to the ~~third quarter~~corresponding periods of ~~2016~~2018 was ~~driven by amortization~~primarily a result of the serviced portfolio during that period partially offset by improvements in the secondary market. The higher year-to-date negative loan servicing revaluation amount as compared to the same period in 2016 was principally driven by amortization of the serviced portfolio combined with decreases in theimproving secondary market ~~for guaranteed portions of 7(a) loans.~~

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premiums.

Net Gains on Sale of Loans: For the three ~~and nine~~ months ended ~~September~~June 30, ~~2017,~~2019, net gains on sales of loans decreased ~~$3.7~~$17.0 million, or ~~16.9%~~73.9%, ~~and increased $2.5 million, or 4.7%, respectively,~~ compared to the three ~~and nine~~ months ended ~~September~~June 30, ~~2016.~~2018. For the three months ended ~~September~~June 30, ~~2017,~~2019, the volume of guaranteed loans sold decreased ~~$46.8~~$223.3 million, or ~~22.2%~~75.6%, to ~~$163.8~~$71.9 million from ~~$210.6~~$295.2 million for the three months ended ~~September~~June 30, ~~2016. This decline in guaranteed~~2018. For the six months ended June 30, 2019, net gains on 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~~totaled $10.2 million, a $37.3 million decrease from ~~seasonality in our renewable energy vertical. For~~ the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, as the volume of guaranteed loans sold ~~increased $74.5~~decreased $407.6 million to $134.9 million, or ~~14.8%, to $576.3 million from $501.8 million for the nine months ended September 30, 2016.~~75.1%. The volume-driven ~~increases~~decrease in the ~~year-to-date~~ net gain on loan ~~sale comparisons were partially~~sales was offset by ~~lower~~higher average premiums paid in the secondary ~~market. The~~market in both the quarter and year to date periods ended June 30, 2019 compared to the corresponding periods in 2018. Excluding fair value fluctuations in exchange traded-interest rate lock commitments, the average net gain on sale of loans for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 was ~~$111~~higher at $94 thousand and ~~$97~~$92 thousand ~~of revenue~~ for each $1 million in loans sold, respectively, compared to ~~$104~~$79 thousand and ~~$105~~$88 thousand ~~of revenue for each $1 million in loans sold~~ for the three and ~~nine~~six months ended ~~September~~June 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.~~2018, respectively.

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,				2019/2018 Increase (Decrease)
	2019		2018		Amount			Percent
Noninterest expense
Salaries and employee benefits	$	21,990	$	22,146	$	(156	)		(0.70	)%
Non-staff expenses:
Travel expense		1,541		2,041		(500	)		(24.50	)
Professional services expense		1,621		1,119		502			44.86
Advertising and marketing expense		1,665		1,868		(203	)		(10.87	)
Occupancy expense		1,848		1,882		(34	)		(1.81	)
Data processing expense		1,947		2,906		(959	)		(33.00	)
Equipment expense		4,239		3,368		871			25.86
Other loan origination and maintenance expense		1,708		1,414		294			20.79
Renewable energy tax credit investment impairment		602		—		602			100.00
FDIC insurance		699		1,010		(311	)		(30.79	)
Title insurance closing services expense		—		372		(372	)		(100.00	)
Other expense		1,716		2,704		(988	)		(36.54	)
Total non-staff expenses		17,586		18,684		(1,098	)		(5.88	)
Total noninterest expense	$	39,576	$	40,830	$	(1,254	)		(3.07	)%

	Six Months Ended June 30,				2019/2018 Increase (Decrease)
	2019		2018		Amount			Percent
Noninterest expense
Salaries and employee benefits	$	43,845	$	42,355	$	1,490			3.52	%
Non-staff expenses:
Travel expense		2,741		3,884		(1,143	)		(29.43	)
Professional services expense		3,803		2,417		1,386			57.34
Advertising and marketing expense		3,029		3,530		(501	)		(14.19	)
Occupancy expense		3,457		3,739		(282	)		(7.54	)
Data processing expense		4,346		5,743		(1,397	)		(24.33	)
Equipment expense		7,564		6,445		1,119			17.36
Other loan origination and maintenance expense		3,347		2,743		604			22.02
Renewable energy tax credit investment impairment		602		—		602			100.00
FDIC insurance		1,334		1,582		(248	)		(15.68	)
Title insurance closing services expense		—		798		(798	)		(100.00	)
Other expense		3,709		5,666		(1,957	)		(34.54	)
Total non-staff expenses		33,932		36,547		(2,615	)		(7.16	)
Total noninterest expense	$	77,777	$	78,902	$	(1,125	)		(1.43	)%

Three Months Ended
September 30, Increase (Decrease)
2017 2016 Amount Percent
Noninterest expense
Salaries and employee benefits $ 19,037
$ 17,471
$ 1,566
8.96 %
Non-staff expenses:
Travel expense 2,289
2,218
71
3.20
Professional services expense 1,068
907
161
17.75
Advertising and marketing expense 1,516
1,097
419
38.20
Occupancy expense 1,473
1,058
415
39.22
Data processing expense 1,982
1,252
730
58.31
Equipment expense 2,228
611
1,617
264.65
Other loan origination and maintenance expense 1,601
806
795
98.64
FDIC insurance 858
210
648
308.57
Title insurance closing services expense 687
—
687
100.00
Other expense 3,117
1,588
1,529
96.28
Total non-staff expenses 16,819
9,747
7,072
72.56
Total noninterest expense $ 35,856
$ 27,218
$ 8,638
31.74 %

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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 expense 6,035
6,394
(359 ) (5.61 )
Professional services expense 4,228
2,345
1,883
80.30
Advertising and marketing expense 4,977
3,425
1,552
45.31
Occupancy expense 4,018
3,306
712
21.54
Data processing expense 5,536
3,864
1,672
43.27
Equipment expense 5,005
1,696
3,309
195.11
Other loan origination and maintenance expense 3,587
2,001
1,586
79.26
FDIC insurance 2,308
507
1,801
355.23
Title insurance closing services expense 1,877
—
1,877
100.00
Other expense 8,883
4,648
4,235
91.11
Total non-staff expenses 46,454
28,186
18,268
64.81
Total noninterest expense $ 102,141
$ 74,061
$ 28,080
37.91 %

Total noninterest expense for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017 increased $8.6~~2019 decreased $1.3 million, or ~~31.7%~~3.1%, and ~~$28.1~~$1.1 million, or ~~37.9%~~1.4%, respectively, compared to the same periods in ~~2016.~~2018. The ~~increase~~decrease in noninterest expense was ~~predominately impacted~~largely driven by ~~increased personnel, equipment expense~~lower levels of travel, data processing, title insurance closing services and other expenses ~~primarily driven by the significant growth of the Company's core business.~~while salaries and employee benefits remained somewhat static. Changes in various components of noninterest expense are discussed below.

Salaries and employee benefits: Total personnel expense for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 decreased by $156 thousand, or 0.7%, and increased by ~~$1.6~~$1.5 million, or ~~9.0%, and $9.8 million, or 21.4%~~3.5%, respectively, compared to the same periods in 2016. A significant driver for this increase was the acquisition of a nationwide title insurance business on February 1, 2017 with 54 full-time and 5 part-time employees. Also contributing to the growth in2018. While personnel expense ~~was continued investment~~is carefully managed, the Company continues to invest in human capital to support the growing loan and lease production from new and existing verticals. Other than careful management of resources invested in human capital, the primary drivers for lower levels of expense arise from the Company’s exit from the title insurance business during the third quarter of 2018, the earlier discussed strategy to sell fewer loans, thereby resulting in higher levels of loan origination costs being capitalized and the termination of certain severance arrangements in 2019. Total full-time equivalent employees ~~increased~~decreased from ~~400~~538 at ~~September~~June 30, ~~2016~~2018 to ~~530~~531 at ~~September~~June 30, ~~2017.~~2019. Salaries and employee benefits expense included ~~$2.0~~$2.9 million and ~~$4.1~~$5.8 million of ~~stock based~~stock-based compensation expense in the three and six months ended ~~September~~June 30, ~~2017 and 2016,~~2019, respectively, ~~and $6.2~~compared to $2.2 million and ~~$7.6~~$4.6 million for the ~~nine~~three and six months ended ~~September~~June 30, ~~2017 and 2016,~~2018, respectively. Expenses related to the employee stock purchase program, stock grants, stock option compensation and restricted stock expense are all considered ~~stock based~~stock-based compensation.

Of the total ~~stock based~~stock-based compensation ~~$286 thousand for the third quarter of 2017 and $1.0 million for the first nine months of 2017~~ included in salaries and employee benefits, is$357 thousand for both the second quarter of 2019 and 2018, and $709 thousand for both the first half of 2019 and 2018 were related to restricted stock unit ("RSU") awards ~~with a market price condition of $34 per share~~ for key employee retention with an effective grant date of May 24, 2016. ~~See Note 10 - Stock Plans in the Notes to the Unaudited Consolidated Financial Statements in our quarterly report on Form 10-Q for the period ended March 31, 2016, for more information.~~

~~Professional services~~

Travel expense: For the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, total ~~professional~~travel services expense ~~increased $161~~decreased $500 thousand, or ~~17.8%,~~24.5% and ~~$1.9~~$1.1 million, or ~~80.3%~~24.9%, respectively compared to the same periods in ~~2016. The primary drivers~~2018. This decrease was principally due to a reduction in repairs and maintenance costs associated with an older aircraft that was sold during the first quarter of ~~the year over year increase~~2019, higher deferred travel costs as more loans were ~~advisory, consulting,~~retained, and ~~due diligence expenses related to the February 2017 acquisition of a title insurance business.~~

~~Advertising and marketing~~general improvements in operational efficiency.

Professional services expense: For the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, total ~~advertising and marketing~~professional services expense increased ~~$419~~$502 thousand, or ~~38.2%~~68.1%, and ~~$1.6~~$1.4 million, or ~~45.3%~~57.3%, respectively compared to the same periods in ~~2016. The primary driver of the~~2018. This increase ~~in advertising~~was driven by legal, accounting, and ~~marketing expense was the cost of growing brand recognition in new and existing verticals and launching a new deposit platform.~~

consulting fees incurred for various strategic initiatives.

Data processing ~~expense~~:expense: For the three and ~~nine~~six months ended ~~September~~June 30, ~~2017, total~~2019, data processing expenses totaled $1.9 million and $4.3 million, respectively, representing decreases of $959 thousand and $1.4 million, respectively, compared to the same periods in 2018. The decrease is primarily the result of the expiration of software development services provided by Apiture directly to the Company combined with the capitalization of certain software development costs during the second quarter of 2019.

Equipment expense:For the three and six months ended June 30, 2019, equipment expense increased ~~$730~~$871 thousand, or ~~58.3%~~25.9%, and ~~$1.7~~$1.1 million, or ~~43.3%~~17.4%, respectively, compared to the same periods in ~~2016. The primary driver~~2018. Primary factors contributing to this increase were the depreciation of ~~the increase in data processing expense was the growth in our loan~~solar panels arising from operating lease activities and ~~deposit portfolios and the development of~~ a new ~~deposit platform.~~

~~Equipment expense:~~aircraft placed in service in the second quarter of 2019.

Other expenses: For the three and ~~nine~~six months ended ~~September~~June 30, ~~2017, the total costs associated with equipment increased $1.6~~2019, other expenses decreased $988 thousand and $2.0 million, ~~or 264.6%, and $3.3 million, or 195.1%, respectively, compared to the same period in 2016. A major factor behind~~

~~Table of Contents~~

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~~2018. The decline in other expenses is attributable to the elimination of costs associated with the operation of the title insurance business, which was ~~the result of revised premium requirements of all FDIC-insured financial institutions~~sold in the ~~latter part~~third quarter of ~~2016 along with significantly higher deposit levels.~~

~~Title insurance closing services expense: With the first quarter 2017 acquisition of a nationwide title insurance company, this is a new expense category. This category reflects the cost of closing services such as notary~~2018, and ~~abstracting~~impairment expenses recognized in the ~~delivery~~second quarter of 2018 with the transfer of the title ~~insurance agency products. For~~business to held for sale.

Income Tax Expense

The effective tax rate for the both the three and ~~nine~~six months ended ~~September~~June 30, ~~2017, total title insurance closing services expense~~2019 was ~~$687 thousand~~11.8% compared to the effective rate of 3.3% and ~~$1.9 million, respectively.~~

~~Other expense:~~ ~~For the three and nine months ended September 30, 2017, the total costs associated with other expenses increased $1.5 million, or 96.3%, and $4.2 million, or 91.1%~~2.9%, respectively, ~~compared to~~for the same periods in ~~2016.~~2018. The ~~quarter-over-quarter increase in other expenses was predominately comprised of costs associated with support expenses and infrastructure~~Company’s effective tax rate is predominantly driven by ~~business growth and an increase in charitable contributions. The year-over-year increase in other expense was comprised predominately~~the leasing 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 and nine months ended September 30, 2017 were (64.8)% and (15.5)%, respectively, compared to the effective rates of 42.4% and 43.7% for the three and nine months ended September 30, 2016, respectively. The negative effective rates of (64.8)% and (15.5)% for the three and nine-month periods ended September 30, 2017 principally reflected an increase in anticipated investment in renewable energy assets ~~generating~~which generate investment tax credits. As the lessor 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.

Discussion and Analysis of Financial Condition

~~September~~

June 30, ~~2017~~2019 vs. December 31, ~~2016~~

2018

Total assets at ~~September~~June 30, ~~2017~~2019 were ~~$2.43~~$4.27 billion, an increase of ~~$676.9~~$603.9 million, or ~~38.6%~~16.5%, compared to total assets of ~~$1.76~~$3.67 billion at December 31, ~~2016.~~2018. The growth in total assets was principally driven by the following:

•

Increased investment securities available-for-sale of $195.8 million which was driven by the Company’s strategic plan to enhance liquidity and improve asset-liability repricing mix; and

•

Growth in loans and leases held for sale and held for investment of $552.5 million resulting from strong originations and higher levels of balances being retained to support the Company's strategic plan to hold more loans.

~~Increased~~

Cash and cash equivalents, comprised of cash and due from banks ~~due~~and federal funds sold, was $183.4 million at June 30, 2019, a decrease of $133.4 million, or 42.1%, compared to $316.8 million at December 31, 2018. This decrease reflects the ~~successful secondary offering completed in August~~Company’s maximization of ~~2017~~returns on liquid assets by deployment of ~~$113.1~~funds into higher-yielding available-for-sale securities.

Total investment securities increased $195.8 million during the first six months of 2019, from $380.5 million at December 31, 2018, to $576.3 million at June 30, 2019, an increase of 51.5%. The Company increased its investment securities position during the first quarter of 2019 as part of its strategy to improve the returns of an enhanced liquidity profile and ~~growth~~improve asset-liability repricing mix. At June 30, 2019, the investment portfolio was comprised of U.S. treasury, U.S. government agency, mortgage-backed securities and municipal bonds.

Loans held for sale increased $170.4 million, or 24.8%, during the first six months of 2019, from ~~deposit gathering campaigns generating $527.8~~$687.4 million ~~in new deposits;~~

~~Growth~~at December 31, 2018, to $857.8 million at June 30, 2019. This increase reflected the impact of a significantly lower volume of loan sales with strong origination activity during the second quarter.

Loans and leases held for investment increased $382.1 million, or 20.7%, during the first six months of 2019, from $1.84 billion at December 31, 2018, to $2.23 billion at June 30, 2019. The increase was primarily the result of $915.9 million in loan and lease ~~originations~~origination activities during the first six months of 2019 combined with ~~longer retention times~~the earlier mentioned strategic shift to retain higher levels of loans ~~held for sale, comprised largely of loans intentionally held for longer periods and those in newer verticals which require a period of loan advances to become fully funded prior to being sold;~~

~~Growth in premises~~on the balance sheet.

Premises and equipment, ~~related~~net, increased $18.6 million, or 7.1%, during the first six months of 2019 which was primarily todriven by construction of a new ~~aircraft hangar, the addition of two new aircraft in replacement of two older ones~~facilities and infrastructure to accommodate Company growth and the addition of solar panels to meet leasing ~~commitments;~~

~~Increased other~~commitments.

Foreclosed 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~~increased $4.9 million, or ~~9.6%~~452.5%, during the first six months of 2019 to $6.0 million compared to ~~$238.0~~$1.1 million at December 31, ~~2016. This~~2018. The increase ~~primarily reflected~~in foreclosed assets arose from two relationships in agriculture and healthcare verticals. The underlying loans were subject to an SBA guarantee and the ~~results of a successful deposit gathering campaign combined with~~total current estimated exposure to the ~~net proceeds from the Company’s secondary capital raise in the third quarter.~~

~~Total investment securities increased $5.5~~Company is considered negligible for these new foreclosures.

Servicing assets decreased $6.0 million, or 12.5%, to $41.7 million during the first ~~nine~~six months of ~~2017,~~2019 due to the reduced level of loan sales during the quarter combined with amortization of the outstanding balance of guaranteed loans sold. At June 30, 2019, the outstanding balance of government guaranteed loans sold in the secondary market was $2.87 billion compared to $3.05 billion at December 31, 2018.

Operating leases right-of-use assets and operating lease liabilities were additions to the balance sheet pursuant to the adoption of the new lease standard (ASU No. 2016-02) effective January 1, 2019. These balance sheet accounts reflect the Company’s rights and obligations created by almost all leases in which it is a lessee with remaining terms of more than 12 months. See Note 1. Basis of Presentation and Note 6. Leases for more information on the adoption of this new standard.

Other assets decreased $25.0 million, or 16.0% from ~~$71.1~~$156.2 million at December 31, ~~2016,~~2018 to ~~$76.6~~$131.2 million at ~~September~~June 30, ~~2017,~~2019. This decrease was principally the result of a reduction in taxes receivable of $13.8 million, largely comprised of a recent tax refund, and the sale of corporate aircraft carried at $10.5 million which was classified as held-for-sale during the fourth quarter of 2018.

Total deposits were $3.72 billion at June 30, 2019, an increase of ~~7.8%. The portfolio is comprised of US government agency securities, residential mortgage-backed securities and a mutual fund.~~

~~Table of Contents~~

~~Loans held for sale increased $298.3~~$572.0 million, or 75.7%, during the first nine months of 2017, from $394.3 million at December 31, 2016, to $692.6 million at September 30, 2017. The increase was primarily the result of strong growth in loan origination activities throughout 2017 and the strategy to enhance interest income by increasing the retention time of guaranteed loans along with growth in certain loans that take time to fully fund.

Loans and leases held for investment increased $262.3 million, or 28.9%, during the first nine months of 2017, from $907.6 million at December 31, 2016, to $1.17 billion at September 30, 2017. The increase was primarily the result of robust loan and lease growth from origination activities during the first three quarters of 2017 combined with greater retention of loans on the consolidated balance sheet.

Premises and equipment, net increased $64.6 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, from $52.0 million at December 31, 2016, to $53.4 million at September 30, 2017. The increase in servicing assets is primarily the result of loan sales outpacing the amortization of the existing serviced portfolio.

Other assets increased $28.1 million, or 76.1%, during the first nine months of 2017, from $37.0 million at December 31, 2016 to $65.2 million at September 30, 2017. 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 acquisition of the nationwide title insurance business. As a result of the title insurance acquisition, other assets includes goodwill and intangible assets of $7.3 million and $5.3 million, respectively.

~~Total deposits were $2.01 billion at September 30, 2017, an increase of $527.8 million, or 35.5%~~18.2%, from ~~$1.49~~$3.15 billion at December 31, ~~2016.~~2018. The increase in deposits was driven by ~~a new deposit savings product and~~the combined success of deposit gathering campaigns to support the growth in loan and lease ~~originations.~~originations and balance sheet management initiatives.

~~Long term borrowings decreased $971 thousand,~~

Other liabilities were $30.2 million at June 30, 2019, an increase of $4.3 million, or ~~3.5%~~16.8%, ~~during the first nine months of 2017,~~ from ~~$27.8~~$25.8 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.~~2018. The increase in other liabilities was ~~principally~~largely driven by ~~a $4.7~~the increased deferred tax liability of $4.1 million ~~earn-out contingent liability~~ related to unrealized gains on the acquisition of the title insurance business and an increase in accrued expenses of $5.7 million in support of ongoing business growth. This was partially offset by a decrease in income taxes payable of $2.1 million.

Company’s growing investment securities available-for-sale portfolio.

Shareholders’ equity at ~~September~~June 30, ~~2017~~2019 was ~~$364.6~~$519.0 million as compared to ~~$222.8~~$493.6 million at December 31, ~~2016.~~2018. The book value per share was ~~$9.15~~$12.90 at ~~September~~June 30, ~~2017~~2019 compared to ~~a book value per share of $6.51~~$12.29 at December 31, ~~2016.~~2018. Average equity to average assets was ~~12.2%~~12.7% for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 compared to ~~14.6%~~13.8% for the full year ended December 31, ~~2016.~~2018. 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~~six months ended ~~September~~June 30, ~~2017~~2019 of ~~$28.8~~$7.3 million combined with ~~stock based~~other comprehensive income of $14.6 million and stock-based compensation expense of ~~$5.7~~$5.8 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~~$2.4 million in dividends.

Asset Quality

Management considers asset quality to be of primary importance. A formal loan review function, independent of loan origination, is used to identify and monitor problem loans. This function reports directly to the Audit & Risk Committee of the Board of Directors.

Nonperforming Assets

The Bank places loans on nonaccrual status when they become 90 days past due as to principal or interest payments, or prior to that if management has determined based upon current information available to them that the timely collection of principal or interest is not probable. When a loan is placed on nonaccrual status, any interest previously accrued as income but not actually collected is reversed and recorded as a reduction of loan interest and fee income. Typically, collections of interest and principal received on a nonaccrual loan are applied to the outstanding principal as determined at the time of collection of the loan.

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

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The following table provides information with respect to nonperforming assets and troubled debt restructurings at the dates indicated.

	June 30, 2019			December 31, 2018
Nonaccrual loans:
Total nonperforming loans (all on nonaccrual)	$	65,473		$	57,690
Total accruing loans past due 90 days or more		—			—
Foreclosed assets		6,044			1,094
Total troubled debt restructurings		31,995			27,495
Less nonaccrual troubled debt restructurings		(4,961	)		(6,494	)
Total performing troubled debt restructurings		27,034			21,001
Total nonperforming assets and troubled debt restructurings	$	98,551		$	79,785
Total nonperforming loans to total loans held for investment		2.94	%		3.13	%
Total nonperforming loans to total assets		1.53	%		1.57	%
Total nonperforming assets and troubled debt restructurings to total assets		2.31	%		2.17	%

	June 30, 2019			December 31, 2018
Nonaccrual loans guaranteed by U.S. government:
Total nonperforming loans guaranteed by the SBA (all on nonaccrual)	$	47,121		$	43,202
Total accruing loans past due 90 days or more guaranteed by the SBA		—			—
Foreclosed assets guaranteed by the SBA		4,816			946
Total troubled debt restructurings guaranteed by the SBA		21,586			19,780
Less nonaccrual troubled debt restructurings guaranteed by the SBA		(4,317	)		(5,684	)
Total performing troubled debt restructurings guaranteed by SBA		17,269			14,096
Total nonperforming assets and troubled debt restructurings guaranteed by the SBA	$	69,206		$	58,244
Total nonperforming loans not guaranteed by the SBA to total held for investment loans		0.82	%		0.79	%
Total nonperforming loans not guaranteed by the SBA to total assets		0.43	%		0.39	%
Total nonperforming assets and troubled debt restructurings not guaranteed by the SBA to total assets		0.69	%		0.59	%

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 assets 2,231
1,648
Total troubled debt restructurings 8,527
9,856
Less nonaccrual troubled debt restructurings (6,078 ) (7,688 )
Total performing troubled debt restructurings 2,449
2,168
Total nonperforming assets and troubled debt restructurings $ 27,100
$ 27,597
Total nonperforming loans to total loans and leases held for investment 1.92 % 2.62 %
Total nonperforming loans to total assets 0.92 % 1.36 %
Total nonperforming assets and troubled debt restructurings to total assets 1.11 % 1.57 %

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 SBA 1,785
1,402
Total troubled debt restructurings guaranteed by the SBA 5,427
6,723
Less nonaccrual troubled debt restructurings guaranteed by the SBA (5,340 ) (6,602 )
Total performing troubled debt restructurings guaranteed by SBA 87
121
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 leases 0.28 % 0.53 %
Total nonperforming loans not guaranteed by the SBA to total assets 0.14 % 0.27 %
Total nonperforming assets and troubled debt restructurings not guaranteed by the SBA to total assets 0.25 % 0.40 %

Total nonperforming assets and troubled debt restructurings at ~~September~~June 30, ~~2017~~2019 were ~~$27.1~~$98.6 million, which represented a ~~$497 thousand,~~$18.8 million, or ~~1.8%~~23.5%, ~~decrease~~increase from December 31, ~~2016.~~2018. Total nonperforming assets at ~~September~~June 30, ~~2017~~2019 were comprised of ~~$22.4~~$65.5 million in nonaccrual loans and ~~$2.2~~$6.0 million in foreclosed assets. Of the ~~$27.1~~$98.6 million of nonperforming assets and troubled debt restructurings ("TDRs"), ~~$21.0~~$69.2 million carried an SBA guarantee, leaving an unguaranteed exposure of ~~$6.1~~$29.3 million in total nonperforming assets and TDRs at ~~September~~June 30, ~~2017. The~~2019. This represents an increase of $7.8 million, or 36.2%, from an unguaranteed exposure of $21.5 million at December 31, 2018. The vast majority of this increase in ~~total~~ nonperforming assets and TDRs ~~at December 31, 2016 was $7.1 million. Unguaranteed exposure relating~~arose from our mature verticals. See the below discussion related to ~~nonperforming assets~~the change in potential problem and ~~TDRs at September 30, 2017 decreased by $970 thousand, or 13.7%, compared to December 31, 2016.~~

impaired loans for management’s overall observations regarding growth in this area.

As a percentage of the Bank’s total capital, nonperforming loans represented ~~10.2%~~14.0% at ~~September~~June 30, ~~2017,~~2019, compared to ~~nonperforming loans of 15.3% of the Bank’s total capital~~14.8% at December 31, ~~2016.~~2018. Adjusting the ratio to include only the unguaranteed portion of nonperforming loans to reflect management’s belief that the greater magnitude of risk resides in this portion, the ratios at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018 were ~~1.5%~~3.9% and ~~3.1%~~3.7%, respectively.

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As of ~~September~~June 30, ~~2017~~2019, and December 31, ~~2016,~~2018, potential problem and impaired loans and leases totaled ~~$66.0~~$178.8 million and ~~$64.1~~$148.0 million, respectively. Risk Grades 5 through 8 represent the spectrum of criticized and impaired ~~loans.~~loans and leases. At ~~September~~June 30, ~~2017,~~2019, the portion of criticized loans and leases guaranteed by the SBA or USDA totaled ~~$28.2~~$88.0 million resulting in unguaranteed exposure risk of ~~$37.8~~$90.8 million, or ~~3.3%~~5.3% of total held for investment unguaranteed exposure. This compares to the December 31, ~~2016~~2018 portion of criticized loans and leases guaranteed by the SBA or USDA which totaled ~~$29.0~~$69.3 million resulting in unguaranteed exposure risk of ~~$35.1~~$78.7 million, or ~~4.0%~~5.1% of total held for investment unguaranteed exposure. As of ~~September~~June 30, ~~2017~~2019, loans and leases in ~~Veterinary,~~Other Industries, Healthcare, Agriculture and Independent Pharmacies ~~industry~~ verticals comprise the largest portion of the total potential problem and impaired loans at ~~28.5%~~29.3%, ~~30.8%~~24.7%, 15.5% and ~~20.4%~~11.9%, respectively. With 29.3% of total potential problem and impaired loans and leases in the Other Industries, 11.5% was related to Hotel and 10.0% was related to Wine and Craft Beverage industries. As of December 31, ~~2016~~2018, loansand leases in the Healthcare, Other Industries, Independent Pharmacies and Veterinary ~~industries~~Industry verticals comprise the largest portion of the total potential problem and impaired loans and leases at ~~30.8%~~28.0%, 18.6%, 15.5% and ~~32.9%~~15.0%, respectively. With 18.6% of total potential problem and impaired loans and leases in the Other Industries, 8.7% was related to Government Contractors and 6.8% was related to Wine and Craft Beverage industries. No systemic issues were identified in the first six months of 2019. The increase in potential problem and impaired loans and leases, which were comprised of a relatively small number of borrowers, was largely concentrated in our more mature verticals. Furthermore, the Company believes that its underwriting and credit quality standards have improved as the business has matured.

The Bank does not classify loans and leases that experience insignificant payment delays and payment shortfalls as impaired. The Bank considers an “insignificant period of time” from payment delays to be a period of 90 days or less. The Bank would consider a modification for a customer experiencing what is expected to be a short-term event that has temporarily impacted cash flow. This could be due, among other reasons, to illness, weather, impact from a one-time expense, slower than expected start-up, construction issues or other short-term issues. In all cases, credit will review the request to determine if the customer is stressed and how the event has impacted the ability of the customer to repay the loan or lease long term. To date, the only types of ~~short term~~short-term modifications the Bank has given are payment deferral and interest only extensions. The Bank does not typically alter the rate or lengthen the amortization of the note due to insignificant payment delays. Short term modifications are not classified as TDRs, because they do not meet the definition set by the applicable accounting standards and the Federal Deposit Insurance Corporation.

During the third quarter of 2017, the Southern U.S. and Puerto Rico encountered three hurricanes while California suffered from wildfires. As a nationwide lender the Company has over approximately 350 borrowers in the affected areas. As a result of these unfortunate disasters, Live Oak has actively reached out to each of these borrowers to work with any that have been impacted. At this time, there have been a limited number of short-term payment deferrals provided to help borrowers in need with none deemed to meet the definition of a troubled debt restructuring and no impairments have been realized as a result of these events. We are continuing to work with borrowers impacted by these disasters.

Management endeavors to be proactive in its approach to identify and resolve ~~special mention (Risk Grade 5)~~problem loans and leases and is focused on working with the borrowers and guarantors of these loans and leases to provide loan and lease modifications when warranted. ~~At September~~Management implements a proactive approach to identifying and classifying loans and leases as special mention, Risk Grade 5. For example, at June 30, ~~2017~~2019, and December 31, ~~2016,~~2018, Risk Grade 5 loans and leases totaled ~~$30.5~~$87.0 million and ~~$32.1~~$65.5 million, respectively. The decrease in Risk Grade 5 loans from December 31, 2016 to September 30, 2017 was principally confined to three verticals; Veterinary ($3.2 million or 41.8% of decrease), Healthcare ($353 thousand or 4.5% of decrease), and Independent Pharmacy ($144 thousand or 1.7% of decrease). The decrease in these three verticals was offset by an increase in Risk Grade 5 loans ~~from December 31, 2016~~during the first six months of 2019 was principally confined to ~~September 30, 2017 in two~~nine relationships across four verticals; ~~Agriculture~~Hotels ($~~1.1~~8.1 million or ~~95.0%~~37.5%), Self Storage ($6.7 million or 31.1%), Wine and Craft Beverage ($6.3 million or 29.1% of increase) and ~~Investment Advisors~~Funeral Home & Cemetery ($~~464 thousand~~3.6 million or ~~20.7% of decrease)~~16.8%). ~~The overall~~These increases were somewhat offset by a decrease in ~~Risk Grade~~Government Contracting ($9.0 million). The increase in risk grade 5 loans ~~from December 31, 2016~~in 2019 was due to ~~September~~the continued maturity of these verticals. At June 30, ~~2017 was the result of routine credit monitoring in the ongoing risk grade management process. At September 30, 2017,~~2019, approximately ~~99.9%~~98.6% of loans classified as Risk Grade 5 are performing with no current payments past ~~due.~~due more than 30 days. While the level of nonperforming assets fluctuates in response to changing economic and market conditions, 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 and Lease Losses

The allowance for loan and lease losses (“ALLL”), a material estimate which could change significantly in the near-term in the event of rapidly deteriorating credit quality, is established through a provision for loan and lease losses charged to earnings to account for losses that are inherent in the loan and lease portfolio and estimated to occur, and is maintained at a level that management considers appropriate to absorb potential losses in the portfolio. Loan and lease losses are charged against the ALLL when management believes that the ~~collectibility~~collectability 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 accounting

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pronouncements. The ALLL is determined by the sum of three separate components: (i) the impaired loan or lease component, which addresses specific reserves for impaired loans or leases; (ii) the general reserve component, which addresses reserves for pools of homogeneous loans and leases; and (iii) an unallocated reserve component (if any) based on management’s judgment and experience. The loan and lease pools and impaired loans and leases are mutually exclusive; any loan or lease that is impaired should be excluded from its homogeneous pool for purposes of that pool’s reserve calculation, regardless of the level of impairment.

During the second quarter of 2016, the Company implemented enhancements to the methodology for estimating the allowance for loan and lease losses, including refinements to the measurement of qualitative factors in the estimation process. Management believes these enhancements will improve the precision of the process for estimating the allowance.

The ALLL of ~~$18.2~~$32.4 million at December 31, ~~2016~~2018 increased by ~~$2.8~~$5.6 million, or ~~15.5%~~17.3%, to ~~$21.0~~$38.0 million at ~~September~~June 30, ~~2017.~~2019. The ALLL, as a percentage of loans and leases held for investment, amounted to ~~1.8%~~1.7% at ~~September~~June 30, ~~2017~~2019 and ~~2.0%~~1.8% at December 31, ~~2016.~~2018. The ~~declining level of~~increase in the allowance for loan and lease losses ~~in relation to~~as a percentage of total loans and leases held for investment was ~~principally driven by improvements~~largely attributable to continued growth in ~~industry-specific loss rates and lower levels of classified loans combined with~~ the ~~migration to Company-specific loss rates for maturing verticals which was partially offset by an increase in reserves due to~~ loan and lease ~~volume and~~portfolio, with the ~~effect~~magnitude somewhat softened by the greater levels of ~~higher net~~guaranteed loan production combined with decreased levels of charge-offs in the first half of 2019, as addressed more fully in the Provision for Loan and Lease Losses section of Results of Operations. General reserves as a percentage of non-impaired loans amounted to ~~1.56%~~1.26% at ~~September~~June 30, ~~2017~~2019 and ~~1.70%~~1.34% at December 31, ~~2016. See~~2018. Also, see the aforementioned Provision for Loan and Lease Losses section ~~of this section~~ for a discussion of the Company's charge-off experience.

Actual past due held for investment loans and leases have decreased by $11.4 million since December 31, ~~2016~~2018. Of this decrease, $7.9 million was related to a single loan which was temporarily past due at year end and returned to current status early in the first quarter of 2019. Excluding this single loan, total past dues decreased $3.5 million since December 31, 2018. Total loans 90 or more days past due decreased $281 thousand, or 0.7%, compared to December 31, 2018. The decrease was primarily the result of the decline in the guaranteed portion of past due loans which declined $2.9 million compared to December 31, 2018. At June 30, 2019 and December 31, 2018, total held for investment unguaranteed loans and leases past due as ~~management~~a percentage of total held for investment unguaranteed loans and leases was 0.90% and 1.56%, respectively. Management continues to actively monitor and work to improve asset quality. Management believes the ALLL of ~~$21.0~~$38.0 million at ~~September~~June 30, ~~2017~~2019 is appropriate in light of the risk inherent in the loan and lease portfolio. Management’s judgments are based on numerous assumptions about current events that it believes to be reasonable, but which may or may not be valid. Thus, there can be no assurance that loan and lease losses in future periods will not exceed the current ALLL or that future increases in the ALLL will not be required. No assurance can be given that management’s ongoing evaluation of the loan and lease portfolio in light of changing economic conditions and other relevant circumstances will not require significant future additions to the ALLL, thus adversely affecting the Company’s operating results. Additional information on the ALLL is presented in Note 65 - Loans and Leases Held for Investment and Allowance for Loan and Lease Losses of the Notes to the Unaudited 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 ~~September~~June 30, ~~2017,~~2019, the total amount of these four items was ~~$589.1 million,~~$1.10 billion, or ~~25.1%~~25.7% of total assets, an increase of ~~$93.3~~$56.9 million from ~~$495.8 million,~~$1.04 billion, or ~~28.2%~~28.4% of total assets, at December 31, ~~2016.~~

2018.

Loans and other assets are funded ~~primarily~~ by loan sales, wholesale deposits and core deposits. To date, an increasing retail deposit base and an increased ~~amount of long-term brokered deposits~~long term wholesale deposit base have been adequate to meet loan obligations, while maintaining the desired level of immediate liquidity. Additionally, anthe investment securities portfolio is available for both immediate and secondary liquidity purposes.

At ~~September~~June 30, ~~2017,~~2019, 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~~$576.3 million available as lendable collateral. ~~In addition, of the $260.9 million in cash on hand, $1.5 million was pledged for ACH processing at one of the correspondent depository banks.~~

Contractual Obligations

The following table presents the Company’s significant fixed and determinable contractual obligations by payment date as of ~~September~~June 30, ~~2017.~~2019. The payment amounts represent those amounts contractually due to the recipient. The table excludes liabilities recorded where management cannot reasonably estimate the timing of any payments that may be required in connection with these liabilities.

	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	$	1,164,788	$	1,164,788	$	—	$	—	$	—
Time deposits		2,556,809		1,965,696		460,423		70,200		60,490
Short term borrowings		1,345		1,345		—		—		—
Long term borrowings		16		5		9		2		—
Operating lease obligations		2,525		889		939		610		87
Total	$	3,725,483	$	3,132,723	$	461,371	$	70,812	$	60,577

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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 deposits 1,183,944
860,718
209,019
114,207
—
Long term borrowings 26,872
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

1
1	The 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~~June 30, ~~2017~~2019, and December 31, ~~2016,~~2018, the Company had unfunded commitments to provide capital contributions for on-balance sheet investments in the amount of ~~$4.4~~$1.6 million and ~~$4.9~~$2.8 million, respectively.

Asset/Liability Management and Interest Rate Sensitivity

One of the primary objectives of asset/liability management is to maximize the net interest margin while minimizing the earnings risk associated with changes in interest rates. One method used to manage interest rate sensitivity is to measure, over various time periods, the interest rate sensitivity positions, or gaps. This method, however, addresses only the magnitude of asset and liability repricing timing differences as of the report date and does not address earnings, or market ~~value.~~value nor growth. Therefore, management uses an earnings simulation model to prepare, on a regular basis, earnings projections based on a range of interest rate scenarios to more accurately measure interest rate risk.

The balance sheet is asset-sensitive with a total cumulative gap position of ~~5.92%~~2.0% at ~~September~~June 30, ~~2017.~~2019. The ~~cash on hand~~asset sensitivity is relatively stable from the ~~August 2017 capital raise and growth in savings deposits during the quarter has increased the asset-liability sensitivity of the Company in the current period.~~prior quarter. 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 of~~by match funding assets and liabilities ~~being short-term, adjustable~~with similar rate instruments. The quarterly revaluation adjustment to the servicing asset, however, adjusts in an opposite direction to interest rate changes. Asset/liability sensitivity is primarily derived from the prime-based loans that adjust as the prime interest rate changes and the longer duration of indeterminate term deposits.

Capital

The maintenance of appropriate levels of capital is a management priority and is monitored on a regular basis. The Company’s principal goals related to the maintenance of capital are to provide adequate capital to support the Company’s risk profile consistent with the risk appetite approved by the Board of Directors; provide financial flexibility to support future growth and client needs; comply with relevant laws, regulations, and supervisory guidance; achieve optimal credit ratings for the Company and its subsidiaries; and provide a competitive return to shareholders. Management regularly monitors the capital position of the Company on both a consolidated and bank level basis. In this regard, management’s goal is to maintain capital at levels that are in excess of the regulatory “well capitalized” levels. Risk-based capital ratios, which include Tier 1 Capital, Total Capital and Common Equity Tier 1 Capital, are calculated based on regulatory guidance related to the measurement of capital and risk-weighted assets.

The Basel III Capital Rules, a comprehensive capital framework for U.S. banking organizations, became effective for the Company and Bank on January 1, 2015 (subject to a phase-in period for certain provisions). Quantitative measures established by the Basel III Capital Rules to ensure capital adequacy require the maintenance of minimum amounts and ratios (set forth in the table below) of Common Equity Tier 1 capital, Tier 1 capital and Total capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to adjusted quarterly average assets (as defined).

When fully phased in on January 1, 2019, the Basel III Capital Rules will require the Company and Bank to maintain (i) a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of at least 4.5%, plus a 2.5% "capital conservation buffer" (which is added to the 4.5% Common Equity Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of at least 7.0% upon full implementation), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation), (iii) a minimum ratio of Total capital (that is, Tier 1 plus Tier 2) to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation) and (iv) a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average quarterly assets.

The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and will be phased in over a three-year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019). Banking institutions with a ratio of Common Equity Tier 1 capital to risk-weighted assets below the effective minimum (4.5% plus the capital conservation buffer) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.

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Capital amounts and ratios as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016,~~2018, are presented in the table below.

	Actual					Minimum Capital Requirement					Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions₍₁₎
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Consolidated - June 30, 2019
Common Equity Tier 1 (to Risk-Weighted Assets)	$	481,414		15.94	%	$	135,935		4.50	%	N/A		N/A
Total Capital (to Risk-Weighted Assets)	$	519,177		17.19	%	$	241,663		8.00	%	N/A		N/A
Tier 1 Capital (to Risk-Weighted Assets)	$	481,414		15.94	%	$	181,247		6.00	%	N/A		N/A
Tier 1 Capital (to Average Assets)	$	481,414		11.77	%	$	163,664		4.00	%	N/A		N/A
Bank - June 30, 2019
Common Equity Tier 1 (to Risk-Weighted Assets)	$	430,767		14.43	%	$	134,329		4.50	%	$	194,031		6.50	%
Total Capital (to Risk-Weighted Assets)	$	468,089		15.68	%	$	238,807		8.00	%	$	298,509		10.00	%
Tier 1 Capital (to Risk-Weighted Assets)	$	430,767		14.43	%	$	179,105		6.00	%	$	238,807		8.00	%
Tier 1 Capital (to Average Assets)	$	430,767		10.58	%	$	162,917		4.00	%	$	203,646		5.00	%
Consolidated - December 31, 2018
Common Equity Tier 1 (to Risk-Weighted Assets)	$	467,033		17.10	%	$	122,937		4.50	%	N/A		N/A
Total Capital (to Risk-Weighted Assets)	$	499,467		18.28	%	$	218,555		8.00	%	N/A		N/A
Tier 1 Capital (to Risk-Weighted Assets)	$	467,033		17.10	%	$	163,917		6.00	%	N/A		N/A
Tier 1 Capital (to Average Assets)	$	467,033		13.40	%	$	139,453		4.00	%	N/A		N/A
Bank - December 31, 2018
Common Equity Tier 1 (to Risk-Weighted Assets)	$	385,030		14.35	%	$	120,706		4.50	%	$	174,353		6.50	%
Total Capital (to Risk-Weighted Assets)	$	417,609		15.57	%	$	214,588		8.00	%	$	268,235		10.00	%
Tier 1 Capital (to Risk-Weighted Assets)	$	385,030		14.35	%	$	160,941		6.00	%	$	214,588		8.00	%
Tier 1 Capital (to Average Assets)	$	385,030		11.22	%	$	137,304		4.00	%	$	171,630		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)
~~(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, are an integral part of the Company’s consolidated financial statements. A thorough understanding of these accounting policies is essential when reviewing the Company’s reported results of operations and financial position. Management believes that the critical accounting policies and estimates listed below require the Company to make difficult, subjective or complex judgments about matters that are inherently uncertain.

•

Determination of the allowance for loan and lease losses;

~~Determination of the allowance for loan losses;~~

•

Valuation of servicing assets;

~~Valuation of servicing assets;~~

•

Income taxes;

~~Valuation of foreclosed assets; and~~

•

Restricted stock unit awards with market price conditions;

~~Valuation of earn-out contingent liability.~~

•

Valuation of foreclosed assets;

•

Business combination and goodwill; and

•

Unconsolidated joint ventures.

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

~~Table of Contents~~

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Management considers interest rate risk the most significant market risk. Interest rate risk is the exposure to adverse changes in net interest income due to changes in interest rates. Consistency of net interest income is largely dependent upon the effective management of interest rate risk.

The Company’s Asset/Liability Management Committee (“ALCO”), which includes senior management representatives and reports to the Board of Directors, monitors and manages interest rate risk. See “Asset/Liability Management and Interest Rate Sensitivity” in Item 2 of this Form 10-Q for further discussion.

The objective of asset/liability management is the maximization of net interest income within the Company’s risk guidelines. This objective is accomplished through management of the balance sheet composition, maturities, liquidity, and interest rate risk exposures arising from changing economic conditions, interest rates and customer preferences.

To identify and manage its interest rate risk, the Company employs an earnings simulation model to analyze net interest income sensitivity to changing interest rates. The model is based on contractual cash flows and repricing characteristics and incorporates market-based assumptions regarding the effect of changing interest rates on the prepayment rates of certain assets and liabilities. The model also includes management projections for activity levels in each of the product lines offered by the Bank. Assumptions are inherently uncertain, and the measurement of net interest income or the impact of rate fluctuations on net interest income cannot be precisely predicted. Actual results may differ materially from simulated results due to timing, magnitude, and frequency of interest rate changes as well as changes in market conditions and management strategies.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

An evaluation of the Company’s disclosure controls and procedures (as defined in Rules 13(a)-15(e) and 15(d)-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), was carried out under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer as of ~~September~~June 30, ~~2017,~~2019, 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 ~~September~~June 30, ~~2017~~2019 in ensuring that the information required to be disclosed in the reports the Company files or submits under the Exchange Act is (i) accumulated and communicated to management (including the Company’s Chief Executive Officer and Chief Financial Officer) as appropriate to allow timely decisions regarding required disclosures, and (ii) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the three months ended ~~September~~June 30, ~~2017~~2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

~~Table of Contents~~

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

In the ordinary course of operations, the Company is party to various legal proceedings. The Company is not involved in, nor has it terminated during the three ~~and nine~~ months ended ~~September~~June 30, ~~2017,~~2019, any pending legal proceedings other than nonmaterial proceedings occurring in the ordinary course of business.

Item 1A. Risk Factors

See “Risk Factors” in Part 1, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, and "Risk Factors" in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2017, for a detailed discussion of risk factors affecting the Company.

There have been no material changes to the risk factors that have been previously disclosed in ~~these filings.~~

the Company’s 2018 Annual Report filed with the SEC.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

~~Table of Contents~~

Item 6. Exhibits.

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)
4.2			Registration and Other Rights Agreement between Live Oak Bancshares, Inc. and Wellington purchasers (incorporated by reference to Exhibit 4.2 of the registration statement on Form S-1, filed on June 19, 2015)
~~31.1~~ 10.1			Form of 2019 RSU Award Agreement for non-employee directors* #
10.2			Amendment to 2008 Nonstatutory Stock Option Plan effective July 1, 2019* #
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 ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016;~~2018; (ii) Condensed Consolidated Statements of Income for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2019 and ~~2016;~~2018; (iii) Condensed Consolidated Statements of Comprehensive Income for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2019 and ~~2016;~~2018; (iv) Condensed Consolidated Statements of Changes in Shareholders’ Equity for the ~~Nine~~Three and Six Months Ended ~~September~~June 30, ~~2017~~2019 and ~~2016;~~2018; (v) Condensed Consolidated Statements of Cash Flows for the ~~Nine~~Six Months Ended ~~Septemeber~~June 30, ~~2017~~2019 and ~~2016;~~2018; and (vi) Notes to Unaudited Condensed Consolidated Financial Statements*
104			Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

*	Indicates a document being filed with this Form 10-Q.

* 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.

~~Table of Contents~~

#	Denotes management contract or compensatory plan.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	Live Oak Bancshares, Inc.
	(Registrant)

Date: ~~November~~August 6, ~~2017~~2019	By:	/s/ S. Brett Caines
		S. Brett Caines
		Chief Financial Officer

North Carolina	26-4596286

~~North Carolina~~	~~26-4596286~~
(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)



Large accelerated filer	¨ ☒	Accelerated filer	x ☐

Non-accelerated filer	¨ ~~(Do not check if smaller reporting company)~~ ☐	Smaller reporting company	¨ ☐

		Emerging growth company	x ☐


☒
ý	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934


☐
¨	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934



	September 30, 2017			December 31, 2016*
Assets
Cash and due from banks	$	260,907		$	238,008
Certificates of deposit with other banks	3,250			7,250
Investment securities available-for-sale	76,575			71,056
Loans held for sale	692,586			394,278
Loans and leases held for investment	1,169,887			907,566
Allowance for loan and lease losses	(21,027		)	(18,209		)
Net loans and leases	1,148,860			889,357
Premises and equipment, net	129,233			64,661
Foreclosed assets	2,231			1,648
Servicing assets	53,392			51,994
Other assets	65,155			37,009
Total assets	$	2,432,189		$	1,755,261
Liabilities and Shareholders’ Equity
Liabilities
Deposits:
Noninterest-bearing	$	55,260		$	27,990
Interest-bearing	1,957,631			1,457,086
Total deposits	2,012,891			1,485,076
Long term borrowings	26,872			27,843
Other liabilities	27,835			19,495
Total liabilities	2,067,598			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, respectively	266,336			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, respectively	49,168			50,015
Retained earnings	49,707			23,518
Accumulated other comprehensive loss	(620		)	(652		)
Total equity	364,591			222,847
Total liabilities and shareholders’ equity	$	2,432,189		$	1,755,261



	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, taxable	325			337			964			840
Other interest earning assets	870			264			1,682			650
Total interest income	28,172			15,562			72,936			40,358
Interest expense
Deposits	6,758			3,689			16,893			9,376
Borrowings	389			242			985			725
Total interest expense	7,147			3,931			17,878			10,101
Net interest income	21,025			11,631			55,058			30,257
Provision for loan and lease losses	2,426			3,806			5,481			8,692
Net interest income after provision for loan and lease losses	18,599			7,825			49,577			21,565
Noninterest income
Loan servicing revenue	6,490			5,860			18,587			15,725
Loan servicing asset revaluation	(3,691		)	(3,421		)	(6,864		)	(5,051		)
Net gains on sales of loans	18,148			21,833			55,276			52,813
Gain on sale of investment securities available-for-sale	—			1			—			1
Construction supervision fee income	362			502			1,077			1,799
Title insurance income	1,968			—			5,803			—
Other noninterest income	1,783			657			3,601			1,925
Total noninterest income	25,060			25,432			77,480			67,212
Noninterest expense
Salaries and employee benefits	19,037			17,471			55,687			45,875
Travel expense	2,289			2,218			6,035			6,394
Professional services expense	1,068			907			4,228			2,345
Advertising and marketing expense	1,516			1,097			4,977			3,425
Occupancy expense	1,473			1,058			4,018			3,306
Data processing expense	1,982			1,252			5,536			3,864
Equipment expense	2,228			611			5,005			1,696
Other loan origination and maintenance expense	1,601			806			3,587			2,001
FDIC insurance	858			210			2,308			507
Title insurance closing services expense	687			—			1,877			—
Other expense	3,117			1,588			8,883			4,648
Total noninterest expense	35,856			27,218			102,141			74,061
Income before taxes	7,803			6,039			24,916			14,716
Income tax (benefit) expense	(5,059		)	2,561			(3,853		)	6,432
Net income	12,862			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



	Common stock						Retained earnings			Accumulated other comprehensive income (loss)			Non- controlling interest			Total equity
	Shares
	Class A	Class B		Amount
Balance at December 31, 2015	29,449,369	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 stock	16,745	—		—			—			—			—			—
Stock option exercises	25,406	—		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, 2016	29,491,520	4,723,530		$	195,299		$	18,723		$	130		$	—		$	214,152
Balance at December 31, 2016	29,530,072	4,723,530		$	199,981		$	23,518		$	(652	)	$	—		$	222,847
Net income	—	—		—			28,769			—			—			28,769
Other comprehensive income	—	—		—			—			32			—			32
Issuance of restricted stock	306,902	—		—			—			—			—			—
Withholding cash issued in lieu of restricted stock issuance	—	—		(4,891		)	—			—			—			(4,891		)
Employee stock purchase program	22,634	—		445			—			—			—			445
Stock option exercises	76,285	—		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 sale	80,000	(80,000	)	—			—			—			—			—
Issuance of common stock in connection with secondary offering, net of issue costs	5,175,000	—		113,096			—			—			—			113,096
Dividends (distributions to shareholders)	—	—		—			(2,580		)	—			—			(2,580		)
Balance at September 30, 2017	35,218,617	4,643,530		$	315,504		$	49,707		$	(620	)	$	—		$	364,591



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



	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



Fair value of assets acquired
Cash	$	102
Accounts receivable	159
Intangible assets	5,505
Total assets acquired	5,766
Fair value of liabilities assumed
Contingent consideration	4,300
Accounts payable and other liabilities	381
Total liabilities assumed	4,681
Net assets acquired	$	1,085
Purchase price
Common shares issued	27,724
Purchase price per share of the Company’s common stock	$	20.38
Company common stock issued	565
Cash	7,798
Total purchase price	8,363
Goodwill	$	7,278



	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 stockholders	12,862		4,183		28,807		9,952
Basic earnings per share	0.34		0.12		0.81		0.29
Diluted earnings per share	0.33		0.12		0.78		0.28



	September 30, 2017
	Available-for-Sale
	Amortized cost		Fair value
US government agencies
Within one year	$	11,302	$	11,312
One to five years	6,527		6,492
Total	17,829		17,804

Residential mortgage-backed securities
Five to ten years	7,264		7,200
After 10 years	50,421		49,550
Total	57,685		56,750

Total	$	75,514	$	74,554



	September 30, 2017			December 31, 2016
Commercial & Industrial
Agriculture	$	2,698		$	1,714
Death Care Management	12,101			9,684
Healthcare	41,454			37,270
Independent Pharmacies	97,171			83,677
Registered Investment Advisors	91,241			68,335
Veterinary Industry	45,570			38,930
Other Industries	142,115			94,836
Total	432,350			334,446
Construction & Development
Agriculture	34,636			32,372
Death Care Management	4,744			3,956
Healthcare	46,814			30,467
Independent Pharmacies	1,696			2,013
Registered Investment Advisors	329			294
Veterinary Industry	13,265			11,514
Other Industries	45,052			31,715
Total	146,536			112,331
Commercial Real Estate
Agriculture	14,689			5,591
Death Care Management	61,462			52,510
Healthcare	121,331			114,281
Independent Pharmacies	18,508			15,151
Registered Investment Advisors	13,550			11,462
Veterinary Industry	110,028			102,906
Other Industries	106,418			46,245
Total	445,986			348,146
Commercial Land
Agriculture	146,814			113,569
Total	146,814			113,569
Total Loans and Leases¹	1,171,686			908,492
Net Deferred Costs	8,038			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



	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 Management	11,976		118		7		12,101
Healthcare	32,350		1,716		7,388		41,454
Independent Pharmacies	87,173		6,523		3,475		97,171
Registered Investment Advisors	87,940		2,566		735		91,241
Veterinary Industry	41,738		1,833		1,999		45,570
Other Industries	142,096		19		—		142,115
Total	405,743		13,003		13,604		432,350
Construction & Development
Agriculture	34,636		—		—		34,636
Death Care Management	4,744		—		—		4,744
Healthcare	44,937		704		1,173		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	144,659		704		1,173		146,536
Commercial Real Estate
Agriculture	14,689		—		—		14,689
Death Care Management	54,684		4,288		2,490		61,462
Healthcare	111,943		5,050		4,338		121,331
Independent Pharmacies	15,043		1,843		1,622		18,508
Registered Investment Advisors	13,406		144		—		13,550
Veterinary Industry	95,055		2,680		12,293		110,028
Other Industries	105,738		680		—		106,418
Total	410,558		14,685		20,743		445,986
Commercial Land
Agriculture	144,687		2,104		23		146,814
Total	144,687		2,104		23		146,814
Total¹	$	1,105,647	$	30,496	$	35,543	$	1,171,686



September 30, 2017	Loan and Lease Balance		Guaranteed Balance		Unguaranteed Exposure
Commercial & Industrial
Healthcare	$	6,703	$	5,712	$	991
Independent Pharmacies	2,605		2,253		352
Registered Investment Advisors	—		—		—
Veterinary Industry	1,556		1,517		39
Total	10,864		9,482		1,382
Commercial Real Estate
Death Care Management	1,576		1,246		330
Healthcare	3,548		2,749		799
Independent Pharmacies	1,622		1,622		—
Veterinary Industry	4,787		3,999		788
Total	11,533		9,616		1,917
Commercial Land
Agriculture	23		23		—
Total	23		23		—
Total	$	22,420	$	19,121	$	3,299



December 31, 2016	Loan and Lease Balance		Guaranteed Balance		Unguaranteed Exposure
Commercial & Industrial
Healthcare	$	6,416	$	5,152	$	1,264
Independent Pharmacies	2,799		2,204		595
Veterinary Industry	2,119		2,079		40
Total	11,334		9,435		1,899
Construction & Development
Agriculture	231		173		58
Total	231		173		58
Commercial Real Estate
Death Care Management	1,611		1,263		348
Healthcare	3,225		2,731		494
Independent Pharmacies	529		—		529
Veterinary Industry	6,793		5,395		1,398
Total	12,158		9,389		2,769
Commercial Land
Agriculture	58		—		58
Total	58		—		58
Total	$	23,781	$	18,997	$	4,784



Nine months ended	Construction & 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
Provision	369			1,858			5,667			798			8,692
Ending Balance	$	1,433		$	4,341		$	7,570		$	1,834		$	15,178



	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	$	—
Healthcare	7,076		11		6,345		38
Independent Pharmacies	4,266		26		1,946		18
Registered Investment Advisors	894		14		742		7
Veterinary Industry	2,511		11		2,501		13
Total	14,789		63		11,543		76
Construction & Development
Healthcare	602		2		—		—
Total	602		2		—		—
Commercial Real Estate
Death Care Management	2,512		13		1,801		2
Healthcare	3,079		11		1,012		12
Independent Pharmacies	1,985		—		551		2
Veterinary Industry	13,950		132		12,218		87
Total	21,526		156		15,582		103
Commercial Land
Agriculture	23		—		156		—
Total	23		—		156		—
Total	$	36,940	$	221	$	27,281	$	179



	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	$	—
Healthcare	4,996		25		5,777		60
Independent Pharmacies	7,998		52		1,927		51
Registered Investment Advisors	1,438		28		588		13
Veterinary Industry	4,329		24		2,715		29
Total	19,074		132		11,016		153
Construction & Development
Healthcare	120		2		—		—
Total	120		2		—		—
Commercial Real Estate
Death Care Management	2,030		30		1,811		5
Healthcare	2,940		24		1,013		27
Independent Pharmacies	149		—		551		2
Veterinary Industry	13,069		278		12,266		249
Total	18,188		332		15,641		283
Commercial Land
Agriculture	199		—		355		—
Total	199		—		355		—
Total	$	37,581	$	466	$	27,012	$	436



	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 Industry	2	559		559		—	—		—
Total Payment Deferral	2	559		559		1	440		440
Total	2	$	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 Pharmacies	1	262		262		—	—		—
Total Payment Deferral and Extended Amortization	1	262		262		—	—		—
Payment Deferral
Commercial & Industrial
Healthcare	—	—		—		1	440		440
Veterinary Industry	2	559		559		1	420		420
Total Payment Deferral	2	559		559		2	860		860
Total	3	$	821	$	821	2	$	860	$	860



	Shares	Weighted Average Grant Date Fair Value
Non-vested at December 31, 2016	3,016,100	$	4.78
Granted	—	—
Vested	317,602	4.17
Forfeited	203,671	6.03
Non-vested at September 30, 2017	2,494,827	$	4.75



	Shares	Weighted Average Grant Date Fair Value
Non-vested at December 31, 2015	3,393,441	$	4.56
Granted	169,987	6.58
Vested	349,996	4.22
Forfeited	166,483	3.13
Non-vested at September 30, 2016	3,046,949	$	4.79



	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 sale	640			4,286			4,926			1,343			5,670		7,013
Loans and leases held for investment	1,468			5,622			7,090			2,538			21,871		24,409
Total interest income	2,561			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 accounts	478			(41		)	437			689			292		981
Certificates of deposit	81			1,818			1,899			(74		)	5,744		5,670
Other borrowings	22			125			147			26			234		260
Total interest expense	581			2,635			3,216			641			7,136		7,777
Net interest income	$	1,980		$	7,414		$	9,394		$	4,030		$	20,771	$	24,801



	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 loans	18,148			21,833			(3,685		)	(16.88	)
Gain on sale of securities available-for-sale	—			1			(1		)	(100.00	)
Construction supervision fee income	362			502			(140		)	(27.89	)
Title insurance income	1,968			—			1,968			100.00
Other noninterest income	1,783			657			1,126			171.39
Total noninterest income	$	25,060		$	25,432		$	(372	)	(1.46	)%



	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 assets	2,231			1,648
Total troubled debt restructurings	8,527			9,856
Less nonaccrual troubled debt restructurings	(6,078		)	(7,688		)
Total performing troubled debt restructurings	2,449			2,168
Total nonperforming assets and troubled debt restructurings	$	27,100		$	27,597
Total nonperforming loans to total loans and leases held for investment	1.92		%	2.62		%
Total nonperforming loans to total assets	0.92		%	1.36		%
Total nonperforming assets and troubled debt restructurings to total assets	1.11		%	1.57		%



	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 SBA	1,785			1,402
Total troubled debt restructurings guaranteed by the SBA	5,427			6,723
Less nonaccrual troubled debt restructurings guaranteed by the SBA	(5,340		)	(6,602		)
Total performing troubled debt restructurings guaranteed by SBA	87			121
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 leases	0.28		%	0.53		%
Total nonperforming loans not guaranteed by the SBA to total assets	0.14		%	0.27		%
Total nonperforming assets and troubled debt restructurings not guaranteed by the SBA to total assets	0.25		%	0.40		%



	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 deposits	1,183,944		860,718		209,019		114,207		—
Long term borrowings	26,872		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



	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	%