☐

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

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of ~~November 4, 2017,~~May 3, 2022, there were ~~35,233,241~~43,801,292 shares of the registrant’s voting common stock ~~outstanding and 4,643,530 shares of the registrant’s non-voting common stock~~ outstanding.

~~Table of Contents~~

Live Oak Bancshares, Inc. ~~and Subsidiaries~~

Form 10-Q

For the Quarterly Period Ended ~~September 30, 2017~~

March 31, 2022

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 30, 2017~~March 31, 2022 and December 31, ~~2016~~2021		1
		Condensed Consolidated Statements of Income for the Three ~~and Nine~~ Months Ended ~~September 30, 2017~~March 31, 2022 and ~~2016~~2021		2
		Condensed Consolidated Statements of Comprehensive Income for the Three ~~and Nine~~ Months Ended ~~September 30, 2017~~March 31, 2022 and ~~2016~~2021	4	3
		Condensed Consolidated Statements of Changes in Shareholders’ Equity for the ~~Nine~~Three Months Ended ~~September 30, 2017~~March 31, 2022 and ~~2016~~2021	5	4
		Condensed Consolidated Statements of Cash Flows for the ~~Nine~~Three Months Ended ~~September 30, 2017~~March 31, 2022 and ~~2016~~2021	6	5
		Notes to Unaudited Condensed Consolidated Financial Statements	8	7
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	47	32
Item 3.		Quantitative and Qualitative Disclosures about Market Risk	67	49
Item 4.		Controls and Procedures	67	50
		PART II. OTHER INFORMATION
Item 1.		Legal Proceedings	68	51
Item 1A.		Risk Factors	68	51
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	68	51
Item 3.		Defaults Upon Senior Securities	68	51
Item 4.		Mine Safety Disclosures	68	51
Item 5.		Other Information	68	51
Item 6.	~~Exhibits~~	68Exhibits		52
	~~Signatures~~	70
	Index to Exhibits		52
		XSignatures		53

~~Table of Contents~~

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Live Oak Bancshares, Inc.

Condensed Consolidated Balance Sheets

As of ~~September 30, 2017~~March 31, 2022 (unaudited) and December 31, 2016*

2021*

(Dollars in thousands)

	March 31, 2022			December 31, 2021
Assets
Cash and due from banks	$	477,778		$	187,203
Federal funds sold		29,993			16,547
Certificates of deposit with other banks		4,250			4,750
Investment securities available-for-sale		844,577			906,052
Loans held for sale (includes $25,056 and $25,310 measured at fair value, respectively)		1,028,635			1,116,519
Loans and leases held for investment (includes $600,571 and $645,201 measured at fair value, respectively)		5,738,241			5,521,262
Allowance for credit losses on loans and leases		(63,058	)		(63,584	)
Net loans and leases		5,675,183			5,457,678
Premises and equipment, net		254,865			240,196
Foreclosed assets		198			620
Servicing assets		36,286			33,574
Other assets		268,201			250,254
Total assets	$	8,619,966		$	8,213,393
Liabilities and Shareholders’ Equity
Liabilities
Deposits:
Noninterest-bearing	$	86,342		$	89,279
Interest-bearing		7,550,821			7,022,765
Total deposits		7,637,163			7,112,044
Borrowings		196,911			318,289
Other liabilities		72,565			67,927
Total liabilities		7,906,639			7,498,260
Shareholders’ equity
Preferred stock, no par value, 1,000,000 shares authorized, NaN issued or outstanding at March 31, 2022 and December 31, 2021		—			—
Class A common stock, no par value, 100,000,000 shares authorized, 43,787,660 and 43,494,046 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively		315,607			310,970
Class B common stock, no par value, 10,000,000 shares authorized, NaN issued or outstanding at March 31, 2022 and 125,024 shares issued and outstanding at December 31, 2021		—			1,324
Retained earnings		434,226			400,893
Accumulated other comprehensive (loss) income		(36,506	)		1,946
Total shareholders’ equity		713,327			715,133
Total liabilities and shareholders’ equity	$	8,619,966		$	8,213,393

*	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~~ months ended ~~September 30, 2017~~March 31, 2022 and ~~2016~~2021 (unaudited)

(Dollars in thousands, except per share data)

	Three Months Ended March 31,
	2022			2021
Interest income
Loans and fees on loans	$	89,198		$	84,993
Investment securities, taxable		3,399			2,929
Other interest earning assets		185			303
Total interest income		92,782			88,225
Interest expense
Deposits		14,348			16,944
Borrowings		655			1,331
Total interest expense		15,003			18,275
Net interest income		77,779			69,950
Provision for (recovery of) loan and lease credit losses		1,836			(873	)
Net interest income after provision for (recovery of) loan and lease credit losses		75,943			70,823
Noninterest income
Loan servicing revenue		6,356			6,434
Loan servicing asset revaluation		(1,569	)		1,493
Net gains on sales of loans		20,977			11,929
Net gain on loans accounted for under the fair value option		516			4,218
Equity method investments income (loss)		(2,124	)		(1,157	)
Equity security investments gains (losses), net		(44	)		105
Lease income		2,503			2,599
Management fee income		1,488			1,934
Other noninterest income		4,565			3,502
Total noninterest income		32,668			31,057
Noninterest expense
Salaries and employee benefits		38,507			31,366
Travel expense		1,897			659
Professional services expense		2,791			3,831
Advertising and marketing expense		1,729			652
Occupancy expense		2,327			2,112
Technology expense		6,053			4,878
Equipment expense		3,816			3,701
Other loan origination and maintenance expense		3,113			3,327
Renewable energy tax credit investment impairment		—			3,127
FDIC insurance		1,972			1,765
Other expense		3,509			2,854
Total noninterest expense		65,714			58,272
Income before taxes		42,897			43,608
Income tax expense		8,388			4,181
Net income	$	34,509		$	39,427
Basic earnings per share	$	0.79		$	0.92
Diluted earnings per share	$	0.76		$	0.88

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~~ months ended ~~September 30, 2017~~March 31, 2022 and ~~2016~~2021 (unaudited)

(Dollars in thousands)

	Three Months Ended March 31,
	2022			2021
Net income	$	34,509		$	39,427
Other comprehensive loss before tax:
Net unrealized loss on investment securities arising during the period		(50,594	)		(16,288	)
Reclassification adjustment for gain on sale of securities available-for-sale included in net income		—			—
Other comprehensive loss before tax		(50,594	)		(16,288	)
Income tax benefit		12,142			3,909
Other comprehensive loss, net of tax		(38,452	)		(12,379	)
Total comprehensive (loss) income	$	(3,943	)	$	27,048

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 months ended ~~September 30, 2017~~March 31, 2022 and ~~2016~~2021 (unaudited)

(Dollars in thousands)

	Three Months Ended
	Common stock											Accumulated other
	Shares								Retained			comprehensive			Total
	Class A		Class B			Amount			earnings			income (loss)			equity
Balance at December 31, 2021		43,494,046		125,024		$	312,294		$	400,893		$	1,946		$	715,133
Net income		—		—			—			34,509			—			34,509
Other comprehensive loss		—		—			—			—			(38,452	)		(38,452	)
Issuance of restricted stock		95,537		—			—			—			—			—
Tax withholding related to vesting of restricted stock and other		—		—			(2,894	)		—			—			(2,894	)
Employee stock purchase program		11,119		—			534			—			—			534
Stock option exercises		61,934		—			719			—			—			719
Stock option based compensation expense		—		—			391			—			—			391
Restricted stock expense		—		—			4,563			—			—			4,563
Non-voting common stock converted to voting common stock in private sale		125,024		(125,024	)		—			—			—			—
Transfer from retained earnings to other assets for pro rata portion of equity method investee stock compensation expense		—		—			—			136			—			136
Cash dividends ($0.03 per share)		—		—			—			(1,312	)		—			(1,312	)
Balance at March 31, 2022		43,787,660		—		$	315,607		$	434,226		$	(36,506	)	$	713,327

Balance at December 31, 2020		41,344,689		1,107,757		$	310,619		$	235,724		$	21,507		$	567,850
Net income		—		—			—			39,427			—			39,427
Other comprehensive loss		—		—			—			—			(12,379	)		(12,379	)
Issuance of restricted stock		292,216		—			—			—			—			—
Tax withholding related to vesting of restricted stock and other		—		—			(11,287	)		—			—			(11,287	)
Employee stock purchase program		5,686		—			296			—			—			296
Stock option exercises		200,996		—			1,213			—			—			1,213
Stock option based compensation expense		—		—			344			—			—			344
Restricted stock expense		—		—			4,670			—			—			4,670
Non-voting common stock converted to voting common stock in private sale		415,504		(415,504	)		—			—			—			—
Transfer from retained earnings to other assets for pro rata portion of equity method investee stock compensation expense		—		—			—			1,508			—			1,508
Cash dividends ($0.03 per share)		—		—			—			(1,282	)		—			(1,282	)
Balance at March 31, 2021		42,259,091		692,253		$	305,855		$	275,377		$	9,128		$	590,360

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 Cash Flows

For the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2022 and ~~2016~~2021 (unaudited)

(Dollars in thousands)

	Three Months Ended March 31,
	2022			2021
Cash flows from operating activities
Net income	$	34,509		$	39,427
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Depreciation and amortization		5,405			5,265
Provision for (recovery of) loan and lease credit losses		1,836			(873	)
Amortization of premium on securities, net of accretion		1,421			1,817
Deferred tax expense (benefit)		6,775			(3,984	)
Originations of loans held for sale		(222,557	)		(253,588	)
Proceeds from sales of loans held for sale		349,364			182,685
Net gains on sale of loans held for sale		(20,977	)		(11,929	)
Net loss on sale of foreclosed assets		17			24
Net gain on loans accounted for under fair value option		(516	)		(4,218	)
Net increase in servicing assets		(2,712	)		(3,826	)
Net gain on disposal of long-lived asset		—			(114	)
Net gain on disposal of property and equipment		—			(48	)
Impairment on premises and equipment, net		—			904
Equity method investments (income) loss		2,124			1,157
Equity security investments (gains) losses, net		44			(105	)
Renewable energy tax credit investment impairment		—			3,127
Stock option based compensation expense		391			344
Restricted stock expense		4,563			4,670
Stock based compensation excess tax benefit		1,119			5,152
Changes in assets and liabilities:
Lease right-of-use assets and liabilities, net		(12	)		(1	)
Other assets		(3,095	)		2,699
Other liabilities		(1,260	)		(5,406	)
Net cash provided (used) by operating activities		156,439			(36,821	)
Cash flows from investing activities
Purchases of securities available-for-sale		(37,837	)		(108,223	)
Proceeds from sales, maturities, calls, and principal paydown of securities available-for-sale		47,297			65,039
Proceeds from SBA reimbursement/sale of foreclosed assets, net		333			152
Maturities of certificates of deposits with other banks		500			—
Loan and lease originations and principal collections, net		(243,463	)		(121,814	)
Proceeds from sale of long-lived asset		—			8,988
Proceeds from sale of premises and equipment		—			84
Purchases of premises and equipment, net		(20,036	)		(674	)
Net cash used by investing activities		(253,206	)		(156,448	)

Nine Months Ended
September 30,
2017 2016
Cash flows from operating activities
Net income $ 28,769
$ 8,284
Adjustments to reconcile net income to net cash used by operating activities:
Depreciation and amortization 7,020
3,201
Provision for loan losses 5,481
8,692
Amortization of premium on securities, net of accretion 355
135
Amortization of discount on unguaranteed loans, net 1,263
773
Deferred tax expense (benefit) 413
(510 )
Originations of loans held for sale (884,741 ) (701,415 )
Proceeds from sales of loans held for sale 648,300
555,192
Net gains on sale of loans held for sale (55,276 ) (52,813 )
Net loss on sale of foreclosed assets 30
61
Net increase in servicing assets (1,398 ) (5,499 )
Gain on sale of securities available-for-sale —
(1 )
Net loss on disposal of premises and equipment 213
—
Stock option based compensation expense 1,496
1,752
Restricted stock expense 4,210
5,893
Stock based compensation expense excess tax benefits 1,073
—
Business combination contingent consideration fair value adjustment 350
—
Changes in assets and liabilities:
Other assets (17,661 ) (858 )
Other liabilities 3,875
2,652
Net cash used by operating activities (256,228 ) (174,461 )
Cash flows from investing activities
Purchases of securities available-for-sale (13,009 ) (24,946 )
Proceeds from sales, maturities, calls, and principal paydowns of securities available-for-sale 7,187
8,764
Proceeds from sale/collection of foreclosed assets 50
680
Business combination, net of cash acquired (7,696 ) —
Maturities of certificates of deposit with other banks 4,000
2,750
Loan and lease originations and principal collections, net (273,501 ) (154,738 )
Purchases of premises and equipment, net (71,420 ) (1,194 )
Net cash used in investing activities (354,389 ) (168,684 )

See Notes to Unaudited Condensed Consolidated Financial Statements

~~Table of Contents~~

Live Oak Bancshares, Inc.

Condensed Consolidated Statements of Cash Flows (Continued)

For the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2022 and ~~2016~~2021 (unaudited)

(Dollars in thousands)

	Three Months Ended March 31,
	2022			2021
Cash flows from financing activities
Net increase in deposits	$	525,119		$	603,176
Proceeds from borrowings		12,026			498,666
Repayment of borrowings		(133,404	)		(580,291	)
Stock option exercises		719			1,213
Employee stock purchase program		534			296
Withholding cash issued in lieu of restricted stock and other		(2,894	)		(11,287	)
Shareholder dividend distributions		(1,312	)		(1,282	)
Net cash provided by financing activities		400,788			510,491
Net increase in cash and cash equivalents		304,021			317,222
Cash and cash equivalents, beginning		203,750			318,320
Cash and cash equivalents, ending	$	507,771		$	635,542

Supplemental disclosures of cash flow information
Interest paid	$	15,263		$	18,469
Income tax paid, net		8			354

Supplemental disclosures of noncash operating, investing, and financing activities
Unrealized holding losses on available-for-sale securities, net of taxes	$	(38,452	)	$	(12,379	)
Transfers from loans and leases to foreclosed real estate and other repossessions or SBA receivable		6,692			2,246
Net transfers between foreclosed real estate and SBA receivable		72			196
Transfer of loans held for sale to loans and leases held for investment		70,649			176,285
Transfer of loans and leases held for investment to loans held for sale		110,452			24,260
Transfer from retained earnings to other assets for pro rata portion of equity method investee stock compensation expense		136			1,508
Recording of secured borrowing		—			5,493
Equity method investment commitments		10,971			—
Equity security investment commitments		500			1,500

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~~(collectively with its subsidiaries including Live Oak Banking Company, the “Company” ~~or “LOB”~~) is a bank holding company headquartered in Wilmington, North Carolina incorporated under the laws of the State of North Carolina in December 2008. The Company conducts business operations primarily through its commercial bank subsidiary, Live Oak Banking Company (the “Bank”). The Bank was organized and incorporated under the laws of the State of North Carolina on February 25, 2008 and commenced operations on May 12, 2008. The Bank specializes in ~~providing~~ lending and deposit related services to small businesses ~~nationwide in targeted industries, which we refer to as verticals.~~nationwide. The Bank identifies and ~~grows~~extends 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~~Agriculture’s ("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’s wholly owned subsidiaries are the ~~Company completed its initial public offering with a secondary offering completed in August of 2017. In 2010, the~~ Bank, ~~formed Live Oak Number One, Inc., a wholly-owned subsidiary, to hold properties foreclosed on by the Bank.~~

~~In addition to the Bank, the Company owns Live Oak Grove, LLC, opened in September 2015 for the purpose of providing Company employees and business visitors an on-site restaurant location;~~ Government Loan Solutions, Inc. (“GLS”), Live Oak Grove, LLC (“Grove”), Live Oak Ventures, Inc. (“Live Oak Ventures”), and Canapi Advisors, LLC (“Canapi Advisors”).

The Bank’s wholly owned subsidiaries are Live Oak Number One, Inc., Live Oak Clean Energy Financing LLC (“LOCEF”), and Live Oak Private Wealth, LLC (“Live Oak Private Wealth”). Live Oak Number One, Inc. holds properties foreclosed on by the Bank. LOCEF provides financing to entities for renewable energy applications. Live Oak Private Wealth provides high-net-worth individuals and families with strategic wealth and investment management services. During the first quarter of 2022, Jolley Asset Management, LLC (“JAM”) was merged into Live Oak Private Wealth. JAM was previously a wholly owned subsidiary of Live Oak Private Wealth.

~~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~~ Canapi Advisors provides investment advisory services to a series of funds focused on providing ~~financing~~venture capital to ~~entities for renewable energy applications.~~

~~On February 1, 2017, the Company completed its acquisition of Reltco Inc.~~new and National Assurance Title, Inc. (collectively referred to as "Reltco"), two nationwide title agencies under common control based in Tampa, Florida. See Note 4. Business Combination for a further discussion of this transaction.

emerging financial technology companies.

The Company ~~earns~~generates revenue primarily from net interest income and secondarily through the origination and sale of ~~SBA and USDA-guaranteed~~government guaranteed loans. Income from the retention of loans ~~and net~~is comprised of interest income. Income from the sale of loans is comprised of net gains on ~~the sale~~sales of loans ~~revenues on the servicing of sold loans and valuation of~~along with loan servicing ~~rights.~~revenue and revaluation of related servicing assets. Offsetting these revenues are the cost of funding sources, provision for loan and lease credit losses, any costs related to foreclosed assets and other operating costs such as salaries and employee benefits, travel, professional services, advertising and marketing and tax expense.

The Company also has less routinely generated gains and losses arising from its financial technology investments in its fintech segment.

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~~three months ended ~~September 30, 2017~~March 31, 2022 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, ~~2017.~~2022. The ~~consolidated balance sheet~~Unaudited Condensed Consolidated Balance Sheet as of December 31, ~~2016~~2021 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,~~2021, filed with the Securities Exchange Commission on ~~March 9, 2017~~February 24, 2022 (SEC File No. 001-37497) (the ~~"2016 Annual Report"~~"2021 Form 10-K"). A summary description of the significant accounting policies followed by the Company is set forth in Note 1 of the Notes to Consolidated Financial Statements in the Company’s ~~2016 Annual Report.~~2021 Form 10-K. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes in the Company's ~~2016 Annual Report.~~

2021 Form 10-K.

~~Table of Contents~~

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed 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

Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Management has determined that the Company has ~~one~~two significant operating ~~segment, which is providing a lending platform for small businesses nationwide.~~segments: Banking and Fintech, as discussed more fully in Note 11. Segments. In determining the appropriateness of a segment definition, the Company considers the ~~materiality~~criteria 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

Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 280, Segment Reporting.

Reclassifications

Certain reclassifications have been made to the prior period’s unaudited condensed 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.~~

reclassifications.

Note 2. Recent Accounting Pronouncements

In ~~May 2014,~~March 2020, the ~~Financial Accounting Standards Board (“FASB”)~~FASB issued Accounting Standards Update (“ASU”) No. ~~2014-09, “Revenue from Contracts with Customers~~2020-04 “Reference Rate Reform (Topic ~~606)”~~848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU ~~2014-09”~~2020-04”). ~~This standard is intended~~ASU 2020-04 provides optional guidance for a limited period of time to ~~clarify~~ease the ~~principles~~potential burden in accounting for (or recognizing ~~revenue and to develop a common revenue standard for GAAP. The Company's revenue is comprised of loan servicing revenue, net gains on sales of loans and net interest income~~the effects of) reference rate reform on financial ~~assets~~reporting. The amendments are effective for and ~~financial liabilities, all~~can be adopted by the Company as 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.March 12, 2020, through December 31, 2022. The Company does not expect ~~the adoption of ASU 2014-09 to~~this standard will have a material ~~effect~~impact on ~~the~~its consolidated financial statements.To address the discontinuance of LIBOR, the Company has stopped originating variable LIBOR-based loans effective December 31, 2021 and has started to negotiate loans using the preferred replacement index, the Secured Overnight Financing Rate (“SOFR”) or a relevant duration U.S. Treasury rate. For currently outstanding LIBOR-based loans, the timing and manner in which each customer’s contract transitions from LIBOR to another rate will vary on a case-by-case basis. The Company expects to ~~adopt~~complete all transitions by the ~~standard in the first~~second quarter of ~~2018 with a cumulative effect adjustment to opening retained earnings,~~2023 or at the next repricing date if ~~such adjustment is deemed to be significant.~~

later in 2023.

In ~~February 2016,~~March 2022, the FASB issued ASU No. ~~2016-02, “Leases~~2022-02 “Financial Instruments – Credit Losses (Topic ~~842)”~~326): Troubled Debt Restructurings (“TDRs”) and Vintage Disclosures” (“ASU ~~2016-02”~~2022-02”). ~~The FASB issued this~~ ASU ~~to increase transparency~~2022-02 eliminates the accounting guidance for TDRs by creditors in ASC 310-40, Receivables – Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and ~~comparability among organizations~~restructurings when a borrower is experiencing financial difficulty. Additionally, for public business entities, ASU 2022-02 requires that an entity disclose current-period gross write-offs by ~~recognizing lease assets~~year of origination for financing receivables and ~~lease liabilities on~~net investments in leases within the ~~balance sheet by lessees for those leases classified as operating leases under current GAAP and disclosing key information about leasing arrangements.~~scope of ASC 326-20, Financial Instruments – Credit Losses – Measured at Amortized Cost. The amendments in this ~~ASU are effective for the Company on January 1, 2019. The impact of this~~ standard will depend on the Company's lease portfolio at the time of the adoption and the Company is currently assessing the effect that the adoption of this standard will have on the consolidated financial statements.

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

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

In June 2016, the FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). This new guidance replaces the incurred loss impairment methodology in current standards with an expected credit loss methodology and requires consideration of a broader range of information to determine credit loss estimates. ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 will be effective for the Company on January 1, 2020. The Company is currently evaluating the potential impact of ASU 2016-13 on the 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, 2018.2023. The Company does not ~~expect~~believe this ~~amendment to have a material effect on its consolidated financial statements.~~

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

In February 2017, 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 the hedge accounting recognition and presentation requirements in ASC 815 to improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities to better align the entity’s financial reporting for hedging relationships with those risk

~~Table of Contents~~

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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

Note 3. Earnings Per Share

Basic and diluted earnings per share are computed based on the ~~weighted average~~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~~share in the net income of the Company.

	Three Months Ended March 31,
	2022		2021
Basic earnings per share:
Net income	$	34,509	$	39,427
Weighted-average basic shares outstanding		43,701,943		42,673,615
Basic earnings per share	$	0.79	$	0.92
Diluted earnings per share:
Net income, for diluted earnings per share	$	34,509	$	39,427
Total weighted-average basic shares outstanding		43,701,943		42,673,615
Add effect of dilutive stock options and restricted stock grants		1,525,593		2,023,235
Total weighted-average diluted shares outstanding		45,227,536		44,696,850
Diluted earnings per share	$	0.76	$	0.88
Anti-dilutive shares		172,631		—

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 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. Investment~~ Securities

Available-for-Sale

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

March 31, 2022	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
US government agencies	$	10,445	$	58	$	—	$	10,503
Mortgage-backed securities		876,426		2,961		51,165		828,222
Municipal bonds		3,240		117		5		3,352
Other debt securities		2,500		—		—		2,500
Total	$	892,611	$	3,136	$	51,170	$	844,577

December 31, 2021
US government agencies	$	10,444	$	193	$	—	$	10,637
Mortgage-backed securities		887,302		14,246		12,209		889,339
Municipal bonds		3,246		333		3		3,576
Other debt securities		2,500		—		—		2,500
Total	$	903,492	$	14,772	$	12,212	$	906,052

During the three months ended March 31, 2022, 9 mortgage-backed securities totaling $13.9 million were settled. During the three months ended March 31, 2021, 2 mortgage-backed securities totaling $6.5 million were settled.

Accrued interest receivable on available-for-sale securities totaled $2.0 million and $1.9 million at March 31, 2022 and December 31, 2021, respectively, and is included in other assets in the accompanying Unaudited Condensed Consolidated Balance Sheets.

~~Table of Contents~~

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Amortized
Cost

Unrealized
Gains

Unrealized
Losses

Fair
Value
September 30, 2017
US government agencies $ 17,829
$ 11
$ 35
$ 17,805
Residential mortgage-backed securities 57,685
—
936
56,749
Mutual fund 2,070
—
49
2,021
Total $ 77,584
$ 11
$ 1,020
$ 76,575

December 31, 2016
US government agencies $ 17,803
$ 52
$ 32
$ 17,823
Residential mortgage-backed securities 52,301
3
1,031
51,273
Mutual fund 2,012
—
52
1,960
Total $ 72,116
$ 55
$ 1,115
$ 71,056

~~There were no sales of securities during the three and nine months ended September 30, 2017.The~~

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
March 31, 2022	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Mortgage-backed securities	$	472,660	$	32,492	$	184,166	$	18,673	$	656,826	$	51,165
Municipal bonds		—		—		94		5		94		5
Total	$	472,660	$	32,492	$	184,260	$	18,678	$	656,920	$	51,170

	Less Than 12 Months				12 Months or More				Total
December 31, 2021	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Mortgage-backed securities	$	479,322	$	8,503	$	110,633	$	3,706	$	589,955	$	12,209
Municipal bonds		—		—		96		3		96		3
Total	$	479,322	$	8,503	$	110,729	$	3,709	$	590,051	$	12,212

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

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 30, 2017,~~March 31, 2022, there were ~~twelve residential~~NaN mortgage-backed securities and ~~one US government agency security~~1 municipal bond in unrealized loss positions for greater than 12 months and ~~fourteen residential~~190 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~~2021 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~~NaN 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 Unaudited Condensed Consolidated Statements of Income.

All ~~residential~~ mortgage-backed securities in the Company’s portfolio at ~~September 30, 2017~~March 31, 2022 and December 31, ~~2016~~2021 were backed by USU.S. government sponsored enterprises (“GSEs”).

~~Table of Contents~~

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

The following is a summary of investment securities by maturity:

	March 31, 2022
	Available-for-Sale
	Amortized cost		Fair value
US government agencies
Within one year	$	7,505	$	7,542
One to five years		2,940		2,961
Total		10,445		10,503
Mortgage-backed securities
Within one year		201		201
One to five years		79,667		79,248
Five to ten years		248,563		236,614
After 10 years		547,995		512,159
Total		876,426		828,222
Municipal bonds
After 10 years		3,240		3,352
Total		3,240		3,352
Other debt securities
Within one year		500		500
One to five years		2,000		2,000
Total		2,500		2,500

Total	$	892,611	$	844,577

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~~

Mortgage-backed securities are included in maturity categories based on their contractual ~~maturities.~~maturity date. Actual ~~results will~~maturities may differ asfrom contractual maturities because issuers may have the ~~loans underlying the mortgage-backed~~right to call or prepay obligations.

There were 0 securities ~~may repay sooner than scheduled. This table excludes the 504 Fund mutual fund investment.~~

Atpledged at March 31, 2022 or December 31, ~~2016, an~~2021.

Other

Other investments, largely comprised of non-marketable equity investments, are generally accounted for under the equity method or equity security accounting and are included in other assets in the accompanying Unaudited Condensed Consolidated Balance Sheets. The below tables provide additional information related to investments accounted for under these two methods.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Equity Method Accounting

The carrying amount and ownership percentage of each equity investment ~~security with a fair market value of $1.5 million was pledged to secure a line of credit with~~over which 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~~Company has significant influence at March 31, 2022 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~~2021 is reflected in the ~~state~~following table:

	March 31, 2022					December 31, 2021
	Amount		Ownership %			Amount		Ownership %
Apiture, Inc.	$	51,211		39.1	%	$	52,323		39.1	%
Canapi Ventures SBIC Fund, LP ^{(1) (4)}		19,058		2.9	%		19,431		2.9	%
Canapi Ventures Fund, LP ^{(2) (4)}		2,350		1.5	%		2,402		1.5	%
Canapi Ventures Fund II, LP ^{(3) (4)}		7,500		1.7	%		—	N/A
Other fintech investments in private companies ⁽⁵⁾		5,077	Various				5,330	Various
Other ⁽⁶⁾		12,370	Various				4,664	Various
Total	$	97,566				$	84,150

(1)	Includes unfunded commitments of $5.6 million and $6.8 million as of March 31, 2022 and December 31, 2021, respectively.

(2)	Includes unfunded commitments of $627 thousand and $770 thousand as of March 31, 2022 and December 31, 2021, respectively.

(3)	Includes unfunded commitments of $7.5 million as of March 31, 2022. There were 0 unfunded commitments as of December 31, 2021.

(4)	Investee is accounted for under equity method due to the Company's participation as an investment advisor.

(5)	Other fintech investments include Finxact, Inc., Payrailz, LLC and Kwipped, Inc. Investees are accounted for under equity method due to the company’s ability to exercise significant influence through executive management’s board involvement.

(6)	Other includes affordable housing and solar income tax credit projects. Includes unfunded commitments of $3.5 million as of March 31, 2022. There were 0 unfunded commitments as of December 31, 2021.

Equity Security Accounting

The carrying amount of ~~Ohio and investment~~the Company’s investments in non-marketable equity securities with no readily determinable fair value and amounts recognized in earnings on a ~~fair market value~~cumulative basis as of ~~$2.5 million~~March 31, 2022 and ~~$1.2 million, respectively, were pledged~~for the quarters ended March 31, 2022 and 2021 is reflected in the following table:

				As of and for the three month period ended
	Cumulative Adjustments			2022		2021
Carrying value ⁽¹⁾				$	64,728	$	32,527
Carrying value adjustments:
Impairment	$	—			—		—
Upward changes for observable prices ⁽²⁾		48,469			—		—
Downward changes for observable prices		(86	)		—		—
Net upward change	$	48,383		$	—	$	—

(1)	Includes $3.2 million and $2.0 million in unfunded commitments for the quarters ended March 31, 2022 and 2021, respectively.

(2)	Excludes $13.9 million in realized cash gains for the sale of an investment in the second quarter of 2021.

Live Oak Bancshares, Inc.

Notes 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~~

Credit Quality

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

~~Commercial and Industrial~~

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

~~Construction and Development~~

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

~~Table of Contents~~

~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Consolidated Financial Statements~~

~~Commercial Real Estate~~

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

~~Commercial Land~~

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

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

~~Table of Contents~~

~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Consolidated Financial Statements~~

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

September 30,
2017 December 31,
2016
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~~tables present total loans and leases ~~by industry segment. An independent review of~~held for investment and an aging analysis for the ~~loan and lease~~Company’s portfolio ~~is performed annually by an external firm. The goal of the Bank’s annual review of select borrowers' financial performance is to validate the adequacy of the risk grade assigned.~~

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

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

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

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

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

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

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

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

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

~~Table of Contents~~

~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Consolidated Financial Statements~~

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

Risk Grades
1 - 4

Risk Grade
5

Risk Grades
6 - 8
Total
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~~

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
March 31, 2022
Commercial & Industrial
Small Business Banking	$	1,181,570	$	6,200	$	10,291	$	16,491	$	1,198,061	$	230,009	$	1,428,070
Specialty Lending		1,024,894		331		—		331		1,025,225		60,646		1,085,871
Paycheck Protection Program		132,876		—		1,414		1,414		134,290		—		134,290
Total		2,339,340		6,531		11,705		18,236		2,357,576		290,655		2,648,231
Construction & Development
Small Business Banking		308,995		2,670		1,366		4,036		313,031		—		313,031
Specialty Lending		79,994		—		—		—		79,994		—		79,994
Total		388,989		2,670		1,366		4,036		393,025		—		393,025
Commercial Real Estate
Small Business Banking		1,661,997		7,159		9,507		16,666		1,678,663		235,524		1,914,187
Specialty Lending		339,775		—		1,718		1,718		341,493		17,179		358,672
Total		2,001,772		7,159		11,225		18,384		2,020,156		252,703		2,272,859
Commercial Land
Small Business Banking		369,012		180		2,055		2,235		371,247		57,213		428,460
Total		369,012		180		2,055		2,235		371,247		57,213		428,460
Total	$	5,099,113	$	16,540	$	26,351	$	42,891	$	5,142,004	$	600,571	$	5,742,575
Net deferred fees														(4,334	)
Loans and Leases, Net													$	5,738,241

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, 2021
Commercial & Industrial
Small Business Banking	$	1,103,915	$	13,171	$	7,320	$	20,491	$	1,124,406	$	248,806	$	1,373,212
Specialty Lending		875,367		—		—		—		875,367		64,525		939,892
Paycheck Protection Program		266,893		68		1,414		1,482		268,375		—		268,375
Total		2,246,175		13,239		8,734		21,973		2,268,148		313,331		2,581,479
Construction & Development
Small Business Banking		275,786		—		1,366		1,366		277,152		—		277,152
Specialty Lending		82,014		—		—		—		82,014		—		82,014
Total		357,800		—		1,366		1,366		359,166		—		359,166
Commercial Real Estate
Small Business Banking		1,577,765		5,802		10,761		16,563		1,594,328		250,856		1,845,184
Specialty Lending		285,373		—		2,315		2,315		287,688		19,481		307,169
Total		1,863,138		5,802		13,076		18,878		1,882,016		270,337		2,152,353
Commercial Land
Small Business Banking		362,881		7,399		2,055		9,454		372,335		61,533		433,868
Total		362,881		7,399		2,055		9,454		372,335		61,533		433,868
Total	$	4,829,994	$	26,440	$	25,231	$	51,671	$	4,881,665	$	645,201	$	5,526,866
Net deferred fees														(5,604	)
Loans and Leases, Net													$	5,521,262

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
$ —

(1)

Total loans and leases include ~~$40.4 million~~$2.00 billion of U.S. government guaranteed loans as of ~~September 30, 2017,~~March 31, 2022, of which ~~$14.3~~$16.8 million is ~~greater than~~ 90 days or more past due, ~~$5.0~~$10.5 million is past due 30-89 days ~~past due~~ and ~~$21.1 million is included in current~~$1.97 billion are current. Total loans and leases include $2.07 billion of U.S. government guaranteed loans as ~~presented above.~~of December 31, 2021, of which $16.4 million is 90 days or more past due, $18.4 million is past due 30-89 days and $2.04 billion are current.

(2)	The Company measures the carrying value of the retained portion of loans sold at fair value under FASB ASC Subtopic 825-10, Financial Instruments: Overall. 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 present asset quality indicators by portfolio class and origination year. See Note 3. Loans and Leases Held for Investment and Credit Quality in the Company’s 2021 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
	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term		Total^1,2
March 31, 2022
Small Business Banking
Risk Grades 1 - 4	$	228,645	$	1,095,845	$	831,655	$	511,688	$	264,712	$	270,411	$	57,223	$	384	$	3,260,563
Risk Grade 5		—		7,048		30,708		58,116		60,421		53,324		2,882		350		212,849
Risk Grades 6 - 8		—		4,351		5,123		24,891		13,315		38,604		1,306		—		87,590
Total		228,645		1,107,244		867,486		594,695		338,448		362,339		61,411		734		3,561,002
Specialty Lending
Risk Grades 1 - 4		174,145		634,405		233,734		68,634		42,605		41,474		139,641		124		1,334,762
Risk Grade 5		—		22,300		28,236		22,191		10,067		11,042		4,116		—		97,952
Risk Grades 6 - 8		—		236		17		3,079		8,944		1,718		4		—		13,998
Total		174,145		656,941		261,987		93,904		61,616		54,234		143,761		124		1,446,712
Paycheck Protection Program
Risk Grades 1 - 4		—		100,841		33,449		—		—		—		—		—		134,290
Risk Grade 5		—		—		—		—		—		—		—		—		—
Risk Grades 6 - 8		—		—		—		—		—		—		—		—		—
Total		—		100,841		33,449		—		—		—		—		—		134,290
Total	$	402,790	$	1,865,026	$	1,162,922	$	688,599	$	400,064	$	416,573	$	205,172	$	858	$	5,142,004

	2021		2020		2019		2018		2017		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term		Total^1,2
December 31, 2021
Small Business Banking
Risk Grades 1 - 4	$	1,051,775	$	853,250	$	522,407	$	285,397	$	188,858	$	116,645	$	46,356	$	1,771	$	3,066,459
Risk Grade 5		7,838		19,651		65,715		60,615		37,661		13,933		5,066		195		210,674
Risk Grades 6 - 8		2,517		8,667		27,696		14,545		14,193		21,239		1,457		774		91,088
Total		1,062,130		881,568		615,818		360,557		240,712		151,817		52,879		2,740		3,368,221
Specialty Lending
Risk Grades 1 - 4		644,851		238,409		73,978		42,452		38,703		—		133,889		1,816		1,174,098
Risk Grade 5		2,250		17,677		5,497		10,415		17,104		—		2,953		848		56,744
Risk Grades 6 - 8		—		17		3,166		8,654		—		2,315		75				14,227
Total		647,101		256,103		82,641		61,521		55,807		2,315		136,917		2,664		1,245,069
Paycheck Protection Program
Risk Grades 1 - 4		204,803		63,572		—		—		—		—		—		—		268,375
Risk Grade 5		—		—		—		—		—		—		—		—		—
Risk Grades 6 - 8		—		—		—		—		—		—		—		—		—
Total		204,803		63,572		—		—		—		—		—		—		268,375
Total	$	1,914,034	$	1,201,243	$	698,459	$	422,078	$	296,519	$	154,132	$	189,796	$	5,404	$	4,881,665

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(1)

Total loans and leases include $2.00 billion of U.S. government guaranteed loans as of March 31, 2022, segregated by risk grade as follows: Risk Grades 1 – 4 = $1.80 billion, Risk Grade 5 = $137.3 million, Risk Grades 6 – 8 = $61.0 million. As of December 31, ~~2016,~~2021, total loans and leases include ~~$37.7 million~~$2.07 billion of U.S. government guaranteed loans, ~~of which $13.7~~segregated by risk grade as follows: Risk Grades 1 – 4 = $1.88 billion, Risk Grade 5 = $134.2 million, ~~is greater than 90 days past due, $6.8 million is 30-89 days past due and $17.2 million is included in current~~Risk Grades 6 – 8 = $63.0 million. Total loans and leases ~~as presented above.~~exclude loans accounted for under the fair value option.

~~Table of Contents~~

(2)	Excludes $600.6 million and $645.2 million of loans accounted for under the fair value option as of March 31, 2022 and December 31, 2021, respectively.

~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Consolidated Financial Statements~~

Nonaccrual Loans and Leases

~~Loans~~

As of March 31, 2022 and ~~leases that become~~December 31, 2021 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 ended ~~September 30, 2017~~March 31, 2022 and ~~2016, respectively, and for the nine months ended September 30, 2017 and 2016 interest income would have increased approximately $831 thousand and $451 thousand, respectively. All nonaccrual~~2021. Nonaccrual loans and leases are generally included in the held for investment portfolio.

Accrued interest receivable on loans totaled $31.2 million and $31.0 million at March 31, 2022 and December 31, 2021, respectively, and is included in other assets in the accompanying Unaudited Condensed Consolidated Balance Sheets.

Nonaccrual loans and leases held for investment as of ~~September 30, 2017~~March 31, 2022 and December 31, ~~2016~~2021 are as follows:

March 31, 2022	Loan and Lease Balance¹		Guaranteed Balance		Unguaranteed Balance		Unguaranteed Exposure with No ACL
Commercial & Industrial
Small Business Banking	$	15,892	$	12,639	$	3,253	$	407
Payroll Protection Program		1,414		1,414		—		—
Total		17,306		14,053		3,253		407
Construction & Development
Small Business Banking		4,037		1,201		2,836		2,344
Total		4,037		1,201		2,836		2,344
Commercial Real Estate
Small Business Banking		20,130		10,876		9,254		5,816
Specialty Lending		1,718		—		1,718		1,718
Total		21,848		10,876		10,972		7,534
Commercial Land
Small Business Banking		9,112		6,699		2,413		827
Total		9,112		6,699		2,413		827
Total	$	52,303	$	32,829	$	19,474	$	11,112

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, 2021	Loan and Lease Balance¹		Guaranteed Balance		Unguaranteed Balance		Unguaranteed Exposure with No ACL
Commercial & Industrial
Small Business Banking	$	16,911	$	13,981	$	2,930	$	—
Payroll Protection Program		1,482		1,482		—		—
Total		18,393		15,463		2,930		—
Construction & Development
Small Business Banking		3,884		1,201		2,683		—
Total		3,884		1,201		2,683		—
Commercial Real Estate
Small Business Banking		12,410		5,226		7,184		5,169
Specialty Lending		2,315		507		1,808		1,808
Total		14,725		5,733		8,992		6,977
Commercial Land
Small Business Banking		5,531		4,148		1,383		—
Total		5,531		4,148		1,383		—
Total	$	42,533	$	26,545	$	15,988	$	6,977

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

The following table presents the amortized cost basis of collateral-dependent loans and leases, which are individually evaluated to determine expected credit losses, as of March 31, 2022 and December 31, 2021:

	Total Collateral Dependent Loans						Unguaranteed Portion
March 31, 2022	Real Estate		Business Assets		Other		Real Estate		Business Assets		Other		Allowance for Credit Losses
Commercial & Industrial
Small Business Banking	$	—	$	7,466	$	34	$	—	$	2,051	$	34	$	1,631
Total		—		7,466		34		—		2,051		34		1,631
Construction & Development
Small Business Banking		4,011		—		—		2,810		—		—		180
Total		4,011		—		—		2,810		—		—		180
Commercial Real Estate
Small Business Banking		5,028		1,751		103		3,968		451		23		280
Total		5,028		1,751		103		3,968		451		23		280
Commercial Land
Small Business Banking		5,812		—		—		1,596		—		—		376
Total		5,812		—		—		1,596		—		—		376
Total	$	14,851	$	9,217	$	137	$	8,374	$	2,502	$	57	$	2,467

December 31, 2016 Loan and Lease Balance
Guaranteed
Balance

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

~~Table of Contents~~

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

	Total Collateral Dependent Loans						Unguaranteed Portion
December 31, 2021	Real Estate		Business Assets		Other		Real Estate		Business Assets		Other		Allowance for Credit Losses
Commercial & Industrial
Small Business Banking	$	698	$	7,475	$	—	$	152	$	449	$	—	$	235
Total		698		7,475		—		152		449		—		235
Construction & Development
Specialty Lending		3,858		—		—		2,657		—		—		57
Total		3,858		—		—		2,657		—		—		57
Commercial Real Estate
Small Business Banking		5,172		700		64		4,038		14		13		65
Specialty Lending		512		—		—		6		—		—		—
Total		5,684		700		64		4,044		14		13		65
Commercial Land
Small Business Banking		5,541		—		—		1,393		—		—		601
Total		5,541		—		—		1,393		—		—		601
Total	$	15,781	$	8,175	$	64	$	8,246	$	463	$	13	$	958

~~Allowance for Loan and Lease Loss Methodology~~

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

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

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

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

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

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

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

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

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

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

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

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

~~Table of Contents~~

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Allowance for Credit Losses - Loans and Leases

See Note 1. Organization and Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements in the Company’s 2021 Form 10-K for a description of the methodologies used to estimate the allowance for credit losses (“ACL”).

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	Commercial & Industrial			Construction & Development		Commercial Real Estate			Commercial Land			Total
March 31, 2022
Beginning Balance	$	37,770		$	3,435	$	19,068		$	3,311		$	63,584
Charge offs		(2,823	)		—		—			(334	)		(3,157	)
Recoveries		145			—		650			—			795
Provision		(930	)		667		1,896			203			1,836
Ending Balance	$	34,162		$	4,102	$	21,614		$	3,180		$	63,058
March 31, 2021
Beginning Balance	$	26,941		$	5,663	$	18,148		$	1,554		$	52,306
Charge offs		(152	)		—		(517	)		(12	)		(681	)
Recoveries		9			—		1,656			—			1,665
Provision		(221	)		224		(641	)		(235	)		(873	)
Ending Balance	$	26,577		$	5,887	$	18,646		$	1,307		$	52,417

Three months ended
Construction &
Development

Commercial
Real Estate

Commercial
& Industrial

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

Nine months ended Construction &
Development Commercial
Real Estate Commercial
& Industrial Commercial
Land Total
September 30, 2017
Beginning Balance $ 1,693
$ 5,897
$ 8,413
$ 2,206
$ 18,209
Charge offs —
(952 ) (1,754 ) (35 ) (2,741 )
Recoveries —
17
55
6
78
Provision (54 ) 3,436
2,160
(61 ) 5,481
Ending Balance $ 1,639
$ 8,398
$ 8,874
$ 2,116
$ 21,027
September 30, 2016
Beginning Balance $ 1,064
$ 2,486
$ 2,766
$ 1,099
$ 7,415
Charge offs —
(7 ) (1,307 ) (63 ) (1,377 )
Recoveries —
4
444
—
448
Provision 369
1,858
5,667
798
8,692
Ending Balance $ 1,433
$ 4,341
$ 7,570
$ 1,834
$ 15,178

~~The following tables detail~~

During the ~~recorded allowance~~three months ended March 31, 2022, the ACL decreased primarily as a result of the charge-off of one large relationship as well as continued improvements in forecasted unemployment and default expectations. These decreases were offset by overall loan growth. Unemployment rates were forecasted for twelve months followed by a twelve-month straight-line reversion period. Additionally, the provision expense was impacted by net charge-offs during the periods.

During the three months ended March 31, 2021, 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 ~~losses~~growth and net recoveries during the ~~investment in loans and leases related to each portfolio segment, disaggregated on the basis of impairment evaluation methodology:~~

September 30, 2017
Construction &
Development

Commercial
Real Estate

Commercial
& Industrial

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

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

periods.

~~Table of Contents~~

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed 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	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, loans and leases receivable includes $37.7 million of U.S. government guaranteed loans, of which $22.1 million are considered impaired.

Included in loans and leases collectively evaluated for impairment are impaired loans and leases with individual unguaranteed exposure of less than $100 thousand. As of September 30, 2017, these balances totaled $13.4 million, of which $12 million are guaranteed by the U.S. government and $1.4 million are unguaranteed. As of December 31, 2016, these balances totaled $12.3 million, of which $10.0 million are guaranteed by the U.S. government and $2.3 million are unguaranteed.~~The allowance for loan and lease losses associated with these loans and leases totaled $417 thousand and $438 thousand as of September 30, 2017 and December 31, 2016, respectively.~~

~~Table of Contents~~

~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Consolidated Financial Statements~~

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

September 30, 2017
Recorded
Investment

Guaranteed
Balance

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

December 31, 2016
Recorded
Investment

Guaranteed
Balance

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

~~Table of Contents~~

~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Consolidated Financial Statements~~

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

September 30, 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 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
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 Consolidated Financial Statements~~

Nine months ended
September 30, 2017 Nine months ended
September 30, 2016
Average
Balance Interest
Income
Recognized Average
Balance Interest
Income
Recognized
Commercial & Industrial
Death Care Management $ 313
$ 3
$ 9
$ —
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 Consolidated Financial Statements~~

The following tables ~~present~~represent the types of ~~TDRs that were made~~loans modified as troubled debt restructurings (“TDRs”) during the ~~three and nine months ended September 30, 2017 and 2016:~~periods presented:

	Three Months Ended March 31, 2022
	Interest Only				Payment Deferral				Extend Amortization				Other				Total TDRs⁽¹⁾
	Number of Loans		Recorded investment at period end		Number of Loans		Recorded investment at period end		Number of Loans		Recorded investment at period end		Number of Loans		Recorded investment at period end		Number of Loans		Recorded investment at period end
Commercial & Industrial
Small Business Banking		—	$	—		2	$	1,015		1	$	350		3	$	3,809		6	$	5,174
Total		—		—		2		1,015		1		350		3		3,809		6		5,174
Commercial Real Estate
Small Business Banking		—		—		—		—		—		—		1		4,847		1		4,847
Total		—		—		—		—		—		—		1		4,847		1		4,847
Total		—	$	—		2	$	1,015		1	$	350		4	$	8,656		7	$	10,021

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

	Three Months Ended March 31, 2021
	Interest Only				Payment Deferral				Extend Amortization				Other				Total TDRs⁽¹⁾
	Number of Loans		Recorded investment at period end		Number of Loans		Recorded investment at period end		Number of Loans		Recorded investment at period end		Number of Loans		Recorded investment at period end		Number of Loans		Recorded investment at period end
Commercial & Industrial
Small Business Banking		—	$	—		1	$	3,269		—	$	—		—	$	—		1	$	3,269
Total		—		—		1		3,269		—		—		—		—		1		3,269
Commercial Real Estate
Small Business Banking		—		—		1		629		—		—		1		3,141		2		3,770
Total		—		—		1		629		—		—		1		3,141		2		3,770
Total		—	$	—		2	$	3,898		—	$	—		1	$	3,141		3	$	7,039

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

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

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~~There were 0 TDRs that were modified within the twelve months ended ~~September 30, 2017~~March 31, 2022 that subsequently defaulted during the three ~~or nine~~ months ended ~~September 30, 2017.~~

~~Table of Contents~~

~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Consolidated Financial Statements~~

~~As of September 30, 2016, one~~March 31, 2022. NaN TDR that was modified within the twelve months ended ~~September 30, 2016~~March 31, 2021 subsequently defaulted during the ~~nine~~three months ended ~~September 30, 2016. This~~March 31, 2021. The TDR that defaulted was a ~~commercial and industrial veterinary~~Commercial Real Estate Small Business Banking loan that ~~was~~had previously been modified for a payment ~~deferral. The~~deferral and had a recorded investment ~~for this TDR~~of $629 thousand at ~~September 30, 2016 was $311 thousand.~~

March 31, 2021.

~~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 to 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:

	March 31, 2022			December 31, 2021
Gross direct finance lease payments receivable	$	6,291		$	7,333
Less – unearned interest		(797	)		(998	)
Net investment in direct financing leases	$	5,494		$	6,335

Future minimum lease payments under finance leases are as follows:

As of March 31, 2022	Amount
2022	$	1,318
2023		2,182
2024		1,570
2025		1,104
2026		117
Total	$	6,291

Interest income of $115 thousand and $186 thousand was recognized in the three months ended March 31, 2022 and 2021, 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.

If the Company decides to sell or otherwise dispose of rental equipment, it is carried at the lower of cost or fair value less costs to sell or dispose. Repair and maintenance costs that do not extend the lives of the rental equipment are charged to equipment expense at the time the costs are incurred.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

As of March 31, 2022 and December 31, 2021, the Company had a net investment of $121.5 million and $123.9 million, respectively, in assets included in premises and equipment that are subject to operating leases. Of the net investment, the gross balance of the assets was $163.4 million as of March 31, 2022 and December 31, 2021, respectively, and accumulated depreciation was $41.9 million and $39.5 million as of March 31, 2022 and December 31, 2021, respectively. Depreciation expense recognized on these assets for the three months ended March 31, 2022 and 2021 was $2.4 million.

Lease income of $2.4 million was recognized in the three months ended March 31, 2022 and 2021.

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

As of March 31, 2022	Amount
2022	$	7,100
2023		9,075
2024		8,808
2025		8,935
2026		8,923
Thereafter		22,252
Total	$	65,093

Note 7. Servicing Assets

Loans serviced for others are not included in the accompanying ~~balance sheet.~~Unaudited Condensed Consolidated Balance Sheets. The unpaid principal balances of loans serviced for others requiring recognition of a servicing asset were ~~$2.36~~$2.38 billion and ~~$2.22~~$2.29 billion at ~~September 30, 2017~~March 31, 2022 and December 31, ~~2016,~~2021, respectively.

The unpaid principal balance for all loans serviced for others was $3.38 billion and $3.30 billion at March 31, 2022 and December 31, 2021, respectively.

The following summarizes the activity pertaining to servicing rights:

	Three Months Ended March 31,
	2022			2021
Balance at beginning of period	$	33,574		$	33,918
Additions, net		4,281			2,333
Fair value changes:
Due to changes in valuation inputs or assumptions		1,388			2,946
Decay due to increases in principal paydowns or runoff		(2,957	)		(1,453	)
Balance at end of period	$	36,286		$	37,744

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 11.7% on ~~September 30, 2017~~March 31, 2022 and ~~8.1% to 14.1%~~8.8% on ~~September 30, 2016.~~March 31, 2021. The fair value of servicing rights was determined using a weighted average prepayment ~~speeds ranging from 3.1% to 10.0%~~speed of 16.1% on ~~September 30, 2017~~March 31, 2022 and ~~2.9% to 9.8%~~18.6% on ~~September 30, 2016,~~March 31, 2021, with the actual rate depending on the stratification of the specific right. Changes to fair value are reported in loan servicing asset revaluation within the ~~consolidated statements~~Unaudited Condensed Consolidated Statements of ~~income.~~

Income.

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

~~Table of Contents~~

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 8. Borrowings

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

	March 31, 2022		December 31, 2021
Borrowings
In March 2021, the Company entered into a 60-month term loan agreement of $50.0 million with a third party correspondent bank. The loan accrues interest at a fixed rate of 2.95% with a monthly payment sufficient to fully amortize the loan, with all remaining unpaid principal and interest due at maturity on March 30, 2026. The Company paid the Lender a non-refundable $325 thousand loan origination fee upon signing of the Note that is presented as a direct deduction from the carrying amount of the loan and will be amortized into interest expense over the life of the loan.	$	40,376	$	42,734
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 6, 2022 to May 4, 2026, 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 $136.6 million borrowing was fully advanced at March 31, 2022.		136,550		267,550
In September 2020, the Company renewed a $50.0 million revolving line of credit originally issued in 2017 with a third party correspondent bank. Subsequently on October 20, 2021, the Company renewed and increased the revolving line of credit from $50.0 million to $100.0 million and increased the term from 12 months to 36 months. The line of credit is unsecured and accrues interest at 30-day SOFR plus 1.25%, with an interest rate cap of 4.25% and an interest rate floor of 2.75%. Payments are interest only with all principal and accrued interest due at maturity on October 10, 2024. The terms of this loan require the Company to maintain minimum capital and debt service coverage ratios. The Company paid the Lender a non-refundable $750 thousand loan origination fee upon signing of the Note that will be amortized into interest expense over the life of the loan. The Company made an advance of $8.0 million on December 20, 2021 and $12.0 million on March 16, 2022. There is $80.0 million of available credit remaining at March 31, 2022.		19,982		8,000
Other short term debt ⁽¹⁾		3		5
Total borrowings	$	196,911	$	318,289

(1)	Includes finance leases.

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~~$167.5 million ~~and $26.5 million~~of available funding as of ~~September 30, 2017~~March 31, 2022 and December 31, ~~2016, respectively.~~2021. 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 30, 2017~~March 31, 2022 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~~

2021.

The Company has entered into a repurchase agreement with a third party for $5an amount up to $5.0 million as of ~~September 30, 2017~~March 31, 2022 and December 31, ~~2016.~~2021. 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 30, 2017~~March 31, 2022 and December 31, ~~2016.~~2021.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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 March 31, 2022 and December 31, 2021, the Company had approximately $2.03 billion and $2.02 billion, respectively, in borrowing capacity available under these agreements. There are no advances outstanding and no collateral pledged as of March 31, 2022 and December 31, 2021.

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~~$2.68 billion and ~~$281.3 million~~$2.44 billion as of ~~September 30, 2017~~March 31, 2022 and December 31, ~~2016,~~2021, respectively. At ~~September 30, 2017~~March 31, 2022 and December 31, ~~2016,~~2021, the Company had approximately ~~$175.0 million~~$2.27 billion and ~~$142.7 million,~~$2.04 billion, respectively, in borrowing capacity available under these arrangements with no0 outstanding balance as of ~~September 30, 2017~~March 31, 2022 and December 31, ~~2016.~~

~~Note 9. Income Taxes~~

The Company's effective tax rate is lower than the U.S. statutory rate primarily because of the anticipated effect of investment tax credits during 2017. The Company's effective tax rate in the future will depend on the actual investment tax credits earned as a part of its financing renewable energy applications.

In the first quarter of 2017, share based compensation expense excess tax benefits of $874 thousand were reflected in the consolidated statements of income as a component of the provision for income taxes as a result of the adoption of ASU 2016-09. Please refer to Note 2 for more details regarding the adoption of ASU 2016-09.

2021.

Note ~~10.~~9. Fair Value of Financial Instruments

Fair Value Hierarchy

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

~~Financial Instruments Measured at Fair Value~~

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

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

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

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

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

~~Table 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 the contingent consideration liability is classified within Level 3 of the valuation hierarchy.

Recurring Fair Value

The table below provides a rollforward of the Level 3 equity warrant asset fair values.

	Three Months Ended March 31,
Equity Warrant Assets	2022		2021
Balance at beginning of period	$	1,672	$	908
Issuances		656		21
Net gains on derivative instruments		—		385
Settlements		—		—
Balance at end of period	$	2,328	$	1,314

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

March 31, 2022	Total		Level 1		Level 2		Level 3
Investment securities available-for-sale
US government agencies	$	10,503	$	—	$	10,503	$	—
Mortgage-backed securities		828,222		—		828,222		—
Municipal bonds⁽¹⁾		3,352		—		3,258		94
Other debt securities		2,500		—		2,500		—
Loans held for sale		25,056		—		—		25,056
Loans held for investment		600,571		—		—		600,571
Servicing assets⁽²⁾		36,286		—		—		36,286
Mutual fund		2,327		—		2,327		—
Equity warrant assets		2,328		—		—		2,328
Total assets at fair value	$	1,511,145	$	—	$	846,810	$	664,335

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 2021	Total		Level 1		Level 2		Level 3
Investment securities available-for-sale
US government agencies	$	10,637	$	0	$	10,637	$	0
Mortgage-backed securities		889,339		0		889,339		0
Municipal bonds⁽¹⁾		3,576		0		3,480		96
Other debt securities		2,500		—		2,500		—
Loans held for sale		25,310		—		—		25,310
Loans held for investment		645,201		—		—		645,201
Servicing assets⁽²⁾		33,574		0		0		33,574
Mutual fund		2,379		0		2,379		0
Equity warrant assets		1,672		0		0		1,672
Total assets at fair value	$	1,614,188	$	0	$	908,335	$	705,853

September 30, 2017 Total Level 1 Level 2 Level 3
Investment securities available-for-sale
US government agencies $ 17,804
$ —
$ 17,804
$ —
Residential mortgage-backed securities 56,750
—
56,750
—
Mutual fund 2,021
—
2,021
—
Servicing assets¹
53,392
—
—
53,392
Total assets at fair value $ 129,967
$ —
$ 76,575
$ 53,392

Contingent consideration liability²
$ 4,650
$ —
$ —
$ 4,650
Total liabilities at fair value $ 4,650
$ —
$ —
$ 4,650

December 31, 2016 Total Level 1 Level 2 Level 3
Investment securities available-for-sale
US government agencies $ 17,823
$ —
$ 17,823
$ —
Residential mortgage-backed securities 51,273
—
51,273
—
Mutual fund 1,960
—
1,960
—
Servicing assets¹
51,994
—
—
51,994
Total assets at fair value $ 123,050
$ —
$ 71,056
$ 51,994

(1)	During the three months ended March 31, 2022, the Company recorded a fair value adjustment loss of $2 thousand. During the three months ended March 31, 2021, the Company recorded no fair value adjustment gain/loss.

(2)

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

assets.


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~~

For additional information on the valuation techniques and significant inputs for Level 2 and Level 3 assets and liabilities that are measured at fair value on a recurring basis, see Note 10. Fair Value of Financial Instruments in the Company’s 2021 Form 10-K.

Fair Value Option

The Company has historically elected to account for retained participating interests of all government guaranteed loans under the fair value option in order to align the accounting presentation with the Company’s viewpoint of the economics of the loans. Interest income is recognized in the same manner on loans reported at fair value as on non-fair value loans, except in regard to origination fees and costs which are recognized immediately upon fair value election. Beginning in the first quarter of 2021, the Company chose not to elect fair value for all retained participating interests arising from new government guaranteed loan sales. Not electing fair value generally results in a larger discount being recorded on the date of the sale. This discount is subsequently accreted into interest income over the underlying loan’s remaining term using the effective interest method. Management made this change of election in alignment with its ongoing effort to reduce volatility and drive more predictable revenue. In accordance with GAAP, any loans for which fair value was previously elected will continue to be measured as such.

There were 0 loans accounted for under the fair value option that were 90 days or more past due and still accruing interest at March 31, 2022 or December 31, 2021. The unpaid principal balance of unguaranteed exposure for nonaccruals was $6.0 million and $6.9 million at March 31, 2022 and December 31, 2021, 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 March 31, 2022 and December 31, 2021.

	March 31, 2022
	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	$	25,056	$	26,747	$	(1,691	)	$	—	$	—	$	—		$	—	$	—	$	—
Loans held for investment		600,571		620,121		(19,550	)		35,301		40,012		(4,711	)		17,411		20,845		(3,434	)
	$	625,627	$	646,868	$	(21,241	)	$	35,301	$	40,012	$	(4,711	)	$	17,411	$	20,845	$	(3,434	)

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

	December 31, 2021
	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	$	25,310	$	26,831	$	(1,521	)	$	—	$	—	$	—		$	—	$	—	$	—
Loans held for investment		645,201		666,066		(20,865	)		38,262		42,841		(4,579	)		24,057		25,633		(1,576	)
	$	670,511	$	692,897	$	(22,386	)	$	38,262	$	42,841	$	(4,579	)	$	24,057	$	25,633	$	(1,576	)

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

	Three Months Ended March 31,
Gains (Losses) on Loans Accounted for under the Fair Value Option	2022			2021
Loans held for sale	$	(170	)	$	36
Loans held for investment		686			4,182
	$	516		$	4,218

Gains/(losses) related to borrower-specific credit risk were $(2.1) million and $191 thousand for the three months ended March 31, 2022 and 2021, respectively.

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

	Three Months Ended March 31,
Loans held for sale	2022			2021
Balance at beginning of period	$	25,310		$	36,111
Issuances & repurchases		65			—
Fair value changes		(170	)		36
Sales		—			—
Settlements		(149	)		(211	)
Balance at end of period	$	25,056		$	35,936

	Three Months Ended March 31,
Loans held for investment	2022			2021
Balance at beginning of period	$	645,201		$	815,374
Repurchases		1,525			5,570
Fair value changes		686			4,184
Settlements		(46,841	)		(34,331	)
Balance at end of period	$	600,571		$	790,797

Non-Recurring Fair Value

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

March 31, 2022	Total		Level 1		Level 2		Level 3
Collateral-dependent loans	$	2,486	$	—	$	—	$	2,486
Foreclosed assets		198		—		—		198
Total assets at fair value	$	2,684	$	—	$	—	$	2,684

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

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

~~Table of Contents~~

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 2021	Total		Level 1		Level 2		Level 3
Collateral-dependent loans	$	1,567	$	—	$	—	$	1,567
Foreclosed assets		620		—		—		620
Total assets at fair value	$	2,187	$	—	$	—	$	2,187

For additional information on the valuation techniques and significant inputs for Level 2 and Level 3 assets that are measured at fair value on a non-recurring basis, see Note 10. Fair Value of Financial Instruments in the Company’s 2021 Form 10-K.

Level 3 Analysis

For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of ~~September 30, 2017~~March 31, 2022 and December 31, ~~2016~~2021 the significant unobservable inputs used in the fair value measurements were as follows:

March 31, 2022

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	5.3% 5.0%
Loans held for sale	$	25,056	Discounted expected cash flows	Discount rate Prepayment speed	6.3% to 20.8% WAVG 17.2%
Loans held for investment	$	600,571	Discounted expected cash flows Discounted appraisals	Loss rate Discount rate Prepayment speed Appraisal adjustments	0% to 70.2% (WAVG 1.6%) 6.3% to 20.8% WAVG 17.2% 10.0% to 81.0%
Equity warrant assets	$	2,328	Black-Scholes option pricing model	Volatility Risk-free interest rate Marketability discount Remaining life	26.6-88.0% 2.5% 20.0% 3 - 10 years
Non-recurring fair value
Collateral-dependent loans	$	2,486	Discounted appraisals	Appraisal adjustments ⁽¹⁾	10.0% to 99.0%
Foreclosed assets	$	198	Discounted appraisals	Appraisal adjustments ⁽¹⁾	10.0%

~~September 30, 2017~~

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

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, ~~2016~~2021

Level 3 Assets with Significant

Unobservable Inputs

Fair Value

Valuation Technique

Significant

Unobservable

Inputs

Range

Recurring fair value

Municipal bond

Discounted expected cash flows

Discount rate

Prepayment speed

4.8%

5.0%

Loans held for sale

25,310

Discounted expected cash flows

Discount rate

Prepayment speed

6.2% to 21.9%

WAVG 17.4%

Loans held for

investment

645,201

Discounted expected cash flows

Discounted appraisals

Loss rate

Discount rate

Prepayment speed

Appraisal adjustments

0.0% to 70.2%

(WAVG 1.5%)

6.2% to 21.9%

WAVG 17.4%

10.0% to 85.0%

Equity warrant assets

1,672

Black-Scholes option pricing model

Volatility

Risk-free interest rate

Marketability discount

Remaining life

26.2-88.2%

1.3% to 1.5%

20.0%

4 - 10 years

Non-recurring fair value

Collateral-dependent

loans

1,567

Discounted appraisals

Appraisal adjustments ⁽¹⁾

10.0% to 99.0%

Foreclosed assets

620

Discounted appraisals

Appraisal adjustments ⁽¹⁾

9.0% to 10.0%

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~~other qualitative adjustments.

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 Condensed Consolidated ~~Financial Statements~~

~~Deposits~~: The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

~~Short and long term borrowings:~~ The fair values of the Company’s short term borrowings approximate fair value while long term borrowings are estimated using discounted cash flow analyses based on the Company’s current incremental debt rates for similar types of debt arrangements.

Balance Sheets.

The carrying amounts and estimated fair values of the Company’s financial instruments not measured at fair value on a recurring or non-recurring basis are as follows:

March 31, 2022	Carrying Amount		Quoted Price In Active Markets for Identical Assets /Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value
Financial assets
Cash and due from banks	$	477,778	$	477,778	$	—	$	—	$	477,778
Federal funds sold		29,993		29,993		—		—		29,993
Certificates of deposit with other banks		4,250		4,316		—		—		4,316
Loans held for sale		1,003,579		—		—		1,074,381		1,074,381
Loans and leases held for investment, net of allowance for credit losses on loans and leases		5,074,612		—		—		5,176,365		5,176,365
Financial liabilities
Deposits		7,637,163		—		7,247,748		—		7,247,748
Borrowings		196,911		—		—		188,221		188,221

September 30, 2017
Carrying
Amount

Quoted Price
In Active
Markets for
Identical Assets
/Liabilities
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Total
Fair
Value
Financial assets
Cash and due from banks $ 260,907
$ 260,907
$ —
$ —
$ 260,907
Certificates of deposit with other banks 3,250
3,251
—
—
3,251
Investment securities, available-for-sale 76,575
—
76,575
—
76,575
Loans held for sale 692,586
—
—
770,923
770,923
Loans and leases, net of allowance for loan and lease losses 1,148,860
—
—
1,151,601
1,151,601
Servicing assets 53,392
—
—
53,392
53,392
Accrued interest receivable 9,669
9,669
—
—
9,669
Financial liabilities
Deposits 2,012,891
—
1,996,493
—
1,996,493
Accrued interest payable 270
270
—
—
270
Long term borrowings 26,872
—
—
27,904
27,904

December 31, 2016
Carrying
Amount

Quoted Price
In Active
Markets for
Identical Assets
/Liabilities
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Total
Fair
Value
Financial assets
Cash and due from banks $ 238,008
$ 238,008
$ —
$ —
$ 238,008
Certificates of deposit with other banks 7,250
7,236
—
—
7,236
Investment securities, available-for-sale 71,056
—
71,056
—
71,056
Loans held for sale 394,278
—
—
426,220
426,220
Loans and leases, net of allowance for loan and lease losses 889,357
—
—
873,158
873,158
Servicing assets 51,994
—
—
51,994
51,994
Accrued interest receivable 7,520
7,520
—
—
7,520
Financial liabilities
Deposits 1,485,076
—
1,469,173
—
1,469,173
Accrued interest payable 319
319
—
—
319
Long term borrowings 27,843
—
—
29,559
29,559

~~Table of Contents~~

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 2021	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	$	187,203	$	187,203	$	—	$	—	$	187,203
Federal funds sold		16,547		16,547		—		—		16,547
Certificates of deposit with other banks		4,750		4,930		—		—		4,930
Loans held for sale		1,091,209		—		—		1,197,307		1,197,307
Loans and leases held for investment, net of allowance for credit losses on loans and leases		4,812,477		—		—		4,958,875		4,958,875
Financial liabilities
Deposits		7,112,044		—		6,942,512		—		6,942,512
Borrowings		318,289		—		—		312,036		312,036

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.

On March 12, 2021, a purported class action was filed against the Company in the United States District Court for the Eastern District of North Carolina, Joseph McAlear, individually and on behalf of all others similarly situated v. Live Oak Bancshares, Inc. et al. The complaint alleges the existence of an agreement between the Company, nCino, Inc. and Apiture, LLC in which those companies purportedly sought to restrain the mobility of employees in violation of antitrust laws by agreeing not to solicit or hire each other’s employees. The complaint alleges violations of Section 1 of the federal Sherman Act (15 U.S.C. § 1) and violations of Sections 75-1 and 75-2 of the North Carolina General Statutes. The plaintiff seeks monetary damages, including treble damages, entitlement to restitution, disgorgement, attorneys’ fees, and pre- and post-judgment interest. On October 12, 2021, the Company reached an agreement to settle the case with a proposed class of all persons (with certain exclusions) employed by the Company or its wholly-owned subsidiary, Live Oak Banking Company, Apiture, Inc. or nCino, Inc. in North Carolina at any time from January 27, 2017, through March 31, 2021. In the agreement, the Company agreed to pay $3.9 million. On October 13, 2021, the plaintiff filed a motion for preliminary approval of the settlement, which the court granted by order entered on November 23, 2021. After class-wide noticing, the plaintiff filed a motion for final approval on March 28, 2022, which the court granted by order entered on April 28, 2022. Pursuant to the terms of the settlement, the Company expects the settlement to become finally effective no later than June 30, 2022.

Financial Instruments with ~~Off-balance-sheet~~Off-Balance-Sheet Risk

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

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

	March 31, 2022		December 31, 2021
Commitments to extend credit	$	2,980,984	$	2,634,387
Standby letters of credit		24,087		10,753
Total unfunded off-balance-sheet credit risk	$	3,005,071	$	2,645,140

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

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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~~Commitment letters are issued after approval of the loan by the Credit ~~Department. Commitment letters~~Department and generally expire ninety days after issuance.

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

In December 2021, the Company entered into a lease agreement to rent real property for a term of 91 months with $1.1 million of future expected lease payments. There is an option to renew the lease for an additional 5 year period. As of ~~September 30, 2017~~March 31, 2022, the lease had not commenced.

The balance of the allowance for off-balance sheet credit exposures was $884 thousand and $739 thousand at March 31, 2022 and December 31, ~~2016,~~2021, respectively.

As of March 31, 2022 and December 31, 2021, the Company ~~had~~recorded unfunded commitments to provide capital contributions for ~~on-balance sheet~~on-balance-sheet investments in the amount of ~~$4.4~~$20.4 million and ~~$4.9~~$10.4 million, respectively.

Concentrations of Credit Risk

Although the Company is not subject to any geographic concentrations, a substantial amount of the Company’s loans, leases, and commitments to extend credit have been granted to customers in the agriculture, healthcare and veterinary verticals. The concentrations of credit by type of loan are set forth in Note 6.

The distribution of commitments to extend credit approximates the distribution of loans outstanding. The Company does not have a significant number of credits to any single borrower or group of related borrowers whereby their retained unguaranteed exposure exceeds ~~$5.0~~$15.0 million, except for ~~seventeen~~thirty-five relationships that have a retained unguaranteed exposure of ~~$144.6~~$850.8 million of which ~~$90.8~~$480.9 million of the unguaranteed exposure has been disbursed.

Additionally, the Company has future minimum lease payments ~~due~~receivable under non-cancelable operating leases totaling ~~$33.0~~$65.1 million, of which ~~$28.0~~$20.0 million is due from ~~two relationships.~~

~~Table of Contents~~

~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Consolidated Financial Statements~~

one relationship.

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

Note ~~12. Stock Plans~~

~~On March 20, 2015,~~11. Segments

The Company's management reporting process measures the performance of its operating segments based on internal operating structure, which is subject to change from time to time. Accordingly, the Company ~~adopted~~operates 2 reportable segments for management reporting purposes as discussed below:

Banking - This segment specializes in providing financing services to small businesses nationwide in targeted industries and deposit-related services to small businesses, consumers and other customers nationwide. The primary source of revenue for this segment is net interest income and secondarily the ~~2015 Omnibus Stock Incentive Plan which replaced the previously existing Amended Incentive Stock Option Plan~~origination and ~~Nonstatutory Stock Option Plan. Subsequently~~sale of government guaranteed loans.

Fintech - This segment is involved in making strategic investments into emerging financial technology companies. The primary sources of revenue for this segment are principally gains and losses 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~~equity method and ~~has an expiration date of March 20, 2025. Options or restricted shares granted under the Amended~~equity security investments 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 valuemanagement fees. The Fintech segment is comprised of the ~~related stock at~~Company's direct wholly owned subsidiaries Live Oak Ventures and Canapi Advisors, and the ~~date of~~investments held by those entities, as well as the ~~grant. Options or restricted shares vest over a minimum of three years from the date of the grant.~~

~~Stock Options~~

~~Compensation cost relating to share-based payment transactions are recognized~~Bank's investment in the financial statements with measurement based upon the fair value of the equity or liability instruments issued. For the three months ended September 30, 2017 and 2016, the Company recognized $536 thousand and $580 thousand in compensation expense for stock options, respectively. For the nine months ended September 30, 2017 and 2016, the Company recognized $1.4 million and $1.8 million in compensation expense for stock options, respectively.

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

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.~~

Apiture.

~~Table of Contents~~

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Shares
Weighted
Average
Grant Date
Fair Value
Non-vested at December 31, 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, unrecognized compensation costs relating~~following tables provide financial information for the Company's segments. The information provided under the caption “Other” represents operations not considered to ~~stock options amounted to $9.8 million which will~~ be ~~recognized over a weighted average period of 2.93 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 lifereportable segments and/or general operating expenses of the ~~awards are based on~~Company, and includes the ~~U.S. Treasury yield curve in effect at~~parent company, other non-bank subsidiaries and elimination adjustments to reconcile the ~~time~~results 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~~operating segments to the Company’s share price closing at or above a specified price ranging from $34.00 to $38.00 per share for at least twenty (20) consecutive trading days at any time prior to expiration date. The amount of Market RSUs earned will not exceed 100% of the Market RSUs awarded. The fair value of the Market RSUs and the implied service period is calculated using the Monte Carlo Simulation method.

~~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 30, 2017 and 2016, the Company recognized $191 thousand and $3.1 million~~unaudited condensed consolidated financial statements prepared in compensation expense for RSUs, respectively. For the nine months ended September 30, 2017 and 2016, the Company recognized $517 thousand and $5.3 million in compensation expense for RSUs, respectively.

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

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

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

For the three months ended September 30, 2017 and 2016, the Company recognized $1.3 million and $346 thousand in compensation expense for Market RSUs, respectively. For the nine months ended September 30, 2017 and 2016, the Company recognized $3.7 million and $577 thousand in compensation expense for Market RSUs, respectively.

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

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

~~Employee Stock Purchase Plan~~

The Company adopted an Employee Stock Purchase Plan on October 8, 2014. On May 24, 2016, the plan was amended and the Amended and Restated Employee Stock Purchase Plan (the "ESPP") became effective within the meaning of Section 423 of the Internal Revenue Code of 1986, as amended. Under the ESPP, eligible employees are able to purchase available sharesconformity 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.GAAP.

	Banking			Fintech			Other			Consolidated
As of and for the three months ended March 31, 2022
Interest income	$	92,746		$	36		$	—		$	92,782
Interest expense		14,530			—			473			15,003
Net interest income		78,216			36			(473	)		77,779
Provision for loan and lease credit losses		1,836			—			—			1,836
Noninterest income		31,935			237			496			32,668
Noninterest expense		61,399			2,168			2,147			65,714
Income tax expense (benefit)		9,076			(146	)		(542	)		8,388
Net income (loss)	$	37,840		$	(1,749	)	$	(1,582	)	$	34,509
Total assets	$	8,450,425		$	121,471		$	48,070		$	8,619,966
As of and for the three months ended March 31, 2021
Interest income	$	88,099		$	122		$	4		$	88,225
Interest expense		18,165			—			110			18,275
Net interest income		69,934			122			(106	)		69,950
(Recovery of) provision for loan and lease credit losses		(873	)		—			—			(873	)
Noninterest income		30,524			(4	)		537			31,057
Noninterest expense		55,625			1,020			1,627			58,272
Income tax expense (benefit)		4,650			5			(474	)		4,181
Net income (loss)	$	41,056		$	(907	)	$	(722	)	$	39,427
Total assets	$	8,281,729		$	91,662		$	44,484		$	8,417,875

~~Table of Contents~~

~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Consolidated Financial Statements~~

Note ~~13.~~12. Subsequent Event

~~Management has evaluated subsequent events through~~

On April 1, 2022, Fiserv, Inc., (“Fiserv”) acquired all of the ~~date~~ownership interests in Finxact, Inc. (“Finxact”) that it did not already own (the “Transaction”), including the ~~financial statements were available to be issued and determined that the following event required disclosure:~~

~~Unconsolidated Joint Venture~~

~~On October 1, 2017,~~interest of the Company, ~~closed~~pursuant to the ~~digital banking joint venture~~previously announced definitive agreement between ~~Live Oak Banking~~Fiserv and Finxact. The Company ~~and First Data Corporation ("First Data"). The new company, named Apiture, combines First Data's~~received initial cash of $125.3 million, and the ~~Bank's digital banking platforms, products, services, and certain human resources used~~Transaction resulted in a pre-tax gain of approximately $120.5 million which will be included in the creation and delivery of technology solutions for financial institutions. The contributed assets of both the Company and First Data are considered businesses in accordance with relevant accounting standards. At closing both the Bank and First Data received equal voting interests in Apiture in exchange for their respective contributions. As a term of the closing agreements, First Data is entitled to a preference in Apiture's cash earningsCompany’s noninterest income for the ~~remainder~~second quarter 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)2022. Under the equity method of accounting, the net equity investment of the Bank and the Bank's share of net income or loss from the unconsolidated entity will be reflected in the Company's consolidated balance sheets and the consolidated statements of income.

The preliminary estimated fair value of Apiture at the date of closing was approximately $150 million. Based on the aforementioned cash earnings preference to First Data during 2017 and 2018, the valuation of equity interests received in exchange for contributions by the two initial investors was unequal. As a consequence of this preference the preliminary initial economic interest in Apiture for First Data was equal to 54.7% or $82.0 million, while the Company's preliminary initial economic interest in Apiture was equal to 45.3%, or $68.0 million. As the Company had no carrying amount for its contribution in the formation of Apiture, the preliminary pre-tax results for this transaction as of the date of closing would be a $68.0 million equity method investment on the balance sheet and a one-time gain of the same amount on the income statement.

The Company is undertaking a comprehensive review of the preliminary fair value estimates to ensure they conform to the measurement and reporting requirements set forth in the accounting guidance for equity method investments and joint ventures, business combinations, and fair value measurements guidance. Determining the fair value of the joint venture and the partners' contributions to the joint venture are complex analyses that involve significant judgment regarding estimates and assumptions. Accordingly, the initial accounting for this transaction is still in process.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following presents management’s discussion and analysis of the financial condition and results of operations of Live Oak Bancshares, Inc. ~~(the~~(individually, “Bancshares” and collectively with its subsidiaries including Live Oak Banking Company, the “Company” ~~or “LOB”~~). This discussion should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included elsewhere in this quarterly report on Form 10-Q and with the Company's Annual Report on Form 10-K for the fiscal year ended December 31, ~~2016~~2021 (the ~~"2016 Annual Report"~~"2021 Form 10-K"). Results of operations for the periods included in this quarterly report on Form 10-Q are not necessarily indicative of results to be obtained during any future period.

Important Note Regarding Forward-Looking Statements

This quarterly report on Form 10-Q contains statements that management believes are forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995.

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

~~Table of Contents~~

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

•

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

•

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

•

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

•

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;

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

•

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

•

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 service providers operating in the Company’s market area and elsewhere, including providers operating regionally, nationally and internationally, together with such competitors offering banking products and services by mail, telephone and the Internet;

•

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

•

changes in governmental monetary and fiscal policies as well as other legislative and regulatory changes, including with respect to SBA or USDA lending programs and investment tax credits;

•

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;

•

adverse results, including related fees and expenses, from pending or future lawsuits, government investigations or private actions;

•

other risk factors listed from time to time in reports that the Company files with the SEC, including those described under “Risk Factors” in this Report; and

•

the Company’s 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~~

Bancshares is a financial holding company and a bank holding company headquartered in Wilmington, North Carolina incorporated under the laws of the state of North Carolina in December 2008. The Company conducts business operations primarily through its commercial bank subsidiary, Live Oak Banking Company (the “Bank”). The Bank was incorporated in February 2008 as a North Carolina-chartered commercial bank. The Bank specializes in providing lending and deposit related services to small businesses ~~nationwide in targeted industries.~~nationwide. The Bank identifies and ~~grows~~extends lending to credit-worthy borrowers within ~~selected industry sectors, or~~specified industries, also called verticals, ~~by leveraging~~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 SBA under ~~its~~the 7(a) ~~program. In 2010,~~Loan Program and the U.S. Department of Agriculture’s ("USDA") Rural Energy for America Program ("REAP"), Water and Environmental Program (“WEP”) and Business & Industry ("B&I") loan programs.

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

The Bank’s wholly owned subsidiaries are Live Oak Number One, Inc., ~~a wholly-owned subsidiary, to hold~~Live Oak Clean Energy Financing LLC (“LOCEF”) and Live Oak Private Wealth, LLC (“Live Oak Private Wealth”). Live Oak Number One, Inc. holds properties foreclosed on by the Bank.

Effective July 29, 2016, the Company elected to become a “financial holding company” within the meaning of the Bank Holding Company Act. A financial holding company, and the nonbank companies under its control, are permitted to engage in activities considered financial in nature or incidental to financial activities. For the Company to become and remain eligible for financial holding company status, it and the Bank must meet certain criteria, including capital, management and Community Reinvestment Act (“CRA”) requirements. The failure to meet such criteria could, depending on which requirements were not met, result in the Company facing restrictions on new financial activities or acquisitions or being required to discontinue existing activities that are not otherwise permissible for bank holding companies.

~~In addition to the Bank, the Company owns Live Oak Clean Energy Financing LLC, formed in November 2016, for the purpose of providing~~ LOCEF provides financing to entities for renewable energy ~~applications;~~applications and became a wholly owned subsidiary of the Bank during the first quarter of 2019. Live Oak ~~Ventures, Inc., formed in August 2016, for~~Private Wealth provides high-net-worth individuals and families with strategic wealth and investment management services. During the ~~purpose~~first quarter of ~~investing in businesses that align with the Company's strategic initiative to be a leader in financial technology;~~2022, Jolley Asset Management, LLC (“JAM”) was merged into Live Oak ~~Grove, LLC, opened in September 2015 for the purpose~~Private Wealth. JAM was previously a wholly owned subsidiary of ~~providing Company employees and business visitors an on-site restaurant location; Government Loan Solutions, Inc. (“GLS”),~~Live Oak Private Wealth.

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 ~~U.S. Department~~USDA guaranteed loans. The Grove provides Company employees and business visitors an on-site restaurant location. Live Oak Ventures’ purpose is investing in businesses that align with the Company's strategic initiative to be a leader in financial technology. Canapi Advisors provides investment advisory services to a series of ~~Agriculture ("USDA"~~funds (the “Canapi Funds”)~~-guaranteed loans;~~ focused on providing venture capital to new and ~~504 Fund Advisors, LLC (“504FA”), which was formed to serve as the investment advisor to The 504 Fund, a closed-end mutual fund organized to invest in SBA section 504 loans.~~

On February 1, 2017, 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.

emerging financial technology companies.

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. Income from the sale of loans is comprised of net gains on sales of loans along with loan servicing revenue and revaluation of related servicing ~~assets and net gains on sales of loans.~~assets. Offsetting these revenues are the cost of funding sources, provision for loan and lease credit losses, any costs related to foreclosed assets and other operating costs such as salaries and employee benefits, travel, professional services, advertising and marketing and tax expense.

~~On July 23, 2015~~ The Company also has less routinely generated gains and losses arising from its financial technology investments in its fintech segment, as discussed more fully later in this section entitled “Results of Segment Operations.”

Recent Developments

The COVID-19 pandemic caused complex and significant adverse impacts, all of which continue to be subject to a high degree of uncertainty. This uncertainty is magnified with the ~~Company closed on its initial public offering with~~continued risk of a ~~secondary offering completed in August of 2017.~~

~~Business Outlook~~

~~Below is a discussion of management’s current expectations regarding company performance over the near-term based on market conditions, the regulatory environment and business strategies as~~resurgence of the ~~time~~virus and new variants. Despite ongoing uncertainty, the ~~Company filed this Report. Actual outcomes~~impact has decreased, and ~~results may differ materially from what is expressed or forecasted~~the economy has continued to generally improve, resulting in ~~these forward-looking statements. See “Important Note Regarding Forward-Looking Statements” in this Report~~positive impacts on the Company’s allowance for ~~more information~~credit losses (“ACL”) on ~~forward-looking statements.~~

~~Table of Contents~~

~~The Company expects to originate approximately $1.90 to 2.00 billion in~~ loans and leases, as discussed below in MD&A.

Relative to Paycheck Protection Program (“PPP”) loans, the Company ended the first quarter of 2022 with a total outstanding balance net of deferred fees and ~~maintain an effective tax~~costs of $130.8 million compared to $261.9 million at December 31, 2021. The Company’s interest income, arising from PPP loan amortization of net deferred fees combined with the 1% annualized interest rate, continues to recede from $20.7 million to $7.5 million to $4.3 million, for the first and fourth quarters of 2021 and first quarter of 2022, respectively. At March 31, 2022, $2.7 million in net deferred fees remains to be recognized into future interest income. The Company’s corresponding Paycheck Protection Program Liquidity Facility (“PPPLF”) used to help provide financing for the origination of PPP loans decreased from $267.6 million at December 31, 2021 to $136.6 million at March 31, 2022. Borrowings under the PPPLF bear interest at a rate of ~~less than 10%~~0.35%, and there are no fees paid by the Company.

Credit

At March 31, 2022, the Company had a total of $3.1 million in unguaranteed loans and leases on payment deferral with $122 thousand in accrued interest receivable. In addition, the Company had $31.2 million in unguaranteed loans on SBA payment assistance at March 31, 2022. As of March 31, 2022, almost all loans after expiration of assistance have returned to making regular payments.

In 2021, the Company disclosed certain industries that had heightened levels of exposure as a result of COVID-19. Specifically, management identified six verticals that were considered to be “at-risk” of significant COVID-19 impacts. These verticals were hotels, educational services, wine and craft beverage, quick service restaurants, entertainment centers and fitness centers. Businesses within these six verticals generally have continued to show notable improvements and are now considered to have emerged from at-risk status. As of March 31, 2022, these verticals contained six loans still on payment deferral with an aggregate balance of $2.3 million, $950 thousand of which was unguaranteed, and 10 loans that continue to receive SBA payment subsidies with an aggregate balance of $26.4 million, $5.9 million of which was unguaranteed. While there are positive signs of emerging from at-risk status, management continues to closely monitor these vulnerable verticals for ~~the full year~~signs of ~~2017, excluding the effect~~weakness.

As a result of the ~~expected one-time gain arising from~~uncertain economic environment caused by COVID-19, the ~~recently announced joint venture~~Company continues to engage in more frequent communication with ~~First Data.~~

borrowers in an effort to better understand their situation and the challenges faced as circumstances evolve, which the Company anticipates will enable it to respond proactively as needs and issues arise.

Results of Operations

Performance Summary

Three months ended ~~September 30, 2017~~March 31, 2022 compared with three months ended ~~September 30, 2016~~

March 31, 2021

For the three months ended ~~September 30, 2017,~~March 31, 2022, the Company reported net income of ~~$12.9~~$34.5 million, or ~~$0.33~~$0.76 per diluted share, as compared to ~~$3.5~~net income of $39.4 million, or ~~$0.10~~$0.88 per diluted share, for the ~~three months ended September 30, 2016. This increase~~first quarter of 2021.

The decrease in net income ~~is primarily~~was primary due to the following items:

•

Provision for loan and lease credit losses increasing $2.7 million, or 310.3%, compared to a recovery of $873 thousand for the first quarter of 2021. The first quarter of 2021 recovery was largely due to significant improvement in forecasts related to employment and default expectations as the economic outlook had improved significantly over that experienced in 2020;

•

A net loss on the loan servicing asset revaluation increasing by $3.1 million, or 205.1%, from a net gain of $1.5 million for the first quarter of 2021;

•

The net gain on loans accounted for under the fair value option decreasing by $3.7 million, or 87.8%;

•

Increased income tax expense of $4.2 million, or 100.6%, primarily due to vesting of restricted stock unit awards with market price conditions during the first three months of 2021; and

•

Increased noninterest expense of $7.4 million, or 12.8%, principally comprised of salaries and employee benefits up $7.1 million, or 22.8%; travel expense up $1.2 million, or 187.9%; advertising and marketing expense up $1.1 million, or 165.2%; and technology expense up $1.2 million, or 24.1%; all partially offset by decreased impairment charges of $3.1 million related to renewable energy tax credits during the three months ended March 31, 2021 combined with decreased professional services expense of $1.0 million, or 27.1%.

Other key factors partially offsetting the decrease in 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 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;~~2022 were:

•

Increased net interest income of $7.8 million, or 11.2%, predominately driven by significant growth in the total loan and lease portfolio combined with lower costs of interest-bearing deposits; and

~~Increases in other noninterest income of $1.1 million, or 171.4%, related to the growth in the Company’s renewable energy leasing business and trust management services; and~~

•

Increased net gains on sales of loans of $9.0 million, or 75.8%.

~~Decreased income tax expense of $7.6 million, or 297.5%, due to the ongoing operation of the renewable energy leasing business yielding investment tax credits.~~

Partially offsetting the above factors that contributed to increased levels of net income was a $3.7 million decrease in the net gains on sales of loans, $1.6 million increase in salaries and employee benefits, $1.6 million in equipment expense and $1.5 million in other expenses. The increase in salaries and employee benefits and other expenses were influenced by the growth of the overall business, including the addition of the title insurance subsidiary in the first quarter of 2017, compared to the same period of 2016. Equipment expense increased principally due to higher levels of depreciation related to aircraft acquired in the first quarter of 2017 and solar panels purchased for the renewable energy leasing initiative.

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

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

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

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

~~Increased loan servicing revenue of $2.9 million, or 18.2%, 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 of interest-bearing liabilities. The Company’s net interest income depends upon the volume of interest-earning assets and interest-bearing liabilities and the interest rates that the Company earns or pays on ~~them.~~them, respectively. Net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as “volume changes.” It is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds, referred to as “rate changes.” ~~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 30, 2017~~March 31, 2022 compared with three months ended ~~September 30, 2016~~

March 31, 2021

For the three months ended ~~September 30, 2017,~~March 31, 2022, net interest income increased ~~$9.4~~$7.8 million, or ~~80.8%~~11.2%, to ~~$21.0~~$77.8 million compared to ~~$11.6~~$70.0 million for the three months ended ~~September 30, 2016.~~March 31, 2021. This increase was principally due to the significant growth in ~~average~~the held for investment loan and lease portfolios since the first quarter of 2021. This increase over the prior year was significantly higher when excluding the effects of declining levels of PPP loan net interest ~~earning assets and to~~income for the compared period, which has been declining over time as PPP loans are paid down. Excluding PPP loan impacts, comprised of amortization of net deferred fees combined with a ~~lesser extent higher yields on these assets which outpaced~~1% annualized interest rate less the ~~growth and change in the cost of~~related interest ~~bearing liabilities.~~expense from funding activity, net interest income, increased by $22.6 million. Average ~~interest earning~~interest-earning assets increased by ~~$746.9~~$411.8 million, or ~~53.8%~~5.5%, to ~~$2.13~~$7.85 billion for the ~~three months ended September 30, 2017,~~first quarter of 2022, compared to ~~$1.39~~$7.44 billion for the ~~three months ended September 30, 2016,~~first quarter of 2021, while the yield on average ~~interest earning~~interest-earning assets ~~rose sharply by seventy-nine~~decreased two basis points to ~~5.24%~~4.79%. The cost of funds on ~~interest bearing~~interest-bearing liabilities for the ~~three months ended September 30, 2017 increased twenty~~first quarter of 2022 decreased 21 basis points to ~~1.43%, and~~0.81% while the average balance of ~~interest bearing~~interest-bearing liabilities increased by ~~$717.1~~$218.1 million, or ~~56.6%~~3.0%, over the ~~same period.~~first quarter of 2021. The increase in average interest-bearing liabilities was largely driven by funding for significant loan originations and growth. This increase was muted by a $1.27 billion reduction in borrowings largely related to PPPLF repayments since March 31, 2021. As indicated in the rate/volume table below, ~~the increase in interest bearing liabilities and corresponding cost of funds was outpaced by the positive effects of the~~ increased volume on interest-earning assets and greater levels of ~~interest earning~~rate reductions on interest-bearing liabilities outpaced the lower yields on interest-earning assets ~~along with much~~and higher ~~yields,~~volume of interest-bearing liabilities, resulting in ~~increased~~increases to interest income of ~~$12.6~~$4.6 million and ~~increased~~decreases to interest expense of ~~$3.2~~$3.3 million for the ~~three months ended September 30, 2017~~first quarter of 2022 compared to the ~~three months ended September 30, 2016.~~first quarter of 2021. For the ~~three months ended September 30, 2017~~first quarter of 2022 compared to the ~~three months ended September 30, 2016,~~first quarter of 2021, net interest margin increased ~~sharply~~ from ~~3.32%~~3.81% to ~~3.91%~~4.02%, respectively, due primarily to significant loan portfolio growth, the ~~aforementioned effects.~~

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

~~For~~maturity of longer term deposits which are repricing at lower rates and the ~~nine months ended September 30, 2017,~~continued deployment of excess liquidity. As of March 31, 2022, the Company had $130.8 million in PPP loan balances on its books which includes $2.7 million in net deferred fees remaining to be recognized into future interest ~~income~~income. The Company expects to recognize most of the remaining net deferred fees for PPP loans in 2022.

In March 2022, the Federal Reserve increased ~~$24.8 million, or 82.0%, to $55.1 million compared to $30.3 million~~the federal funds target rate by 25 basis points and released projections where the midpoint of the projected target range for the ~~nine months ended September 30, 2016. This increase was also principally due~~federal funds rate would rise to 1.9% by the ~~significant growth in average interest earning assets~~end of 2022 to 2.8% by the end of 2023 and ~~to a lesser extent higher yields on these assets outpacing~~remaining static through the ~~growth and change~~end of 2024. These projections imply approximately seven 25 basis point increases in the ~~cost of interest bearing liabilities. Average interest earning assets increased~~federal funds rate in 2022, followed 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 indicatedfour in 2023. There can be no assurance that any increases in the ~~rate/volume table below,~~federal funds rate will occur, and if they do, the ~~increase in~~amount and timing of actual increases are subject to change. See Item 3. Quantitative and Qualitative Disclosures About Market Risk for information about the Company’s sensitivity to interest bearing liabilities and corresponding cost of funds was outpaced by the positive effects of the increased volume of interest earning assets along with much higher yields, resulting in increased interest income of $32.6 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.

rates.

~~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 March 31,
	2022								2021
	Average Balance			Interest		Average Yield/Rate			Average Balance			Interest		Average Yield/Rate
Interest-earning assets:
Interest-earning balances in other banks	$	223,638		$	179		0.32	%	$	331,260		$	297		0.36	%
Federal funds sold		9,197			6		0.26			28,202			6		0.09
Investment securities		895,592			3,399		1.54			736,158			2,929		1.61
Loans held for sale		1,115,441			15,183		5.52			1,158,844			15,077		5.28
Loans and leases held for investment⁽¹⁾		5,609,338			74,015		5.35			5,186,963			69,916		5.47
Total interest-earning assets		7,853,206			92,782		4.79			7,441,427			88,225		4.81
Less: Allowance for credit losses on loans and leases		(62,732	)							(52,317	)
Noninterest-earning assets		588,171								593,573
Total assets	$	8,378,645							$	7,982,683
Interest-bearing liabilities:
Interest-bearing checking	$	—		$	—		—	%	$	250,005		$	356		0.58	%
Savings		3,605,905			4,840		0.54			2,356,598			3,512		0.60
Money market accounts		91,463			54		0.24			105,753			83		0.32
Certificates of deposit		3,551,310			9,454		1.08			3,151,575			12,993		1.67
Total deposits		7,248,678			14,348		0.80			5,863,931			16,944		1.17
Borrowings		262,485			655		1.01			1,429,177			1,331		0.38
Total interest-bearing liabilities		7,511,163			15,003		0.81			7,293,108			18,275		1.02
Noninterest-bearing deposits		86,570								63,917
Noninterest-bearing liabilities		51,940								39,155
Shareholders' equity		728,972								586,503
Total liabilities and shareholders' equity	$	8,378,645							$	7,982,683
Net interest income and interest rate spread				$	77,779		3.98	%				$	69,950		3.79	%
Net interest margin							4.02	%							3.81	%
Ratio of average interest-earning assets to average interest-bearing liabilities							104.55	%							102.03	%

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~~

Nine months ended September 30,
2017 2016
Average Balance Interest Average Yield/Rate Average Balance Interest Average Yield/Rate
Interest earning assets:
Interest earning balances in other banks $ 229,074
$ 1,682
0.98 % $ 189,944
$ 650
0.46 %
Investment securities 71,319
964
1.81
60,057
840
1.86
Loans held for sale 561,408
24,679
5.88
428,316
17,666
5.49
Loans and leases held for investment⁽¹⁾
1,041,265
45,611
5.86
522,757
21,202
5.40
Total interest earning assets 1,903,066
72,936
5.12
1,201,074
40,358
4.48
Less: allowance for loan and lease losses (18,652 ) (9,463 )
Non-interest earning assets 206,653
143,876

Total assets $ 2,091,067
$ 1,335,487

Interest bearing liabilities:
Interest bearing checking $ 39,973
$ 173
0.58 % $ —
$ —
— %
Savings 67,395
693
1.37
—
—
—
Money market accounts 469,505
3,365
0.96
423,923
2,384
0.75
Certificates of deposit 1,163,081
12,662
1.46
637,469
6,992
1.46
Total deposits 1,739,954
16,893
1.30
1,061,392
9,376
1.18
Other borrowings 37,736
985
3.49
28,345
725
3.41
Total interest bearing liabilities 1,777,690
17,878
1.34
1,089,737
10,101
1.23
Non-interest bearing deposits 35,073
19,314

Non-interest bearing liabilities 22,288
19,444

Shareholders’ equity 256,016
206,967

Noncontrolling interest —
25

Total liabilities and shareholders’ equity $ 2,091,067
$ 1,335,487

Net interest income and interest rate spread $ 55,058
3.78 % $ 30,257
3.25 %

Net interest margin 3.87
3.36

Ratio of average interest-earning assets to average interest-bearing liabilities 107.05 % 110.22 %


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

~~Table of Contents~~

Rate/Volume Analysis. The following table sets forth the effects of changing rates and volumes on net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, increases or decreases attributable to changes in both rate and volume that cannot be segregated have been allocated proportionally based on the changes due to rate and the changes due to volume.

	Three Months Ended March 31,
	2022 vs. 2021
	Increase (Decrease) Due to
	Rate			Volume			Total
Interest income:
Interest-earning balances in other banks	$	(26	)	$	(92	)	$	(118	)
Federal funds sold		8			(8	)		—
Investment securities		(150	)		620			470
Loans held for sale		684			(578	)		106
Loans and leases held for investment		(1,534	)		5,633			4,099
Total interest income		(1,018	)		5,575			4,557
Interest expense:
Interest-bearing checking		—			(356	)		(356	)
Savings		(441	)		1,769			1,328
Money market accounts		(19	)		(10	)		(29	)
Certificates of deposit		(4,895	)		1,356			(3,539	)
Borrowings		1,324			(2,000	)		(676	)
Total interest expense		(4,031	)		759			(3,272	)
Net interest income	$	3,013		$	4,816		$	7,829

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~~ACL on loans and ~~lease losses~~leases at a level that the Company believes is appropriate in relation to the estimated losses inherent in the loan and lease portfolio. A number of factors are considered in determining the required level of loan and lease loss reserves and the provision required to achieve the appropriate reserve level, including loan and lease growth, credit risk rating trends, nonperforming loan and lease levels, delinquencies, loan and lease portfolio concentrations and economic and market trends.

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

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

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

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

~~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~~Typical SBA 7(a) ~~loan carries a 75% guarantee while~~and USDA guarantees range from ~~60%~~50% to ~~80%~~90% depending on loan size and type, 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 first quarter of 2022, there was a provision for loan and lease credit losses of $1.8 million compared to a recovery of loan and lease credit losses of $873 thousand for the same period in 2021. The level of provision expense in the first quarter of 2022 was primarily the result of continued improvement in forecasts related to employment and default expectations combined with the effect of higher than usual recoveries in certain verticals and overall growth in the loan and lease portfolio. In comparison, the first quarter of 2021 recovery was largely due to significant improvement in forecasts related to employment and default expectations as the economic outlook had improved significantly over that experienced in 2020.

Loans and leases held for investment at historical cost were $5.14 billion as of March 31, 2022, increasing by $471.7 million, or 10.1%, compared to March 31, 2021. Excluding PPP loans and net unearned fees on those loans, the balance in loans and leases held for investment at historical cost was $5.01 billion at March 31, 2022, an increase of $1.79 billion, or 55.4%, over March 31, 2021.

Net charge-offs for loans and leases carried at historical cost were $2.4 million, or 0.19% of average quarterly loans and leases held for investment, carried at historical cost, on an annualized basis, for the three months ended March 31, 2022, compared to a net recovery of $984 thousand, or (0.09)%, for the three months ended March 31, 2021The increase in net charge-offs for the first quarter of 2022 was principally related to one relationship that was fully reserved for in the fourth quarter of 2021. 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 $4.5 million and $5.8 million accounted for under the fair value option at March 31, 2022 and 2021, respectively, totaled $19.5 million, which was 0.38% of the held for investment loan and lease portfolio carried at historical cost at March 31, 2022, compared to $24.7 million, or 0.53% of loans and leases held for investment carried at historical cost at March 31, 2021. Nonperforming loans and leases carried at historical cost which are not guaranteed by the SBA or USDA were 0.39% and 0.77% of the historical cost portion of the held for investment loan and lease portfolio, excluding PPP loans, at March 31, 2022 and 2021, respectively.

Noninterest Income

Noninterest income is principally comprised of net gains from the sale of SBA and USDA-guaranteed loans along with loan servicing revenue and ~~revaluation.~~related revaluation of the servicing asset. Revenue from the sale of loans depends upon the volume, maturity structure and rates of underlying loans as well as the pricing and availability of funds in the secondary markets prevailing in the period between completed loan funding and closing of sale. In addition, the loan servicing revaluation is significantly impacted by changes in market rates and other underlying assumptions such as prepayment speeds and default rates. Net gain 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~~consistent 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 March 31,						2022/2021 Increase (Decrease)
	2022			2021			Amount			Percent
Noninterest income
Loan servicing revenue	$	6,356		$	6,434		$	(78	)		(1.21	)%
Loan servicing asset revaluation		(1,569	)		1,493			(3,062	)		(205.09	)
Net gains on sales of loans		20,977			11,929			9,048			75.85
Net gain on loans accounted for under the fair value option		516			4,218			(3,702	)		(87.77	)
Equity method investments income (loss)		(2,124	)		(1,157	)		(967	)		(83.58	)
Equity security investments gains (losses), net		(44	)		105			(149	)		(141.90	)
Lease income		2,503			2,599			(96	)		(3.69	)
Management fee income		1,488			1,934			(446	)		(23.06	)
Other noninterest income		4,565			3,502			1,063			30.35
Total noninterest income	$	32,668		$	31,057		$	1,611			5.19	%

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 30, 2017,~~March 31, 2022, noninterest income ~~decreased~~increased by ~~$372 thousand,~~$1.6 million, or ~~1.5%~~5.2%, compared to the three months ended ~~September 30, 2016.~~March 31, 2021. The ~~decline from~~increase over the prior year is primarily the result of ~~net~~a $9.0 million increase in gains on sales of loans ~~decreasing $3.7 million to $18.1 million in the third quarter of 2017 compared to $21.8 million in the third quarter of 2016 as a function of reduced volume of guaranteed loans sales, which was~~ partially offset by ~~an improvement in~~increased losses arising from the ~~average net gain on sale~~loan servicing asset valuation of ~~guaranteed loans. Partially offsetting the effects of~~$3.1 million combined with lower gains on ~~sales~~loans accounted for under the fair value option of loans were increased servicing revenue of $630 thousand, title insurance income of $2.0 million from the acquisition of a nationwide title insurance business on February 1, 2017 and increased other noninterest income of $1.1$3.7 million. ~~The increase in other noninterest income was primarily comprised of $682 thousand of operating lease income from renewable energy assets and trust management income of $236 thousand.~~

For the nine months ended September 30, 2017, noninterest income increased by $10.3 million, or 15.3%, compared to the nine months ended September 30, 2016. Increases in noninterest income were primarily the result of higher year-to-date levels in the serviced loan portfolio and the volume of loans sold in the secondary market which generated $2.9 million of increased servicing revenue and $2.5 million of increased net gains on sale of loans. 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 increase in noninterest income was a higher negative loan servicing revaluation adjustment of $1.8 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 March 31,				For years ended December 31,
	2022		2021		2021		2020		2019		2018
Amount of loans and leases originated	$	865,063	$	1,180,219	$	4,480,725	$	4,450,198	$	2,001,886	$	1,765,680
Guaranteed portions of loans sold		219,703		136,747		668,462		542,596		340,374		945,178
Outstanding balance of guaranteed loans sold⁽¹⁾		2,786,403		2,843,963		2,756,915		2,819,625		2,746,480		3,045,460

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

Nine months ended September 30, For years ended December 31,
2017 2016 2016 2015 2014 2013
Amount of loans and leases originated $ 1,450,816
$ 1,022,445
$ 1,537,010
$ 1,158,640
$ 848,090
$ 498,752
Guaranteed portions of loans sold 576,272
501,808
761,933
640,886
433,912
339,342
Outstanding balance of guaranteed loans sold ⁽¹⁾
2,584,163
2,102,468
2,278,618
1,779,989
1,302,828
1,005,764

(1)
~~(1)~~	This represents the outstanding principal balance of guaranteed loans serviced, as of the last day of the applicable period, which have been sold into the secondary market.

Changes in various components of noninterest income are discussed in more detail below.

Loan Servicing ~~Revenue:~~ While portions of the loans that the Bank originates are sold and generate gain on sale revenue, servicing rights for all loans that the Bank originates, including loans sold, are retained by the Bank. In exchange for continuing to service loans that are sold, the Bank receives fee income represented in loan servicing revenue equivalent to one percent of the outstanding balance of SBA loans sold and 0.40% of the outstanding balance of USDA loans sold. In addition, the cost of servicing sold loans is approximately 0.40% of the balance of the loans sold, which is included in the loan servicing revaluation computations. Unrecognized servicing revenue is reflected in a servicing asset recorded on the balance sheet. Revenues associated with the servicing of loans are recognized over the expected life of the loan through the income statement, and the servicing asset is reduced as this revenue is recognized. For three and nine months ended September 30, 2017, loan servicing revenue increased $630 thousand, or 10.8%, and $2.9 million, or 18.2%, respectively, compared to the three and nine months ended September 30, 2016, as a result of an increase in the average outstanding balance of guaranteed loans sold. At September 30, 2017, the outstanding balance of government guaranteed loans sold in the secondary market was $2.58 billion. At September 30, 2016, the outstanding balance of SBA guaranteed loans sold was $2.10 billion.

~~Loan Servicing~~Asset Revaluation: The Company revalues its serviced loan portfolio at least quarterly. The ~~revaluation considers~~valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as adequate compensation for servicing, the ~~amortization~~discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses, with the prepayment speed being one of the ~~portfolio, current market conditions for loan sale premiums, and current prepayment speeds.~~ most sensitive assumptions. For the three months ended ~~September 30, 2017,~~March 31, 2022, there was a ~~net~~ negative loan servicing revaluation adjustment of ~~$3.7~~$1.6 million, compared to a ~~net negative revaluation~~positive adjustment of ~~$3.4~~$1.5 million ~~for~~ the three months ended ~~September 30, 2016. For~~March 31, 2021. The decrease in the ~~nine months ended September 30, 2017, there was a net negative~~ loan servicing asset revaluation ~~adjustment of $6.9 million compared to a net negative revaluation adjustment of $5.1 million for~~from the ~~nine months ended September 30, 2016. The higher negative loan servicing revaluation amount for the third~~first quarter of ~~2017 as compared~~2021 was largely related to prepayment speeds increasing over the third quarter of 2016 was driven by amortization of the serviced portfolio during that period partially offset by improvements in the secondary market. The higher year-to-date negative loan servicing revaluation amount as compared to the same period in 2016 was principally driven by amortization of the serviced portfolio combined with decreases in the secondary market for guaranteed portions of 7(a) loans.

~~Table of Contents~~

prior year.

Net Gains on ~~Sale~~Sales of Loans:For the three ~~and nine~~ months ended ~~September 30, 2017,~~March 31, 2022, net gains on sales of loans ~~decreased $3.7~~increased $9.0 million, or ~~16.9%~~75.9%, ~~and increased $2.5 million, or 4.7%, respectively,~~ compared to the ~~three and nine months ended September 30, 2016. For the three months ended September 30, 2017, the volume~~first quarter 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, the2021. The volume of guaranteed loans sold increased ~~$74.5~~$83.0 million, or ~~14.8%~~60.7%, in the first quarter of 2022 to ~~$576.3~~$219.7 million from ~~$501.8~~$136.7 million ~~for the nine months ended September 30, 2016. The volume-driven increases~~ in the ~~year-to-date net gain on~~first quarter of 2021. The volume of loan ~~sale comparisons were partially offset by lower average premiums paid~~sales in the ~~secondary market.~~ first quarter of 2022 was influenced by current market considerations. The average net gain on sale premium decreased from 110% to 109%, in the first quarters of 2021 and 2022, respectively, which was largely a product of the mix of loan sales combined with slightly lower premiums.

Net Gain on Loans Accounted for Under the Fair Value Option: For the three months ended March 31, 2022, the net gain on loans accounted for under the fair value option decreased $3.7 million, or 87.8%, compared to the three months ended March 31, 2021. The carrying amount of loans accounted for under the ~~three~~fair value option at March 31, 2022 and ~~nine months ended September 30, 2017~~2021 was ~~$111 thousand~~$625.7 million ($25.1 million classified as held for sale and ~~$97 thousand~~$600.6 million classified as held for investment) and $826.7 million ($35.9 million classified as held for sale and $790.8 million classified as held for investment), respectively, a decrease of ~~revenue~~$201.1 million, or 24.3%. The decreased net gain on loans accounted for ~~each $1 million in loans sold, respectively,~~under the fair value option during first quarter of 2022 as compared to ~~$104 thousand and $105 thousand~~the first quarter of ~~revenue for each $1 million~~2021 was largely the result of significant economic forecasts improvements experienced to a greater degree in ~~loans sold for~~ the three and nine months ended September 30, 2016. The lower average premiums recorded in 2017 were driven by increased USDA guaranteed loan sales which commonly receive lower premiums than SBA guaranteed loan sales.

first quarter of 2021 as compared to the first quarter of 2022.

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 March 31,				2022/2021 Increase (Decrease)
	2022		2021		Amount			Percent
Noninterest expense
Salaries and employee benefits	$	38,507	$	31,366	$	7,141			22.77	%
Non-employee expenses:
Travel expense		1,897		659		1,238			187.86
Professional services expense		2,791		3,831		(1,040	)		(27.15	)
Advertising and marketing expense		1,729		652		1,077			165.18
Occupancy expense		2,327		2,112		215			10.18
Technology expense		6,053		4,878		1,175			24.09
Equipment expense		3,816		3,701		115			3.11
Other loan origination and maintenance expense		3,113		3,327		(214	)		(6.43	)
Renewable energy tax credit investment impairment		—		3,127		(3,127	)		(100.00	)
FDIC insurance		1,972		1,765		207			11.73
Other expense		3,509		2,854		655			22.95
Total non-employee expenses		27,207		26,906		301			1.12
Total noninterest expense	$	65,714	$	58,272	$	7,442			12.77	%

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~~ months ended ~~September 30, 2017~~March 31, 2022, increased ~~$8.6~~$7.4 million, or ~~31.7%~~12.8%, ~~and $28.1 million, or 37.9%, respectively,~~ compared to the same ~~periods~~period in ~~2016.~~2021. The increase in noninterest expense for the comparable three month period was ~~predominately impacted by increased personnel, equipment expense and other expenses primarily~~largely driven by ~~the significant growth of the Company's core business. Changes in~~ various components, ~~of noninterest expense are~~as discussed below.

Salaries and employee benefits: Total personnel expense for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2022 increased by ~~$1.6~~$7.1 million, or ~~9.0%~~22.8%, ~~and $9.8 million, or 21.4%, respectively,~~ compared to the same ~~periods~~period in ~~2016. A significant driver for this~~2021. The increase in salaries and employee benefits was ~~the acquisition of a nationwide title insurance business on February 1, 2017 with 54 full-time and 5 part-time employees. Also contributing~~principally related to ~~the growth in personnel expense was~~ continued investment in human ~~capital~~resources to support ~~the growing loan~~strategic and ~~lease production from new and existing verticals.~~growth initiatives. Total full-time equivalent employees increased from ~~400~~651 at ~~September 30, 2016~~March 31, 2021, to ~~530~~842 at ~~September 30, 2017.~~March 31, 2022. Salaries and employee benefits expense included ~~$2.0 million and $4.1~~$5.0 million of ~~stock based~~stock-based compensation in the ~~three months ended September 30, 2017~~first quarter of both 2022 and ~~2016, respectively, and $6.2 million and $7.6 million for the nine months ended September 30, 2017 and 2016, respectively.~~2021. 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 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 months ended September 30, 2017, total professional services expense~~

Travel expense: Travel expenses increased ~~$161 thousand, or 17.8%, and $1.9~~$1.2 million, or ~~80.3%~~187.9%, respectively, compared to the same periods in 2016. The primary drivers of the year over year increase were advisory, consulting, and due diligence expenses related to the February 2017 acquisition of a title insurance business.

~~Advertising and marketing expense~~: For the three and nine months ended September 30, 2017, total advertising and marketing expense increased $419 thousand, or 38.2%, and $1.6 million, or 45.3%, respectively, compared to the same periods in 2016. The primary driver of the increase in advertising and marketing expense was the cost of growing brand recognition in new and existing verticals and launching a new deposit platform.

~~Data processing expense~~: For the three and nine months ended September 30, 2017, total data processing expense increased $730 thousand, or 58.3%, and $1.7 million, or 43.3%, respectively, compared to the same periods in 2016. The primary driver 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:~~ ~~For the three and nine months ended September 30, 2017, the total costs associated with equipment increased $1.6 million, or 264.6%, and $3.3 million, or 195.1%, respectively,~~ compared to the same period in ~~2016. A major factor behind~~

~~Table~~2021. Travel expenses increased primarily in relation to supporting both loan origination volume and the customer base as travel restrictions continued to ease.

Professional services expense: Professional services expense decreased $1.0 million, or 27.1%, compared to the same period in 2021. The decrease compared to the prior periods was largely driven by lower legal fees.

Advertising and marketing expense: Advertising and marketing expense increased $1.1 million, or 165.2%. The increase over the first quarter of ~~Contents~~

2021 was largely a driven by renewed marketing events.

Technology expense: Technology expense is a new line item which replaces data processing expense in previous consolidated income statements. This new line item includes data processing expense and other non-compensation related costs reclassified from equipment expense and other expense line items for software, computer and telecommunications. This reclassification was made primarily to improve the clarity of expenses related to the Company’s ongoing technology initiatives and is reflected in all comparative periods of this filing. Technology expense for the first quarter of 2022 was $6.1 million, a $1.2 million increase over the first quarter of 2021. This increase was primarily related to enhanced investments in the Company’s technology resources.

Renewable energy tax credit investment impairment: During the first quarter of 2021, the Company recognized $3.1 million in impairment charges related to a $3.9 million renewable energy tax credit investment that was fully funded. Investments of this type generate a return primarily through the realization of income tax credits and other benefits; accordingly, impairment of the investment amount is recognized in conjunction with the realization of related tax benefits.

Income Tax Expense

For the three months ended March 31, 2022, income tax expense was $8.4 million compared to $4.2 million for the first quarter of 2021, and the Company’s effective tax rates were 19.6% and 9.6%, respectively. The effective tax rate for the first quarter of 2022 was principally influenced by anticipated renewable energy tax credits associated with investments expected in 2021 but delayed to 2022 due to supply chain issues. The higher level of ~~depreciation related~~income tax expense for the first quarter of 2022 compared to the first quarter ~~addition~~ of 2021 was primarily driven by vesting of restricted stock unit awards with market price conditions during the first three months of 2021, as the fair value of these awards exceeded the total compensation cost recognized by the Company for book purposes.

Results of Segment Operations

The Company’s operations are managed along two ~~new aircraft combined with useful lives being shortened for existing aircraft as well as for solar panels acquired~~primary operating segments Banking and Fintech. A description of each segment and the methodologies used to ~~meet leasing commitments.~~measure financial performance is described in Note 11. Segments in the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements. Net income (loss) by operating segment is presented below:

	Three Months Ended March 31,
	2022			2021
Banking	$	37,840		$	41,056
Fintech		(1,749	)		(907	)
Other		(1,582	)		(722	)
Consolidated net income	$	34,509		$	39,427

~~FDIC insurance:~~

Banking

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~~March 31, 2022, net income decreased $3.2 million ~~or 355.2%, respectively,~~ compared to the same ~~periods in 2016. This increase was the result~~period of ~~revised premium requirements 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. For the three and nine months ended September 30, 2017, total title insurance closing services expense was $687 thousand and $1.9 million, respectively.

~~Other expense:~~ ~~For the three and nine months ended September 30, 2017, the total costs associated with other expenses~~2021.

Net interest income increased ~~$1.5~~$8.3 million, or ~~96.3%~~11.8%, ~~and $4.2 million, or 91.1%, respectively,~~ compared to the same ~~periods~~period of 2021. See the analysis of net interest income included in ~~2016. The quarter-over-quarter increase~~the above section captioned “Net Interest Income and Margin” as it is predominantly related to the Banking segment.

See the analysis of provision for loan and lease credit losses included in ~~other expenses was predominately comprised of costs associated with support expenses~~the above section captioned “Provision for Loan 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 withLease Credit Losses” as it is entirely related to the ~~newly acquired title company, and a first quarter 2017 loss incurred upon the trade-in of an existing aircraft.~~

~~Income Tax Expense~~

~~The effective tax rates for the three and nine months ended September 30, 2017 were (64.8)% and (15.5)%, respectively,~~Banking segment.

Noninterest income increased $1.4 million compared to the ~~effective rates~~same period of ~~42.4%~~2021. The increase was principally driven by an increase in net gains on sales of loans of $9.0 million and ~~43.7%~~partially offset by a decrease in loan servicing asset revaluation of $3.1 million combined with a $3.7 million lower gain arising from loans accounted for under the fair value option. See the analysis of these categories of noninterest income included in the above section captioned “Noninterest Income” for additional discussion.

Noninterest expense increased $5.8 million, or 10.4%, compared to same period of 2021. See the analysis of these categories of noninterest expense included in the above section captioned “Noninterest Expense” for additional discussion.

For the three ~~and nine~~ months ended ~~September 30, 2016, respectively. The negative effective rates~~March 31, 2022, income tax expense increased $4.4 million, or 95.2%, compared to the same period of ~~(64.8)% and (15.5)% for~~2021. See the above section captioned “Income Tax Expense.”

Fintech

For the three months ended March 31, 2022, net income decreased by $842 thousand compared to same period of 2021. The decrease was principally due to heightened levels of salaries and nine-month periods ended September 30, 2017 principally reflected an increase in anticipated investment in renewable energy assets 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 tax rate also benefited from the first quarter adoption of a new accounting pronouncement relatedbenefits.

Noninterest expense increased $1.1 million compared to the ~~treatment~~same period of ~~share based compensation issued by the Financial Accounting Standards Board that~~2021. As mentioned above, this increase was ~~effective January 1, 2017; "Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting," also referred to as ASU 2016-09.~~

largely due increased levels of salaries and benefits.

Discussion and Analysis of Financial Condition

~~September 30, 2017~~

March 31, 2022 vs. December 31, ~~2016~~

2021

Total assets at ~~September 30, 2017~~March 31, 2022 were ~~$2.43~~$8.62 billion, an increase of ~~$676.9~~$406.6 million, or ~~38.6%~~5.0%, compared to total assets of ~~$1.76~~$8.21 billion at December 31, ~~2016.~~2021. The growth in total assets was principally driven by the following:

Increased 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:~~

•

Cash and cash equivalents, comprised of cash and due from banks and federal funds sold was $507.8 million at March 31, 2022, an increase of $304.0 million, or 149.2%, compared to $203.8 million at December 31, 2021. This increase reflects liquidity planning through increased levels of deposits and heightened levels of loan sales.

◦

~~goodwill~~

•

Growth in total loans and ~~intangibles generated by~~leases held for investment and held for sale of $129.1 million resulting from strong origination activity in the first ~~quarter acquisition~~three months of ~~Reltco, and~~2022. Total originations during the first three months of 2022 were $865.1 million.


◦	~~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~~

Total investment securities available-for-sale decreased $61.5 million ~~at September 30, 2017, an increase~~during the first three months of ~~$22.9 million, or 9.6%, compared to $238.0~~2022, from $906.1 million at December 31, ~~2016. This increase primarily reflected~~2021, to $844.6 million at March 31, 2022, a decrease of 6.8%. The decrease was largely the ~~results~~result of ~~a successful deposit gathering campaign combined with the net proceeds~~$50.6 million in unrealized losses arising from negative market impacts for the Company’s ~~secondary capital raise in~~available-for-sale investment portfolio. At March 31, 2022, the ~~third quarter.~~

~~Total~~ investment ~~securities increased $5.5 million during the first nine months of 2017, from $71.1 million at December 31, 2016, to $76.6 million at September 30, 2017, an increase of 7.8%. The~~ portfolio iswas comprised of USU.S. government ~~agency securities, residential~~agencies, U.S. government-sponsored entity mortgage-backed securities, municipal bonds and ~~a mutual fund.~~

other debt securities.

~~Table of Contents~~

Loans and leases held for sale ~~increased $298.3~~decreased $87.9 million, or ~~75.7%~~7.9%, during the first ~~nine~~three months of ~~2017,~~2022, from ~~$394.3 million~~$1.12 billion at December 31, ~~2016,~~2021, to ~~$692.6~~$1.03 billion at March 31, 2022. The decrease was primarily the result of strong loan sales in the first three months of 2022 combined with higher levels of loans being retained as held for investment.

Loans and leases held for investment increased $217.0 million, or 3.9%, during the first three months of 2022, from $5.52 billion at ~~September 30, 2017.~~December 31, 2021, to $5.74 billion at March 31, 2022. The increase was primarily the result of ~~strong growth~~the above-mentioned loan originations in ~~loan origination activities throughout 2017 and the strategy to enhance interest income by increasing the retention time~~2022 combined with increased levels of ~~guaranteed~~ loans ~~along with growth in certain~~retained as held for investment. Excluding PPP loans, ~~that take time to fully fund.~~

~~Loans~~total loans and leases held for investment increased ~~$262.3~~$348.0 million, or ~~28.9%~~6.6%, during the first ~~nine~~three months of ~~2017,~~2022. All PPP loans are classified as held for investment.

Total deposits were $7.64 billion at March 31, 2022, an increase of $525.1 million, or 7.4%, from ~~$907.6~~$7.11 billion at December 31, 2021. The increase in deposits is largely driven by significant loan origination efforts.

Borrowings decreased to $196.9 million at March 31, 2022 from $318.3 million at December 31, ~~2016,~~2021. This decrease was related principally to ~~$1.17 billion at September 30, 2017. The increase was primarily~~net curtailments of borrowings through the ~~result of robust loan and lease growth from origination activities during~~PPPLF in the first ~~three quarters~~quarter of ~~2017 combined with greater retention of loans on the consolidated balance sheet.~~

~~Premises and equipment, net increased $64.6~~2022 from PPP loan forgiveness. These PPPLF borrowings are used to help fund PPP loans.

Shareholders’ equity at March 31, 2022 was $713.3 million ~~or 99.9%, during the first nine months of 2017. This increase was primarily driven by construction of a new aircraft hangar and the replacement of two older aircraft with two new ones better suited~~as compared to ~~service the Company's growing nationwide customer base and the addition of solar panels to meet leasing commitments.~~

~~Servicing assets increased $1.4 million, or 2.7%, during the first nine months of 2017, from $52.0~~$715.1 million at December 31, ~~2016, to $53.4 million at September 30, 2017. The increase in servicing assets is primarily the result of loan sales outpacing the amortization of the existing serviced portfolio.~~

Other assets increased $28.1 million, or 76.1%, during the first nine months of 2017, from $37.0 million at December 31, 2016 to $65.2 million at September 30, 2017. The increase in other assets was primarily driven by the recognition of $8.9 million in income taxes receivable arising from investment tax credits generated from the investment in solar panel leasing activities combined with the first quarter 2017 acquisition of the nationwide title insurance business. As a result of the title insurance acquisition, other assets includes goodwill and intangible assets of $7.3 million and $5.3 million, respectively.

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

Long term borrowings decreased $971 thousand, or 3.5%, during the first nine months of 2017, from $27.8 million at December 31, 2016 to $26.9 million at September 30, 2017. The decrease in long term borrowings was primarily the result of debt reduction following a successful capital raise in the third quarter.

Other liabilities increased $8.3 million, or 42.8%, during the first nine months of 2017, from $19.5 million at December 31, 2016 to $27.8 million at September 30, 2017. The increase in other liabilities was principally driven by a $4.7 million earn-out contingent liability 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.~~2021. The book value per share was ~~$9.15~~$16.29 at ~~September 30, 2017~~March 31, 2022 compared to ~~a book value per share of $6.51~~$16.39 at December 31, ~~2016.~~2021. Average equity to average assets was ~~12.2%~~8.7% for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2022 compared to ~~14.6%~~8.8% for the year ended December 31, ~~2016.~~2021. The ~~increase~~decrease in shareholders’ equity for the first three months of 2022 was principally the result of $38.5 million in other comprehensive loss associated with negative market impacts on the ~~issuance~~Company’s available-for-sale investment portfolio partially offset by net income of ~~5.2 million additional common shares with net proceeds of $113.1~~$34.5 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 million and $565 thousand related to the issuance of stock in the title insurance company acquisition, partially offset by cash withheld in lieu of issuing restricted stock upon vesting of $4.8 million and $2.6 million in dividends.

$5.0 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).

Nonperforming assets and TDRs, excluding loans measured at fair value, at March 31, 2022 were $93.8 million, which represented a $13.6 million, or 16.9%, increase from December 31, 2021. These nonperforming assets at March 31, 2022 were comprised of $52.3 million in nonaccrual loans and leases and $198 thousand in foreclosed assets. Of the $93.8 million of nonperforming assets and TDRs, $52.4 million carried a government guarantee, leaving an unguaranteed exposure of $41.4 million in total nonperforming assets and TDRs at March 31, 2022. This represents an increase of $4.4 million, or 12.0%, from an unguaranteed exposure of $37.0 million at December 31, 2021.

~~Table of Contents~~

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

	March 31, 2022 ⁽¹⁾			December 31, 2021 ⁽¹⁾
Nonaccrual loans and leases:
Total nonperforming loans and leases (all on nonaccrual)	$	52,303		$	42,533
Total accruing loans and leases past due 90 days or more		—			—
Foreclosed assets		198			620
Total troubled debt restructurings		63,865			55,273
Less nonaccrual troubled debt restructurings		(22,563	)		(18,210	)
Total performing troubled debt restructurings		41,302			37,063
Total nonperforming assets and troubled debt restructurings	$	93,803		$	80,216
Allowance for credit losses on loans and leases	$	63,058		$	63,584
Total nonperforming loans and leases to total loans and leases held for investment		1.02	%		0.87	%
Total nonperforming loans and leases to total assets		0.65	%		0.56	%
Total nonperforming assets and troubled debt restructurings to total assets		1.17	%		1.06	%
Allowance for credit losses on loans and leases to loans and leases held for investment		1.23	%		1.30	%
Allowance for credit losses on loans and leases to total nonperforming loans and leases		120.56	%		149.49	%

(1)	Excludes loans measured at fair value.

	March 31, 2022 ⁽¹⁾			December 31, 2021 ⁽¹⁾
Nonaccrual loans and leases guaranteed by U.S. government:
Total nonperforming loans and leases guaranteed by the U.S government (all on nonaccrual)	$	32,828		$	26,546
Total accruing loans and leases past due 90 days or more guaranteed by the U.S government		—			—
Foreclosed assets guaranteed by the U.S. government		162			490
Total troubled debt restructurings guaranteed by the U.S. government		33,766			26,954
Less nonaccrual troubled debt restructurings guaranteed by the U.S. government		(14,397	)		(10,770	)
Total performing troubled debt restructurings guaranteed by U.S. government		19,369			16,184
Total nonperforming assets and troubled debt restructurings guaranteed by the U.S. government	$	52,359		$	43,220
Allowance for credit losses on loans and leases	$	63,058		$	63,584
Total nonperforming loans and leases not guaranteed by the U.S. government to total held for investment loans and leases		0.38	%		0.33	%
Total nonperforming loans and leases not guaranteed by the U.S. government to total assets		0.24	%		0.21	%
Total nonperforming assets and troubled debt restructurings not guaranteed by the U.S. government to total assets		0.52	%		0.49	%
Allowance for credit losses on loans and leases to total nonperforming loans and leases not guaranteed by the U.S government		323.79	%		397.73	%

(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 assets and ~~troubled debt restructurings~~TDRs, including loans measured at ~~September 30, 2017~~fair value, at March 31, 2022 were ~~$27.1~~$164.7 million, which represented a ~~$497 thousand,~~$11.2 million, or ~~1.8%~~7.3%, ~~decrease~~increase from December 31, ~~2016. Total~~2021. These nonperforming assets at ~~September 30, 2017~~March 31, 2022 were comprised of ~~$22.4~~$92.3 million in nonaccrual loans and ~~$2.2 million~~leases and $198 thousand in foreclosed assets. Of the ~~$27.1~~$164.7 million of nonperforming assets and ~~troubled debt restructurings ("TDRs"), $21.0~~TDRs, $108.6 million carried ~~an SBA~~a government guarantee, leaving an unguaranteed exposure of ~~$6.1~~$56.1 million in total nonperforming assets and TDRs at ~~September 30, 2017. The~~March 31, 2022. This represents an increase of $3.6 million, or 6.8%, from an unguaranteed exposure of $52.5 million at December 31, 2021.

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%~~7.1% at ~~September 30, 2017,~~March 31, 2022, compared to ~~nonperforming loans of 15.3% of the Bank’s total capital~~6.0% at December 31, ~~2016.~~2021. 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 30, 2017~~both March 31, 2022 and December 31, ~~2016~~2021 were ~~1.5%~~2.6% and ~~3.1%~~2.3%, respectively.

~~Table of Contents~~

As of ~~September 30, 2017~~March 31, 2022, and December 31, ~~2016,~~2021, potential problem (also referred to as criticized) and ~~impaired~~classified loans and leases, excluding loans measured at fair value, totaled ~~$66.0~~$412.4 million and ~~$64.1~~$372.7 million, respectively.The following is a discussion of these loans and leases. Risk Grades 5 through 8 represent the spectrum of criticized and ~~impaired loans.~~classified loans and leases. For a complete description of the risk grading system, see Note 3. Loans and Leases Held for Investment and Credit Quality in the Company’s 2021 Form 10-K. At ~~September 30, 2017,~~March 31, 2022, the portion of criticized and classified loans and leases guaranteed by the SBA or USDA totaled ~~$28.2~~$198.3 million resulting in unguaranteed exposure risk of ~~$37.8~~$214.1 million, or ~~3.3%~~6.8% of total held for investment unguaranteed ~~exposure.~~exposure carried at historical cost. This compares to the December 31, ~~2016~~2021 portion of criticized and classified loans and leases guaranteed by the SBA or USDA which totaled ~~$29.0~~$197.2 million resulting in unguaranteed exposure risk of ~~$35.1~~$175.5 million, or ~~4.0%~~6.3% of total held for investment unguaranteed ~~exposure.~~exposure carried at historical cost. As of ~~September 30, 2017~~March 31, 2022, 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: Educational Services at ~~28.5%~~13.0%, ~~30.8%~~Wine and ~~20.4%~~Craft Beverage at 10.9%, ~~respectively.~~Hotels at 9.5%, Entertainment Centers at 9.2%, Healthcare at 7.5%, Senior Care at 7.3%, Agriculture at 7.1%, Fitness Centers at 5.3%, Veterinary at 4.8% and Self Storage at 4.4%. As of December 31, ~~2016~~2021, 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 ~~impaired~~classified loans and leases: Educational Services at ~~30.8%~~16.1%, Wine and ~~32.9%~~Craft Beverage at 13.7%, ~~respectively.~~Hotels at 11.8%, Entertainment Centers at 10.4%, Healthcare at 9.0%, Fitness Centers at 5.3%, Self Storage at 4.8%, Agriculture at 4.5% and Veterinary at 4.4%. Other than Hotels 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 majority of the $40.0 million first quarter of 2022 increase in potential problem and classified loans and leases was comprised of borrowers largely concentrated in the Company’s more mature verticals. Furthermore, the Company believes that its underwriting and credit quality standards have ~~improved as the business has matured.~~

~~The Bank does not classify loans~~remained high and continues to consider changing economic conditions in a rising interest rate environment.

Loans and leases that experience insignificant payment delays and payment shortfalls ~~as impaired.~~are generally not individually evaluated for the purpose of estimating the allowance for credit losses. The Bank generally considers an “insignificant period of time” from payment delays to be a period of 90 days or less. The Bank would consider a modification for a customer experiencing what is expected to be a short-term event that has temporarily impacted cash flow. This could be due, among other reasons, to illness, weather, impact from a one-time expense, slower than expected start-up, construction issues or other short-term issues. ~~In all cases, credit~~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 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~~At March 31, 2022, the Company ~~has over approximately 350 borrowers~~had a total of $3.1 million 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 restructuringmodified unguaranteed loans and ~~no impairments have been realized as a result of these events. We are continuing to work with borrowers impacted by these disasters.~~

leases.

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 30, 2017~~March 31, 2022, and December 31, ~~2016,~~2021, Risk Grade 5 loans and leases, excluding loans measured at fair value, totaled ~~$30.5~~$310.8 million and ~~$32.1~~$267.4 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 ($144 thousand or 1.7% of decrease). The decrease in these three verticals was offset by an increase in Risk Grade 5 loans ~~from December 31, 2016~~and leases, exclusive of loans measured at fair value, during the first quarter of 2022 was principally confined to ~~September 30, 2017 in two verticals; Agriculture~~ten verticals: Senior Care ($~~1.1~~18.5 million or ~~95.0% of increase)~~42.7%), Agriculture ($8.5 million or 19.7%), Venture Banking ($7.9 million or 18.3%), Solar Energy ($5.6 million or 12.9%), Rural Lending ($3.9 million or 9.0%), Bioenergy ($3.7 million or 8.6%), Veterinary ($3.4 million or 7.9%), Sponsor Finance ($2.9 million or 6.7%), Fitness Centers ($2.7 million or 6.2%) and ~~Investment Advisors~~Government Contracting ($~~464 thousand~~2.6 million or ~~20.7% of decrease)~~5.9%). ~~The overall decrease~~Partially offsetting the above increases were declines in Risk Grade 5 loans ~~from December~~principally concentrated in three verticals: Educational Services ($6.3 million or 14.5%), Hotels ($3.9 million or 8.9%) and Wine and Craft Beverage ($2.9 million or 6.6%). Other than Hotels, Sponsor Finance, Venture Banking, Solar Energy, Rural Lending, Bioenergy 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.

At March 31, ~~2016 to September 30, 2017 was the result of routine credit monitoring in the ongoing risk grade management process. At September 30, 2017,~~ 2022, approximately ~~99.9%~~98.2% of loans and leases classified as Risk Grade 5 are performing with ~~no current~~only one relationship having payments past ~~due.~~due more than 30 days. While the level of nonperforming assets fluctuates in response to changing economic and market conditions, in light of the relative size and composition of the loan and lease portfolio and management’s degree of success in resolving problem assets, management believes that a proactive approach to early identification and intervention is critical to successfully managing a small business loan portfolio.

As government payment assistance began to expire toward the end of 2020, borrowers with continuing difficulties arising from the pandemic were provided additional relief through payment deferrals. Management monitors these borrowers closely and has observed financial conditions continuing to improve. Management has also noted that most loans with expired government assistance have been able to resume making regular payments.

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

Leases

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

Judgment in determining the adequacy of the ALLL is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available and as situations and information change.

The ALLL is evaluated on a quarterly basis by management and takes into consideration such factors as changes in the nature and volume of the loan and lease portfolio, overall portfolio quality, review of specific problem loans and leases and current economic conditions and trends that may affect the borrower’s ability to repay.

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

~~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~~$63.6 million at December 31, ~~2016 increased~~2021, decreased by ~~$2.8 million,~~$526 thousand, or ~~15.5%~~0.8%, to ~~$21.0~~$63.1 million at ~~September 30, 2017.~~March 31, 2022. The ~~ALLL,~~ACL as a percentage of loans and leases held for investment at historical cost amounted to ~~1.8%~~1.2% and 1.3% at ~~September 30, 2017~~March 31, 2022 and ~~2.0% at~~ December 31, ~~2016. The declining level~~2021, respectively. 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 at historical cost also amounted to 1.2% and 1.3% at March 31, 2022 and December 31, respectively. The decrease in the ACL during the first quarter of 2022 was ~~principally driven by improvements~~primarily due to continued improvement in ~~industry-specific loss rates~~ forecasts related to employment and ~~lower levels of classified loans~~default expectations combined with ~~the migration to Company-specific loss rates for maturing verticals which was partially offset by an increase in reserves due to loan and lease volume and~~ the effect of higher ~~net charge-offs,~~than usual recoveries in certain verticals and overall growth in the loan and lease portfolio, as addressed more fully in the ~~Provision~~above section captioned “Provision for Loan and Lease ~~Losses section~~Credit Losses” in “Results of ~~Results~~Operations.”

Actual past due held for investment loans and leases, inclusive of ~~Operations. General reserves~~loans measured at fair value, have decreased by $14.3 million since December 31, 2021. Total loans and leases 90 or more days past due decreased $3.4 million, or 7.0%, compared to December 31, 2021. The decrease was comprised of a $264 thousand decrease in unguaranteed exposure combined with a $3.2 million decrease in the guaranteed portion of past due loans compared to December 31, 2021. At March 31, 2022 and December 31, 2021, 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 0.6%. Total unguaranteed loans and leases past due were comprised of $15.6 million carried at historical cost, a decrease of $991 thousand, and $5.7 million measured at fair value, an increase of $632 thousand, as of March 31, 2022 compared to December 31, ~~2016 as management~~2021. Management continues to actively monitor and work to improve asset quality. Management believes the ~~ALLL~~ACL of ~~$21.0~~$63.1 million at ~~September 30, 2017~~March 31, 2022 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 borrowers. 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 Consolidated Financial Statements~~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 30, 2017,~~March 31, 2022, the total amount of these four items was ~~$589.1 million,~~$3.88 billion, or ~~25.1%~~45.0% of total assets, an increase of ~~$93.3~~$461.7 million from ~~$495.8 million,~~$3.42 billion, or ~~28.2%~~41.6% of total assets, at December 31, ~~2016.~~

2021.

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~~a stable amount of ~~long-term~~ brokered deposits have been adequate to meet loan obligations, while maintaining the desired level of immediate liquidity. ~~Additionally,~~The Company maintains an investment securities portfolio that is available for both immediate and secondary contingent liquidity ~~purposes.~~

purposes, whether via pledging to the Federal Home Loan Bank or through liquidation. Additionally, the Company maintains a guaranteed loan portfolio that is also a contingent liquidity source, whether via pledging to the Federal Reserve Discount Window or through liquidation.

At ~~September 30, 2017,~~March 31, 2022, 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~~$842.1 million available to pledge as ~~lendable~~ collateral. ~~In addition, of the $260.9 million in cash on hand, $1.5 million was pledged for ACH processing at one of the correspondent depository banks.~~

Contractual Obligations

The ~~following table presents the Company’s~~Company has entered into significant fixed and determinable contractual obligations ~~by payment date as~~for future payments. Other than normal changes in the ordinary course of ~~September 30, 2017. The payment~~the Company’s operations, there have been no significant changes in the types of contractual obligations or 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.~~

~~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 30, 2017 and~~since December 31, ~~2016,~~2021. See the section titled “Liquidity Management” in Part II, Item 7 of the Company’s 2021 Form 10-K for additional discussion of contractual obligations.

Off-Balance Sheet Arrangements

In the normal course of operations, the Company ~~had unfunded~~engages in a variety of financial transactions that, in accordance with GAAP, are not recorded in the consolidated financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of commitments to ~~provide capital contributions for on-balance sheet investments~~extend credit and standby letters of credit. For more information, see Note 10. Commitments and Contingencies in the ~~amount of $4.4 million and $4.9 million, respectively.~~

accompanying notes to unaudited condensed consolidated financial statements.

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 March 31, 2022, the balance sheet’s total cumulative gap position was asset-sensitive at 4.6%.

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 also 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~~ As of ~~5.92% at September 30, 2017. The cash on hand from~~March 31, 2022, 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 remained 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, rates on cash accounts that adjusts as the federal funds 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 the following: to provide adequate capital to support the Company’s risk profile consistent with the risk appetite approved by the Board of Directors; to provide financial flexibility to support future growth and client needs; comply with relevant laws, regulations, and supervisory guidance; to achieve optimal ~~credit~~ ratings for the Company and its subsidiaries; and to provide a competitive return to shareholders. Management regularly monitors the capital position of the Company on both a consolidated and bank level basis. In this regard, management’s goal is to maintain capital at levels that are in excess of the regulatory “well capitalized” levels. Risk-based capital ratios, which include Tier 1 Capital, Total Capital and Common Equity Tier 1 Capital, are calculated based on regulatory guidance related to the measurement of capital and risk-weighted assets.

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

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

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

~~Table of Contents~~

Capital amounts and ratios as of ~~September 30, 2017~~March 31, 2022 and December 31, ~~2016,~~2021, 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 - March 31, 2022
Common Equity Tier 1 (to Risk-Weighted Assets)	$	724,078		12.10	%	$	269,237		4.50	%	N/A		N/A
Total Capital (to Risk-Weighted Assets)	$	788,020		13.17	%	$	478,644		8.00	%	N/A		N/A
Tier 1 Capital (to Risk-Weighted Assets)	$	724,078		12.10	%	$	358,983		6.00	%	N/A		N/A
Tier 1 Capital (to Average Assets)	$	724,078		8.87	%	$	326,400		4.00	%	N/A		N/A
Bank - March 31, 2022
Common Equity Tier 1 (to Risk-Weighted Assets)	$	677,361		11.88	%	$	256,554		4.50	%	$	370,578		6.50	%
Total Capital (to Risk-Weighted Assets)	$	741,303		13.00	%	$	456,096		8.00	%	$	570,120		10.00	%
Tier 1 Capital (to Risk-Weighted Assets)	$	677,361		11.88	%	$	342,072		6.00	%	$	456,096		8.00	%
Tier 1 Capital (to Average Assets)	$	677,361		8.38	%	$	323,278		4.00	%	$	404,098		5.00	%
Consolidated - December 31, 2021
Common Equity Tier 1 (to Risk-Weighted Assets)	$	689,367		12.38	%	$	250,619		4.50	%	N/A		N/A
Total Capital (to Risk-Weighted Assets)	$	753,691		13.53	%	$	445,544		8.00	%	N/A		N/A
Tier 1 Capital (to Risk-Weighted Assets)	$	689,367		12.38	%	$	334,158		6.00	%	N/A		N/A
Tier 1 Capital (to Average Assets)	$	689,367		8.87	%	$	310,902		4.00	%	N/A		N/A
Bank - December 31, 2021
Common Equity Tier 1 (to Risk-Weighted Assets)	$	640,652		12.05	%	$	239,201		4.50	%	$	345,512		6.50	%
Total Capital (to Risk-Weighted Assets)	$	704,976		13.26	%	$	425,246		8.00	%	$	531,557		10.00	%
Tier 1 Capital (to Risk-Weighted Assets)	$	640,652		12.05	%	$	318,934		6.00	%	$	425,246		8.00	%
Tier 1 Capital (to Average Assets)	$	640,652		8.32	%	$	307,931		4.00	%	$	384,914		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, 2021, 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~~The Company’s most critical accounting policies and estimates listed ~~below~~below. These estimates require the Company to make difficult, subjective or complex judgments about matters that are inherently uncertain.

•

Allowance for credit losses;

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

•

Valuation of loans accounted for under the fair value option; and

~~Valuation of servicing assets;~~

•

Valuation of servicing assets.

~~Valuation of foreclosed assets; and~~

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

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 a significant market risk and can result from timing and volume differences in the ~~exposure to adverse~~repricing of rate-sensitive assets and liabilities, widening or tightening of credit spreads, changes in the general level of market interest rates and changes in the shape and level of market yield curves. The Company manages the interest rate sensitivity of interest-bearing liabilities and interest-earning assets in an effort to minimize the adverse effects of changes in the interest rate environment. Management of interest rate risk is carried out primarily through strategies involving available-for-sale securities, loan and lease portfolio, and available funding sources.

The Company has an Asset/Liability Committee to communicate, coordinate and control all aspects involving interest rate risk management. The Asset/Liability Committee, which includes three members of our board of directors, establishes and monitors the volume, maturities, pricing and mix of assets and funding sources with the objective of managing assets and funding sources to provide results that are consistent with liquidity, growth, risk limits and profitability goals. Adherence to relevant policies is monitored on an ongoing basis by the Asset/Liability Committee.

The Company has a total cumulative gap in interest-earning assets and interest-bearing liabilities of 4.56% as of March 31, 2022, indicating that, overall, assets will reprice before liabilities during the expected life of the instruments. Cumulative gap is a useful measure to monitor balance sheet match-funding, yet economic value of equity and net interest income ~~due~~simulations, discussed below, are more useful in understanding potential impacts to earnings from a change in interest rates.

The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest rate sensitive.” An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The Company analyzes interest rate sensitivity position to manage the risk associated with interest rate movements through the use of two simulation models: economic value of equity (“EVE”) and net interest income (“NII”) simulations. The EVE simulation provides a long-term view of interest rate risk because it analyzes all of the Company’s future cash flows. EVE is defined as the present value of the Company’s assets, less the present value of its liabilities, adjusted for any off-balance sheet items. The results show a theoretical change in the economic value of shareholders’ equity as interest rates change.

EVE and NII simulations are completed routinely and presented to the Asset/Liability Committee. The simulations provide an estimate of the impact of changes in interest ~~rates. Consistency of~~rates on equity and net interest income under a range of assumptions. The numerous assumptions used in the simulation process are provided to the Asset/Liability Committee on at least an annual basis. Changes to these assumptions can significantly affect the results of the simulation. The simulation incorporates assumptions regarding the potential timing in the repricing of certain assets and liabilities when market rates change and the changes in spreads between different market rates. The simulation analysis incorporates management’s current assessment of the risk that pricing margins will change adversely over time due to competition or other factors.

Simulation analysis is ~~largely dependent upon the effective management~~only an estimate of interest rate ~~risk.~~

risk exposure at a particular point in time. The Company continually reviews the potential effect changes in interest rates could have on the repayment of rate sensitive assets and funding requirements of rate sensitive liabilities.

The table below sets forth an approximation of the Company’s ~~Asset/Liability Management Committee (“ALCO”), which includes senior management representatives~~NII sensitivity exposure for the 12-month periods ending March 31, 2023 and ~~reports to~~2024 and the ~~Board~~Company’s EVE sensitivity at March 31, 2022. The simulation uses projected repricing of ~~Directors, monitors~~assets and ~~manages interest~~liabilities at March 31, 2022 on the basis of contractual maturities, anticipated repayments and scheduled rate ~~risk. See “Asset/Liability Management~~adjustments. Critical model assumptions such as loan 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~~investment prepayment rates, deposit decay rates, deposit betas and lags and assumed replacement pricing can have a significant impact on interest income ~~within~~simulation. A static balance sheet is maintained to remove volume considerations and to place the focal point on the rate sensitivity of the Company’s ~~risk guidelines. This objective is accomplished through~~balance sheet. While management ofbelieves such assumptions to be reasonable, approximate actual future activity may differ from the ~~balance sheet composition, maturities, liquidity,~~results shown below as it will include growth considerations and ~~interest rate risk exposures arising from changing economic conditions, interest rates and customer preferences.~~

~~To identify and manage its interest rate risk,~~management actions to mitigate the Company employs an earnings simulation model to analyze net interest income sensitivity to changing interest rates. The model is based on contractual cash flows and repricing characteristics and incorporates market-based assumptions regarding the effectimpacts of changing interest rates on the ~~prepayment rates of certain assets and liabilities. The model also includes management projections for activity levels in each~~balance sheet’s earnings profile.

	Estimated Increase/Decrease in Net Interest Income		Estimated Percentage Change in EVE
Basis Point ("bp") Change in Interest Rates	12 Months Ending March 31, 2023	12 Months Ending March 31, 2024	As of March 31, 2022
+400	8.4%	6.3%	(34.0)%
+300	6.3	4.6	(26.2)
+200	4.1	2.9	(17.8)
+100	2.0	1.4	(9.0)
-100	(5.2)	(5.7)	10.1

Rates are increased instantaneously at the beginning of the ~~product lines offered by~~projection. The Company is slightly asset sensitive in the ~~Bank. Assumptions are inherently uncertain,~~initial year, as the Company’s large variable rate loan portfolio reprices the full amount of the assumed change in interest rates, while the large retail savings and short-term retail certificates of deposits portfolio will reprice with an assumed beta. Annually, the ~~measurement~~Company’s retail certificate of deposits portfolio has a significant maturity event in the first half of the year. The Company is slightly asset sensitive in the second year of the projection due to interest rates increasing or decreasing for the full year, the Company’s loan portfolio continuing to reprice, and also due to the other assumptions used in the analysis as noted previously. Interest rates do not normally move all at once or evenly over time, but management believes that the analysis is useful to understanding the potential direction and magnitude of net interest income ~~or the impact of rate fluctuations on net interest income cannot be precisely predicted. Actual results may differ materially from simulated results~~changes due to ~~timing, magnitude,~~changing interest rates.

The EVE analysis shows that the Company would theoretically lose market value in a rising rate environment. The favorable EVE change resulting from the loan and ~~frequency~~lease portfolio in a rising rate analysis is more than offset by the devaluation of ~~interest~~the interest-bearing liabilities. This is largely driven by the Company’s longer asset duration, primarily consisting of investments and loans, versus the shorter duration of its funding portfolio, primarily consisting of retail savings and short-term retail certificates of deposits. Increased fixed rate ~~changes as well as changes~~loan production since 2020, given the historical low market rate environment, has also been a significant driver in ~~market conditions and management strategies.~~

the model results.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

An evaluation of the Company’s disclosure controls and procedures (as defined in Rules 13(a)-15(e) and 15(d)-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), was carried out under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer as of ~~September 30, 2017,~~March 31, 2022, 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 30, 2017~~March 31, 2022, in ensuring that the information required to be disclosed in the reports the Company files or submits under the Exchange Act is (i) accumulated and communicated to management (including the Company’s Chief Executive Officer and Chief Financial Officer) as appropriate to allow timely decisions regarding required disclosures, and (ii) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the ~~three months~~ quarter ended ~~September 30, 2017~~March 31, 2022, 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~~at times involved in legal proceedings. ~~The~~In the opinion of management, as of March 31, 2022, there are no material pending legal proceedings to which the Company or any of its subsidiaries is a party or of which any of their property is the subject. In addition, the Company is not ~~involved in, nor has it terminated during~~aware of any threatened litigation, unasserted claims or assessments that could have a material adverse effect on its business, operating results or financial condition.

On March 12, 2021, a purported class action was filed against the ~~three and nine months ended September 30, 2017, any pending legal proceedings other than nonmaterial proceedings occurring~~Company in the ~~ordinary course~~United States District Court for the Eastern District of ~~business.~~

North Carolina, Joseph McAlear, individually and on behalf of all others similarly situated v. Live Oak Bancshares, Inc. et al. The complaint alleges the existence of an agreement between the Company, nCino, Inc. and Apiture, LLC in which those companies purportedly sought to restrain the mobility of employees in violation of antitrust laws by agreeing not to solicit or hire each other’s employees. The complaint alleges violations of Section 1 of the federal Sherman Act (15 U.S.C. § 1) and violations of Sections 75-1 and 75-2 of the North Carolina General Statutes. The plaintiff seeks monetary damages, including treble damages, entitlement to restitution, disgorgement, attorneys’ fees, and pre- and post-judgment interest. On October 12, 2021, the Company reached an agreement to settle the case with a proposed class of all persons (with certain exclusions) employed by the Company or its wholly-owned subsidiary, Live Oak Banking Company, Apiture, Inc. or nCino, Inc. in North Carolina at any time from January 27, 2017, through March 31, 2021. In the agreement, the Company agreed to pay $3.9 million. On October 13, 2021, the plaintiff filed a motion for preliminary approval of the settlement, which the court granted by order entered on November 23, 2021. After class-wide noticing, the plaintiff filed a motion for final approval on March 28, 2022, which the court granted by order entered on April 28, 2022. Pursuant to the terms of the settlement, the Company expects the settlement to become finally effective no later than June 30, 2022.

Item 1A. Risk Factors

~~See “Risk Factors”~~

There have been no material changes in ~~Part 1, Item 1A of our~~the Company’s risk factors from those disclosed in the Company’s Annual Report on Form 10-K for the ~~fiscal~~ year ended December 31, 2016, and "Risk Factors" 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.

2021.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

~~Table of Contents~~

Item 6. Exhibits.

Exhibits

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

INDEX TO EXHIBITS



Exhibit No.			Description of Exhibit

3.1			Amended and Restated Articles of Incorporation of Live Oak Bancshares, Inc. (incorporated by reference to Exhibit 3.1 of the registration statement on Form S-1, filed on June 19, 2015)
3.2			Amended Bylaws of Live Oak Bancshares, Inc. (incorporated by reference to Exhibit 3.2 of the amended registration statement on Form S-1, filed on ~~June 19,~~July 13, 2015)
4.1			Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 of the registration statement on Form S-1, filed on June 19, 2015)
4.2			Registration and Other Rights Agreement between Live Oak Bancshares, Inc. and Wellington purchasers (incorporated by reference to Exhibit 4.2 of the registration statement on Form S-1, filed on June 19, 2015)
31.1			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 30, 2017~~March 31, 2022 and December 31, ~~2016;~~2021; (ii) Condensed Consolidated Statements of Income for the Three ~~and Nine~~ Months Ended ~~September 30, 2017~~March 31, 2022 and ~~2016;~~2021; (iii) Condensed Consolidated Statements of Comprehensive Income for the Three ~~and Nine~~ Months Ended ~~September 30, 2017~~March 31, 2022 and ~~2016;~~2021; (iv) Condensed Consolidated Statements of Changes in Shareholders’ Equity for the ~~Nine~~Three Months Ended ~~September 30, 2017~~March 31, 2022 and ~~2016;~~2021; (v) Condensed Consolidated Statements of Cash Flows for the ~~Nine~~Three Months Ended ~~Septemeber 30, 2017~~March 31, 2022 and ~~2016;~~2021; 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~~May 4, 2022	By:	/s/ ~~S. Brett Caines~~ William C. Losch III
		~~S. Brett Caines~~ William C. Losch III
		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



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



	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



	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	)%



	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



	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		%