☐

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~~August 4, ~~2017,~~2020, there were ~~35,233,241~~37,817,698 shares of the registrant’s voting common stock outstanding and ~~4,643,530~~2,715,531 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~~

2020

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~~2020 and December 31, ~~2016~~2019		1
		Condensed Consolidated Statements of Income for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2020 and ~~2016~~2019		2
		Condensed Consolidated Statements of Comprehensive Income for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2020 and ~~2016~~2019	4	3
		Condensed Consolidated Statements of Changes in Shareholders’ Equity for the ~~Nine~~Three and Six Months Ended ~~September~~June 30, ~~2017~~2020 and ~~2016~~2019	5	4
		Condensed Consolidated Statements of Cash Flows for the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2020 and ~~2016~~2019		6
		Notes to Unaudited Condensed Consolidated Financial Statements		8
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	47	38
Item 3.		Quantitative and Qualitative Disclosures about Market Risk	67	60
Item 4.		Controls and Procedures	67	60
		PART II. OTHER INFORMATION
Item 1.		Legal Proceedings	68	61
Item 1A.		Risk Factors	68	61
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	68	63
Item 3.		Defaults Upon Senior Securities	68	63
Item 4.		Mine Safety Disclosures	68	63
Item 5.		Other Information	68	63
Item 6.	~~Exhibits~~	68Exhibits		64
	~~Signatures~~	70
	Index to Exhibits		64
		XSignatures		65

~~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~~2020 (unaudited) and December 31, 2016*

2019*

(Dollars in thousands)

	June 30, 2020			December 31, 2019
Assets
Cash and due from banks	$	1,256,958		$	124,610
Federal funds sold		91,188			96,787
Certificates of deposit with other banks		7,250			7,250
Investment securities available-for-sale		779,794			540,045
Loans held for sale (includes $32,071 and $16,198 measured at fair value, respectively)		976,594			966,447
Loans and leases held for investment (includes $834,602 and $824,520 measured at fair value, respectively)		4,650,056			2,627,286
Allowance for credit losses on loans and leases		(44,083	)		(28,234	)
Net loans and leases		4,605,973			2,599,052
Premises and equipment, net		269,063			279,099
Foreclosed assets		5,660			5,612
Servicing assets		33,834			35,365
Operating lease right-of-use assets		2,886			2,427
Other assets		179,954			156,134
Total assets	$	8,209,154		$	4,812,828
Liabilities and Shareholders’ Equity
Liabilities
Deposits:
Noninterest-bearing	$	53,938		$	51,965
Interest-bearing		5,819,354			4,175,015
Total deposits		5,873,292			4,226,980
Borrowings		1,721,029			14
Operating lease liabilities		3,079			2,619
Other liabilities		63,319			50,829
Total liabilities		7,660,719			4,280,442
Shareholders’ equity
Preferred stock, no par value, 1,000,000 authorized, NaN issued or outstanding at June 30, 2020 and December 31, 2019		—			—
Class A common stock, no par value, 100,000,000 shares authorized, 37,810,101 and 37,401,443 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively		319,542			309,526
Class B common stock, no par value, 10,000,000 shares authorized, 2,715,531 and 2,915,531 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively		28,753			30,871
Retained earnings		174,837			180,265
Accumulated other comprehensive income		25,303			11,724
Total shareholders’ equity		548,435			532,386
Total liabilities and shareholders’ equity	$	8,209,154		$	4,812,828

*	Derived from audited consolidated financial statements.

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~~2020 and ~~2016~~2019 (unaudited)

(Dollars in thousands, except per share data)

	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Interest income
Loans and fees on loans	$	62,022		$	49,914		$	120,983		$	94,880
Investment securities, taxable		3,786			4,116			7,548			7,433
Other interest earning assets		1,009			1,108			1,759			2,747
Total interest income		66,817			55,138			130,290			105,060
Interest expense
Deposits		25,121			21,203			48,376			40,520
Borrowings		798			—			855			—
Total interest expense		25,919			21,203			49,231			40,520
Net interest income		40,898			33,935			81,059			64,540
Provision for loan and lease credit losses		9,958			3,412			21,750			6,443
Net interest income after provision for loan and lease credit losses		30,940			30,523			59,309			58,097
Noninterest income
Loan servicing revenue		6,691			7,063			13,113			14,473
Loan servicing asset revaluation		(1,571	)		(3,245	)		(6,263	)		(7,285	)
Net gains on sales of loans		10,695			6,015			21,807			10,213
Net (loss) gain on loans accounted for under the fair value option		(1,089	)		2,791			(11,727	)		4,874
Equity method investments income (loss)		(2,243	)		(1,736	)		(4,721	)		(3,750	)
Equity security investments gains (losses), net		161			32			97			135
Gain on sale of investment securities available-for-sale, net		734			—			655			5
Lease income		2,635			2,369			5,259			4,694
Management fee income		1,206			91			2,850			91
Construction supervision fee income		684			386			1,074			1,165
Other noninterest income		4,508			884			6,009			3,351
Total noninterest income		22,411			14,650			28,153			27,966
Noninterest expense
Salaries and employee benefits		30,782			21,990			58,845			43,845
Travel expense		364			1,541			2,145			2,741
Professional services expense		1,385			1,621			3,322			3,803
Advertising and marketing expense		624			1,665			1,985			3,029
Occupancy expense		1,955			1,848			4,376			3,457
Data processing expense		2,764			1,947			5,921			4,346
Equipment expense		4,652			4,239			9,287			7,564
Other loan origination and maintenance expense		2,492			1,708			4,948			3,347
Renewable energy tax credit investment impairment		—			602			—			602
FDIC insurance		1,721			699			3,231			1,334
Other expense		1,361			1,716			3,531			3,709
Total noninterest expense		48,100			39,576			97,591			77,777
Income (loss) before taxes		5,251			5,597			(10,129	)		8,286
Income tax expense (benefit)		1,474			662			(6,304	)		979
Net income (loss)	$	3,777		$	4,935		$	(3,825	)	$	7,307
Basic earnings (loss) per share	$	0.09		$	0.12		$	(0.10	)	$	0.18
Diluted earnings (loss) per share	$	0.09		$	0.12		$	(0.10	)	$	0.18

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~~2020 and ~~2016~~2019 (unaudited)

(Dollars in thousands)

	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Net income (loss)	$	3,777		$	4,935		$	(3,825	)	$	7,307
Other comprehensive income before tax:
Net unrealized gain on investment securities arising during the period		10,673			15,637			18,522			19,155
Reclassification adjustment for gain on sale of securities available-for-sale included in net income		(734	)		—			(655	)		(5	)
Other comprehensive income before tax		9,939			15,637			17,867			19,150
Income tax expense		(2,385	)		(3,753	)		(4,288	)		(4,596	)
Other comprehensive income, net of tax		7,554			11,884			13,579			14,554
Total comprehensive income	$	11,331		$	16,819		$	9,754		$	21,861

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~~2020 and ~~2016~~2019 (unaudited)

(Dollars in thousands)

	Three Months Ended
	Common stock										Accumulated other
	Shares							Retained			comprehensive		Total
	Class A		Class B		Amount			earnings			income		equity
Balance at March 31, 2020		37,664,670		2,715,531	$	343,747		$	172,276		$	17,749	$	533,772
Net income		—		—		—			3,777			—		3,777
Other comprehensive income		—		—		—			—			7,554		7,554
Issuance of restricted stock		21,965		—		—			—			—		—
Withholding cash issued in lieu of restricted stock issuance		—		—		(61	)		—			—		(61	)
Stock option exercises		33,539		—		148			—			—		148
Stock option based compensation expense		—		—		406			—			—		406
Restricted stock expense		—		—		2,933			—			—		2,933
Issuance of common stock in connection with acquisition of wholly-owned subsidiary		89,927		—		1,122			—			—		1,122
Cash dividends ($0.03 per share)		—		—		—			(1,216	)		—		(1,216	)
Balance at June 30, 2020		37,810,101		2,715,531	$	348,295		$	174,837		$	25,303	$	548,435

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

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, 2020 and 2019 (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, 2019		37,401,443		2,915,531		$	340,397		$	180,265		$	11,724		$	532,386
Net loss		—		—			—			(3,825	)		—			(3,825	)
Other comprehensive income		—		—			—			—			13,579			13,579
Issuance of restricted stock		29,389		—			—			—			—			—
Withholding cash issued in lieu of restricted stock issuance		—		—			(109	)		—			—			(109	)
Employee stock purchase program		25,161		—			232			—			—			232
Stock option exercises		64,181		—			406			—			—			406
Stock option based compensation expense		—		—			772			—			—			772
Restricted stock expense		—		—			5,475			—			—			5,475
Issuance of common stock in connection with acquisition of wholly-owned subsidiary		89,927		—			1,122			—			—			1,122
Non-voting common stock converted to voting common stock in private sale		200,000		(200,000	)		—			—			—			—
Cumulative effect of accounting change for Accounting Standards Update 2016-13		—		—			—			822			—			822
Cash dividends ($0.06 per share)		—		—			—			(2,425	)		—			(2,425	)
Balance at June 30, 2020		37,810,101		2,715,531		$	348,295		$	174,837		$	25,303		$	548,435

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

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~~2020 and ~~2016~~2019 (unaudited)

(Dollars in thousands)

	Six Months Ended June 30,
	2020			2019
Cash flows from operating activities
Net (loss) income	$	(3,825	)	$	7,307
Adjustments to reconcile net (loss) income to net cash used by operating activities:
Depreciation and amortization		11,194			9,101
Provision for loan and lease credit losses		21,750			6,443
Amortization of premium on securities, net of accretion		636			254
Deferred tax benefit		(11,164	)		(417	)
Originations of loans held for sale		(483,741	)		(455,456	)
Proceeds from sales of loans held for sale		391,706			168,981
Net gains on sale of loans held for sale		(21,807	)		(10,213	)
Net (gain) loss on sale of foreclosed assets		(10	)		4
Net loss (gain) on loans accounted for under fair value option		11,727			(4,874	)
Net decrease in servicing assets		1,531			5,954
Gain on sale of investment securities available-for-sale, net		(655	)		(5	)
Net gain on disposal of long-lived asset		—			(357	)
Net loss on disposal of property and equipment		38			109
Equity method investments (income) loss		4,721			3,750
Equity security investments (gains) losses, net		(97	)		(135	)
Renewable energy tax credit investment impairment		—			602
Stock option based compensation expense		772			870
Restricted stock expense		5,475			4,904
Stock based compensation expense tax shortfall		(93	)		(76	)
Changes in assets and liabilities:
Lease right-of-use assets and liabilities, net		1			102
Other assets		(24,383	)		10,089
Other liabilities		16,886			154
Net cash used by operating activities		(79,338	)		(252,909	)
Cash flows from investing activities
Purchases of securities available-for-sale		(292,825	)		(205,829	)
Proceeds from sales, maturities, calls, and principal paydown of securities available-for-sale		70,962			28,945
Proceeds from SBA reimbursement/sale of foreclosed assets		2,026			393
Business combination, net of cash acquired		(895	)		—
Loan and lease originations and principal collections, net		(1,937,416	)		(256,823	)
Proceeds from sale of long-lived asset		—			10,895
Purchases of premises and equipment, net		(1,196	)		(27,823	)
Net cash used by investing activities		(2,159,344	)		(450,242	)

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~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016~~2019 (unaudited)

(Dollars in thousands)

	Six Months Ended June 30,
	2020			2019
Cash flows from financing activities
Net increase in deposits	$	1,646,312		$	566,698
Proceeds from borrowings		1,781,966			—
Repayment of borrowings		(60,951	)		(98	)
Stock option exercises		406			172
Employee stock purchase program		232			182
Withholding cash issued in lieu of restricted stock		(109	)		(86	)
Shareholder dividend distributions		(2,425	)		(2,411	)
Net cash provided by financing activities		3,365,431			564,457
Net increase (decrease) in cash and cash equivalents		1,126,749			(138,694	)
Cash and cash equivalents, beginning		221,397			319,311
Cash and cash equivalents, ending	$	1,348,146		$	180,617

Supplemental disclosures of cash flow information
Interest paid	$	49,397		$	39,391
Income tax paid (received)		460			(12,439	)

Supplemental disclosures of noncash operating, investing, and financing activities
Unrealized holding gains on available-for-sale securities, net of taxes	$	13,579		$	14,554
Transfers from loans and leases to foreclosed real estate and other repossessions		2,034			5,058
Net transfers between foreclosed real estate and SBA receivable		30			(289	)
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		98,002			146,305
Transfer of loans and leases held for investment to loans held for sale		22,948			23,321
Business combination:
Assets acquired (excluding goodwill)		2,523			—
Liabilities assumed		2,074			—
Goodwill recorded		1,797			—

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"), Water and Environmental Program (“WEP”) and Business & Industry ("B&I") loan programs. ~~On July 28, 2015 the Company completed its initial public offering with a secondary offering completed in August of 2017. In 2010, the Bank formed~~

The Bank’s wholly owned subsidiaries are Live Oak Number One, Inc., ~~a wholly-owned~~Live Oak Clean Energy Financing LLC (“LOCEF”), and Live Oak Private Wealth, LLC.

Live Oak Private Wealth, LLC’s wholly owned subsidiary ~~to hold~~is Jolley Asset Management, LLC (“JAM”). See Business Combination discussion below for more information on this new subsidiary.

The Company’s wholly owned subsidiaries are the Bank, Government Loan Solutions (“GLS”), Live Oak Grove, LLC (“the Grove”), Live Oak Ventures, Inc. (“Live Oak Ventures”), and Canapi Advisors, LLC (“Canapi”).

Live Oak Number One, Inc. holds 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”), GLS is a management and technology consulting firm that ~~specializes~~advises and offers solutions and services to participants in the government guaranteed lending sector. GLS primarily provides services in connection with the settlement, accounting, and securitization processes for government guaranteed loans, including loans originated under the SBA 7(a) loan ~~program~~programs and ~~USDA-guaranteed loans;~~USDA guaranteed loans. The Grove provides Company employees and ~~504 Fund Advisors, LLC (“504FA”), formed to serve as the investment adviser to the 504 Fund, a closed-end mutual fund organized to invest in SBA section 504 loans.~~

~~The Company acquired control over 504FA, previously carried as~~business visitors an equity method investment, on February 2, 2015 by increasing its ownership from 50.0% to 91.3%. The acquisition of an additional 41.3% of ownership occurred in exchange for contingent consideration estimated to total $170 thousand. Transactions in the third quarter of 2015 and first quarter of 2016 increased the Company’s ownership to 92.9%. On September 1, 2016, the Company acquired the remaining 7.1% ownership from a third party investor in exchange for contingent consideration estimated to total $24 thousand.

~~In August 2016, the Company formed~~on-site restaurant location. Live Oak ~~Ventures, Inc. for the~~Ventures’ purpose ofis 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 for the purpose of providing~~ LOCEF provides financing to entities for renewable energy ~~applications.~~

~~On February 1, 2017,~~applications and became a wholly owned subsidiary of the Bank during the first quarter of 2019. Live Oak Private Wealth, LLC and JAM provide high-net-worth individuals and families with strategic wealth and investment management services. Canapi provides investment advisory services to a series of new funds focused on providing venture capital to new and emerging financial technology companies.

The Company jointly formed 504 Fund Advisors, LLC (“504FA”) to serve as the investment adviser for the 504 Fund, a closed-end mutual fund organized to invest in SBA section 504 loans. 504FA exited as advisor for the 504 Fund in May 2019 and the Company completed its acquisition of Reltco Inc. and National Assurance Title, Inc. (collectively referred to as "Reltco"), two nationwide title agencies under common control based in Tampa, Florida. See Note 4. Business Combination for a further discussion ofsubsequently dissolved this ~~transaction.~~

legal entity.

The Company ~~earns~~generates revenue primarily from net interest income and secondarily through the origination and sale of ~~SBA~~government guaranteed loans. Income from the retention of loans is comprised of interest income. The Company elects to account for certain loans under the fair value option with interest reported in interest income and ~~USDA-guaranteed~~changes in fair value reported in the net (loss) gain on loans ~~and net interest~~accounted for under the fair value option line item of the consolidated statements of 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 credit losses, any costs related to foreclosed assets and other operating costs such as salaries and employee benefits, travel, professional services, advertising and marketing and tax expense.

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~~2020 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, ~~2017.~~2020. The condensed consolidated balance sheet as of December 31, ~~2016~~2019 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,~~2019, filed with the Securities Exchange Commission on ~~March 9, 2017~~February 27, 2020 (SEC File No. 001-37497) (the ~~"2016~~"2019 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~~2019 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~~2019 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. Current period reclassifications were primarily related to fair value presentation requirements for loans in which the fair value option had previously been elected and included a reclassification of amounts representing the credit component of the fair value discount that was previously reported as a component of the allowance for credit losses on loans and leases to be netted directly against loans and leases held for investment on the Company’s consolidated balance sheet. Amounts reclassified from the allowance for credit losses on loans and leases to net directly against total loans and leases held for investment was $20.0 million, as of December 31, 2019. In addition, the change in the credit component of the fair value discount was previously reported in the provision for loan and lease credit losses while the change in the liquidity component of the fair value discount was previously reported in the loan servicing asset revaluation in the consolidated statements of income, but both have now been reclassified to net (loss) gain on loans accounted for under the fair value option. Amounts reclassified from the provision for loan and lease credit losses and the loan servicing asset revaluation to net (loss) gain on loans accounted for under the fair value option were $(51) thousand and $2.8 million, respectively, for the three months ended June 30, 2019, and $(238) thousand and $4.6 million, respectively for the six months ended June 30, 2019.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

The effect of the above discussed reclassifications on the consolidated balance sheet as of December 31, 2019 is reflected in the March 31, 2020 10-Q. The effect on the consolidated statements of income and consolidated statements of cash flows for each period are presented below:

	As Reported			Reclassifications			As Reclassified
Consolidated Statement of Income for the three months ended June 30, 2019
Provision for loan and lease credit losses	$	3,463		$	(51	)	$	3,412
Net interest income after provision for loan and lease credit losses		30,472			51			30,523
Loan servicing asset revaluation		(403	)		(2,842	)		(3,245	)
Net (loss) gain on loans accounted for under the fair value option		—			2,791			2,791
Total noninterest income		14,701			(51	)		14,650
Net income		4,935			—			4,935

Consolidated Statement of Income for the six months ended June 30, 2019
Provision for loan and lease credit losses	$	6,205		$	238		$	6,443
Net interest income after provision for loan and lease credit losses		58,335			(238	)		58,097
Loan servicing asset revaluation		(2,649	)		(4,636	)		(7,285	)
Net (loss) gain on loans accounted for under the fair value option		—			4,874			4,874
Total noninterest income		27,728			238			27,966
Net income		7,307			—			7,307

Consolidated Statement of Cash Flows for the six months ended June 30, 2019
Provision for loan and lease credit losses	$	6,205		$	238		$	6,443
Net decrease in servicing assets		5,954			—			5,954
Change in discount on unguaranteed loans		(3,431	)		3,431			—
Net loss (gain) on loans accounted for under fair value option		—			(4,874	)		(4,874	)
Net cash used by operating activities		(251,704	)		(1,205	)		(252,909	)
Loan and lease originations and principal collections, net		(258,028	)		1,205			(256,823	)
Net cash used by investing activities		(451,447	)		1,205			(450,242	)

As a result of the increase in number and diversification of the industry verticals that the Company serves, management also made changes to the loan and lease classes used in the credit quality disclosures in Note 5. Loans and leases are now grouped in one of the following classes (also referred to as divisions): Small Business Banking, Specialty Lending, or Paycheck Protection Program. Small Business Banking includes loans to customers in verticals that generally have traditional loan structures. Specialty Lending includes loans to customers in verticals that generally have atypical ownership structures as well as complex collateral arrangements, underwriting requirements, and servicing needs. Paycheck Protection Program (“PPP”) includes all loans originated under the PPP pursuant to the Coronavirus Aid, Relief, and Economic Security Act’s (“CARES Act”) economic relief program and carry a 100% government guarantee. These loan and lease classes were determined based on industry risk characteristics and management’s method for monitoring credit risk and managing those lending divisions. There were no changes to the Company’s portfolio segments.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Adoption of New Accounting Standard

On January 1, 2020, the Company adopted Accounting Standards Update (“ASU”) No. 2016-13 “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”) along with its amendments, which replaces the incurred loss impairment methodology in current standards with the current expected credit loss methodology (“CECL”) 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. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities management does not intend to sell.

The Company adopted Accounting Standards Codification (“ASC”) 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance-sheet credit exposures. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a net increase to retained earnings of $822 thousand, comprised of a $1.3 million decrease in the allowance for credit losses combined with a $499 thousand increase in reserve on unfunded commitments, as of January 1, 2020 for the cumulative effect of adopting ASC 326.

Allowance for Credit Losses – Loans and Leases Held for Investment

The allowance for credit losses (“ACL”) is a valuation account that is deducted from, or added to, the amortized cost basis of loans and leases to present a net amount expected to be collected. The ACL excludes loans held for sale and loans accounted for under the fair value option. Loans and leases are charged-off against the ACL when management believes the uncollectibility of a loan or lease balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

The Company’s ACL on loans and leases is estimated using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The Company’s historical credit loss experience provides the basis for the estimation of expected credit losses. Management adjusts historical loss information for differences in current risk characteristics such as portfolio risk grading, delinquency levels, or portfolio mix as well as for changes in environmental conditions such as changes in unemployment rates.

The ACL is measured on a pooled basis when similar risk characteristics are present in the portfolio. The Company has identified portfolio segments based on industry and whether the receivable is secured by real estate or another form of collateral. Additional information related to the portfolio segments can be found in the Company’s 2019 Form 10-K. Expected credit losses for pooled loans and leases are estimated using a discounted cash flow (“DCF”) methodology.

Loans or leases that do not share risk characteristics are evaluated on an individual basis and are excluded from the pooled evaluation. This generally occurs when, based on current information and events, it is probable that the Company 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 meeting the criteria defined below must be reviewed quarterly to determine if they should be evaluated for expected credit losses on an individual basis.

•

All commercial loans and leases classified substandard or worse.

•

Any loan or lease that is on nonaccrual, or any loan or lease that is delinquent greater than 90 days past due and still accruing interest.

•

Any loan or lease that meets the definition of a troubled debt restructuring (“TDR”).

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Expected credit losses are estimated over the contractual term of the loan or lease, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless management has a reasonable expectation at the reporting date that a TDR will be executed with an individual borrower or the extension or renewal options are included in the contract at the reporting date and are not unconditionally cancellable by the Company.

When the ACL, for pooled or individually evaluated loans and leases, is estimated using the DCF method, the effective interest rate used to discount expected cash flows is adjusted for expected prepayments.

Past due status of loans and leases is determined based on contractual terms. Loans and leases are placed in nonaccrual status and interest accrual is discontinued if they become 90 days delinquent or there is evidence that the borrower’s ability to make the required payments is impaired. When interest accrual is discontinued, all unpaid accrued interest is reversed. Management has made the accounting policy election to exclude accrued interest receivable on loans from the estimate of credit losses.

A loan or lease is accounted for as a TDR if the Company, for reasons related to the borrower’s financial difficulties, restructures a loan or lease, and grants a concession to the borrower that it would not otherwise grant. A TDR typically involves a more than short-term modification of terms such as a reduction of the interest rate below the current market rate for a loan or lease with similar risk characteristics or the waiving of certain financial covenants without corresponding offsetting compensation or additional support.

When management determines that foreclosure is probable or when the borrower is experiencing financial difficulty at the reporting date and repayment is expected to be provided substantially through the operation or sale of the collateral, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.

Allowance for Credit Losses – Off-Balance Sheet Credit Exposures

Expected credit losses on off-balance sheet credit exposures is estimated over the contractual period in which the Company is exposed to such losses, unless the obligation to extend credit is unconditionally cancellable. The estimate of off-balance sheet credit exposures includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated losses. The estimate is influenced by historical loss experience, adjusted for current risk characteristics, and economic forecasts.

Allowance for Credit Losses – Available-for-Sale Securities

When available-for-sale debt securities are in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. Available-for-sale debt securities that do not meet the aforementioned criteria are evaluated to determine whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected from the security is less than the amortized cost basis, a credit loss exists and an ACL is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Changes in the ACL are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectibility of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Management has made the accounting policy election to exclude accrued interest receivable on available-for-sale debt securities from the estimate of credit losses. Available-for-sale securities are charged-off against the allowance or, in the absence of any allowance, written down through income when deemed uncollectible by management or when either of the aforementioned criteria regarding intent or requirement to sell is met.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Common Stock

On March 15, 2020, the Board of Directors of the Company authorized the repurchase of up to $20,000,000 in shares of the Company’s voting common stock from time to time through December 31, 2020 (the “Repurchase Program”). The Repurchase Program enables the Company to acquire shares through open market purchases or privately negotiated transactions, including through a Rule 10b5-1 plan, at the discretion of management and on terms (including quantity, timing, and price) that management determines to be advisable. Actions in connection with the repurchase program will be subject to various factors, including the Company’s capital and liquidity positions, regulatory and accounting considerations, the Company’s financial and operational performance, alternative uses of capital, the trading price of the Company’s common stock, and market conditions. The repurchase program does not obligate the Company to acquire a specific dollar amount or number of shares and may be extended, modified, or discontinued at any time. There were 0 shares repurchased during the three and six months ended June 30, 2020.

Business Combination

On April 1, 2020, the Company acquired 100% of the equity interests of JAM, a registered investment advisor based in Rocky Mount, North Carolina. Goodwill, intangible assets and contingent consideration of $1.8 million, $2.3 million and $2.1 million, respectively, have been recorded by the Company. Intangible assets are almost entirely comprised of customer relationships that are being amortized using the straight-line method over 15 years. As a result of this acquisition, the Bank's subsidiary Live Oak Private Wealth, LLC, expects to broaden service offerings to existing high-net-worth individuals and families, attract new clients from an expanded footprint and benefit from economies of scale. The acquisition did not materially impact the Company's financial position, results of operations or cash flows. Given the impact of the above acquisition was immaterial to the Company and its result of operations, pro forma information has not been included.

Note 2. Recent Accounting Pronouncements

In ~~May 2014,~~August 2018, the Financial Accounting Standards Board (“FASB”) issued ~~Accounting Standards Update (“ASU”)~~ASU No. ~~2014-09, “Revenue from Contracts with Customers~~2018-13, “Fair Value Measurement (Topic ~~606)”~~820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU ~~2014-09”~~2018-13”). ~~This standard is intended to clarify the principles for recognizing revenue~~ASU 2018-13 removes, modifies and ~~to develop a common revenue standard for GAAP. The Company's revenue is comprised of loan servicing revenue, net gains~~adds certain fair value disclosure requirements 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.fair value measurements. The Company ~~does not expect~~adopted the ~~adoption of ASU 2014-09 to have a~~standard on January 1, 2020 with no material effect on ~~the~~its consolidated financial statements. ~~The Company expects to adopt the standard in the first quarter of~~

In August 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)”~~2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU ~~2016-02”~~2018-15”). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The ~~FASB issued this ASU to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on~~Company adopted the balance sheet by lessees for those leases classified as operating leases under current GAAP and disclosing key information about leasing arrangements. The amendments in this ASU are effective for the Companystandard on January 1, ~~2019. The impact of this standard will depend~~2020 with no material effect 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~~its consolidated financial statements.

In March ~~2016,~~2019, the FASB issued ASU No. ~~2016-09, “Compensation-Stock Compensation~~2019-01, “Leases (Topic ~~718)~~842): ~~Improvements to Employee Share-Based Payment Accounting~~Codification Improvements” (“ASU ~~2016-09”~~2019-01”). ASU ~~2016-09 simplifies~~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 certain transition disclosures. The Company adopted 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 Companystandard 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~~2020 with 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 impactmaterial effect on ~~our~~its consolidated financial statements.

In ~~June 2016,~~April 2019, the FASB issued ASU No. 2019-04, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments” (“ASU 2019-04”). ASU 2019-04 provides clarification and minor improvements related to ASU 2016-01 “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” ASU 2016-13 ~~“Measurement~~“Financial Instruments – Credit Losses (Topic 326): 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 financial statements. In that regard, a cross-functional working group has been formed, under the direction of the Company's Chief Financial Officer and Chief Credit Officer. The working group is comprised of individuals from various functional areas including credit, risk management, finance and information technology, among others. The Company is currently developing an implementation plan to include assessment of processes, portfolio segmentation, model development, system requirements and the identification of data and resource needs, among other things. The Company is also currently evaluating selected third-party vendor solutions to assist in the application of the ASU 2016-13. While the Company is currently unable to reasonably estimate the impact of adopting ASU 2016-13, the impact of adoption is expected to be significantly influenced by the composition, characteristics and quality of loan and securities portfolios as well as the prevailing economic conditions and forecasts as of the adoption date.

In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805) - Clarifying the Definition of a Business” (“ASU 2017-01”). ASU 2017-01 clarifies the definition and provides a more robust framework to use in determining when a set of assets and activities constitutes a business. ASU 2017-01 is intended to provide guidance when evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 will be effective for the Company on January 1, 2018. The Company does not expect this amendment to have a material effect on its consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). ASU 2017-04 removes Step 2 from the goodwill impairment test. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 will be effective for the Company on January 1, 2020, with early adoption permitted for interim or annual impairment tests performed after January 1, 2017. ASU 2017-04 is not expected to have a material impact on its consolidated financial statements.

In February 2017, the FASB issued ASU No. 2017-05, “Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20) - Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets” (“ASU 2017-05”). ASU 2017-05 clarifies the scope of Subtopic 610-20 and adds guidance on nonfinancial asset derecognition as well as the accounting for partial sales of nonfinancial assets. The amendments conform the derecognition guidance on nonfinancial assets with the model for transactions in the new revenue standard. ASU 2017-05 will be effective for the Company on January 1, 2018 and is not expected to have a significant impact on its consolidated financial statements.

In May 2017, the FASB issued ASU No. 2017-09, "Compensation - Stock Compensation (Topic 718) - Scope of Modification Accounting" ("ASU 2017-09"). ASU 2017-09 clarifies when changes to the terms or conditions of a share-based payment award should be accounted for as a modification. This guidance indicates modification accounting is required when the fair value, vesting conditions, or classification of the award changes. ASU 2017-09 will be effective for the Company on January 1, 2018 and is not expected to have a significant impact on its consolidated financial statements.

~~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~~Activities.” The Company adopted the ~~hedge accounting recognition and presentation requirements in ASC 815 to improve the transparency and understandability of information conveyed to~~standard on January 1, 2020 with no material effect on its consolidated financial ~~statement users about an entity’s risk management activities to better align the entity’s financial reporting for hedging relationships with those risk~~

statements.

~~Table of Contents~~

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

~~management activities~~

In January 2020, the FASB issued ASU No. 2020-01, “Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)-Clarifying the Interactions between Topic 321, Topic 323, and Topic 815” (“ASU 2020-01”). ASU 2020-01 clarifies the interaction between accounting standards related to ~~reduce~~equity securities, equity method investments, and certain derivatives including accounting for the ~~complexity~~transition into and out of the equity method and ~~simplify the application of hedge accounting. ASU 2017-12~~measuring certain purchased options and forward contracts to acquire investments. The amendments in this standard will be effective for the Company on January 1, ~~2019 and is~~2021. The Company does not ~~expected~~expect this standard to have a ~~significant~~material effect on its consolidated financial statements.

In March 2020, the FASB issued ASU No. 2020-03, “Codification Improvements to Financial Instruments” (“ASU 2020-03”). The amendments represent clarification and improvements to the codification and correct unintended application. This standard was effective immediately upon issuance and its adoption did not have a material effect on the Company’s consolidated financial statements.

In March 2020, the FASB issued ASU No. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”). ASU 2020-04 provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments are effective for the Company as of March 12, 2020 through December 31, 2022. The Company does not believe this standard will have a material 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,
	2020		2019		2020			2019
Basic earnings (loss) per share:
Net income (loss)	$	3,777	$	4,935	$	(3,825	)	$	7,307
Weighted-average basic shares outstanding		40,506,671		40,196,662		40,420,425			40,178,491
Basic earnings (loss) per share	$	0.09	$	0.12	$	(0.10	)	$	0.18
Diluted earnings (loss) per share:
Net income (loss), for diluted earnings (loss) per share	$	3,777	$	4,935	$	(3,825	)	$	7,307
Total weighted-average basic shares outstanding		40,506,671		40,196,662		40,420,425			40,178,491
Add effect of dilutive stock options and restricted stock grants		615,354		801,879		677,612			801,879
Total weighted-average diluted shares outstanding		41,122,025		40,998,541		41,098,037			40,980,370
Diluted earnings (loss) per share	$	0.09	$	0.12	$	(0.10	)	$	0.18
Anti-dilutive shares		2,077,886		1,578,197		2,077,886			1,578,197

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, 2020	Amortized Cost		Unrealized Gains		Unrealized Losses		Allowance for Credit Losses		Fair Value
US treasury securities	$	4,997	$	21	$	—	$	—	$	5,018
US government agencies		19,942		652		—		—		20,594
Mortgage-backed securities		718,285		32,329		65		—		750,549
Municipal bonds		3,277		362		6		—		3,633
Total	$	746,501	$	33,364	$	71	$	—	$	779,794

December 31, 2019
US treasury securities	$	4,988	$	27	$	—	$	—	$	5,015
US government agencies		22,444		335		—		—		22,779
Mortgage-backed securities		488,694		15,530		927		—		503,297
Municipal bonds		8,493		469		8		—		8,954
Total	$	524,619	$	16,361	$	935	$	—	$	540,045

~~Table~~

During the three months ended June 30, 2020, 1 US government agency matured at $2.5 million, 11 mortgage-backed securities totaling $9.6 million were sold resulting in a net gain 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

$114 thousand, and 2 municipal bonds totaling $5.2 million were sold resulting in a net gain of $620 thousand. There were no0 sales of securities during the three ~~and nine~~ months ended ~~September~~June 30, ~~2017.The~~2019.

During the six months ended June 30, 2020, 1 US government agency matured at $2.5 million, 13 mortgage-backed securities totaling $14.2 million were sold resulting in a net gain of $35 thousand, and 2 municipal bonds totaling $5.2 million were sold resulting in a net gain of $620 thousand. During the six months ended June 30, 2019, $900 thousand of 1 municipal bond was sold resulting in a net gain of $5 thousand.

Accrued interest receivable on available-for-sale securities totaled $2.0 million and $1.6 million at June 30, 2020 and December 31, 2019, respectively, and is included in other assets in the accompanying condensed consolidated balance sheets.

The following tables show ~~gross~~debt securities available-for-sale in an unrealized loss position for which an allowance for credit losses ~~and fair value,~~has not been recorded, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position.

	Less Than 12 Months				12 Months or More				Total
June 30, 2020	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Mortgage-backed securities	$	14,345	$	41	$	2,627	$	24	$	16,972	$	65
Municipal bonds		—		—		94		6		94		6
Total	$	14,345	$	41	$	2,721	$	30	$	17,066	$	71

	Less Than 12 Months				12 Months or More				Total
December 31, 2019	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Mortgage-backed securities	$	42,835	$	460	$	36,518	$	467	$	79,353	$	927
Municipal bonds		—		—		92		8		92		8
Total	$	42,835	$	460	$	36,610	$	475	$	79,445	$	935

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

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Management evaluates available-for-sale debt securities to determine whether the unrealized loss is due to credit related factors or non-credit related factors. The evaluation considers the extent to which the security’s fair value is less than cost, the financial condition and near-term prospects of the issuer, and intent and ability of the Company to retain its investment in the security for a period of time sufficient to allow for any anticipated recovery in fair value.

At ~~September~~June 30, ~~2017,~~2020, there were ~~twelve residential~~4 mortgage-backed securities and ~~one US government agency security~~1 municipal bond in unrealized loss positions for greater than 12 months and ~~fourteen residential~~5 mortgage-backed securities ~~two US government agency securities and the 504 Fund mutual fund investment~~ in an unrealized loss ~~position~~positions for less than 12 months. Unrealized losses at December 31, ~~2016~~2019 were comprised of ~~two residential~~NaN mortgage-backed securities and 1 municipal bond in unrealized loss positions for greater than 12 months and ~~three US government agency securities, twenty-two residential~~20 mortgage-backed securities ~~and the 504 Fund mutual fund investment~~ in an unrealized loss ~~position~~positions for less than 12 months.

These unrealized losses are primarily the result of non-credit related volatility in the market and ~~are related to~~ market interest rates. Since none of the unrealized losses relate to marketability of the securities or the issuer’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~~NaN of the ~~securities are deemed to be other than temporarily impaired.~~

losses have been recognized in the Company’s consolidated statements of income.

All ~~residential~~ mortgage-backed securities in the Company’s portfolio at ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016~~2019 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, 2020
	Amortized cost		Fair value
US treasury securities
Within one year	$	4,997	$	5,018
Total		4,997		5,018
US government agencies
Within one year		9,503		9,644
One to five years		7,518		7,832
Five to ten years		2,921		3,118
Total		19,942		20,594
Mortgage-backed securities
One to five years		2,501		2,709
Five to ten years		217,499		236,085
After 10 years		498,285		511,755
Total		718,285		750,549
Municipal bonds
After 10 years		3,277		3,633
Total		3,277		3,633

Total	$	746,501	$	779,794

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 0 securities pledged at June 30, 2020 or December 31, ~~2016, an investment security with a fair market value of $1.5 million was pledged~~2019.

Live Oak Bancshares, Inc.

Notes 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 security with a fair market value of $100 thousand was pledged to the Ohio State Treasurer to allow the Company's trust department to conduct business in the state of Ohio and investment securities with a fair market value of $2.5 million and $1.2 million, respectively, were pledged to the Company's trust department for uninsured trust assets held by the trust department.

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~~Credit Quality

As described in Note 1. Basis of ~~the portfolio segments. Each~~Presentation, loan and lease ~~category is assigned a risk grade~~classes were changed during the ~~origination~~current period. Small Business Banking includes loans to customers in verticals that generally have traditional loan structures. Specialty Lending includes loans to customers in verticals that generally have atypical ownership structures as well as complex collateral arrangements, underwriting requirements, and ~~closing process based on criteria described later in this section.~~

~~Commercial~~servicing needs. Paycheck Protection Program includes all loans originated under the CARES Act’s economic relief program and ~~Industrial~~

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

~~Construction and Development~~

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

~~Table of Contents~~

~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Consolidated Financial Statements~~

~~Commercial Real Estate~~

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

~~Commercial Land~~

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

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

~~Table of Contents~~

~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Consolidated Financial Statements~~

~~Loans and leases consist of the following:~~

September 30,
2017 December 31,
2016
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	~~Total loans and leases include $40.4 million and $37.7 million of U.S. government guaranteed loans as of September 30, 2017 and December 31, 2016, respectively.~~


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 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. 100% government guarantee.

The following ~~guidelines govern the assignment of these risk grades:~~

Exceptional (1 Rated): These loans and leases are of the highest quality, with strong, well-documented sources of repayment. Debt service coverage (“DSC”) is over 1.75X based on historical results. Secondary source of repayment is strong, with a loan to value (“LTV”) of 65% or less if secured solely by commercial real estate (“CRE”). Discounted collateral coverage from all sources should exceed 125%. Guarantors have credit scores above 740.

Quality (2 Rated): These loans and leases are of good quality, with good, well-documented sources of repayment. DSC is over 1.25X based on historical or pro-forma results. Secondary source of repayment is good, with a LTV of 75% or less if secured solely by CRE. Discounted collateral coverage should exceed 100%. Guarantors have credit scores above 700.

Acceptable (3 rated): These loans and leases are of acceptable quality, with acceptable sources of repayment. DSC of over 1.00X based on historical or pro-forma results. Companies that do not meet these credit metrics must be evaluated to determine if they should be graded below this level.

Acceptable (4 rated): These loans and leases are considered very weak pass. These loans and leases are riskier than a 3-rated credit, but due to various mitigating factors are not considered a Special mention or worse. The mitigating factors must clearly be identified to offset further downgrade. Examples of loans and leases that may be put in this category include start-uptables present total loans and leases and ~~loans and leases with less than 1:1 cash flow coverage with other sources of repayment.~~

Special mention (5 rated): These loans and leases are considered as emerging problems, with potentially unsatisfactory characteristics. These loans and leases require greater management attention. A loan or lease may be put into this category ifan aging analysis for the ~~Bank is unable to obtain financial reporting from a company to fully evaluate its position.~~

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

Doubtful (7 rated): Loans and leases graded Doubtful have inherent weaknesses that make collection or liquidation in full questionable. Loans and leases graded Doubtful must be placed on non-accrual status.

Loss (8 rated): Loss rated loans and leases are considered uncollectible and of such little value that their continuance as an active Bank asset is not warranted. The asset should be charged off, even though partial recovery may be possible in the future.

~~Table of Contents~~

~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Consolidated Financial Statements~~

~~The following tables summarize the risk grades of each category:~~

Risk Grades
1 - 4

Risk Grade
5

Risk Grades
6 - 8
Total
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~~

~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Consolidated Financial Statements~~

Risk Grades
1 - 4

Risk Grade
5

Risk Grades
6 - 8
Total
December 31, 2016
Commercial & Industrial
Agriculture $ 1,656
$ 58
$ —
$ 1,714
Death Care 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 million of U.S. government guaranteed loans as of September 30, 2017, segregated by risk grade as follows: Risk Grades 1 – 4 = $12.1 million, Risk Grade 5 = $3.7 million, Risk Grades 6 – 8 = $24.6 million. As of December 31, 2016, total loans and leases include $37.7 million of U.S. government guaranteed loans, segregated by risk grade as follows: Risk Grades 1 – 4 = $8.7 million, Risk Grade 5 = $7.7 million, Risk Grades 6 – 8 = $21.3 million.

~~Table of Contents~~

~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Consolidated Financial Statements~~

~~Past Due Loans and Leases~~

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

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~~

	Current or Less than 30 Days Past Due		30-89 Days Past Due		90 Days or More Past Due		Total Past Due		Total Carried at Amortized Cost¹		Loans Accounted for Under the Fair Value Option²		Total Loans and Leases
June 30, 2020
Commercial & Industrial
Small Business Banking	$	405,176	$	1,908	$	4,028	$	5,936	$	411,112	$	298,349	$	709,461
Specialty Lending		208,564		437		155		592		209,156		70,612		279,768
Paycheck Protection Program		1,738,441		—		—		—		1,738,441		—		1,738,441
Total		2,352,181		2,345		4,183		6,528		2,358,709		368,961		2,727,670
Construction & Development
Small Business Banking		250,479		—		—		—		250,479		—		250,479
Specialty Lending		61,577		3,715		—		3,715		65,292		—		65,292
Total		312,056		3,715		—		3,715		315,771		—		315,771
Commercial Real Estate
Small Business Banking		666,543		—		8,089		8,089		674,632		331,152		1,005,784
Specialty Lending		192,690		5,525		1,849		7,374		200,064		24,006		224,070
Total		859,233		5,525		9,938		15,463		874,696		355,158		1,229,854
Commercial Land
Small Business Banking		302,989		2,111		2,168		4,279		307,268		110,483		417,751
Total		302,989		2,111		2,168		4,279		307,268		110,483		417,751
Total	$	3,826,459	$	13,696	$	16,289	$	29,985	$	3,856,444	$	834,602	$	4,691,046
Net Deferred (Fees) Costs													$	(40,990	)
Loan and Leases, Net of unearned													$	4,650,056

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

	Current or Less than 30 Days Past Due		30-89 Days Past Due		90 Days or More Past Due		Total Past Due		Total Carried at Amortized Cost¹		Loans Accounted for Under the Fair Value Option²		Total Loans and Leases
December 31, 2019
Commercial & Industrial
Small Business Banking	$	374,283	$	7,363	$	4,577	$	11,940	$	386,223	$	275,269	$	661,492
Specialty Lending		166,710		532		776		1,308		168,018		58,044		226,062
Total		540,993		7,895		5,353		13,248		554,241		333,313		887,554
Construction & Development
Small Business Banking		302,470		—		—		—		302,470		—		302,470
Specialty Lending		44,848		—		—		—		44,848		—		44,848
Total		347,318		—		—		—		347,318		—		347,318
Commercial Real Estate
Small Business Banking		525,858		7,210		5,586		12,796		538,654		358,359		897,013
Specialty Lending		121,191		1,849		—		1,849		123,040		27,291		150,331
Total		647,049		9,059		5,586		14,645		661,694		385,650		1,047,344
Commercial Land
Small Business Banking		234,133		—		—		—		234,133		105,557		339,690
Total		234,133		—		—		—		234,133		105,557		339,690
Total	$	1,769,493	$	16,954	$	10,939	$	27,893	$	1,797,386	$	824,520	$	2,621,906
Net Deferred (Fees) Costs													$	5,380
Loan and Leases, Net of unearned													$	2,627,286

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~~$2.47 billion of U.S. government guaranteed loans as of June 30, 2020, of which $11.1 million is 90 days or more past due, $3.5 million is past due 30-89 days and $2.46 billion are current. Total loans and leases include $622.6 million of U.S. government guaranteed loans as of ~~September 30, 2017,~~December 31, 2019, of which ~~$14.3~~$6.4 million is ~~greater than~~ 90 days or more past due, ~~$5.0~~$13.6 million is past due 30-89 days ~~past due~~ and ~~$21.1~~$602.6 million ~~is included in current~~are current.

2	The Company measures the carrying value of the retained portion of loans sold at fair value under ASC Subtopic 825-10. See Note 9. Fair Value of Financial Instruments for additional information.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Credit Quality Indicators

The following tables presents asset quality indicators by portfolio class and origination year. See Note 5. Loans and Leases Held for Investment and Credit Quality in the Company’s 2019 Form 10-K for additional discussion around the asset quality indicators that the Company uses to manage and monitor credit risk.

	Term Loans and Leases Amortized Cost Basis by Origination Year
	2020		2019		2018		2017		2016		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term		Total^1,2
June 30, 2020
Small Business Banking
Risk Grades 1 - 4	$	152,493	$	485,989	$	316,738	$	280,574	$	178,817	$	71,894	$	32,064	$	622	$	1,519,191
Risk Grade 5		582		11,182		24,647		19,148		17,308		4,497		5,070		71		82,505
Risk Grades 6 - 8		—		3,270		7,619		12,389		7,929		9,972		442		175		41,796
Total		153,075		500,441		349,004		312,111		204,054		86,363		37,576		868		1,643,492
Specialty Lending
Risk Grades 1 - 4		105,105		107,475		61,902		82,857		7,339		37,008		49,857		332		451,875
Risk Grade 5		—		—		2,946		—		8,479		—		480		—		11,905
Risk Grades 6 - 8		—		—		8,715		155		1,849		—		12		—		10,731
Total		105,105		107,475		73,563		83,012		17,667		37,008		50,349		332		474,511
Payroll Protection Program
Risk Grades 1 - 4		1,738,441		—		—		—		—		—		—		—		1,738,441
Risk Grade 5		—		—		—		—		—		—		—		—		—
Risk Grades 6 - 8		—		—		—		—		—		—		—		—		—
Total		1,738,441		—		—		—		—		—		—		—		1,738,441
Total	$	1,996,621	$	607,916	$	422,567	$	395,123	$	221,721	$	123,371	$	87,925	$	1,200	$	3,856,444


	Total^1,2
December 31, 2019
Small Business Banking
Risk Grades 1 - 4	$	1,361,220
Risk Grade 5		63,015
Risk Grades 6 - 8		37,249
Total		1,461,484
Specialty Lending
Risk Grades 1 - 4		307,098
Risk Grade 5		26,497
Risk Grades 6 - 8		2,307
Total		335,902
Total	$	1,797,386

Total loans and leases include $2.47 billion of U.S. government guaranteed loans as ~~presented above.~~of June 30, 2020, segregated by risk grade as follows: Risk Grades 1 – 4 = $2.39 billion, Risk Grade 5 = $46.0 million, Risk Grades 6 – 8 = $33.0 million. As of December 31, ~~2016,~~2019, total loans and leases include ~~$37.7~~$622.6 million of U.S. government guaranteed loans, ~~of which $13.7~~segregated by risk grade as follows: Risk Grades 1 – 4 = $556.8 million, ~~is greater than 90 days past due, $6.8~~Risk Grade 5 = $42.7 million, ~~is 30-89 days past due and $17.2 million is included in current~~Risk Grades 6 – 8 = $23.1 million. Total loans and leases ~~as presented above.~~exclude loans accounted for under the fair value option.

~~Table of Contents~~

2	Excludes $834.6 million and $824.5 million of loans accounted for under the fair value option as of June 30, 2020 and December 31, 2019, respectively.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Nonaccrual Loans and Leases

~~Loans~~

As of June 30, 2020 and ~~leases that become~~December 31, 2019 there were 0 loans greater than 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~~past due and still accruing. There was 0 interest ~~accrual is discontinued. If interest~~income recognized on nonaccrual loans and leases ~~had been accrued in accordance with the original terms, interest income would have increased by approximately $302 thousand and $165 thousand for~~during the three ~~months~~and six month periods ended ~~September~~June 30, ~~2017 and 2016, respectively, and for the nine months ended September~~2020 or June 30, ~~2017 and 2016 interest income would have increased approximately $831 thousand and $451 thousand, respectively.~~2019. All nonaccrual loans and leases are included in the held for investment portfolio.

Accrued interest receivable on loans totaled $27.2 million and $19.8 million at June 30, 2020 and December 31, 2019, respectively, and is included in other assets in the accompanying condensed consolidated balance sheets.

Nonaccrual loans and leases as of ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016~~2019 are as follows:

June 30, 2020	Loan Balance¹		Guaranteed Balance		Unguaranteed Balance		Unguaranteed Exposure with No ACL
Commercial & Industrial
Small Business Banking	$	13,777	$	11,844	$	1,933	$	—
Specialty Lending		155		155		—		—
Total		13,932		11,999		1,933		—
Construction & Development
Specialty Lending		3,715		—		3,715		3,715
Total		3,715		—		3,715		3,715
Commercial Real Estate
Small Business Banking		11,501		6,654		4,847		1,841
Specialty Lending		6,849		5,137		1,712		—
Total		18,350		11,791		6,559		1,841
Commercial Land
Small Business Banking		4,278		3,363		915		32
Total		4,278		3,363		915		32
Total	$	40,275	$	27,153	$	13,122	$	5,588

December 31, 2019	Loan Balance¹		Guaranteed Balance		Unguaranteed Balance
Commercial & Industrial
Small Business Banking	$	6,162	$	5,399	$	763
Specialty Lending		776		157		619
Total		6,938		5,556		1,382
Commercial Real Estate
Small Business Banking		8,245		4,130		4,115
Total		8,245		4,130		4,115
Commercial Land
Small Business Banking		6,756		5,028		1,728
Total		6,756		5,028		1,728
Total	$	21,939	$	14,714	$	7,225

1	Excludes nonaccrual loans accounted for under the fair value option. See Note 9. Fair Value of Financial Instruments for additional information.

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~~

The following table presents the amortized cost basis of ~~Contents~~

~~Live Oak Bancshares, Inc.~~

~~Notes~~collateral-dependent loans and leases, which are individually evaluated to ~~Unaudited Consolidated Financial Statements~~determine expected credit losses, as of June 30, 2020:

	Total Collateral Dependent Loans						Unguaranteed Portion
June 30, 2020	Real Estate		Business Assets		Other		Real Estate		Business Assets		Other		Allowance for Credit Losses
Commercial & Industrial
Small Business Banking	$	2,468	$	5,401	$	207	$	572	$	136	$	75	$	161
Specialty Lending		—		163		—		—		8		—		8
Total		2,468		5,564		207		572		144		75		169
Commercial Real Estate
Small Business Banking		8,857		—		—		3,457		—		—		183
Specialty Lending		1,869		—		—		483		—		—		3
Total		10,726		—		—		3,940		—		—		186
Commercial Land
Small Business Banking		4,299		—		—		934		—		—		314
Total		4,299		—		—		934		—		—		314
Total	$	17,493	$	5,564	$	207	$	5,446	$	144	$	75	$	669

Allowance for ~~Loan~~Credit Losses - Loans and ~~Lease Loss Methodology~~

~~The methodology and~~Leases

On January 1, 2020 the ~~estimation process for calculating~~Company adopted ASC 326. Upon adoption, the ~~Allowance for Loan and Lease Losses (“ALLL”) is described below:~~

~~Estimated~~Company maintains the ACL at levels management believes represents the future expected credit losses ~~should meet~~in the ~~criteria~~loan and lease portfolios as of the balance sheet date. See Note 1. Basis of Presentation for ~~accrual of a loss contingency, i.e., a provision to~~additional information around the ~~ALLL, set forth in GAAP. The~~ Company’s methodology for ~~determining~~estimating the ~~ALLL is based on the requirements~~ACL. See Note 1. Organization and Summary of ~~GAAP, the Interagency Policy Statement on the Allowance for Loan~~Significant Accounting Policies 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.

Note 5. Loans and ~~leases are considered impaired when, based on current~~Leases Held for Investment and Credit Quality in the Company’s 2019 Form 10-K for additional information ~~and events, it is probable that the creditor will be unable to collect all interest and principal payments due according~~related to the ~~originally contracted, or reasonably modified, terms of~~Company’s methodology for estimating the ~~loan or lease agreement. The Company has determined that loans and leases that meet the criteria defined below must be reviewed quarterly to determine if they are impaired.~~

~~All commercial loans and leases classified substandard or worse.~~

~~Any other delinquent loan or lease that is in a nonaccrual status, or any loan or lease that is delinquent more than 89 days and still accruing interest.~~

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

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

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

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

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

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

~~Table of Contents~~

~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Consolidated Financial Statements~~

losses under ASC 310.

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

Three Months Ended	Construction & Development		Commercial Real Estate		Commercial & Industrial			Commercial Land			Total
June 30, 2020
Beginning Balance	$	4,823	$	13,110	$	16,337		$	1,636		$	35,906
Charge offs		—		—		(1,825	)		—			(1,825	)
Recoveries		—		15		29			—			44
Provision		38		2,972		6,962			(14	)		9,958
Ending Balance	$	4,861	$	16,097	$	21,503		$	1,622		$	44,083
June 30, 2019
Beginning Balance	$	2,236	$	5,379	$	8,282		$	1,653		$	17,550
Charge offs		—		—		(145	)		(24	)		(169	)
Recoveries		—		6		42			—			48
Provision		688		1,463		1,162			99			3,412
Ending Balance	$	2,924	$	6,848	$	9,341		$	1,728		$	20,841

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Six Months Ended	Construction & Development		Commercial Real Estate			Commercial & Industrial			Commercial Land			Total
June 30, 2020
Beginning Balance, prior to adoption of ASC 326	$	2,732	$	8,427		$	15,757		$	1,318		$	28,234
Impact of adopting ASC 326		1,131		1,916			(4,561	)		193			(1,321	)
Charge offs		—		(109	)		(4,170	)		(408	)		(4,687	)
Recoveries		—		43			64			—			107
Provision		998		5,820			14,413			519			21,750
Ending Balance	$	4,861	$	16,097		$	21,503		$	1,622		$	44,083
June 30, 2019
Beginning Balance	$	2,042	$	5,259		$	6,524		$	607		$	14,432
Charge offs		—		—			(145	)		(24	)		(169	)
Recoveries		—		14			121			—			135
Provision		882		1,575			2,841			1,145			6,443
Ending Balance	$	2,924	$	6,848		$	9,341		$	1,728		$	20,841

During the three and six month periods ended June 30, 2020, increases to the ACL were primarily related to the severity of forecasted unemployment rates and ongoing developments as a result of the COVID-19 pandemic. Unemployment rates were forecasted for twelve months followed by a twelve-month straight-line reversion period. Additionally, the provision expense was impacted by loan and lease growth and net charge-offs during the period.

The following tables represent the types of TDRs that were made during the periods presented:

	Three Months Ended June 30, 2020
	Extended Amortization				Payment Deferral				Total TDRs
	Number of Loans		Recorded investment at period end		Number of Loans		Recorded investment at period end		Number of Loans		Recorded investment at period end
Commercial & Industrial
Small Business Banking		—	$	—		3	$	439		3	$	439
Total		—		—		3		439		3		439
Commercial Land
Small Business Banking		1		4,921		—		—		1		4,921
Total		1		4,921		—		—		1		4,921
Total		1	$	4,921		3	$	439		4	$	5,360

There were 0 TDRs modified during the three months ended June 30, 2019.

	Six Months Ended June 30, 2020
	Extended Amortization				Payment Deferral				Total TDRs
	Number of Loans		Recorded investment at period end		Number of Loans		Recorded investment at period end		Number of Loans		Recorded investment at period end
Commercial & Industrial
Small Business Banking		—	$	—		5	$	1,882		5	$	1,882
Specialty Lending		1		224		—		—		1		224
Total		1		224		5		1,882		6		2,106
Commercial Real Estate
Small Business Banking		—		—		1		3,412		1		3,412
Total		—		—		1		3,412		1		3,412
Commercial Land
Small Business Banking		1		4,921		—		—		1		4,921
Total		1		4,921		—		—		1		4,921
Total		2	$	5,145		6	$	5,294		8	$	10,439

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

	Six Months Ended June 30, 2019
	Extended Amortization				Payment Deferral				Total TDRs
	Number of Loans		Recorded investment at period end		Number of Loans		Recorded investment at period end		Number of Loans		Recorded investment at period end
Commercial Real Estate
Small Business Banking		—	$	—		1	$	1,853		1	$	1,853
Total		—		—		1		1,853		1		1,853
Commercial Land
Small Business Banking		1		3,475		—		—		1		3,475
Total		1		3,475		—		—		1		3,475
Total		1	$	3,475		1	$	1,853		2	$	5,328

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

Concessions made to improve a loan or lease’s performance have varying degrees of success. NaN TDR was modified within the twelve months ended June 30, 2020 and subsequently defaulted during the three and six months ended June 30, 2020. The TDR that defaulted was a Commercial & Industrial Small Business Banking loan that had been previously modified for payment deferral and had a recorded investment of $39 thousand at June 30, 2020. NaN TDRs that were modified within the twelve months ended June 30, 2019 subsequently defaulted during the three and six months ended June 30, 2019.

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:

December 31, 2019	Construction & Development		Commercial Real Estate		Commercial & Industrial		Commercial Land		Total^1,2
Allowance for loan and lease losses:
Loans and leases individually evaluated for impairment	$	17	$	2,067	$	3,989	$	748	$	6,821
Loans and leases collectively evaluated for impairment		2,715		6,360		11,768		570		21,413
Total allowance for loan and lease losses	$	2,732	$	8,427	$	15,757	$	1,318	$	28,234
Loans and leases receivable:
Loans and leases individually evaluated for impairment	$	719	$	25,389	$	14,052	$	17,347	$	57,507
Loans and leases collectively evaluated for impairment		346,599		636,305		540,189		216,786		1,739,879
Total loans and leases receivable	$	347,318	$	661,694	$	554,241	$	234,133	$	1,797,386

September 30, 2017
Construction &
Development

Commercial
Real Estate

Commercial
& Industrial

Commercial
Land
Total
Allowance for Loan and Lease Losses:
Loans and leases individually evaluated for impairment $ 53
$ 1,610
$ 1,290
$ —
$ 2,953
Loans and leases collectively evaluated for impairment²
1,586
6,788
7,584
2,116
18,074
Total allowance for loan and lease losses $ 1,639
$ 8,398
$ 8,874
$ 2,116
$ 21,027
Loans and leases receivable¹:

Loans and leases individually evaluated for impairment $ 1,151
$ 16,231
$ 7,321
$ —
$ 24,703
Loans and leases collectively evaluated for impairment²
145,385
429,755
425,029
146,814
1,146,983
Total loans and leases receivable $ 146,536
$ 445,986
$ 432,350
$ 146,814
$ 1,171,686

~~Table of Contents~~

~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Consolidated Financial Statements~~

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 million of U.S. government guaranteed loans as of September 30, 2017, of which $24.7 million are impaired.~~ As of December 31, ~~2016,~~2019, loans and leases receivable includes ~~$37.7~~$622.6 million of U.S. government guaranteed loans, of which ~~$22.1~~$36.0 million are considered impaired.

~~Included in loans~~

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~~receivable exclude $824.5 million of ~~which $12 million are guaranteed by~~loans accounted for under 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.~~

fair value option.

~~Table of Contents~~

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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

December 31, 2019	Recorded Investment		Guaranteed Balance		Unguaranteed Exposure
Commercial & Industrial
Small Business Banking	$	11,612	$	7,841	$	3,771
Specialty Lending		2,440		157		2,283
Total		14,052		7,998		6,054
Construction & Development
Small Business Banking		719		530		189
Total		719		530		189
Commercial Real Estate
Small Business Banking		23,473		13,198		10,275
Specialty Lending		1,916		1,387		529
Total		25,389		14,585		10,804
Commercial Land
Small Business Banking		17,347		12,898		4,449
Total		17,347		12,898		4,449
Total	$	57,507	$	36,011	$	21,496

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~~

~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Consolidated Financial Statements~~

The following table presents evaluated balances of loans and leases classified as impaired at the dates presented that carried an associated reserve as compared to those with no reserve. The recorded investment includes accrued interest and net deferred loan and lease fees or costs.

	December 31, 2019
	Recorded Investment
	With a Recorded Allowance		With No Recorded Allowance		Total		Unpaid Principal Balance		Related Allowance Recorded
Commercial & Industrial
Small Business Banking	$	11,607	$	5	$	11,612	$	12,577	$	1,967
Specialty Lending		2,440		—		2,440		2,307		2,022
Total		14,047		5		14,052		14,884		3,989
Construction & Development
Small Business Banking		719		—		719		706		17
Total		719		—		719		706		17
Commercial Real Estate
Small Business Banking		21,370		2,103		23,473		23,996		2,055
Specialty Lending		1,916		—		1,916		1,849		12
Total		23,286		2,103		25,389		25,845		2,067
Commercial Land
Small Business Banking		17,347		—		17,347		17,399		748
Total		17,347		—		17,347		17,399		748
Total Impaired Loans and Leases	$	55,399	$	2,108	$	57,507	$	58,834	$	6,821

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~~

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 2016
Recorded Investment

With a
Recorded
Allowance

With No
Recorded
Allowance
Total
Unpaid
Principal
Balance

Related
Allowance
Recorded
Commercial & Industrial
Death Care Management $ 8
$ 103
$ 111
$ 111
$ 1
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 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 June 30, 2019
	Average Balance		Interest Income Recognized
Commercial & Industrial
Small Business Banking	$	7,135	$	24
Specialty Lending		765		7
Total		7,900		31
Commercial Real Estate
Small Business Banking		15,945		167
Specialty Lending		1,588		—
Total		17,533		167
Commercial Land
Small Business Banking		18,940		236
Total		18,940		236
Total	$	44,373	$	434

	Six Months Ended June 30, 2019
	Average Balance		Interest Income Recognized
Commercial & Industrial
Small Business Banking	$	7,196	$	54
Specialty Lending		763		24
Total		7,959		78
Commercial Real Estate
Small Business Banking		16,000		309
Specialty Lending		1,588		—
Total		17,588		309
Commercial Land
Small Business Banking		19,000		432
Total		19,000		432
Total	$	44,547	$	819

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~~

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 6. Leases

Lessor Equipment Leasing

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, 2020			December 31, 2019
Gross direct finance lease payments receivable	$	12,452		$	13,959
Less – unearned interest		(2,110	)		(2,562	)
Net investment in direct financing leases	$	10,342		$	11,397

Future minimum lease payments under finance leases are as follows:

As of June 30, 2020	Amount
2020	$	1,606
2021		3,100
2022		2,675
2023		2,233
2024		1,591
Thereafter		1,247
Total	$	12,452

Interest income of $212 thousand and $267 thousand was recognized in the three months ended June 30, 2020 and 2019, respectively. Interest income of $445 thousand and $501 thousand was recognized in the six months ended June 30, 2020 and 2019, 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 2 additional terms or purchase the equipment at the then current fair market value.

Rental revenue from operating leases is recognized on a straight-line basis over the term of the lease. Rental equipment is recorded at cost and depreciated to an estimated residual value on a straight-line basis over the estimated useful life. The useful lives generally range from 20 to 25 years and residual values generally range from 20% to 50%, however, they are subject to periodic evaluation. Changes in useful lives or residual values will impact depreciation expense and any gain or loss from the sale of used equipment. The estimated useful lives and residual values of the Company's leasing equipment are based on industry disposal experience and the Company's expectations for future sale prices.

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

~~The following tables present~~

As of June 30, 2020 and December 31, 2019, the ~~types~~Company had a net investment of ~~TDRs~~$139.4 million and $144.3 million, respectively, in assets included in premises and equipment that ~~were made during~~are subject to operating leases. Of the net investment, the gross balance of the assets was $164.3 million as of June 30, 2020 and December 31, 2019 and accumulated depreciation was $24.9 million and $20.0 million as of June 30, 2020 and December 31, 2019, respectively. Depreciation expense recognized on these assets for the three ~~and nine~~ months ended ~~September~~June 30, ~~2017~~2020 and ~~2016:~~

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

All Restructurings
All Restructurings

Number of Loans
Pre-
modification
Recorded
Investment
Post-
modification
Recorded
Investment
Number of
Loans
Pre-
modification
Recorded
Investment
Post-
modification
Recorded
Investment
Payment Deferral and Extended Amortization

Commercial & Industrial

Independent Pharmacies —

$ —

$ —

—

$ —

$ —
Total Payment Deferral and Extended Amortization —

—

—

—

—

—
Payment Deferral

Commercial & Industrial

Healthcare —

—

—

1

440

440
Veterinary 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 lease’s performance have varying degrees of success. No TDRS that were modified within~~2019 was $2.4 million. Depreciation expense recognized on these assets for the ~~twelve~~six months ended ~~September~~June 30, ~~2017 subsequently defaulted during~~2020 and 2019 was $4.9 million and $4.8 million, respectively.

Lease income of $2.4 million was recognized in the three ~~or nine~~ months ended ~~September~~June 30, ~~2017.~~

~~Table~~2020 and 2019. Lease income of ~~Contents~~

~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Consolidated Financial Statements~~

~~As of September 30, 2016, one TDR that~~$4.8 million and $4.7 million was ~~modified within~~recognized in the ~~twelve~~six months ended ~~September~~June 30, ~~2016 subsequently defaulted during the nine months ended September 30, 2016. This TDR was a commercial~~2020 and ~~industrial veterinary loan that was previously modified for payment deferral. The recorded investment for this TDR at September 30, 2016 was $311 thousand.~~

~~Table~~2019, respectively.

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

As of June 30, 2020	Amount
2020	$	4,010
2021		9,052
2022		9,044
2023		9,075
2024		8,808
Thereafter		40,110
Total	$	80,099

~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Consolidated Financial Statements~~

Note 7. Servicing Assets

Loans serviced for others are not included in the accompanying condensed consolidated balance ~~sheet.~~sheets. The unpaid principal balances of loans serviced for others requiring recognition of a servicing asset were ~~$2.36~~$2.25 billion and ~~$2.22~~$2.26 billion at ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016,~~2019, respectively.

The unpaid principal balance for all loans serviced for others was $3.07 billion and $2.97 billion at June 30, 2020 and December 31, 2019, respectively.

The following summarizes the activity pertaining to servicing rights:

	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Balance at beginning of period	$	33,532		$	44,324		$	35,365		$	47,641
Additions, net		1,873			608			4,732			1,331
Fair value changes:
Due to changes in valuation inputs or assumptions		(123	)		260			(2,162	)		(489	)
Decay due to increases in principal paydowns or runoff		(1,448	)		(3,505	)		(4,101	)		(6,796	)
Balance at end of period	$	33,834		$	41,687		$	33,834		$	41,687

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~~2020 and ~~8.1% to 14.1% on September 30, 2016.~~2019. The fair value of servicing rights was determined using a weighted average prepayment ~~speeds ranging from 3.1% to 10.0%~~speed of 18.7% on ~~September~~June 30, ~~2017~~2020 and ~~2.9% to 9.8%~~14.1% on ~~September~~June 30, ~~2016,~~2019, 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 typically have the most significant impact on the fair value of servicing rights. Generally, as interest rates rise on variable rate loans, loan prepayments increase due to an increase in refinance activity, which results in a decrease in the fair value of servicing ~~assets.~~assets, however, weakening economic conditions or significant declines in interest rates can also increase loan prepayment activity. Measurement of fair value is limited to the conditions existing and the assumptions used as of a particular point in time, and those assumptions may not be appropriate if they are applied at a different time.

~~Table of Contents~~

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 8. Borrowings

Total outstanding ~~long term~~ borrowings consisted of the following:

	June 30, 2020		December 31, 2019
Borrowings
In 2019, the Company renewed a revolving line of credit issued in 2017. The line of credit is unsecured and accrues interest at 30-day LIBOR plus 1.15% for a term of 13 months. Payments are interest only with all principal and accrued interest due on October 20, 2020. The terms of this loan require the Company to maintain minimum capital and debt service coverage ratios. The $50.0 million line of credit was fully advanced at March 31, 2020. The Company made a principal paydown of $45.0 million on May 28, 2020 and there is $45.0 million of available credit at June 30, 2020.	$	5,000	$	—
In April 2020, the Company entered into the Federal Reserve Bank's Paycheck Protection Program Liquidity Facility ("PPPLF"). Under the PPPLF, advances must be secured by pledges of loans to small businesses originated by the Company under the U.S. Small Business Administration's 7(a) loan program titled the Paycheck Protection Program. The PPPLF accrues interest at NaN basis points and matures at various dates equal to the maturity date of the PPPLF collateral pledged to secure the advance, ranging from April 1, 2022 to June 24, 2022, and will be accelerated on and to the extent of any 7(a) loan forgiveness reimbursement by the SBA for any PPPLF collateral or the date of purchase by the SBA from the borrower of any PPPLF collateral. On the maturity date of each advance, the Company shall repay the advance plus accrued interest. This $1.72 billion borrowing was fully advanced at June 30, 2020.		1,716,018		—
In October 2017, the Company entered into a financing 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.		11		14
Total borrowings	$	1,721,029	$	14

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~~2020 and December 31, ~~2016, respectively.~~2019. 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 no0 outstanding balances on the lines of credit as of ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016.~~

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

~~Table of Contents~~

~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Consolidated Financial Statements~~

The Company has entered into a repurchase agreement with a third party for $5$5.0 million as of ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016.~~2019. 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 no0 outstanding balance on the repurchase agreement as of ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016.~~

2019.

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, 2020 and December 31, 2019, the Company had approximately $1.30 billion and $1.14 billion, respectively, in borrowing capacity available under these agreements. There is no collateral pledged and no advances outstanding as of June 30, 2020 and December 31, 2019.

The Company may borrow funds through the Federal Reserve Bank’s discount window. These borrowings are secured by a blanket floating lien on qualifying loans with a balance of ~~$321.0 million~~$1.40 billion and ~~$281.3~~$526.8 million as of ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016,~~2019, respectively. At ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016,~~2019, the Company had approximately ~~$175.0 million~~$1.03 billion and ~~$142.7~~$294.5 million, respectively, in borrowing capacity available under these arrangements with no0 outstanding balance as of ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016.~~2019.

~~Note 9. Income Taxes~~

The Company's effective tax rate is lower than the U.S. statutory rate primarily because of the anticipated effect of investment tax credits during 2017. The Company's effective tax 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.~~9. Fair Value of Financial Instruments

Fair Value Hierarchy

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

~~Financial Instruments Measured at~~

Recurring Fair Value

The following sections provide a description of the valuation methodologies used for instruments measured at fair value on a recurring basis, 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 held for sale: The fair values of loans~~: Impairment~~ held for sale are determined by discounting estimated cash flows using interest rates approximating prevailing market rates for similar loans adjusted to reflect the inherent credit risk.

Loans held for investment: The fair values of aloans held for investment are typically determined based on discounted cash flow analyses using market-based interest rate spreads. Discounted cash flow analyses are adjusted, as appropriate, to reflect current market conditions and borrower-specific credit risk. If the loan is collateral dependent, the fair value is determined based on the difference between the fair value of the collateral and the amortized cost basis of the loan ~~for collateral-dependent loans.~~as of the measurement date. Fair value of the loan’s collateral ~~when the loan is dependent on collateral,~~ is determined by appraisals, or independent valuation, or management’s estimation of fair value 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.

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.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Equity warrant assets: Fair value measurements of equity warrant assets of private companies are priced based on a Black-Scholes option pricing model to estimate the asset value by using stated strike prices, option expiration dates, risk-free interest rates and option volatility assumptions. Option volatility assumptions used in the Black-Scholes model are based on public companies that operate in similar industries as the companies in the Company’s private company portfolio. Option expiration dates are modified to account for estimates to actual life relative to stated expiration. Values are further adjusted for a general lack of liquidity due to the private nature of the associated underlying company. The Company classifies equity warrant assets within Level 3 of the valuation hierarchy.

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

June 30, 2020	Total		Level 1		Level 2		Level 3
Investment securities available-for-sale
US treasury securities	$	5,018	$	—	$	5,018	$	—
US government agencies		20,594		—		20,594		—
Mortgage-backed securities		750,549		—		750,549		—
Municipal bonds¹		3,633		—		3,539		94
Loans held for sale		32,071		—		—		32,071
Loans held for investment		834,602		—		—		834,602
Servicing assets²		33,834		—		—		33,834
Mutual fund		2,303		—		2,303		—
Equity warrant assets³		855		—		—		855
Total assets at fair value	$	1,683,459	$	—	$	782,003	$	901,456

December 31, 2019	Total		Level 1		Level 2		Level 3
Investment securities available-for-sale
US treasury securities	$	5,015	$	—	$	5,015	$	—
US government agencies		22,779		—		22,779		—
Mortgage-backed securities		503,297		—		503,297		—
Municipal bonds¹		8,954		—		8,862		92
Loans held for sale		16,198		—		—		16,198
Loans held for investment		824,520		—		—		824,520
Servicing assets²		35,365		—		—		35,365
Mutual fund		2,206		—		2,206		—
Equity warrant assets³		570		—		—		570
Total assets at fair value	$	1,418,904	$	—	$	542,159	$	876,745

During the three and six months ended June 30, 2020, the Company recorded a fair value adjustment gain of $1 thousand and $2 thousand, respectively. 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 0 fair value adjustment.

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

During the six months ended June 30 ,2020, the Company entered into equity warrant assets with a fair value of $179 thousand at the time of issuance and recorded net gains on derivative instruments of $106 thousand. During the three months ended June 30, 2020, the Company entered into equity warrant assets with a fair value of $15 thousand at the time of issuance and recorded net gains on derivative instruments of $138 thousand. 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.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Fair Value Option

The Company elects to account for retained participating interests of government guaranteed loans under the fair value option in order to align the accounting presentation with the Company’s viewpoint of the economics of the loans. Interest income on loans accounted for under the fair value option is recognized in loans and fees on loans on the Company’s consolidated statements of income. There were 0 loans accounted for under the fair value option that were 90 days or more past due and still accruing interest at June 30, 2020 or December 31, 2019. The unpaid principal balance of unguaranteed exposure for nonaccruals was $8.5 million and $10.7 million at June 30, 2020 and December 31, 2019, respectively.

The following tables provide more information about the fair value carrying amount and the unpaid principal outstanding of loans accounted for under the fair value option at June 30, 2020 and December 31, 2019.

	June 30, 2020
	Total Loans							Nonaccruals							90 Days or More Past Due
	Fair Value Carrying Amount		Unpaid Principal Balance		Difference			Fair Value Carrying Amount		Unpaid Principal Balance		Difference			Fair Value Carrying Amount		Unpaid Principal Balance		Difference
Fair Value Option Elections
Loans held for sale	$	32,071	$	34,424	$	(2,353	)	$	—	$	—	$	—		$	—	$	—	$	—
Loans held for investment		834,602		862,735		(28,133	)		46,221		50,536		(4,315	)		27,312		29,435		(2,123	)
	$	866,673	$	897,159	$	(30,486	)	$	46,221	$	50,536	$	(4,315	)	$	27,312	$	29,435	$	(2,123	)

	December 31, 2019
	Total Loans							Nonaccruals							90 Days or More Past Due
	Fair Value Carrying Amount		Unpaid Principal Balance		Difference			Fair Value Carrying Amount		Unpaid Principal Balance		Difference			Fair Value Carrying Amount		Unpaid Principal Balance		Difference
Fair Value Option Elections
Loans held for sale	$	16,198	$	17,230	$	(1,032	)	$	—	$	—	$	—		$	—	$	—	$	—
Loans held for investment		824,520	��	842,456		(17,936	)		49,739		54,370		(4,631	)		26,644		28,137		(1,493	)
	$	840,718	$	859,686	$	(18,968	)	$	49,739	$	54,370	$	(4,631	)	$	26,644	$	28,137	$	(1,493	)

The following table presents the net gains (losses) from changes in fair value.

	Three Months Ended June 30,					Six Months Ended June 30,
Gains (Losses) on Loans Accounted for under the Fair Value Option	2020			2019		2020			2019
Loans held for sale	$	(106	)	$	822	$	14		$	471
Loans held for investment		(983	)		1,969		(11,741	)		4,403
	$	(1,089	)	$	2,791	$	(11,727	)	$	4,874

Losses related to borrower-specific credit risk were $913 thousand and $1.8 million for the three and six months ended June 30, 2020, respectively, and $1.1 million and $1.7 million for the three and six months ended June 30, 2019, respectively.

The following tables summarize the activity pertaining to loans accounted for under the fair value option.

	Three Months Ended June 30,						Six Months Ended June 30,
Loans held for sale	2020			2019			2020			2019
Balance at beginning of period	$	19,151		$	25,293		$	16,198		$	17,745
Issuances		13,154			6,207			16,199			19,842
Fair value changes		(106	)		822			14			471
Sales		—			(5,644	)		—			(11,344	)
Settlements		(128	)		(75	)		(340	)		(111	)
Balance at end of period	$	32,071		$	26,603		$	32,071		$	26,603

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

	Three Months Ended June 30,						Six Months Ended June 30,
Loans held for investment	2020			2019			2020			2019
Balance at beginning of period	$	831,426		$	868,654		$	824,520		$	885,527
Issuances		37,761			24,413			99,372			54,521
Fair value changes		(983	)		1,969			(11,741	)		4,403
Settlements		(33,602	)		(55,956	)		(77,549	)		(105,371	)
Balance at end of period	$	834,602		$	839,080		$	834,602		$	839,080

Non-recurring Fair Value

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

Collateral dependent loans: Loans are considered collateral dependent when the Company has determined that foreclosure of the collateral is probable or when a borrower is experiencing financial difficulty and the loan is expected to be repaid substantially through the operation or sale of collateral. A collateral dependent loan’s ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date. Fair value of the loan’s collateral is determined by appraisals, independent valuation, or management’s estimation of fair value which is then adjusted for the cost related to liquidation of the collateral. Collateral dependent loans are generally classified as Level 3 based on management’s judgment and estimation.

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

~~Table~~

Equity security investment with a non-readily determinable fair value: The following equity security investment is measured at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of ~~Contents~~

~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Consolidated Financial Statements~~

~~Contingent consideration liability:~~ ~~Contingent consideration associated with~~ the ~~acquisition of Reltco will be adjusted to fair value quarterly until settled. The assumptions used to measure fair value are based on internal metrics that are unobservable and therefore~~same issuer. When an observable price change in an orderly transaction occurs, the ~~contingent consideration liability~~investment is classified ~~within~~as nonrecurring Level ~~3 of~~1 within the valuation hierarchy.

~~Recurring Fair Value~~

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

September 30, 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	~~See~~ ~~Note 7~~ ~~for a rollforward of recurring Level 3 fair values for servicing assets and various assumptions used in the fair value measurement.~~


2	~~See Note 4 for activity related to the recurring Level 3 fair value for the contingent consideration liability and various assumptions used in the fair value measurement.~~

~~Non-recurring Fair Value~~

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

June 30, 2020	Total		Level 1		Level 2		Level 3
Collateral dependent loans	$	2,056	$	—	$	—	$	2,056
Foreclosed assets		5,660		—		—		5,660
Total assets at fair value	$	7,716	$	—	$	—	$	7,716

December 31, 2019	Total		Level 1		Level 2		Level 3
Collateral dependent loans	$	1,245	$	—	$	—	$	1,245
Foreclosed assets		5,612		—		—		5,612
Equity security investment with a non-readily determinable fair value		8,738		8,738		—		—
Total assets at fair value	$	15,595	$	8,738	$	—	$	6,857

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

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~~2020 and December 31, ~~2016~~2019 the significant unobservable inputs used in the fair value measurements were as follows:

~~September~~

June 30, ~~2017~~2020

Level 3 Assets with Significant Unobservable Inputs	Fair Value		Valuation Technique	Significant Unobservable Inputs	Range
Recurring fair value
Municipal bond	$	94	Discounted expected cash flows	Discount rate Prepayment speed	4.1% 5.0%
Loans held for sale	$	32,071	Discounted expected cash flows	Discount rate Prepayment speed	5.1% to 21.1% WAVG 18.6%
Loans held for investment	$	834,602	Discounted expected cash flows Discounted appraisals	Loss rate Discount rate Prepayment speed Appraisal adjustments	0.0% to 74.2% (WAVG 1.8%) 5.1% to 21.1% WAVG 18.6% 10% to 45%
Equity warrant assets	$	855	Black-Scholes option pricing model	Volatility Risk-free interest rate Marketability discount Remaining life	25.8 to 84.9% 0.66% 20.0% 5-10 years
Non-recurring fair value
Collateral dependent loans	$	2,056	Discounted appraisals	Appraisal adjustments ⁽¹⁾	10.0% to 55.0%
Foreclosed assets	$	5,660	Discounted appraisals	Appraisal adjustments ⁽¹⁾	4.0% to 14.5%

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~~2019

Level 3 Assets with Significant Unobservable Inputs	Fair Value		Valuation Technique	Significant Unobservable Inputs	Range
Recurring fair value
Municipal bond	$	92	Discounted expected cash flows	Discount rate Prepayment speed	4.6% 5.0%
Loans held for sale	$	16,198	Discounted expected cash flows	Discount rate Prepayment speed	7.7% to 21.4% WAVG 13.1%
Loans held for investment	$	824,520	Discounted expected cash flows Discounted appraisals	Loss rate Discount rate Prepayment speed Appraisal adjustments	0.0% to 10.9% (WAVG 1.3%) 7.7% to 21.4% WAVG 13.1% 10.0% to 70.0%
Equity warrant assets	$	570	Black-Scholes option pricing model	Volatility Risk-free interest rate Marketability discount Remaining life	21.0-75.0% 1.90% 20.0% 8-10 years
Non-recurring fair value
Collateral dependent loans	$	1,245	Discounted appraisals	Appraisal adjustments ⁽¹⁾	10.0% to 57.0%
Foreclosed assets	$	5,612	Discounted appraisals	Appraisal adjustments ⁽¹⁾	10.0% to 37.0%

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 not measured at fair value on a recurring or non-recurring basis are as follows:

June 30, 2020	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	$	1,256,958	$	1,256,958	$	—	$	—	$	1,256,958
Federal funds sold		91,188		91,188		—		—		91,188
Certificates of deposit with other banks		7,250		7,753		—		—		7,753
Loans held for sale		944,523		—		—		1,022,635		1,022,635
Loans and leases, net of allowance for credit losses on loans and leases		3,771,371		—		—		3,928,595		3,928,595
Financial liabilities
Deposits		5,873,292		—		5,935,529		—		5,935,529
Borrowings		1,721,029		—		—		1,718,449		1,718,449

December 31, 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	$	124,610	$	124,610	$	—	$	—	$	124,610
Federal funds sold		96,787		96,787		—		—		96,787
Certificates of deposit with other banks		7,250		7,568		—		—		7,568
Loans held for sale		950,249		—		—		1,004,135		1,004,135
Loans and leases, net of allowance for credit losses on loans and leases		1,774,532		—		—		1,822,569		1,822,569
Financial liabilities
Deposits		4,226,980		—		4,211,522		—		4,211,522
Borrowings		14		—		—		14		14

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 Consolidated Financial Statements~~

Note ~~11.~~10. Commitments and Contingencies

Litigation

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

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.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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, 2020		December 31, 2019
Commitments to extend credit	$	1,575,314	$	1,834,449
Standby letters of credit		26,997		25,532
Total unfunded off-balance-sheet credit risk	$	1,602,311	$	1,859,981

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~~2020 and December 31, ~~2016,~~2019, the Company had unfunded commitments to provide capital contributions for ~~on-balance sheet~~on-balance-sheet investments in the amount of ~~$4.4~~$16.8 million and ~~$4.9~~$16.9 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~~34 relationships that have a retained unguaranteed exposure of ~~$144.6~~$422.3 million of which ~~$90.8~~$248.4 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~~$80.1 million, of which ~~$28.0~~$57.4 million is due from ~~two~~four relationships.

~~Table of Contents~~

~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Consolidated Financial Statements~~

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

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note ~~12.~~11. Stock Plans

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

~~Stock Options~~

~~Compensation cost relating~~ Restricted stock grants vest in equal installments ranging from immediate vesting to ~~share-based payment transactions are recognized in~~over a seven year period from the ~~financial statements with measurement based upon the fair value~~date of the ~~equity~~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 ~~liability instruments issued. For~~above a specified price defined at time of grant.

Stock Options

There were 0 stock options granted during the three and six months ended ~~September~~June 30, ~~2017 and 2016, the Company recognized $536 thousand and $580 thousand in compensation expense for stock options, respectively. For the nine months ended September~~2020.

At June 30, ~~2017 and 2016, the Company recognized $1.4 million and $1.8 million in compensation expense for stock options, respectively.~~

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

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

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

~~Table of Contents~~

~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited 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 30, 2017 and 2016 was $1.1 million and $223 thousand, respectively.~~

~~At September 30, 2017,~~2020, unrecognized compensation costs relating to stock options amounted to ~~$9.8~~$3.2 million which will be recognized over a weighted average period of ~~2.93~~2.11 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 months ended September 30, 2017.

Restricted Stock

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

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

Market RSUs also have a restriction based on the passage of time and non-market-related performance criteria, but also have a restriction based on market price criteria 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.

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

Shares
Weighted
Average Grant
Date Fair Value
Non-vested at December 31, 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 and 2016, the Company recognized $191 thousand and $3.1 million in compensation expense for~~2020, 58,348 RSUs ~~respectively.~~were granted with a weighted average grant date fair value of $12.52. For the ~~nine~~six months ended ~~September~~June 30, ~~2017 and 2016,~~2020, 541,679 RSUs were granted with a weighted average grant date fair value of $17.39. Of the ~~Company recognized $517 thousand and $5.3 million~~RSUs granted in ~~compensation expense for RSUs, respectively.~~

the six month period, 447,273 were awarded in connection with annual long term incentive stock compensation.

At ~~September~~June 30, ~~2017,~~2020, unrecognized compensation costs relating to RSUs amounted to ~~$2.5~~$15.9 million which will be recognized over a weighted average period of ~~4.55~~4.61 years.

~~Table of Contents~~

~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Consolidated Financial Statements~~

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

Shares
Weighted
Average Grant
Date Fair Value
Non-vested at December 31, 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 and is recognized on a straight-line basis over the average vesting period. The Monte Carlo Simulation used 100,000 simulation paths to assess the expected date of achieving the market price criteria.

~~Related to the 100,733~~

There were 0 Market RSUs granted on January 31, 2017 and the 3,058 Market RSUs granted on May 8, 2017, the share price simulation was based on the Cox, Ross & Rubinstein option pricing methodology for a period of 7.0 years. The implied term of the restricted stock was 4.1 years. The Monte Carlo Simulation used various assumptions that included a risk free rate of return of 2.28%, expected volatility of 30.00% and a dividend yield of 0.39%.

Related to the 130,000 Market RSUs granted on August 7, 2017, the share price simulation was based on the Cox, Ross & Rubinstein option pricing methodology for a period of 7.0 years. The implied term of the restricted stock was 3.9 years. The Monte Carlo Simulation used various assumptions that included a risk free rate of return of 2.07%, expected volatility of 30.00% and a dividend yield of 0.33%.

~~For~~during the three and six months ended ~~September~~June 30, ~~2017 and 2016, the Company recognized $1.3 million and $346 thousand in compensation expense for Market RSUs, respectively. For the nine months ended September~~2020.

At June 30, ~~2017 and 2016, the Company recognized $3.7 million and $577 thousand in compensation expense for Market RSUs, respectively.~~

~~All of the Company's Market RSUs had an effective grant date of May 24, 2016, November 30, 2016, January 31, 2017, May 8, 2017 and August 7, 2017~~

~~At September 30, 2017,~~2020, unrecognized compensation costs relating to Market RSUs amounted to ~~$17.9~~$8.0 million which will be recognized over a weighted average period of ~~3.27~~2.91 years.

~~Employee Stock Purchase Plan~~

The Company adopted an Employee Stock Purchase Plan on October 8, 2014. On May 24, 2016, the plan was amended and the Amended and Restated Employee Stock Purchase Plan (the "ESPP") became effective within the meaning of Section 423 of the Internal Revenue Code of 1986, as amended. Under the ESPP, eligible employees are able to purchase available shares with post-tax dollars as of the grant date. In order for employees to be eligible to participate in the ESPP they must be employed or on an authorized leave of absence from the Company or any subsidiary immediately prior to the grant date. ESPP stock purchases cannot exceed $25 thousand in fair market value per employee per calendar year. Options to purchase shares under the ESPP are granted at a 15% discount to fair market value. Expense recognized in relation to the ESPP for the nine months ended September 30, 2017 was $79 thousand. There were no ESPP purchases for the nine months ended September 30, 2016. For the three months ended September 30, 2017 and 2016, the Company recognized $36 thousand and $0 expense, respectively.

~~Table of Contents~~

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed 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,~~12. Significant Equity Method Investments

In accordance with Rule 10-01(b)(1) of Regulation S-X, the Company ~~closed~~must assess whether any of its equity method investments are significant equity method investments. In evaluating the ~~digital banking joint venture between Live Oak Banking~~significance of these investments, the Company ~~and First Data Corporation ("First Data"). The new company, named Apiture, combines First Data's~~performed the income test and the ~~Bank's digital banking platforms, products, services,~~investment test described in S-X 3-05 and ~~certain human resources used~~S-X 1-02(w). Rule 10-01(b)(1) of Regulation S-X requires summarized financial information 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~~quarterly report if any 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)two tests exceeds 20%. Under the income test, the Company’s proportionate share of its equity method investees' aggregated net losses exceeded the applicable threshold of ~~accounting,~~20% and is accordingly required to provide summarized financial information for these investees for all periods presented in this Form 10-Q.

The following table provides summarized balance sheet information for the ~~net~~Company’s equity ~~investment~~method investments as of ~~the Bank~~June 30, 2020 and ~~the Bank's share of net income or loss from the unconsolidated entity will be reflected~~December 31, 2019. The Company’s equity method investments are included in the ~~Company's~~other assets line on the condensed consolidated balance sheets and are largely concentrated in new or emerging financial service technology companies.

	June 30, 2020		December 31, 2019
Balance sheet data
Current assets	$	47,724	$	56,710
Noncurrent assets		175,022		162,304
Total assets	$	222,746	$	219,014

Current liabilities	$	22,698	$	19,910
Noncurrent liabilities		451		683
Total liabilities		23,149		20,593
Equity interests		199,597		198,421
Total liabilities and equity	$	222,746	$	219,014

The following table provides summarized income statement information for 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~~Company’s equity method investments for the three and ~~joint ventures, business combinations,~~six months ended June 30, 2020 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.2019.

	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Summary of operations
Total revenues	$	16,180		$	13,851		$	31,972		$	27,240

Net loss		(13,053	)		(6,100	)		(29,486	)		(13,220	)

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~~2019 (the ~~"2016~~"2019 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.

~~Table of Contents~~

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 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 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;~~

•

the potential impacts of the Coronavirus Disease 2019 (COVID-19) pandemic on trade (including supply chains and export levels), travel, employee productivity and other economic activities that may have a destabilizing and negative effect on financial markets, economic activity and customer behavior;

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

•

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

•

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

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

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

the effects of competition from other commercial banks, non-bank lenders, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and mutual funds, and other financial institutions operating in the Company’s market area and elsewhere, including institutions operating regionally, nationally and internationally, together with such competitors offering banking products and services by mail, telephone and the Internet;

~~the Company's ability to attract and retain key personnel;~~

~~changes in governmental monetary and fiscal policies as well as other legislative and regulatory changes, including with respect to SBA 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;

~~Table of Contents~~

•

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

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;

•

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

~~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 and various state agencies;

•

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

•

other risk factors listed from time to time in reports that the Company files with the SEC, including in the Company’s 2019 Annual Report; and

•

the Company’s 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 (“MD&A”) have been presented in thousands, except percentage, time period, stock option, share and per share data or where otherwise indicated.

Nature of Operations

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.~~Water and Environmental Program (“WEP”) and Business & Industry ("B&I") 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.

In ~~addition to the Bank,~~2018, the Company ~~owns~~ 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 technology companies. In 2019, Live Oak Clean Energy Financing LLC (“LOCEF”) became a subsidiary of the Bank.LOCEF was formed in November 2016 as a subsidiary of the Company for the purpose of providing financing to entities for renewable energy ~~applications;~~applications. In 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 on April 1, 2020, it acquired Jolley Asset Management, LLC to broaden service offerings for existing high-net-worth individuals and families, attract new clients from an expanded footprint and benefit from economies of scale. In 2017, the Bank entered into a joint venture, Apiture LLC (“Apiture”), with First Data Corporation for the purpose of creating next generation technology for financial institutions. In addition to the Bank, the Company owns Live Oak Ventures, Inc., formed in August 2016 for the purpose of investing in businesses that align with the Company's strategic initiative to be a leader in financial technology; Live Oak Grove, LLC, ~~opened~~formed in ~~September~~February 2015 for the purpose of providing Company employees and business visitors an on-site restaurant location; and Government Loan Solutions, Inc. (“GLS”), a management and technology consulting firm that specializes in the settlement, accounting, and securitization processes for government guaranteed loans, including loans originated under the SBA 7(a) loan program and ~~U.S. Department of Agriculture ("USDA")-guaranteed loans; and~~USDA-guaranteed loans. In 2019, 504 Fund Advisors, LLC (“504FA”)~~, which was formed to serve~~ exited 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,~~and the Company completed its acquisition of Reltco Inc. and National Assurance Title, Inc. (collectively referred to as "Reltco" or "title insurance business"), two nationwide title agencies under common control based in Tampa, Florida.

dissolved this legal entity.

The Company generates revenue primarily from ~~the~~net interest income and secondarily through 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 principally of interest income. The Company elects to account for certain loans under the fair value option with interest reported in interest income and changes in fair value reported in the net (loss) gain on loans accounted for under the fair value option line item of the consolidated statements of 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 credit losses, any costs related to foreclosed assets and other operating costs such as salaries and employee benefits, travel, professional services, advertising and marketing and tax expense.

~~On July 23, 2015~~

Recent Developments

The COVID-19 pandemic in the United States continues to have a complex and significant adverse impact on the economy, the banking industry and the Company, ~~closed on its initial public offering with~~all subject to a ~~secondary offering completed in August~~high degree of ~~2017.~~

~~Business Outlook~~

~~Below~~uncertainty. While it is ~~a discussion~~still not possible to know the full universe or extent of ~~management’s current expectations regarding company performance over the near-term based on market conditions, the regulatory environment and business strategies~~these impacts as of the date of this filing, we are disclosing potentially material items of which we are currently aware.

Financial position and results of operations

Relating to our June 30, 2020 financial condition and results of operations, COVID-19 had a significant impact on the allowance for credit losses (“ACL”) on loans and leases, loans carried at fair value, loan servicing asset revaluation, net gains on sales of loans and net interest income. While the Company has not yet experienced any charge-offs related to COVID-19, the ACL and loan fair value calculation and resulting provision for loan and lease credit losses and net loss on loans accounted for under the fair value option were significantly impacted by changes in forecasted economic conditions. Given that forecasted economic scenarios continued to be negative with substantial uncertainty since the pandemic was declared in early March combined with effects surfacing in certain pandemic-at-risk verticals and the risk that payments being made by the SBA for borrowers under its programs may be skewing actual indications of ability to repay, the need for additional credit related reserves increased significantly by the end of the second quarter. Refer to the discussion of the ACL and loans at fair value in Notes 5 and 9, respectively, of the unaudited condensed consolidated financial statements as well as further discussion below in MD&A. Also impacted by deteriorating market conditions was the Company’s valuation of the loan servicing asset as discussed in Note 7 of the unaudited condensed consolidated financial statements and net gains on sales of loans, both of which are further discussed below in MD&A. The secondary market improved at the end of the second quarter which offset earlier negative COVID-19 adjustments for loans carried at fair value and the loan servicing asset valuation. In the second quarter the net interest margin was negatively impacted by significant rate cuts in response to stimulus efforts combined with heightened levels of liquidity at the Company as a part of pandemic preparedness, while the Paycheck Protection Program (the “PPP”) lending had a positive impact on net interest margin, as discussed more fully below in MD&A. Should economic conditions worsen, the Company could experience further increases in the required ACL and negative fair value marks and record additional credit or market related loss expense. It is also possible that the Company’s asset quality measures could worsen at future measurement periods if the effects of COVID-19 are prolonged.

While there are current signs of recovery in the secondary market pricing, the income from gain on sale of loans in future periods could be reduced due to COVID-19. Impacts began to be felt in the latter part of March and early April with loan sales executed at that time as secondary markets conditions began to weaken. At this time, the Company ~~filed~~is unable to project the materiality of such an impact but recognizes the breadth of the economic impact is likely to impact gains in future periods.

Interest income could be further reduced due to COVID-19. In keeping with guidance from banking regulators, the Company has and continues to actively work with COVID-19 affected borrowers to help defer their payments, interest, and fees. In addition to regulatory relief on deferrals from banking regulators, six months of payment relief are also available from the SBA for certain loans guaranteed by that agency. While interest and fees will still accrue to interest, should eventual credit losses on these loans with deferred payments emerge, interest income and fees accrued would need to be reversed. In such a scenario, interest income in future periods could be negatively impacted. At this ~~Report. Actual outcomes~~time, we are unable to project the materiality of such an impact, but recognize the breadth of the economic impact may affect our borrowers’ ability to repay in future periods.

Capital and ~~results~~liquidity

As of June 30, 2020, all of the Company’s capital ratios, and the Bank’s capital ratios, were in excess of all regulatory requirements. While the Company believes that capital is sufficient to withstand an extended economic recession brought about by COVID-19, reported and regulatory capital ratios could be adversely impacted by further credit losses. The Company relies on cash on hand as well as dividends from the Bank to service any debt at the Company. If our capital deteriorates such that the Bank is unable to pay dividends to the Company for an extended period of time, the Company may ~~differ materially~~not be able to service its debt.

The Company maintains access to multiple sources of liquidity. Wholesale funding markets have remained open to the Company, but rates for short term funding have recently been volatile and the secondary market for guaranteed loans has shown reactionary and varying responses to the changing economic environment. In addition to increased levels of loan sales, the Company also increased its levels of deposits and borrowings in the first half of the year, as discussed further in MD&A. If funding costs are elevated for an extended period of time, it could have an adverse effect on the Company’s net interest margin. If an extended recession causes large numbers of the Company’s deposit customers to withdraw their funds, the Company might become more reliant on volatile or more expensive sources of funding.

The Federal Reserve has created the Paycheck Protection Program Liquidity Facility (“PPPLF”) to help provide financing for the origination of PPP loans. The PPPLF extends loans to banks that have loaned money to small businesses under the PPP, discussed in more detail below. Amounts borrowed are non-recourse and have a 100% advance rate equal to the principal amount of PPP loans pledged as security. In addition, loans financed under the PPPLF have a neutral impact on regulatory leverage capital ratios. The maturity date of a borrowing under the PPPLF is equal to the maturity date of the PPP loan pledged to secure the borrowing and would be accelerated (i) if the underlying PPP loan goes into default and is transferred to the SBA to realize on the SBA guarantee or (ii) to the extent that any loan forgiveness reimbursement is received from ~~what~~the SBA. Borrowings under the PPPLF bear interest at a rate of 0.35%, and there are no fees paid by the Company. As of June 30, 2020, the Company had borrowed $1.72 billion from the PPPLF.

Lending operations and accommodations to borrowers

With the passage of the PPP, administered by the SBA, the Company has actively interpreted and implemented new loan programs and systems using its technology platform while participating in assisting its customers and other small businesses in need of resources through the program. PPP loans earn interest at 1% and currently have a two-year or five-year contractual term depending on the origination date. For the earlier loans with a two-year term there 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.~~

~~Table of Contents~~

an option to extend to five years if requested by the borrower and approved by the lender. The Company expects ~~to originate approximately $1.90 to 2.00~~that some portion of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. As of June 30, 2020, the Company has secured funding from the SBA for 10,847 PPP loans representing $1.74 billion in originations. Loans funded through the PPP are fully guaranteed by the SBA, subject to the terms and conditions of the program. Should those circumstances change, the Company could be required to record additional credit loss expense through earnings.

With the passage of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) on March 27, 2020, the SBA will be making six months of principal and interest payments on all fully disbursed SBA 7(a) and SBA Express loans in regular servicing status that close by September 27, 2020. In addition, with regulatory guidance to work with borrowers during this unprecedented situation, the Company has also mobilized to provide a payment deferral program when needed by customers that are adversely affected by the pandemic. Depending on the demonstrated need of the client, the Company is deferring either the full loan payment or the principal component of the loan payment for 60 or 90 days. In accordance with interagency guidance issued in March 2020, these short-term deferrals are not considered troubled debt restructurings. At June 30, 2020 the Company estimated that as a percentage to total loans and leases at amortized cost, excluding PPP, 60% of its loans were receiving the six months of payments from the SBA and ~~maintain an effective tax rate~~that 9% of ~~less than 10%~~its loans had a payment deferral in place.

On June 5, 2020, the Paycheck Protection Program Flexibility Act (the “new Act”) was signed into law, and made significant changes to the PPP to provide additional relief for small businesses. The new Act increased flexibility for small businesses that have been unable to rehire employees due to lack of employee availability, or have been unable to operate as normal due to COVID-19 related restrictions. It extended the ~~full year~~period that businesses have to use PPP funds to qualify for loan forgiveness to 24 weeks, up from 8 weeks under the original rules. The new Act also relaxed the requirements that loan recipients must adhere to in order to qualify for loan forgiveness. In addition, the new Act extended the payment deferral period for PPP loans until the date when the amount of ~~2017, excluding~~loan forgiveness is determined and remitted to the ~~effect~~lender. For PPP recipients who do not apply for forgiveness, the loan deferral period is 10 months after the applicable forgiveness period ends.

Credit

While all industries have and will continue to experience adverse impacts as a result of COVID-19, the Company has exposures in the following verticals considered to be “at-risk” of significant impact as of June 30, 2020: hotels, wine and craft beverage, educational services, entertainment centers, fitness centers, and quick service restaurants each comprising $178.9 million or 8.1%, $101.6 million or 4.6%, $80.4 million or 3.6%, $56.8 million or 2.6%, $22.8 million or 1.0%, and $12.3 million or 0.6% of total unguaranteed loans and leases (all at amortized cost, inclusive of loans carried at fair value), respectively.

The Company continues to work with customers directly affected by COVID-19 and is prepared to offer short-term assistance in accordance with regulatory guidelines. As a result of the ~~expected one-time gain arising from~~uncertain economic environment caused by COVID-19, the ~~recently announced joint venture~~Company is engaging in more frequent communication with ~~First Data.~~borrowers to better understand their situation and the challenges faced and circumstances evolve, which the Company anticipates will allow it to respond proactively as needs and issues arise.

Results of Operations

Performance Summary

Three months ended ~~September~~June 30, ~~2017~~2020 compared with three months ended ~~September~~June 30, ~~2016~~

2019

For the three months ended ~~September~~June 30, ~~2017,~~2020, the Company reported net ~~income~~earnings of ~~$12.9~~$3.8 million, or ~~$0.33~~$0.09 per diluted share, compared to net earnings of $4.9 million, or $0.12 per diluted share, for the second quarter of 2019. This decrease in net income was largely due to continued risks and uncertainties related to the COVID-19 pandemic with significant impacts to the Company’s credit reserves and fair value adjustments, as outlined below:

•

The provision for loan and lease credit losses increased $6.5 million, or 191.9%; and

•

The net loss on loans accounted for under the fair value option increased $3.8 million, or 139.0%.

Outside of the continued effects of COVID-19, which was intensified by the adoption of new current expected credit losses model (“CECL”) in the first quarter of 2020, salaries and employee benefits increased $8.8 million, or 40.0%, as the Company continued to invest in its workforce to support growth and a variety of initiatives including $7.2 million in expense for a performance bonus pool that was available to all employees other than executive officers.

The primary factors partially offsetting the decrease in net income for the three months ended June 30, 2020 were:

•

Increase in net interest income of $7.0 million, or 20.5%, predominately driven by significant growth in total loan and lease portfolios which was accentuated by the origination of $1.74 billion in PPP loans during the second quarter of 2020;

•

Net gains on sales of loans increased $4.7 million, or 77.8%, due largely to a higher volume of loans sold in the second quarter of 2020. The volume in guaranteed loan sales in the second quarter of 2020 increased to $154.5 million, in line with the Company’s balance sheet strategy, compared to $71.9 million in the second quarter of 2019; and

•

Other noninterest income increased $3.6 million, or 410.0%, primarily as the result of $2.5 million in revenue resulting from the sale of services from co-developed technology for processing PPP loans.

Six months ended June 30, 2020 compared with six months ended June 30, 2019

For the six months ended June 30, 2020, the Company reported a net loss of $3.8 million, or $(0.10) per diluted share, as compared to ~~$3.5~~net earnings of $7.3 million, or ~~$0.10~~$0.18 per diluted share, for the ~~three~~six months ended ~~September~~June 30, ~~2016.~~2019. This ~~increase~~decrease in net income ~~is primarily~~was largely the due to ~~the following items:~~

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;

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

~~Increased loan servicing revenue of $630 thousand, or 10.8%, as a result of continued growth in the servicing portfolio due to ongoing loan sales;~~

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

~~Increases in other noninterest income of $1.1 million, or 171.4%,~~above-mentioned risks and uncertainties related to the ~~growth in~~COVID-19 pandemic during the ~~Company’s renewable energy leasing business and trust management services; and~~

~~Decreased income tax expense~~first half of ~~$7.6 million, or 297.5%, due to~~2020, as reflected below:

•

The provision for loan and lease credit losses increased $15.3 million, or 237.6%; and

•

The net loss on loans accounted for under the fair value option increased $16.6 million, or 340.6%.

Outside of COVID-19 effects on the ~~ongoing operation~~first half of ~~the renewable energy leasing business yielding investment tax credits.~~

~~Partially offsetting the above factors that contributed to increased levels of net income was a $3.7 million decrease in the net gains on sales of loans, $1.6 million increase in~~ 2020, salaries and employee benefits ~~$1.6~~increased $15.0 million, or 34.2%, as the Company continued to invest in ~~equipment expense~~its workforce to support growth and ~~$1.5 million in other expenses.~~ a variety of initiatives, as discussed more fully above.

The ~~increase in salaries and employee benefits and other expenses were influenced by~~primary factors partially offsetting the growth of the overall business, including the addition of the title insurance subsidiary in the first quarter of 2017, compared to the same period of 2016. Equipment expense increased principally due to higher levels of depreciation related to aircraft acquired in the first quarter of 2017 and solar panels purchasednet loss for the ~~renewable energy leasing initiative.~~

~~Nine~~six months ended ~~September~~June 30, ~~2017 compared with nine months ended September 30, 2016~~2020 were:

•

Increase in net interest income of $16.5 million, or 25.6%, predominately driven by significant growth in total loan and lease portfolios which was accentuated by the origination of $1.74 billion in PPP loans during the second quarter of 2020;

•

Net gains on sales of loans increased $11.6 million, or 113.5% largely due to higher sale volumes in the first quarter to strengthen the Company’s capital and liquidity profile in preparation for pandemic uncertainties. The volume in guaranteed loan sales in the first half of 2020 increased to $317.3 million compared to $134.9 million in the first half of 2019;

•

Other noninterest income increased $2.7 million, or 79.3%, primarily as the result of $2.5 million in revenue resulting from the sale of services from co-developed technology for processing PPP loans; and

For the nine months ended September 30, 2017, the Company reported net income of $28.8 million, or $0.78 per diluted share, as compared to $8.3 million, or $0.24 per diluted share, for the nine months ended September 30, 2016. This increase in net income is primarily attributable to the following items:

•

Income tax benefit increased $7.3 million primarily as a result of a $3.7 million estimated benefit related to the enactment of the CARES Act which allows the carryback of certain net operating losses for five years combined with the Company’s overall net pretax loss in the first half of 2020.

Increased net interest income of $24.8 million, or 82.0%, predominately driven by significant growth in the loans and leases held for sale and held for investment portfolios combined with a significantly higher net interest margin;

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

~~Increased loan servicing revenue of $2.9 million, or 18.2%, 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 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 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.

Net Interest Income and Margin

~~Table of Contents~~

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.~~them, respectively. Net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as “volume changes.” It is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds, referred to as “rate changes.” ~~Without~~As a bank without a branch network, the Bank ~~generates~~gathers 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~~2020 compared with three months ended ~~September~~June 30, ~~2016~~

2019

For the three months ended ~~September~~June 30, ~~2017,~~2020, net interest income increased ~~$9.4~~$7.0 million, or ~~80.8%~~20.5%, to ~~$21.0~~$40.9 million compared to ~~$11.6~~$33.9 million for the three months ended ~~September~~June 30, ~~2016. This~~2019. The increase was principally due to the significant growth in ~~average interest earning assets~~the held for investment loan and lease portfolio reflecting the Company's ongoing initiative to grow recurring revenue sources and strengthen liquidity. This increase over the prior year was primarily a ~~lesser extent higher yields on these assets which outpaced~~product of the ~~growth and change~~aforementioned origination of $1.74 billion in PPP loans in the ~~cost~~second quarter of 2020 with $8.7 million in interest ~~bearing liabilities. Average~~income coming from recognition of net deferred fees combined with a 1% annualized interest rate. Accordingly, average interest earning assets increased by ~~$746.9 million,~~$2.73 billion, or ~~53.8%~~74.6%, to ~~$2.13~~$6.40 billion for the three months ended ~~September~~June 30, ~~2017,~~2020, compared to ~~$1.39~~$3.66 billion for the three months ended ~~September~~June 30, ~~2016,~~2019, while the yield on average interest earning assets ~~rose sharply by seventy-nine~~decreased 185 basis points to ~~5.24%~~4.19%. The cost of funds on interest bearing liabilities for the three months ended ~~September~~June 30, ~~2017 increased twenty~~2020 decreased 76 basis points to ~~1.43%~~1.65%, and the average balance of interest bearing liabilities increased by ~~$717.1 million,~~$2.78 billion, or ~~56.6%~~78.8%, over the same ~~period.~~ period in 2019. The increase in average interest bearing liabilities was largely driven by strategically heightened levels of liquidity related to COVID-19 risks and uncertainties and funding for PPP loans. As indicated in the rate/volume table below, increased interest earning asset volume more than offset lower yields outpacing the higher volume and lower levels of cost declines for interest bearing liabilities, resulting in increased interest income of $11.7 million and increased interest expense of $4.7 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019. For the three months ended June 30, 2019 compared to the three months ended June 30, 2020, net interest margin decreased from 3.71% to 2.56%, respectively, principally due to the Company’s interest earning assets repricing more rapidly from lower fed funds rates than its interest bearing liabilities, combined with above mentioned impacts of PPP related activities and heightened liquidity.

Six Months Ended June 30, 2020 compared with six months ended June 30, 2019

For the six months ended June 30, 2020, net interest income increased $16.5 million, or 25.6%, to $81.1 million compared to $64.5 million for the six months ended June 30, 2019. This increase was principally due to the significant growth in 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 grow recurring revenue sources and strengthen liquidity. This increase over the first half of 2019 was also enhanced by the above mentioned origination of PPP loans in the second quarter. Accordingly, average interest earning assets increased by $1.93 billion, or 54.7%, to $5.47 billion for the six months ended June 30, 2020, compared to $3.53 billion for the six months ended June 30, 2019, while the yield on average interest earning assets decreased 122 basis points to 4.78%. The cost of funds on interest bearing liabilities for the six months ended June 30, 2020 decreased 54 basis points to 1.85%, and the average balance of interest bearing liabilities increased by $1.93 billion, or 56.5%, over the same period in 2019. The increase in average interest bearing liabilities was also largely impacted by strategically heightened levels of liquidity in the first half of 2020 related to COVID-19 risks and uncertainties and funding sources for PPP loans. As indicated in the rate/volume table below, the increase in interest ~~bearing liabilities~~earning assets and corresponding yields outpaced the higher volume and decreased 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~~$25.2 million and increased interest expense of ~~$3.2~~$8.7 million for the ~~three~~six months ended ~~September~~June 30, ~~2017~~2020 compared to the ~~three~~six months ended ~~September~~June 30, ~~2016.~~2019. For the ~~three~~six months ended ~~September~~June 30, ~~2017~~2019 compared to the ~~three~~six months ended ~~September~~June 30, ~~2016,~~2020, net interest margin ~~increased sharply~~decreased from ~~3.32%~~3.68% to ~~3.91% due to the aforementioned effects.~~

~~Nine months ended September 30, 2017 compared with nine months ended September 30, 2016~~

~~For the nine months ended September 30, 2017, net interest income increased $24.8 million, or 82.0%~~2.97%, ~~to $55.1 million compared to $30.3 million for the nine months ended September 30, 2016. This increase was also~~respectively, principally due to lower fed funds rates impacting the ~~significant growth in average~~yield on interest earning assets ~~and to a lesser extent higher yields on these assets outpacing the growth and change in~~more rapidly than the cost of interest bearing liabilities. Average interest earning assets increased by $702.0 million, or 58.4%, to $1.90 billion for the nine months ended September 30, 2017 compared to $1.20 billion for the nine months ended September 30, 2016, while the yield on average interest earning assets increased by sixty-four basis points to 5.12%. The cost of funds on interest bearing liabilities for the nine months ended September 30, 2017 increased by eleven basis points to 1.34%, and the average balance of interest bearing liabilities increased by $688.0 million, or 63.13%, during the same period. As indicated in the ~~rate/volume table below,~~first half of 2020, combined with the ~~increase in interest bearing liabilities~~above mentioned impacts of PPP related activities and ~~corresponding cost~~heightened levels of funds was outpaced by the positive effects of the increased volume of interest earning assets along with much higher yields, resulting in increased interest income of $32.6 million and increased interest expense of $7.8 million for the nine months ended September 30, 2017. For the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016, net interest margin increased sharply from 3.36% to 3.87% due to the aforementioned effects.

liquidity.

~~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,
	2020								2019
	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	$	711,916		$	1,009		0.57	%	$	184,986		$	1,108		2.40	%
Investment securities		556,014			3,786		2.73			566,159			4,116		2.92
Loans held for sale		921,956			13,115		5.71			839,724			14,333		6.85
Loans and leases held for investment⁽¹⁾		4,208,109			48,907		4.66			2,073,297			35,581		6.88
Total interest earning assets		6,397,995			66,817		4.19			3,664,166			55,138		6.04
Less: Allowance for credit losses on loans and leases		(35,875	)							(19,196	)
Non-interest earning assets		603,610								472,529
Total assets	$	6,965,730							$	4,117,499
Interest bearing liabilities:
Interest bearing checking	$	462,977		$	646		0.56	%	$	—		$	—		—	%
Savings		1,398,378			4,814		1.38			989,512			5,235		2.12
Money market accounts		82,908			89		0.43			85,982			161		0.75
Certificates of deposit		3,689,041			19,572		2.13			2,452,159			15,807		2.59
Total deposits		5,633,304			25,121		1.79			3,527,653			21,203		2.41
Borrowings		676,849			798		0.47			1,409			—		—
Total interest bearing liabilities		6,310,153			25,919		1.65			3,529,062			21,203		2.41
Non-interest bearing deposits		41,218								49,466
Non-interest bearing liabilities		50,554								26,580
Shareholders' equity		563,805								512,391
Total liabilities and shareholders' equity	$	6,965,730							$	4,117,499
Net interest income and interest rate spread				$	40,898		2.54	%				$	33,935		3.63	%
Net interest margin							2.56	%							3.71	%
Ratio of average interest-earning assets to average interest-bearing liabilities							101.39	%							103.83	%

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.~~loans and leases.

~~Table of Contents~~

	Six Months Ended June 30,
	2020								2019
	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	$	470,901		$	1,759		0.75	%	$	233,904		$	2,747		2.37	%
Investment securities		546,110			7,548		2.77			514,038			7,433		2.92
Loans held for sale		963,359			28,980		6.03			794,919			26,934		6.83
Loans and leases held for investment⁽¹⁾		3,485,135			92,003		5.29			1,990,054			67,946		6.89
Total interest earning assets		5,465,505			130,290		4.78			3,532,915			105,060		6.00
Less: Allowance for credit losses on loans and leases		(31,439	)							(17,600	)
Non-interest earning assets		555,469								473,512
Total assets	$	5,989,535							$	3,988,827
Interest bearing liabilities:
Interest bearing checking	$	231,489		$	646		0.56	%	$	84		$	—		—	%
Savings		1,261,131			9,658		1.54			958,716			10,021		2.11
Money market accounts		80,265			189		0.47			84,648			269		0.64
Certificates of deposit		3,425,850			37,883		2.22			2,367,902			30,230		2.57
Total deposits		4,998,735			48,376		1.94			3,411,350			40,520		2.40
Borrowings		342,002			855		0.50			1,436			—		—
Total interest bearing liabilities		5,340,737			49,231		1.85			3,412,786			40,520		2.39
Non-interest bearing deposits		45,071								47,294
Non-interest bearing liabilities		52,024								20,548
Shareholders' equity		551,703								508,199
Total liabilities and shareholders' equity	$	5,989,535							$	3,988,827
Net interest income and interest rate spread				$	81,059		2.93	%				$	64,540		3.61	%
Net interest margin							2.97	%							3.68	%
Ratio of average interest-earning assets to average interest-bearing liabilities							102.34	%							103.52	%

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.~~loans and leases.

~~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,
	2020 vs. 2019									2020 vs. 2019
	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	$	(2,050	)	$	1,951		$	(99	)	$	(2,822	)	$	1,834		$	(988	)
Investment securities		(259	)		(71	)		(330	)		(339	)		454			115
Loans held for sale		(2,505	)		1,287			(1,218	)		(3,341	)		5,387			2,046
Loans and leases held for investment		(17,398	)		30,724			13,326			(21,200	)		45,257			24,057
Total interest income		(22,212	)		33,891			11,679			(27,702	)		52,932			25,230
Interest expense:
Interest bearing checking		—			646			646			—			646			646
Savings		(2,206	)		1,785			(421	)		(3,101	)		2,738			(363	)
Money market accounts		(67	)		(5	)		(72	)		(68	)		(12	)		(80	)
Certificates of deposit		(3,503	)		7,268			3,765			(4,950	)		12,603			7,653
Borrowings		2			796			798			4			851			855
Total interest expense		(5,774	)		10,490			4,716			(8,115	)		16,826			8,711
Net interest income	$	(16,438	)	$	23,401		$	6,963		$	(19,587	)	$	36,106		$	16,519

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 Credit Losses

The provision for loan and lease credit losses represents the amount necessary to be charged against the current period’s earnings to maintain the allowance for ~~loan~~credit losses (“ACL”) on loans and ~~lease losses~~leases 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%~~50% to ~~80%~~90% 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 2020, the provision for loan and lease credit losses was $10.0 million compared to $3.4 million for the same period in 2019, an increase of $6.5 million. For the first half of 2020, the provision for loan and lease credit losses was $21.8 million compared to $6.4 million for the same period in 2019, an increase of $15.3 million. The Company adopted the new current expected credit losses (“CECL”) standard effective January 1, 2020 and accordingly determined to use forecasted levels of unemployment as a primary economic variable in forecasting future expected losses. The majority of the provision for the second quarter of 2020 was due to the effects of the COVID-19 pandemic, while approximately $15.5 million of the first half of 2020 provision was estimated to be based upon the severity of ongoing developments resulting from the COVID-19 pandemic.

Loans and leases held for investment at historical cost were $3.82 billion as of June 30, 2020, increasing by $2.45 billion, or 178.7%, compared to June 30, 2019. This growth was largely fueled by $1.74 billion in PPP loan originations in the second quarter of 2020. Excluding PPP loan originations and net unearned fees on those loans, the balance in loans and leases held for investment at historical cost was $2.13 billion at June 30, 2020, an increase of $758.2 million, or 55.4%, over June 30, 2019. This growth, outside of PPP activity in the second quarter of 2020, was fueled by continued origination volumes combined with retention of substantially more loans on the balance sheet.

Net charge-offs for loans and leases carried at historical cost were $1.8 million, or 0.21% of average quarterly loans and leases held for investment, carried at historical cost, on an annualized basis, for the three months ended June 30, 2020, compared to $121 thousand, or 0.04%, for the three months ended June 30, 2019. Net charge-offs for loans and leases carried at historical cost for the second quarter of 2020 was 0.25% of average quarterly loans and leases held for investment, excluding PPP loans, on an annualized basis. For the six months ended June 30, 2020, net charge-offs totaled $4.6 million compared to $34 thousand for the six months ended June 30, 2019, an increase of $4.5 million, or 13,370.6%. The increase in net charge-offs largely consisted of a number of loans in the Government Contracting, Healthcare, Family Entertainment, and Independent Pharmacies verticals. Net charge-offs are a key element of historical experience in the Company's estimation of the allowance for credit losses on loans and leases.

In addition, nonperforming loans and leases not guaranteed by the SBA or USDA, excluding $6.4 million and $7.7 million accounted for under the fair value option at June 30, 2020 and 2019, respectively, totaled $13.1 million, which was 0.34% of the held for investment loan and lease portfolio carried at historical cost at June 30, 2020, compared to $6.5 million, or 0.48% of loans and leases held for investment at June 30, 2019. Nonperforming loans and leases carried at historical cost which are not guaranteed by the SBA or USDA were 0.62% of the historical cost portion of the held for investment loan and lease portfolio, excluding PPP loans, at June 30, 2020.

Noninterest Income

Noninterest income is principally comprised of net gains from the sale of SBA and USDA-guaranteed loans along with loan servicing revenue and ~~revaluation.~~related revaluation of the servicing asset. Revenue from the sale of loans depends upon the volume, maturity structure and rates of underlying loans as well as the pricing and availability of funds in the secondary markets prevailing in the period between completed loan funding and closing of sale. In addition, the loan servicing revaluation is significantly impacted by changes in market rates and other underlying assumptions such as prepayment speeds and default rates. Net (loss) gain on loans accounted for under the fair value option is also significantly impacted by changes in market rates, prepayment speeds and inherent credit risk. Other less 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,						2020/2019 Increase (Decrease)
	2020			2019			Amount			Percent
Noninterest income
Loan servicing revenue	$	6,691		$	7,063		$	(372	)		(5.27	)%
Loan servicing asset revaluation		(1,571	)		(3,245	)		1,674			51.59
Net gains on sales of loans		10,695			6,015			4,680			77.81
Net (loss) gain on loans accounted for under the fair value option		(1,089	)		2,791			(3,880	)		(139.02	)
Equity method investments income (loss)		(2,243	)		(1,736	)		(507	)		29.21
Equity security investments gains (losses), net		161			32			129			403.13
Gain on sale of investment securities available-for-sale, net		734			—			734			100.00
Lease income		2,635			2,369			266			11.23
Management fee income		1,206			91			1,115			1,225.27
Construction supervision fee income		684			386			298			77.20
Other noninterest income		4,508			884			3,624			409.95
Total noninterest income	$	22,411		$	14,650		$	7,761			52.98	%

	Six Months Ended June 30,						2020/2019 Increase (Decrease)
	2020			2019			Amount			Percent
Noninterest income
Loan servicing revenue	$	13,113		$	14,473		$	(1,360	)		(9.40	)%
Loan servicing asset revaluation		(6,263	)		(7,285	)		1,022			14.03
Net gains on sales of loans		21,807			10,213			11,594			113.52
Net (loss) gain on loans accounted for under the fair value option		(11,727	)		4,874			(16,601	)		(340.60	)
Equity method investments income (loss)		(4,721	)		(3,750	)		(971	)		25.89
Equity security investments gains (losses), net		97			135			(38	)		(28.15	)
Gain on sale of investment securities available-for-sale, net		655			5			650			13,000.00
Lease income		5,259			4,694			565			12.04
Management fee income		2,850			91			2,759			3,031.87
Construction supervision fee income		1,074			1,165			(91	)		(7.81	)
Other noninterest income		6,009			3,351			2,658			79.32
Total noninterest income	$	28,153		$	27,966		$	187			0.67	%

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,~~2020, noninterest income ~~decreased~~increased by ~~$372 thousand,~~$7.8 million, or ~~1.5%~~53.0%, compared to the three months ended ~~September~~June 30, ~~2016.~~2019. The ~~decline~~increase from the prior year is primarily the result of the aforementioned increase in net gains on sales of loans ~~decreasing $3.7~~combined with a $3.6 million ~~to $18.1~~increase in other noninterest income largely comprised of $2.5 million in revenue resulting from the ~~third~~sale of services from co-developed technology for processing PPP loans. Other items contributing to the increase in noninterest income were a lower net loss on the loan servicing asset revaluation of $1.7 million and management fee income earned by Canapi Advisors, the Company’s investment advisor subsidiary, increasing by $1.1 million. Offsetting the increases in noninterest income for the second quarter of ~~2017~~2020 was the aforementioned net negative valuation adjustment related to loans measured at fair value which increased by $3.9 million.

For the six months ended June 30, 2020, noninterest income increased by $187 thousand, or 0.7%, compared to ~~$21.8 million~~the six months ended June 30, 2019. The slight increase from the prior year is also primarily the result of the aforementioned increase 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. Partially offsetting the effects of lower~~ gains on sales of loans ~~were increased servicing revenue of $630 thousand, title insurance income of $2.0~~combined with a $2.7 million ~~from the acquisition of a nationwide title insurance business on February 1, 2017 and increased other noninterest income of $1.1 million. The~~ increase in other noninterest income ~~was primarily~~largely comprised of ~~$682 thousand~~$2.5 million in revenue resulting from the sale of ~~operating lease income~~services from ~~renewable energy assets and trust management income of $236 thousand.~~

~~For the nine months ended September 30, 2017, noninterest income increased by $10.3 million, or 15.3%, compared~~co-developed technology for processing PPP loans. Other items contributing to the ~~nine months ended September 30, 2016. Increases~~increase in noninterest income were ~~primarily~~a lower net loss on the ~~result~~loan servicing asset revaluation of ~~higher year-to-date levels in~~$1.0 million and management fee income earned by Canapi Advisors, the ~~serviced loan portfolio and~~Company’s investment advisor subsidiary, increasing by $2.8 million. Offsetting the volume of loans sold in the secondary market which generated $2.9 million of increased servicing revenue and $2.5 million of increased net gains on sale of loans. Also driving increased levels of noninterest income was $5.8 million in title insurance revenue from the acquisition of a nationwide title insurance business in early 2017 and increased other

~~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 offsetting the overall increaseincreases in noninterest income for the first half of 2020 was ~~a higher~~the aforementioned net negative valuation adjustment related to loans measured at fair value which increased by $16.6 million and decreased loan servicing ~~revaluation adjustment~~revenue of ~~$1.8~~$1.4 million.

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,
	2020		2019		2020		2019
Amount of loans and leases originated	$	2,175,055	$	525,088	$	500,634	$	390,851
Guaranteed portions of loans sold		154,980		71,934		162,297		62,940
Outstanding balance of guaranteed loans sold ⁽¹⁾		2,840,429		2,870,108		2,761,015		2,952,774

	Six Months Ended June 30,				For years ended December 31,
	2020		2019		2019		2018		2017		2016
Amount of loans and leases originated	$	2,675,689	$	915,939	$	2,001,886	$	1,765,680	$	1,934,238	$	1,537,010
Guaranteed portions of loans sold		317,277		134,874		340,374		945,178		787,926		761,933
Outstanding balance of guaranteed loans sold⁽¹⁾		2,840,429		2,870,108		2,746,840		3,045,460		2,680,641		2,278,618

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~~those sold portions are retained by the Bank. In exchange for continuing to service sold loans, ~~that are sold,~~ the Bank receives fee income represented in loan servicing revenue equivalent to ~~one percent~~1.0% of the outstanding balance of SBA loans sold and 0.40% of the outstanding balance of USDA loans sold. In addition, the standard cost of(adequate compensation) for 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 above the standard cost to service 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~~the quarter ended ~~September~~June 30, ~~2017,~~2020, loan servicing revenue ~~increased $630~~decreased $372 thousand, or ~~10.8%~~5.27%, ~~and $2.9~~to $6.7 million ~~or 18.2%, respectively,~~as compared to the ~~three and nine~~quarter ended June 30, 2019. For the six months ended ~~September~~June 30, ~~2016,~~2020, loan servicing revenue decreased $1.4 million, or 9.4% to $13.1 million as compared to the six months ended June 30, 2019. The lower servicing revenue for the second quarter and first half of 2020 has been a result of ~~an increase in~~ the ~~average outstanding~~declining balance of ~~guaranteed loans sold.~~the serviced portfolio. At ~~September~~June 30, ~~2017,~~2020, the outstanding balance of ~~government~~ guaranteed loans sold in the secondary market was ~~$2.58 billion. At September~~$2.84 billion compared to $2.87 billion at June 30, ~~2016, the outstanding balance of SBA guaranteed loans sold was $2.10 billion.~~

2019.

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,~~2020, there was a net negative loan servicing revaluation adjustment of ~~$3.7~~$1.6 million compared to a net negative ~~revaluation~~ adjustment of ~~$3.4~~$3.2 million for the three months ended ~~September~~June 30, ~~2016.~~2019. For the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, there was a net negative loan servicing revaluation adjustment of ~~$6.9~~$6.3 million compared to a net negative ~~revaluation~~ adjustment of ~~$5.1~~$7.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2016. The higher negative loan servicing~~2019.The lower revaluation amount for the ~~third~~second quarter and first half of ~~2017~~2020 as compared to the ~~third quarter~~corresponding period of ~~2016~~2019 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 the secondaryimproving market ~~for guaranteed portions of 7(a) loans.~~

~~Table of Contents~~

conditions.

Net Gains on Sale of Loans: For the three ~~and nine~~ months ended ~~September~~June 30, ~~2017,~~2020, net gains on sales of loans ~~decreased $3.7~~increased $4.7 million, or ~~16.9%~~77.8%, ~~and increased $2.5 million, or 4.7%, respectively,~~ compared to the three ~~and nine~~ months ended ~~September~~June 30, ~~2016.~~2019. For the three months ended ~~September~~June 30, 2017, the volume of guaranteed loans sold decreased $46.8 million, or 22.2%, to $163.8 million from $210.6 million for the three months ended September 30, 2016. This decline in guaranteed sale volume was principally the result of a decrease in the percentage of loans that were fully funded and thereby eligible for sale at closing arising largely from seasonality in our renewable energy vertical. For the nine months ended September 30, 2017,2020, the volume of guaranteed loans sold increased ~~$74.5~~$83.0 million, or ~~14.8%~~115.4%, to ~~$576.3~~$155.0 million from ~~$501.8~~$71.9 million for the ~~nine~~three months ended ~~September~~June 30, ~~2016. The volume-driven increases in~~2019. For the ~~year-to-date~~six months ended June 30, 2020, net ~~gain~~gains on ~~loan sale comparisons were partially offset by lower average premiums paid in~~sales of loans increased $11.6 million, or 113.5%, compared to the ~~secondary market.~~six months ended June 30, 2019. For the six months ended June 30, 2020, the volume of guaranteed loans sold increased $182.4 million, or 135.2%, to $317.3 million from $134.9 million for the six months ended June 30, 2019. The average net gain on guaranteed loan sales decreased from $80.1 thousand to $66.8 thousand, per million sold, in the second quarters of 2019 and 2020, respectively, and decreased from $71.3 thousand to $65.2 thousand, per million sold, in the first half of 2019 and 2020, respectively. With this overall decrease in market value due to loan sales earlier in the second quarter combined with the mix of loan sales, the increase in net gains on sales of loans in the second quarter and second half of 2020 is due to a higher volume of loans sold. Secondary market values continued to recover as the second quarter of 2020 progressed. The volume of sales in the first quarter of 2020 was heightened to strengthen the Company’s capital and liquidity profile in light of uncertain market conditions while the second quarter of 2020 sales volume is in-line with the Company’s balance sheet strategy. Also enhancing the increase in net gains on sale of loans in the second quarter of 2020 are $1.1 million in decreased losses from fair value changes in exchange-traded interest rate futures contracts. This decrease in volatility of exchange-traded interest rate futures contracts was the product of the Company preemptively exiting such contracts in the first quarter.

Net (Loss) Gain on Loans Accounted for Under the Fair Value Option: For the three ~~and nine~~ months ended ~~September~~June 30, ~~2017 was $111 thousand and $97 thousand of revenue~~2020, the net loss on loans accounted for ~~each $1~~under the fair value option increased $3.9 million, ~~in loans sold, respectively,~~or 139.0%, compared to ~~$104 thousand and $105 thousand of revenue for each $1 million in loans sold for~~ the three ~~and nine~~ months ended ~~September~~June 30, ~~2016.~~2019. For the six months ended June 30, 2020, the net loss on loans accounted for under the fair value option increased $16.6 million, or 340.6%, compared to the six months ended June 30, 2019. The ~~lower average premiums recorded~~carrying amount of loans accounted for under the fair value option at June 30, 2020 and 2019 was $866.7 million ($32.1 million classified as held for sale and $834.6 million classified as held for investment) and $865.7 million ($26.6 million classified as held for sale and $839.1 million classified as held for investment), respectively, an increase of $990 thousand, or 0.1%. The first half of 2020 net loss on loans accounted for under the fair value option was estimated to be approximately $9.7 million related to the severity of ongoing developments of the COVID-19 pandemic. The magnitude of COVID-19 related impacts on loan fair value adjustments in ~~2017 were driven~~the second quarter of 2020 was dampened by ~~increased USDA guaranteed loan sales which commonly receive lower premiums than SBA guaranteed loan sales.~~

improving market conditions for unguaranteed loans.

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,				2020/2019 Increase (Decrease)
	2020		2019		Amount			Percent
Noninterest expense
Salaries and employee benefits	$	30,782	$	21,990	$	8,792			39.98	%
Non-staff expenses:
Travel expense		364		1,541		(1,177	)		(76.38	)
Professional services expense		1,385		1,621		(236	)		(14.56	)
Advertising and marketing expense		624		1,665		(1,041	)		(62.52	)
Occupancy expense		1,955		1,848		107			5.79
Data processing expense		2,764		1,947		817			41.96
Equipment expense		4,652		4,239		413			9.74
Other loan origination and maintenance expense		2,492		1,708		784			45.90
Renewable energy tax credit investment impairment		—	��	602		(602	)		(100.00	)
FDIC insurance		1,721		699		1,022			146.21
Other expense		1,361		1,716		(355	)		(20.69	)
Total non-staff expenses		17,318		17,586		(268	)		(1.52	)
Total noninterest expense	$	48,100	$	39,576	$	8,524			21.54	%

	Six Months Ended June 30,				2020/2019 Increase (Decrease)
	2020		2019		Amount			Percent
Noninterest expense
Salaries and employee benefits	$	58,845	$	43,845	$	15,000			34.21	%
Non-staff expenses:
Travel expense		2,145		2,741		(596	)		(21.74	)
Professional services expense		3,322		3,803		(481	)		(12.65	)
Advertising and marketing expense		1,985		3,029		(1,044	)		(34.47	)
Occupancy expense		4,376		3,457		919			26.58
Data processing expense		5,921		4,346		1,575			36.24
Equipment expense		9,287		7,564		1,723			22.78
Other loan origination and maintenance expense		4,948		3,347		1,601			47.83
Renewable energy tax credit investment impairment		—		602		(602	)		(100.00	)
FDIC insurance		3,231		1,334		1,897			142.20
Other expense		3,531		3,709		(178	)		(4.80	)
Total non-staff expenses		38,746		33,932		4,814			14.19
Total noninterest expense	$	97,591	$	77,777	$	19,814			25.48	%

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 %

~~Table of Contents~~

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~~2020 increased ~~$8.6~~$8.5 million, or ~~31.7%~~21.5%, and ~~$28.1~~$19.8 million, or ~~37.9%~~25.5%, respectively, compared to the same periods in ~~2016.~~2019. The increase in noninterest expense was ~~predominately impacted by increased personnel, equipment expense and other expenses primarily~~largely driven by ~~the significant growth of the Company's core business.~~salaries and employee benefits. 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~~2020 increased by ~~$1.6~~$8.8 million, or ~~9.0%~~40.0%, and ~~$9.8~~$15.0 million, or ~~21.4%~~34.2%, respectively, compared to the same periods in ~~2016. A significant driver for~~2019. While personnel expense is carefully managed, 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~~is principally due to the ~~growth in personnel expense was continued~~Company’s commitment to and investment in ~~human capital~~its workforce to support ~~the growing loan~~growth and ~~lease production from new and existing verticals.~~a variety of initiatives combined with $7.2 million in expense for a performance bonus pool that was available to all employees other than executive officers. Total full-time equivalent employees increased from ~~400~~531 at ~~September~~June 30, ~~2016~~2019 to ~~530~~640 at ~~September~~June 30, ~~2017.~~2020. Salaries and employee benefits expense included ~~$2.0~~$3.3 million ~~and $4.1 million of stock based compensation in the three months ended September 30, 2017 and 2016, respectively,~~ and $6.2 million of stock-based compensation for the three and ~~$7.6~~six months ended June 30, 2020, respectively, compared to $2.9 million and $5.8 million for the ~~nine~~three and six months ended ~~September~~June 30, ~~2017 and 2016,~~2019, 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 compensation, $286 thousand~~

Data processing expense: Total data processing expense for the third quarter of 2017 and $1.0 million for the first nine months of 2017 included in salaries and employee benefits is related to restricted stock unit ("RSU") awards with a market price condition of $34 per share for key employee retention with an effective grant date of May 24, 2016. See Note 10 - Stock 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 expense: For~~ the three and ~~nine~~six months ended ~~September~~June 30, ~~2017, total professional services expense~~2020 increased ~~$161~~by $817 thousand, or ~~17.8%~~42.0%, and ~~$1.9~~$1.6 million, or ~~80.3%~~36.2%, respectively, compared to the same periods in ~~2016.~~2019. The ~~primary drivers of the year over year~~ increase ~~were advisory, consulting,~~was predominantly driven by third party costs incurred in internal software development and ~~due diligence expenses related~~with additional software subscriptions to ~~the February 2017 acquisition of a title insurance business.~~

~~Advertising and marketing expense~~: help maximize operational efficiencies.

Equipment expense:For the three and ~~nine~~six months ended ~~September~~June 30, ~~2017, total advertising and marketing~~2020, equipment expense increased ~~$419~~$413 thousand, or ~~38.2%~~9.7%, and ~~$1.6~~$1.7 million, or ~~45.3%~~22.8%, respectively, compared to the same periods in ~~2016. The primary driver~~2019. Primary factors contributing to this increase were the depreciation of technology and infrastructure investments to support the ~~increase in advertising~~Company’s growth initiatives.

Other loan origination and ~~marketing expense was the cost of growing brand recognition in new and existing verticals and launching a new deposit platform.~~

~~Data processing expense~~: maintenance expense:For the three and ~~nine~~six months ended ~~September~~June 30, ~~2017, total data processing~~2020, other loan origination and maintenance expense increased ~~$730~~$784 thousand, or ~~58.3%~~45.9%, and ~~$1.7~~$1.6 million, or ~~43.3%~~47.8%, respectively, compared to the same periods in ~~2016. The primary driver~~2019 due to increased levels of ~~the increase in data processing expense was the growth in our loan and deposit portfolios and the development of a new deposit platform.~~

~~Equipment expense:~~SBA loans.

FDIC insurance:For the three and ~~nine~~six months ended ~~September~~June 30, ~~2017, the total costs associated with equipment~~2020, FDIC insurance increased ~~$1.6~~$1.0 million, or ~~264.6%~~146.2%, and ~~$3.3~~$1.9 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%~~142.2%, respectively, compared to the same periods in ~~2016.~~2019 due to higher required premiums.

Travel & Advertising and marketing expenses:For the three and six months ended June 30, 2020, travel & advertising and marketing expenses in aggregate decreased $2.2 million, or 69.2%, and $1.6 million, or 28.4%, respectively. This ~~increase~~decrease was the result of ~~revised premium requirements~~certain activities being paused due to the impact of ~~all FDIC-insured financial institutions in the latter part of 2016 along with significantly higher deposit levels.~~

~~Title insurance closing services expense~~: With the first quarter 2017 acquisition of a nationwide title insurance company, this is a new expense category. This category reflects the cost of closing services such as notary and abstracting in the delivery of title insurance agency products. COVID-19.

Income Tax Expense

For the three ~~and nine~~ months ended ~~September~~June 30, ~~2017, total title insurance closing services~~2020, income tax expense ~~was $687~~increased by $812 thousand ~~and $1.9 million, respectively.~~

~~Other expense:~~ ~~For the three and nine months ended September 30, 2017, the total costs associated with other expenses increased $1.5 million, or 96.3%, and $4.2 million, or 91.1%, respectively,~~ compared to the same ~~periods~~period in ~~2016. The quarter-over-quarter increase in other expenses was predominately comprised of costs associated with support expenses~~2019, and infrastructure driven by business growth and an increase in charitable contributions. The year-over-year increase in other expense was comprised predominately of charitable initiatives, costs associated with the ~~newly acquired title company, and a first quarter 2017 loss incurred upon the trade-in of an existing aircraft.~~

~~Income Tax Expense~~

~~The~~Company’s effective tax rates ~~for~~were 28.1% and 11.8%, respectively. The increase in the ~~three and nine~~second quarter of 2020 over the second quarter of 2019 is primarily due to the absence of expected tax credits during 2020.

For the six months ended ~~September~~June 30, ~~2017 were (64.8)~~2020, the Company had an income tax benefit of $(6.3) million with an effective tax rate of (62.2)% ~~and (15.5)%, respectively, compared to~~while the first half of 2019 had income tax expense of $979 thousand with an effective ~~rates~~tax rate of ~~42.4% and 43.7% for the three and nine months ended September 30, 2016, respectively.~~ 11.8%. The negative effective ~~rates~~tax rate during the first half of ~~(64.8)%~~2020 was a result of a discrete, estimated income tax benefit of $3.7 million related to the enactment of the CARES Act on March 27, 2020. The CARES Act allows taxpayers to carryback certain net operating losses to each of the five taxable years preceding the taxable year of such losses. As a result, the Company will be allowed to carryback its 2018 net operating loss which had been utilized and ~~(15.5)%~~measured under the prior law using a 21% corporate income tax rate to pre-2018 taxable years during which the corporate income tax rate was 35%. The remaining income tax benefit in the first half of 2020 was predominantly driven by the Company’s overall net pretax loss. Based upon current projections, the effective tax rate for the ~~three~~remainder of 2020 is expected to be approximately 26.0% to 28.0%; however, there can be no assurance as to the actual amount because it will be dependent upon the nature and ~~nine-month periods ended September 30, 2017 principally reflected an increase in anticipated investment in renewable energy assets~~amount of future income and expenses, investments generating 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~~credits and transactions with discrete 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.effects.

Discussion and Analysis of Financial Condition

~~September~~

June 30, ~~2017~~2020 vs. December 31, ~~2016~~

2019

Total assets at ~~September~~June 30, ~~2017~~2020 were ~~$2.43~~$8.21 billion, an increase of ~~$676.9 million,~~$3.40 billion, or ~~38.6%~~70.6%, compared to total assets of ~~$1.76~~$4.81 billion at December 31, ~~2016.~~2019. The growth in total assets was principally driven by the following:

•

Cash and cash equivalents, comprised of cash and due from banks and federal funds sold, increased $1.13 billion as a product of increased levels of borrowings, deposits and loan sales arising from strategically heightened levels of liquidity related to COVID-19 risks and uncertainties and funding for PPP loans originated in the second quarter;

•

Increased investment securities available-for-sale of $239.7 million. This increase in investment securities was due to availability of excess surplus liquidity, discussed above related to pandemic readiness, accelerating 2020 investment growth in accordance with the Company’s asset-liability and liquidity management plan; and

~~Increased~~

•

Growth in loans and leases held for sale and held for investment of $2.03 billion resulting from strong origination activity in the first half of 2020, largely comprised of $1.74 billion in PPP loans.

Cash and cash equivalents, comprised of cash and due from banks ~~due to the successful secondary offering completed in August of 2017 of $113.1 million~~ and ~~growth from deposit gathering campaigns generating $527.8 million in new deposits;~~

Growth in loan and lease originations combined with longer retention times 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 and equipment related primarily to construction of a new aircraft hangar, the addition of two new aircraft in replacement of two older ones and the addition of solar panels to meet leasing commitments;

~~Increased other assets largely related to:~~


◦	~~goodwill and intangibles generated by the first quarter acquisition of Reltco, and~~


◦	~~income taxes receivable arising from investment tax credits generated by investment in solar panels classified in premises and equipment in which the Company is the lessor.~~

~~Cash and cash equivalents were $260.9 million~~federal funds sold, was $1.35 billion at ~~September~~June 30, ~~2017,~~2020, an increase of ~~$22.9 million,~~$1.13 billion, or ~~9.6%~~508.9%, compared to ~~$238.0~~$221.4 million at December 31, ~~2016. This~~2019. As mentioned above, this increase ~~primarily reflected~~reflects the ~~results~~impact of ~~a successful deposit gathering campaign combined with~~strategically heightened levels of liquidity related to COVID-19 risks and uncertainties and funding for PPP loans during the ~~net proceeds from the Company’s secondary capital raise in the third~~second quarter.

Total investment securities increased ~~$5.5~~$239.7 million during the first ~~nine~~six months of ~~2017,~~2020, from ~~$71.1~~$540.0 million at December 31, ~~2016,~~2019, to ~~$76.6~~$779.8 million at ~~September~~June 30, ~~2017,~~2020, an increase of ~~7.8%~~44.4%. The Company increased its investment securities position during the first half of 2020 largely as a part of improving returns on excess liquidity and meeting annual investment asset-liability plans, as discussed above. At June 30, 2020, the investment portfolio iswas comprised of USU.S. treasury, U.S. government agency, ~~securities, residential~~U.S. government- sponsored entity mortgage-backed securities and ~~a mutual fund.~~

~~Table of Contents~~

municipal bonds.

Loans and leases held for ~~sale~~investment increased ~~$298.3 million,~~$2.02 billion, or ~~75.7%~~77.0%, during the first ~~nine~~six months of ~~2017,~~2020, from ~~$394.3 million~~$2.63 billion at December 31, ~~2016,~~2019, to ~~$692.6 million~~$4.65 billion at ~~September~~June 30, ~~2017.~~2020. The increase was primarily the result of ~~strong growth~~$1.74 billion in PPP loan ~~origination activities throughout 2017~~originations combined with $930.8 million in other loan originations in the first half of 2020.

Premises 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~~equipment, net, decreased $10.0 million, or ~~28.9%~~3.6%, during the first ~~nine~~six 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~~2020 which was primarily driven by ~~construction~~increased levels of ~~a new aircraft hangar~~depreciation of facilities and ~~the replacement of two older aircraft with two new ones better suited~~infrastructure to ~~service the Company's growing nationwide customer base~~accommodate Company growth and ~~the addition of~~ solar panels to meet leasing ~~commitments.~~

~~Servicing~~obligations in prior periods.

Other assets increased ~~$1.4~~$23.8 million, or ~~2.7%~~15.3%, ~~during the first nine months of 2017,~~ from ~~$52.0~~$156.1 million at December 31, ~~2016,~~2019 to ~~$53.4~~$180.0 million at ~~September~~June 30, ~~2017. The~~2020. This increase was due to a variety of items, principally comprised of a $7.7 million 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 primarilyaccrued interest receivable driven by ~~the recognition~~higher levels of ~~$8.9~~interest earning assets combined with $4.6 million in ~~income taxes receivable arising from investment tax credits generated~~increased receivables from the ~~investment~~SBA for guarantee recoveries, $4.1 million in ~~solar panel leasing activities combined with the first quarter 2017 acquisition of the nationwide title insurance business. As~~new intangibles added as a result of the ~~title insurance~~ acquisition ~~other assets includes goodwill~~of Jolley Asset Management, LLC (as discussed more fully in Note 1. Basis of Presentation under the subheading Business Combination), $2.5 million in additional receivables for co-developed technology PPP loan processing services and ~~intangible assets of $7.3~~$2.3 million in capitalized software development and ~~$5.3 million, respectively.~~

implementation costs.

Total deposits were ~~$2.01~~$5.87 billion at ~~September~~June 30, ~~2017,~~2020, an increase of ~~$527.8 million,~~$1.65 billion, or ~~35.5%~~38.9%, from ~~$1.49~~$4.23 billion at December 31, ~~2016.~~2019. The increase in deposits was largely driven by ~~a new deposit savings product~~the planned origination of PPP loans and ~~success of deposit gathering campaigns~~following the defensive strategy to ~~support the growth in loan and lease originations.~~

~~Long term borrowings decreased $971 thousand, or 3.5%,~~build liquidity during the first ~~nine months~~quarter of ~~2017,~~2020 due to the uncertainty of the effects of COVID-19.

Borrowings increased to $1.72 billion at June 30, 2020 from ~~$27.8~~$14 thousand at December 31, 2019. This increase was related to $1.72 billion in new borrowings through the PPPLF in the second quarter of 2020. These PPPLF borrowings were used to help fund PPP loans and complement the defensive strategy to build liquidity which commenced in the first quarter of 2020 due to the uncertainty of the effects of COVID-19.

Shareholders’ equity at June 30, 2020 was $548.4 million as compared to $532.4 million at December 31, ~~2016 to $26.9 million at September 30, 2017. The decrease in long term borrowings was primarily the result of debt reduction following a successful capital raise in the third quarter.~~

Other liabilities increased $8.3 million, or 42.8%, during the first nine months of 2017, from $19.5 million at December 31, 2016 to $27.8 million at September 30, 2017. The increase in other liabilities was principally driven by a $4.7 million earn-out contingent liability related to the acquisition of the title insurance business and an increase in accrued expenses of $5.7 million in support of ongoing business growth. This was partially offset by a decrease in income taxes payable of $2.1 million.

~~Shareholders’ equity at September 30, 2017 was $364.6 million as compared to $222.8 million at December 31, 2016.~~2019. The book value per share was ~~$9.15~~$13.53 at ~~September~~June 30, ~~2017~~2020 compared to ~~a book value per share of $6.51~~$13.20 at December 31, ~~2016.~~2019. Average equity to average assets was ~~12.2%~~9.2% for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 compared to ~~14.6%~~12.2% for the year ended December 31, ~~2016.~~2019. The increase in shareholders’ equity was principally the result of ~~the issuance~~other comprehensive income of ~~5.2 million additional common shares with net proceeds of $113.1~~$13.6 million and ~~net income to common shareholders for the nine months ended September 30, 2017 of $28.8 million combined with stock based~~stock-based compensation expense of ~~$5.7~~$6.2 million, ~~and $565 thousand related to the issuance of stock in the title insurance company acquisition,~~ partially offset by ~~cash withheld in lieu~~a net loss of ~~issuing restricted stock upon vesting of $4.8~~$3.8 million and ~~$2.6~~$2.4 million in dividends.

During the first half of 2020, 200,000 shares of Class B common stock (non-voting) were converted to Class A common stock (voting) under a private sale. The conversion decreased the value of Class B common stock (non-voting) and increased the value of Class A common stock (voting) by $2.1 million.

Asset Quality

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

Nonperforming Assets

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

~~Table of Contents~~

loan or lease.

Troubled debt restructurings (“TDRs”) 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).

~~Table~~

Total nonperforming assets and troubled debt restructurings, including loans measured at fair value, at June 30, 2020 were $134.3 million, which represented a $23.2 million, or 20.9%, increase from December 31, 2019. These nonperforming assets, at June 30, 2020 were comprised of ~~Contents~~

$90.1 million in nonaccrual loans and leases and $5.7 million in foreclosed assets. Of the $134.3 million of nonperforming assets and TDRs, $100.9 million carried an SBA guarantee, leaving an unguaranteed exposure of $33.4 million in total nonperforming assets and TDRs at June 30, 2020. This represents an increase of $6.2 million, or 22.8%, from an unguaranteed exposure of $27.2 million at December 31, 2019.

The following table provides information with respect to nonperforming assets and troubled debt restructurings, excluding loans measured at fair value, at the dates indicated.

	June 30, 2020 ⁽¹⁾			December 31, 2019 ⁽¹⁾
Nonaccrual loans and leases:
Total nonperforming loans and leases (all on nonaccrual)	$	40,275		$	21,937
Total accruing loans and leases past due 90 days or more		—			—
Foreclosed assets		5,660			5,612
Total troubled debt restructurings		26,781			16,566
Less nonaccrual troubled debt restructurings		(7,477	)		(2,225	)
Total performing troubled debt restructurings		19,304			14,341
Total nonperforming assets and troubled debt restructurings	$	65,239		$	41,890
Total nonperforming loans and leases to total loans and leases held for investment		1.06	%		1.22	%
Total nonperforming loans and leases to total assets		0.55	%		0.55	%
Total nonperforming assets and troubled debt restructurings to total assets		0.89	%		1.05	%

	June 30, 2020 ⁽¹⁾			December 31, 2019 ⁽¹⁾
Nonaccrual loans and leases guaranteed by U.S. government:
Total nonperforming loans and leases guaranteed by the SBA (all on nonaccrual)	$	27,153		$	14,713
Total accruing loans and leases past due 90 days or more guaranteed by the SBA		—			—
Foreclosed assets guaranteed by the SBA		4,461			4,492
Total troubled debt restructurings guaranteed by the SBA		18,147			10,845
Less nonaccrual troubled debt restructurings guaranteed by the SBA		(4,117	)		(385	)
Total performing troubled debt restructurings guaranteed by SBA		14,030			10,460
Total nonperforming assets and troubled debt restructurings guaranteed by the SBA	$	45,644		$	29,665
Total nonperforming loans and leases not guaranteed by the SBA to total loans and leases held for investment		0.34	%		0.40	%
Total nonperforming loans and leases not guaranteed by the SBA to total assets		0.18	%		0.18	%
Total nonperforming assets and troubled debt restructurings not guaranteed by the SBA to total assets		0.27	%		0.31	%

(1)	Excludes loans measured at fair value.

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~~

Nonperforming assets and ~~troubled debt restructurings~~TDRs, excluding loans measured at ~~September~~fair value, at June 30, ~~2017~~2020 were ~~$27.1~~$65.2 million, which represented a ~~$497 thousand,~~$23.3 million, or ~~1.8%~~55.7%, ~~decrease~~increase from December 31, ~~2016. Total~~2019. These nonperforming assets, at ~~September~~June 30, ~~2017~~2020 were comprised of ~~$22.4~~$40.3 million in nonaccrual loans and ~~$2.2~~leases and $5.7 million in foreclosed assets. Of the ~~$27.1~~$65.2 million of nonperforming assets and ~~troubled debt restructurings ("TDRs"), $21.0~~TDRs, $45.6 million carried an SBA guarantee, leaving an unguaranteed exposure of ~~$6.1~~$19.6 million in total nonperforming assets and TDRs at ~~September~~June 30, ~~2017. The~~2020. This represents an increase of $7.4 million, or 60.3%, from an unguaranteed exposure of $12.2 million at December 31, 2019.

See the below discussion related to the change in potential problem and impaired loans and leases for management’s overall observations regarding growth in total nonperforming ~~assets~~loans and TDRs at December 31, 2016 was $7.1 million. Unguaranteed exposure relating to nonperforming assets and TDRs at September 30, 2017 decreased by $970 thousand, or 13.7%, compared to December 31, 2016.

leases.

As a percentage of the Bank’s total capital, nonperforming loans and leases, excluding loans measured at fair value, represented ~~10.2%~~8.1% at ~~September~~June 30, ~~2017,~~2020, compared to ~~nonperforming loans of 15.3% of the Bank’s total capital~~4.4% at December 31, ~~2016.~~2019. Adjusting the ratio to include only the unguaranteed portion of nonperforming loans and leases at historical cost to reflect management’s belief that the greater magnitude of risk resides in this portion, the ratios at ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016~~2019 were ~~1.5%~~2.6% and ~~3.1%~~1.5%, respectively.

~~Table of Contents~~

As of ~~September~~June 30, ~~2017~~2020, and December 31, ~~2016,~~2019, potential problem (also referred to as criticized) and ~~impaired~~classified loans and leases, excluding loans measured at fair value, totaled ~~$66.0~~$146.9 million and ~~$64.1~~$129.1 million, respectively. The following is a discussion of these loans and leases. Risk Grades 5 through 8 represent the spectrum of criticized and ~~impaired loans.~~classified loans and leases. At ~~September~~June 30, ~~2017,~~2020, the portion of criticized and classified loans and leases guaranteed by the SBA or USDA totaled ~~$28.2~~$79.0 million resulting in unguaranteed exposure risk of ~~$37.8~~$68.0 million, or ~~3.3%~~4.9% of total held for investment unguaranteed ~~exposure.~~exposure carried at historical cost. This compares to the December 31, ~~2016~~2019 portion of criticized and classified loans and leases guaranteed by the SBA or USDA which totaled ~~$29.0~~$65.8 million resulting in unguaranteed exposure risk of ~~$35.1~~$63.3 million, or ~~4.0%~~5.4% of total held for investment unguaranteed ~~exposure.~~exposure carried at historical cost. As of ~~September~~June 30, ~~2017~~2020, loans ~~in Veterinary, Healthcare~~ and ~~Independent Pharmacies industry~~leases carried at historical cost within the following verticals comprise the largest portion of the total potential problem and ~~impaired~~classified loans and leases: Healthcare at ~~28.5%~~20.8%, ~~30.8%~~Wine and ~~20.4%~~Craft Beverage at 15.1%, ~~respectively.~~ Hotels at 13.0%, Entertainment Centers at 9.6%, Veterinary at 9.2%, Self Storage at 5.8% and Educational Services at 5.0%. As of December 31, ~~2016~~2019, loans inand leases carried at historical cost within the ~~Healthcare and Veterinary industries~~following verticals comprise the largest portion of the total potential problem and classified loans and leases: Healthcare at 20.8%, Hotels at 14.7%, Wine and Craft Beverage at 14.3%, Self Storage at 8.4%, Veterinary at 7.1%, Government Contracting at 6.1%, and Educational Services at 5.7%. Other than Hotels and Government Contracting which are a part of the Company’s Specialty Lending division, all of the above listed verticals are within the Company’s Small Business Banking division. Two previously impaired Government Contracting relationships were charged off in the first half of 2020 which resulted in a reduction in impaired loans ~~at 30.8%~~for this vertical. The majority of the increase in potential problem and ~~32.9%, respectively. The~~classified loans and leases was comprised of a relatively small number of borrowers largely concentrated in the Company’s more mature verticals. Furthermore, the Company believes that its underwriting and credit quality standards have ~~improved~~continued to tighten with emphasis on new production in pandemic resilient verticals and increased monitoring of existing loans in pandemic susceptible verticals as the ~~business has matured.~~

impacts and uncertainties COVID-19 continue to evolve. With this emphasis, systemic issues which began to emerge during the latter part of 2019 related to higher than expected levels of competition in the Wine and Craft Beverage and Entertainment Center verticals combined with pandemic susceptibility continue to contribute to the increase in criticized and classified loans and leases.

The Bank does not classify loans and leases that experience insignificant payment delays and payment shortfalls as impaired. The Bank generally considers an “insignificant period of time” from payment delays to be a period of 90 days or less, unless the borrower was not past due at the time of a modification as a part of a COVID-19 assistance program. In such instances this time period could extend to a period of three months 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 personnel will review the request to determine if the customer is stressed and how the event has impacted the ability of the customer to repay the loan or lease long term. To date, the only types of ~~short term~~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. Management implements a proactive approach to identifying and classifying loans and leases as special mention (also referred to as criticized), Risk Grade 5. At ~~September~~June 30, ~~2017~~2020, and December 31, ~~2016,~~2019, Risk Grade 5 loans and leases, excluding loans measured at fair value, totaled ~~$30.5~~$94.4 million and ~~$32.1~~$89.5 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~~and leases, exclusive of loans measured at fair value, during the first half of 2020 was principally confined to ~~September 30, 2017 in two verticals; Agriculture~~five verticals: Entertainment Centers ($9.2 million or 187.7%), Senior Care ($4.0 million or 82.6%), Healthcare ($4.0 million or 81.5%), Veterinary ($3.6 million or 74.2%), General Lending Solutions ($1.4 million or 29.4%), and Funeral Home & Cemetery ($1.1 million or ~~95.0% of increase) and Investment Advisors ($464 thousand or 20.7% of decrease)~~21.9%). ~~The overall decrease~~Largely offsetting the increase in the above Risk Grade 5 loans ~~from December 31, 2016~~and leases were decreases in Hotels ($10.5 million or 213.3%) Government Contracting ($3.8 million or 78.4%) and Self Storage ($2.1 million or 43.3%). Other than Hotels and Government Contracting which are a part of the Company’s Specialty Lending division, all of the above listed verticals are within the Company’s Small Business Banking division. The decrease in Hotels was due to ~~September 30, 2017 was the result of routine credit monitoring in the ongoing~~two relationships moving to risk grade ~~management process.~~6 (substandard) while the decrease in Government Contracting was due to loan paydowns which moved loans back to pass grades, and the decrease in Self Storage was due to one relationship being upgraded to a risk grade 4 (acceptable). At ~~September~~June 30, ~~2017,~~2020, approximately ~~99.9%~~100.0% of loans and leases 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, in light of the relative size and composition of the loan and lease portfolio and management’s degree of success in resolving problem assets, management believes that a proactive approach to early identification and intervention is critical to successfully managing a small business loan portfolio. In conjunction with this, management believes that volumes of delinquencies may be not be an accurate depiction of the borrower’s repayment abilities under the current pandemic induced circumstances due to payments being made by the SBA on behalf of borrower with loans under its programs. This payment assistance commenced in the first quarter and will continue for six months.

Allowance for ~~Loan~~Credit Losses on Loans and ~~Lease Losses~~

Leases

The allowance for ~~loan~~credit losses (“ACL”) on loans and ~~lease losses (“ALLL”),~~leases is a ~~material estimate which could change significantly in~~valuation account that is deducted from, or added to, the ~~near-term in~~amortized cost basis of loans and leases to present a net amount expected to be collected. The ACL excludes loans held for sale and loans accounted for under the ~~event of rapidly deteriorating credit quality, is established through a provision for loan~~fair value option. Loans and ~~lease losses charged to earnings to account for losses that~~leases 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 chargedcharged-off against the ~~ALLL~~ACL when management believes ~~that~~ the ~~collectibility~~uncollectibility of ~~the principal~~a loan ~~and~~or lease balance is ~~unlikely. Subsequent~~confirmed. Expected recoveries ~~if any, are credited~~do not exceed the aggregate of amounts previously charged-off and expected to ~~the ALLL when received.~~

be charged-off.Judgment in determining the adequacy of the ~~ALLL~~ACL 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~~ACL is evaluated on a quarterly basis by management and ~~takes into consideration~~is estimated using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The Company’s historical credit loss experience provides the basis for the estimation of expected credit losses. Management adjusts historical loss information for differences in current risk characteristics such ~~factors~~as portfolio risk grading, delinquency levels, or portfolio mix as well as for changes in environmental conditions such as changes in ~~the nature and volume~~unemployment rates.

The ACL 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

~~Table of Contents~~

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~~$28.2 million at December 31, ~~2016~~2019 increased by ~~$2.8~~$15.8 million, or ~~15.5%~~56.1%, to ~~$21.0~~$44.1 million at ~~September~~June 30, ~~2017.~~2020. The ~~ALLL,~~ACL, as a percentage of loans and leases held for investment at historical cost amounted to ~~1.8%~~1.2% at ~~September~~June 30, ~~2017~~2020 and ~~2.0%~~1.6% at December 31, ~~2016. The declining level~~2019. Excluding PPP loans and related reserves, the ACL, as a percentage of ~~the allowance for loan and lease losses in relation to total~~ loans and leases held for investment ~~was principally driven by improvements~~at historical cost amounted to 2.0% at June 30, 2020. As mentioned earlier, the Company adopted the new CECL standard effective January 1, 2020. Upon adoption, the Company recorded a $1.3 million decrease in ~~industry-specific loss rates and lower~~the ACL. In implementing CECL, the Company accordingly determined to use forecasted levels of ~~classified~~unemployment as a primary economic variable in forecasting future expected losses. Based upon the severity of ongoing developments resulting from the COVID-19 pandemic, the Company’s allowance for credit losses on loans and leases increased significantly, combined with the ~~migration to Company-specific loss rates for maturing verticals which was partially offset by an increase in reserves due to loan~~effects of the above discussed increased levels of criticized and ~~lease volume~~classified loans and ~~the effect of higher net~~leases and charge-offs, as addressed more fully in the Provision for Loan and Lease Credit Losses section of Results of Operations. ~~General reserves~~

Actual past due held for investment loans and leases, inclusive of loans measured at fair value, have decreased by $8.5 million since December 31, 2019. This decrease was due to monthly payments being made by SBA for our SBA 7(a) borrowers. Total loans and leases 90 or more days past due increased $6.6 million, or 17.0%, compared to December 31, 2019. The increase was the result of a $6.9 million increase in the guaranteed portion of past due loans compared to December 31, 2019. At June 30, 2020 and December 31, 2019, total held for investment unguaranteed loans and leases past due as a percentage of ~~non-impaired loans amounted to 1.56% at September 30, 2017 and 1.70% December 31, 2016. See the aforementioned Provision~~total held for ~~Loan and Lease Losses section of this section for a discussion of the Company's charge-off experience.~~

~~Actual past due~~investment unguaranteed loans and leases, ~~have decreased since~~inclusive of loans measured at fair value, was 0.9% and 1.7%, respectively. Total unguaranteed loans and leases past due were comprised of $9.4 million carried at historical cost, an increase of $1.4 million, and $4.1 million measured at fair value, a decrease of $7.6 million as of June 30, 2020 compared to December 31, ~~2016 as management~~2019. Management continues to actively monitor and work to improve asset quality. Management believes the ~~ALLL~~ACL of ~~$21.0~~$44.1 million at ~~September~~June 30, ~~2017~~2020 is appropriate in light of the risk inherent in the loan and lease portfolio. Management’s judgments are based on numerous assumptions about current and expected events that it believes to be reasonable, but which may or may not be ~~valid. Thus, there can be~~valid, including but not limited to factors related to the above mentioned SBA delinquency effect and pandemic-susceptible verticals. Accordingly, no ~~assurance that loan and lease losses in future periods will not exceed the current ALLL or that future increases in the ALLL will not be required. No~~ assurance can be given that management’s ongoing evaluation of the loan and lease portfolio in light of changing economic conditions and other relevant circumstances will not require significant future additions to the ~~ALLL,~~ACL, thus adversely affecting the Company’s operating results. Additional information on the ~~ALLL~~ACL is presented in Note ~~6 -~~5. Loans and Leases Held for Investment and ~~Allowance for Loan and Lease Losses~~Credit Quality of the Notes to the Unaudited Condensed Consolidated Financial Statements in this report.

Liquidity Management

Liquidity management refers to the ability to meet day-to-day cash flow requirements based primarily on activity in loan and deposit accounts of the Company’s customers. Liquidity is immediately available from four major sources: (a) cash on hand and on deposit at other banks; (b) the outstanding balance of federal funds sold; (c) the market value of unpledged investment securities; and (d) availability under lines of credit. At ~~September~~June 30, ~~2017,~~2020, the total amount of these four items was ~~$589.1 million,~~$3.28 billion, or ~~25.1%~~40.0% of total assets, an increase of ~~$93.3 million~~$2.09 billion from ~~$495.8 million,~~$1.19 billion, or ~~28.2%~~24.8% of total assets, at December 31, ~~2016.~~

2019.

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,~~2020, 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~~$779.8 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.~~2020. 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	$	2,247,774	$	2,247,774	$	—	$	—	$	—
Time deposits		3,625,518		2,396,055		812,146		340,346		76,971
Borrowings		1,721,029		5,004		1,716,025		—		—
Operating lease obligations		3,753		736		1,430		363		1,224
Total	$	7,598,074	$	4,649,569	$	2,529,601	$	340,709	$	78,195

~~Table of Contents~~

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	~~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~~2020, and December 31, ~~2016,~~2019, the Company had unfunded commitments to provide capital contributions for on-balance sheet investments in the amount of ~~$4.4~~$16.8 million and ~~$4.9~~$16.9 million, respectively.

Asset/Liability Management and Interest Rate Sensitivity

One of the primary objectives of asset/liability management is to maximize the net interest margin while minimizing the earnings risk associated with changes in interest rates. One method used to manage interest rate sensitivity is to measure, over various time periods, the interest rate sensitivity positions, or gaps. ~~This~~As of June 30, 2020, the balance sheet’s total cumulative gap position was slightly liability-sensitive at -1.5%. The shift to liability-sensitive versus the prior quarter asset-sensitive position is primarily due to the variable, short-term funding added in early in the second quarter of 2020 to provide initial funding for the Payroll Protection Program fixed rate loans.

The interest rate gap method, however, addresses only the magnitude of asset and liability repricing timing differences as of the report date and does not address earnings, or market ~~value.~~value, changes in account behaviors based on the interest rate environment, 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~~risk more accurately. As of ~~5.92% at September~~June 30, ~~2017. The cash on hand from~~2020, the ~~August 2017 capital raise and growth in savings deposits during~~Company’s interest rate risk profile under the ~~quarter has increased the asset-liability sensitivity of the Company in the current period.~~earnings simulation model method remains asset-sensitive. 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.

~~Table of Contents~~

Capital amounts and ratios as of ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016,~~2019, 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, 2020
Common Equity Tier 1 (to Risk-Weighted Assets)	$	498,283		12.84	%	$	174,660		4.50	%	N/A		N/A
Total Capital (to Risk-Weighted Assets)	$	542,984		13.99	%	$	310,506		8.00	%	N/A		N/A
Tier 1 Capital (to Risk-Weighted Assets)	$	498,283		12.84	%	$	232,879		6.00	%	N/A		N/A
Tier 1 Capital (to Average Assets)	$	498,283		7.96	%	$	250,488		4.00	%	N/A		N/A
Bank - June 30, 2020
Common Equity Tier 1 (to Risk-Weighted Assets)	$	453,473		11.85	%	$	172,243		4.50	%	$	248,795		6.50	%
Total Capital (to Risk-Weighted Assets)	$	498,174		13.02	%	$	306,210		8.00	%	$	382,762		10.00	%
Tier 1 Capital (to Risk-Weighted Assets)	$	453,473		11.85	%	$	229,657		6.00	%	$	306,210		8.00	%
Tier 1 Capital (to Average Assets)	$	453,473		7.30	%	$	248,462		4.00	%	$	310,577		5.00	%
Consolidated - December 31, 2019
Common Equity Tier 1 (to Risk-Weighted Assets)	$	499,513		14.90	%	$	150,927		4.50	%	N/A		N/A
Total Capital (to Risk-Weighted Assets)	$	527,747		15.74	%	$	268,315		8.00	%	N/A		N/A
Tier 1 Capital (to Risk-Weighted Assets)	$	499,513		14.90	%	$	201,236		6.00	%	N/A		N/A
Tier 1 Capital (to Average Assets)	$	499,513		10.65	%	$	187,582		4.00	%	N/A		N/A
Bank - December 31, 2019
Common Equity Tier 1 (to Risk-Weighted Assets)	$	451,807		13.66	%	$	148,950		4.50	%	$	215,150		6.50	%
Total Capital (to Risk-Weighted Assets)	$	480,040		14.51	%	$	264,800		8.00	%	$	331,000		10.00	%
Tier 1 Capital (to Risk-Weighted Assets)	$	451,807		13.66	%	$	198,600		6.00	%	$	264,800		8.00	%
Tier 1 Capital (to Average Assets)	$	451,807		9.68	%	$	186,627		4.00	%	$	233,283		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 and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, 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 credit losses on loans and leases;

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

•

Valuation of loans accounted for under the fair value option;

•

Valuation of servicing assets;

~~Valuation of foreclosed assets; and~~

•

Income taxes;

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

•

Restricted stock unit awards with market price conditions;

•

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,~~2020, 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~~2020, 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~~

Beginning January 1, 2020, the Company adopted ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The Company implemented changes to the policies, processes, and controls over the estimation of the allowance for credit losses to support the adoption of ASU 2016-13. While many controls in operation under this new standard mirror controls under prior GAAP, there were some new controls implemented.

During the three months ended June 30, 2020, the Company implemented new processes and controls related to the origination of loans through the SBA’s Paycheck Protection Program. As a part of the Company’s PPP efforts in the second quarter, a new loan accounting system was implemented and utilized as the system of record for PPP loans. The Company will continue to monitor and evaluate internal controls over financial reporting as it relates to the PPP portfolio and this new loan system.

Except as related to the adoption of ASU 2016‑13 and the loan accounting system for PPP loans, there were no changes in the Company’s internal control over financial reporting during the three ~~months~~and six month periods ended ~~September~~June 30, ~~2017~~2020, 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,~~2020, any pending legal proceedings other than nonmaterial proceedings occurring in the ordinary course of business.

Item 1A. Risk Factors

There have been no material changes in the Company’s risk factors from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, with the exception of the following:

The ongoing COVID-19 pandemic and measures intended to prevent its spread could have a material adverse effect on our business, results of operations, and financial condition, and such effects will depend on future developments that are highly uncertain and difficult to predict.

Global health concerns relating to the COVID-19 outbreak and related government actions taken to reduce the spread of the virus have had a significant negative impact on the macroeconomic environment, and the outbreak has significantly increased economic uncertainty and reduced economic activity. The outbreak has resulted in government authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place or total lock-down orders and business limitations and shutdowns. Such measures have significantly contributed to historically high unemployment and negatively impacted consumer and business spending. The United States government has taken steps to attempt to mitigate some of the more severe anticipated economic effects of the virus, including the passage of the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, but there can be no assurance that such steps will be effective or achieve their desired results in a timely fashion.

The outbreak has adversely impacted and is likely to further adversely impact our operations and the operations of our borrowers, customers, and business partners. For example, as a result of the significant uncertainty due to the COVID-19 pandemic we realized a substantial build in our allowance for credit losses for the first half of 2020. We could also experience declining values of other financial assets and other negative impacts on our financial position, including possible constraints on liquidity and capital, as well as higher costs of capital. A number of factors impacting us or our borrowers, customers or business partners could materially adversely affect our business, results of operations, and financial condition, including but not limited to:

•

elevated levels of unemployment may lead to increases in loan delinquencies, losses, and charge-offs;

~~See~~

•

collateral for loans, including real estate, may decline in value, which could cause loan losses to increase;

•

demand for our products and services may decline, making it difficult to grow or maintain assets and income;

•

noninterest income from premiums paid in the secondary market for the sale of loans may be reduced due to deteriorating market conditions and a decrease in the number of potential buyers;

•

the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;

•

we may experience operational failures due to changes in our normal business practices necessitated by the outbreak and related governmental actions;

•

third-party vendors on which we rely may not be able to provide us critical services;

•

our risk management policies and practices may be negatively impacted in general, including, but not limited to, the effectiveness and accuracy of our models given the lack of data and comparable precedent;

•

cyber and payment fraud risk may increase as cybercriminals attempt to profit from the disruption given increased online and remote activity; and

•

FDIC deposit insurance premiums may increase if the agency experiences additional resolution costs.

The spread of COVID-19 has caused us to modify our business practices (including restricting employee travel and developing work-from-home and social distancing plans for our employees), and we may take further actions as may be required by government authorities or as we determine are in the best interests of our employees, customers, and business partners. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus or will otherwise be satisfactory to government authorities.

Federal, state and local governmental authorities have enacted, and may enact in the future, legislation, regulations, and protocols in response to the COVID-19 pandemic, including governmental programs intended to provide economic relief to businesses and individuals. Our participation in and execution of any such programs may cause operational, compliance, reputational, and credit risks, which could result in litigation, governmental action or other forms of loss. There remains significant uncertainty regarding the measures that authorities will enact in the future and the ultimate impact of the legislation, regulations, and protocols that have been and will be enacted. For example, the CARES Act temporarily added a new program titled the Paycheck Protection Program (the “PPP”) to the SBA’s 7(a) loan program. The PPP is intended to provide economic relief to small businesses nationwide. Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved lenders that enroll in the program, subject to numerous limitations and eligibility criteria. Since the PPP launched on April 3, 2020, we have been an active participant in the program originating a substantial number and principal amount of PPP loans. Rules and guidance regarding the PPP were not readily available at the start of the program, and the SBA and other government agencies continue to release additional rules and guidance that change or update the requirements and expectations of the regulatory agencies administering the PPP and regulating participating lenders. As of the date of this report, there remains some ambiguity in the laws, rules, and guidance regarding the operation of the PPP, with a number of important aspects of the PPP where regulatory agencies have not provided adequate guidance, particularly with respect to process, procedures and criteria for forgiveness of PPP loans. Banks participating in the PPP have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP and regarding claims for fees to be paid to purported agents and other third parties, and we are exposed to the risk of litigation regarding the PPP. If any such litigation is not resolved in a manner favorable to us, it may result in significant financial liability or adversely affect our reputation. In addition, litigation can be costly, regardless of outcome. We also face credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by the Bank, such as an issue with the eligibility of a borrower to receive a PPP loan. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by the Bank, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Bank.

Additionally, our future success and profitability substantially depends on the management skills of our executive officers and directors. The unanticipated loss or unavailability of key employees due to the outbreak could harm our ability to operate our business or execute our business strategy. We may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability.

The extent to which the COVID-19 outbreak impacts our business, results of operations, and financial condition will depend on future developments that are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 outbreak has subsided, we may continue to experience materially adverse impacts to our business, financial condition, and results of operations and prospects as a result of the virus’s global economic impact, including the availability of credit, adverse impacts on our liquidity, and any recession that has occurred or may occur in the future. For more information on the impacts of COVID-19 on our business, results of operations and financial condition, see “Recent Developments” in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and the ultimate impact of the outbreak is highly uncertain and subject to change. We do not yet know the full extent of the impacts on our business, our operations, or the global economy as a whole. However, the effects could have a material impact on our results of operations and heighten many of our known risks described in the “Risk Factors” ~~in Part 1, Item 1A~~section 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 previously disclosed in these filings.2019.

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

~~None.~~

On April 1, 2020, the Company issued 89,927 shares of voting common stock to the members of Jolley Asset Management, LLC ("JAM"), pursuant to the acquisition of all of the outstanding membership interests of JAM. These shares were exempt from registration under the Securities Act of 1933, or the Securities Act, because they were issued in a private placement under Section 4(a)(2) of the Securities Act.

On March 15, 2020, the Board of Directors of the Company authorized the repurchase of up to $20,000,000 in shares of the Company’s voting common stock from time to time through December 31, 2020 (the “Repurchase Program”). The Repurchase Program enables the Company to acquire shares through open market purchases or privately negotiated transactions, including through a Rule 10b5-1 plan, at the discretion of management and on terms (including quantity, timing, and price) that management determines to be advisable. Actions in connection with the repurchase program will be subject to various factors, including the Company’s capital and liquidity positions, regulatory and accounting considerations, the Company’s financial and operational performance, alternative uses of capital, the trading price of the Company’s common stock, and market conditions. The repurchase program does not obligate the Company to acquire a specific dollar amount or number of shares and may be extended, modified, or discontinued at any time. As of June 30, 2020, the Company had not made any purchases of shares under the Repurchase Program.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

~~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 2020 RSU Award Agreement for non-employee directors* #
10.2.1			Amendment to Software Service Agreement dated April 1, 2020, between Live Oak Banking Company and nCino, Inc.*
10.2.2			Amendment to Software Service Agreement dated April 5, 2020, between Live Oak Banking Company and nCino, Inc.*
10.2.3			Amendment to Software Service Agreement dated April 24, 2020, between Live Oak Banking Company and nCino, Inc.*
31.1			Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2			Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32			Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
101			Interactive data files pursuant to Rule 405 of Regulation ~~S-T:~~S-T, formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets as of ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016;~~2019; (ii) Condensed Consolidated Statements of Income for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2020 and ~~2016;~~2019; (iii) Condensed Consolidated Statements of Comprehensive Income for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2020 and ~~2016;~~2019; (iv) Condensed Consolidated Statements of Changes in Shareholders’ Equity for the ~~Nine~~Three and Six Months Ended ~~September~~June 30, ~~2017~~2020 and ~~2016;~~2019; (v) Condensed Consolidated Statements of Cash Flows for the ~~Nine~~Six Months Ended ~~Septemeber~~June 30, ~~2017~~2020 and ~~2016;~~2019; 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 6, 2017~~August 5, 2020	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



	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	$	—



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 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 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



	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



	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	%