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Item 2. Management’s Discussion and Analysis

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. (individually, “Bancshares” and collectively with its subsidiaries including Live Oak Banking Company, the “Company”). 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, 2021 (the "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 financial condition, results of operations, plans, objectives, future performance or 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 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 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 interest rates that affect the level and composition of deposits, loan demand and the values of loan collateral, securities, and interest sensitive assets and liabilities; 
 • the failure of assumptions underlying the establishment of reserves for possible loan and lease losses; 
 • changes in loan underwriting, credit review or loss reserve policies associated with economic conditions, examination conclusions, or regulatory developments; 
 • 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 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; 
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 • 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 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; 
 • operational, compliance and other factors, including conditions in local areas in which the Company conducts business such as inclement weather or a reduction in the availability of services or products for which loan proceeds will be used, that could prevent or delay closing and funding loans before they can be sold in the secondary market; 
 • the effect of any mergers, acquisitions or other transactions, to which the Company or the Bank may from time to time be a party, including management’s ability to successfully integrate any businesses acquired; 
 • adverse results, including related fees and expenses, from pending or future lawsuits, government investigations or private actions; 
 • 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. 
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 Nature of Operations 
 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. The Bank identifies and extends lending to credit-worthy borrowers within specified 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 SBA under the 7(a) 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 include the Bank, 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., Live Oak Clean Energy Financing LLC (“LOCEF”), Live Oak Private Wealth, LLC (“Live Oak Private Wealth”) and Tiburon Land Holdings, LLC (“TLH”). Live Oak Number One, Inc. holds properties foreclosed on by the Bank. LOCEF provides financing to entities for renewable energy applications and became a wholly owned subsidiary of the Bank during the first quarter of 2019. Live Oak Private Wealth provides high-net-worth individuals and families with strategic wealth and investment management services. During the first quarter of 2022, Jolley Asset Management, LLC (“JAM”) was merged into Live Oak Private Wealth. JAM was previously a wholly owned subsidiary of Live Oak Private Wealth. TLH was formed in the third quarter of 2022 to hold land adjacent to the Bank's headquarters consisting of wetlands and other protected property for the use and enjoyment of the Bank's employees and customers. 
 GLS is a management and technology consulting firm that 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 programs and 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 funds (the “Canapi Funds”) focused on providing venture capital to new and emerging financial technology companies. 
 The Company generates revenue primarily from net interest income and secondarily through origination and sale of government guaranteed loans. Income from the retention of loans 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. 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 generates 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.” 
 
 Results of Operations 
 Performance Summary 
 Three months ended September 30, 2022 compared with three months ended September 30, 2021 
 For the three months ended September 30, 2022, the Company reported net income of $42.9 million, or $0.96 per diluted share, compared to net income of $33.8 million, or $0.76 per diluted share, for the third quarter of 2021. 
 The increase in net income was largely due to the following items: 
 • Increase in equity method investment income of $30.4 million, largely driven by a $28.4 million gain related to the Company’s sale of its investment in Payrailz, LLC (“Payrailz”); 
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 • Increase in net interest income of $6.2 million, or 7.9%, predominately from increases in volume for the total loan and lease portfolio, partially mitigated by a decrease in the net interest margin arising from an increase in interest-bearing liabilities combined with average cost of funds outpacing the average yield on interest earning assets; 
 • A net loss on loan servicing asset revaluation decreasing by $4.6 million, or 77.5%; 
 • The net gain on loans accounted for under the fair value option increasing by $5.5 million, or 529.1%, from a net loss of $1.0 million in the third quarter of 2021; and 
 • Decreased income tax expense of $7.9 million, or 83.8%, largely due to higher than expected investment tax credits arising from renewable energy investments in the third quarter of 2022. 
 Key factors partially offsetting the increase in net income for the third quarter of 2022 were: 
 • Provision for loan and lease credit losses increased $9.9 million, or 228.1%, compared to $4.3 million for the third quarter of 2021. The level of provision expense in the third quarter of 2022 was primarily the result of loan growth, charge-off experience impacts, increased levels of loans classified as held for investment and changes in the macroeconomic outlook; 
 • Decreased net gains on sales of loans of $9.6 million, or 50.8%, the result of lower volume of loan sales combined with overall weaker market conditions compared to those experienced in the prior year; and 
 • Increased noninterest expense of $27.6 million, or 49.7%, principally comprised of salaries and employee benefits up $15.3 million, or 54.2%, and $7.7 million in impairment charges related to a renewable energy tax credit investment closed in the third quarter of 2022. 
 Nine months ended September 30, 2022 compared with nine months ended September 30, 2021 
 For the nine months ended September 30, 2022, the Company reported a net income of $174.4 million, or $3.88 per diluted share, as compared to net income of $136.8 million, or $3.05 per diluted share, for the nine months ended September 30, 2021. This increase in net income was largely due to the following items: 
 • Increase in equity method investment income of $150.8 million, due to the above mentioned third quarter 2022 Payrailz gain of $28.4 million combined with the $120.5 million gain recognized in the second quarter of 2022 related to the sale of its investment in Finxact, Inc. ("Finxact"); and 
 • Increase in net interest income of $22.5 million, or 10.2%, predominately from increases in both average yield and volume for the total loan and lease portfolio. The growth in net interest income was mitigated by rising average cost of funds and moderate growth in interest-bearing liabilities. 
 Key factors partially offsetting the increase in net income for the first nine months of 2022 were: 
 • Decreased equity security investment gains of $42.0 million, due to the Company’s $44.1 million second quarter 2021 fair value gain from its investment in Greenlight Financial Technologies, Inc. (“Greenlight”); 
 • Provision for loan and lease credit losses increasing $10.0 million, or 88.4%, compared to $11.3 million in the first nine months of 2021. The level of provision expense in the year to date period of 2022 was primarily the result of the above mentioned factors driving the increase for the third quarter of 2022; 
 • Decreased net gains on sales of loans of $11.1 million, or 23.7%, combined with an increased loss on loan servicing asset revaluation of $4.0 million, or 52.8%, and a net gain on loans accounted for under the fair value option decreasing by $3.8 million, or 89.0%, all principally the result of weaker overall market conditions emerging in 2022 as compared to the first nine months of 2021; 
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 • Increased noninterest expense of $58.4 million, or 34.1%, principally comprised of salaries and employee benefits up $35.8 million, or 38.7%, advertising and marketing expense up $3.5 million, or 110.6%, technology expense up $3.4 million, or 21.2%, contributions and donations up $4.4 million, or 221.0%; and increased impairment charges of $4.6 million related to renewable energy tax credits; and 
 • Increased income tax expense of $9.0 million primarily due the above discussed increase in net income. 
 Net Interest Income and Margin 
 Net interest income represents the difference between the income that the Company earns on interest-earning assets and the cost 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, 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.” As a bank without a branch network, the Bank 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, 2022 compared with three months ended September 30, 2021 
 For the three months ended September 30, 2022, net interest income increased $6.2 million, or 7.9%, to $83.9 million compared to $77.7 million for the three months ended September 30, 2021. This increase was principally due to growth in the volume for the total loan and lease portfolio outpacing moderate growth in interest-bearing liabilities combined with an increase in average cost of funds which exceeded the increase in average yield on interest-earning assets. This increase in net interest income over the prior year was significantly higher when excluding the effects of declining levels of Paycheck Protection Program (“PPP”) loan net interest income for the compared period, which has been declining over time as PPP loans are paid down. Excluding PPP loan impacts of $1.2 million, comprised of amortization of net deferred fees combined with a 1% annualized interest rate less the related interest expense from funding activity, net interest income increased by $17.2 million. Average interest-earning assets increased by $926.6 million, or 12.0%, to $8.66 billion for the three months ended September 30, 2022, compared to $7.74 billion for the three months ended September 30, 2021, while the yield on average interest-earning assets increased fifty-five basis points to 5.31%. The cost of funds on interest-bearing liabilities for the three months ended September 30, 2022, increased seventy-five basis points to 1.55% while the average balance of interest-bearing liabilities increased by $704.9 million, or 9.5%, over the three months ended September 30, 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 $755.3 million reduction in average borrowings largely related to the Federal Reserve Bank's Paycheck Protection Program Liquidity Facility ("PPPLF") repayments since September 30, 2021. As indicated in the rate/volume table below, the overall increase discussed above is reflected in increased interest income of $23.0 million outpacing growth in interest expense of $16.9 million for the third quarter of 2022 compared to the third quarter of 2021. For the three months ended September 30, 2021, compared to the three months ended September 30, 2022, net interest margin decreased from 3.99% to 3.84%. As of September 30, 2022, the Company had $23.9 million in PPP loan balances on its books which includes $490 thousand in net deferred fees remaining to be recognized into future interest income. The Company expects to recognize most of the remaining net deferred fees for PPP loans in 2022. 
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 Nine months ended September 30, 2022 compared with nine months ended September 30, 2021 
 For the nine months ended September 30, 2022, net interest income increased $22.5 million, or 10.2%, to $241.6 million compared to $219.1 million for the nine months ended September 30, 2021. This increase was principally due to growth in both average yield and volume for the total loan and lease portfolio outpacing growth in both interest-bearing liabilities and average cost of funds. This increase in net interest income over the prior year was significantly higher when excluding the effects of declining levels of PPP loan net interest income for the compared period. Excluding PPP loan impacts of $6.5 million as defined above, net interest income increased by $59.9 million. Average interest-earning assets increased by $566.9 million, or 7.4%, to $8.26 billion for the nine months ended September 30, 2022, compared to $7.69 billion for the nine months ended September 30, 2021, while the yield on average interest-earning assets increased thirty-one basis points to 4.99%. The cost of funds on interest-bearing liabilities for the nine months ended September 30, 2022, increased twenty-four basis points to 1.13% while the average balance of interest-bearing liabilities increased by $349.6 million, or 4.7%, over the nine months ended September 30, 2021. The increase in average interest-bearing liabilities was also largely driven by funding for significant loan originations and growth. This increase was muted by a $1.05 billion reduction in average borrowings largely related to PPPLF repayments since September 30, 2021. As indicated in the rate/volume table below, the overall increase discussed above is reflected in increased interest income of $38.9 million as compared to an increase in interest expense of $16.4 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. For the nine months ended September 30, 2021 compared to the nine months ended September 30, 2022, net interest margin increased from 3.81% to 3.91%. 
 During the first nine months of 2022, the Federal Reserve increased the federal funds target r ate by 300 basis points. In September 2022, the Federal Reserve released federal funds target rate midpoint projections which implied an additional increase of approximately 125 basis points in the remainder of 2022 and an increase of approximately 30 basis points by the end of 2023. Of the additional increases anticipated in 2022, a 75 basis point increase is currently expected to occur in November 2022. There can be no assurance that any further increases in the federal funds rate will occur, and if they do, the amount and timing of actual increases are subject to change. See Item 3. Quantitative and Qualitative Disclosures About Market Risk for information about the Company’s sensitivity to interest rates. 
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 Average Balances and Yields. The following table presents information regarding average balances for assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amount of interest expense on average interest-bearing liabilities, and the resulting average yields and costs. The yields and costs for the periods indicated are derived by dividing the income or expense by the average balances for assets or liabilities, respectively, for the periods presented and annualizing that result. Loan fees are included in interest income on loans. 
 
 Three Months Ended September 30, 
 2022 2021 
 Average
Balance Interest Average
Yield/Rate Average 
 Balance 
 Interest Average
Yield/Rate 
 Interest-earning assets: 
 Interest-earning balances in other banks $ 225,959 $ 1,375 2.41 % $ 452,830 $ 221 0.19 % 
 Federal funds sold 187,014 1,073 2.28 9,260 3 0.13 
 Investment securities 1,040,076 5,506 2.10 808,697 3,174 1.56 
 Loans held for sale 1,000,912 16,156 6.40 1,098,940 15,090 5.45 
 Loans and leases held for investment (1) 
 6,208,447 91,724 5.86 5,366,088 74,298 5.49 
 Total interest-earning assets 8,662,408 115,834 5.31 7,735,815 92,786 4.76 
 Less: Allowance for credit losses on loans and leases 
 (65,511) (56,411) 
 Noninterest-earning assets 598,220 581,771 
 Total assets $ 9,195,117 $ 8,261,175 
 Interest-bearing liabilities: 
 
 Savings $ 4,009,928 $ 16,775 1.66 % $ 3,367,168 $ 4,359 0.51 % 
 Money market accounts 100,074 72 0.29 104,576 74 0.28 
 Certificates of deposit 3,978,793 14,706 1.47 3,156,834 9,726 1.22 
 Total deposits 8,088,795 31,553 1.55 6,628,578 14,159 0.85 
 Borrowings 63,207 395 2.48 818,511 892 0.43 
 Total interest-bearing liabilities 8,152,002 31,948 1.55 7,447,089 15,051 0.80 
 Noninterest-bearing deposits 133,676 79,006 
 Noninterest-bearing liabilities 84,597 46,907 
 Shareholders' equity 824,842 688,173 
 Total liabilities and shareholders' equity 
 $ 9,195,117 $ 8,261,175 
 Net interest income and interest rate spread 
 $ 83,886 3.76 % $ 77,735 3.96 % 
 Net interest margin 3.84 % 3.99 % 
 Ratio of average interest-earning assets to average interest-bearing liabilities 
 106.26 % 103.88 % 

 (1) Average loan and lease balances include non-accruing loans and leases. 
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 Nine Months Ended September 30, 
 2022 2021 
 Average 
 Balance 
 Interest Average 
 Yield/Rate 
 Average 
 Balance 
 Interest Average 
 Yield/Rate 
 
 Interest-earning assets: 
 Interest-earning balances in other banks $ 259,212 $ 2,402 1.24 % $ 433,219 $ 752 0.23 % 
 Federal funds sold 92,127 1,275 1.85 22,151 19 0.11 
 Investment securities 950,787 12,951 1.82 769,890 9,078 1.58 
 Loans held for sale 1,078,743 47,308 5.86 1,127,924 45,383 5.38 
 Loans and leases held for investment (1) 
 5,876,078 243,927 5.55 5,336,824 213,778 5.36 
 Total interest-earning assets 8,256,947 307,863 4.99 7,690,008 269,010 4.68 
 Less: Allowance for credit losses on loans and leases 
 (63,613) (53,589) 
 Noninterest-earning assets 610,330 599,902 
 Total assets $ 8,803,664 $ 8,236,321 
 Interest-bearing liabilities: 
 Interest-bearing checking $ — $ — — % $ 102,566 $ 442 0.58 % 
 Savings 3,838,150 29,153 1.02 2,945,535 12,180 0.55 
 Money market accounts 94,901 182 0.26 105,048 239 0.30 
 Certificates of deposit 3,749,894 35,343 1.26 3,129,084 33,062 1.41 
 Total deposits 7,682,945 64,678 1.13 6,282,233 45,923 0.98 
 Borrowings 152,157 1,586 1.39 1,203,240 3,940 0.44 
 Total interest-bearing liabilities 7,835,102 66,264 1.13 7,485,473 49,863 0.89 
 Noninterest-bearing deposits 105,629 76,304 
 Noninterest-bearing liabilities 64,205 43,819 
 Shareholders' equity 798,728 630,725 
 Total liabilities and shareholders' equity 
 $ 8,803,664 $ 8,236,321 
 Net interest income and interest rate spread 
 $ 241,599 3.86 % $ 219,147 3.79 % 
 Net interest margin 3.91 % 3.81 % 
 Ratio of average interest-earning assets to average interest-bearing liabilities 
 105.38 % 102.73 % 

 (1) Average loan and lease balances include non-accruing loans and leases. 
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 Rate/Volume Analysis. The following table sets forth the effects of changing rates and volumes on net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, increases or decreases attributable to changes in both rate and volume that cannot be segregated have been allocated proportionally based on the changes due to rate and the changes due to volume. 
 
 Three Months Ended September 30, Nine Months Ended September 30, 
 2022 vs. 2021 2022 vs. 2021 
 Increase (Decrease) Due to Increase (Decrease) Due to 
 Rate Volume Total Rate Volume Total 
 Interest income: 
 Interest-earning balances in other banks $ 1,900 $ (746) $ 1,154 $ 2,607 $ (957) $ 1,650 
 Federal funds sold 531 539 1,070 742 514 1,256 
 Investment securities 1,265 1,067 2,332 1,574 2,299 3,873 
 Loans held for sale 2,530 (1,464) 1,066 3,993 (2,068) 1,925 
 Loans and leases held for investment 5,372 12,054 17,426 8,156 21,993 30,149 
 Total interest income 11,598 11,450 23,048 17,072 21,781 38,853 
 Interest expense: 
 Interest-bearing checking — — — — (442) (442) 
 Savings 10,656 1,760 12,416 11,738 5,235 16,973 
 Money market accounts 1 (3) (2) (36) (21) (57) 
 Certificates of deposit 2,195 2,785 4,980 (3,924) 6,205 2,281 
 Borrowings 2,275 (2,772) (497) 4,845 (7,199) (2,354) 
 Total interest expense 15,127 1,770 16,897 12,623 3,778 16,401 
 Net interest income $ (3,529) $ 9,680 $ 6,151 $ 4,449 $ 18,003 $ 22,452 

 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 ACL on loans and leases at a level that the Company believes is appropriate in relation to the estimated losses inherent in the loan and lease portfolio. 
 Losses inherent in loan relationships are mitigated if a portion of the loan is guaranteed by the SBA or USDA. Typical SBA 7(a) and USDA guarantees range from 50% to 90% depending on loan size and type, which 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 third quarter of 2022, there was a provision for loan and lease credit losses of $14.2 million compared to $4.3 million for the same period in 2021, an increase of $9.9 million. For the first nine months of 2022, there was a provision for loan and lease credit losses of $21.3 million compared to $11.3 million for the same period in 2021, an increase of $10.0 million. The increase in provision expense as compared to the third quarter of 2021 and the first nine months of 2021 was primarily the result of loan growth, charge-off experience impacts, a transfer of $729.5 million in loans carried at amortized cost, including $694.0 million in guaranteed loans, from held for sale to held for investment and changes in the macroeconomic outlook. See “Results of Operations” discussion of “Net Gains on Sales of Loans” for additional information influencing management's intent to hold more loans for investment. 
 Loans and leases held for investment at historical cost were $6.35 billion as of September 30, 2022, increasing by $1.6 billion, or 34.3%, compared to September 30, 2021. Excluding PPP loans and net unearned fees on those loans, the balance in loans and leases held for investment at historical cost was $6.32 billion at September 30, 2022, an increase of $2.09 billion, or 49.3%, over September 30, 2021. 
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 Net charge-offs for loans and leases carried at historical cost were $1.7 million, or 0.12% of average quarterly loans and leases held for investment, carried at historical cost, on an annualized basis, for the three months ended September 30, 2022, compared to net charge-offs of $2.5 million, or 0.21%, for the three months ended September 30, 2021. For the nine months ended September 30, 2022, net charge-offs totaled $6.6 million compared to $3.9 million for the nine months ended September 30, 2021 , an increase of $2.6 million, or 67.6%. The increase in net charge-offs for the first nine months of 2022 was anticipated following the expiration of government subsidies and the return to expected losses consistent with pre-Covid historical experience. Net charge-offs are a key element of historical experience in the Company's estimation of the allowance for credit losses on loans an d leases. 
 In addition, nonperforming loans and leases not guaranteed by the SBA or USDA, excluding $2.7 million and $6.3 million accounted for under the fair value option at September 30, 2022 and 2021, respectively, totaled $14.3 million, which was 0.23% of the held for investment loan and lease portfolio carried at historical cost at September 30, 2022, compared to $20.5 million, or 0.43% of loans and leases held for investment carried at historical cost at September 30, 2021. Nonperforming loans and leases carried at historical cost which are not guaranteed by the SBA or USDA were 0.23% and 0.48% of the historical cost portion of the held for investment loan and lease portfolio, excluding PPP loans, at September 30, 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 related revaluation of the servicing asset. Revenue from the sale of loans depends upon the volume, maturity structure and rates of underlying loans as well as the pricing and availability of funds in the secondary markets prevailing in the period between completed loan funding and closing of sale. In addition, the loan servicing revaluation is significantly impacted by changes in market rates and other underlying assumptions such as prepayment speeds and default rates. Net gain (loss) on loans accounted for under the fair value option is also significantly impacted by changes in market rates, prepayment speeds and inherent credit risk. Other less consistent elements of noninterest income include gains and losses on investments. 
 The following table shows the components of noninterest income and the dollar and percentage changes for the periods presented. 
 
 Three Months Ended September 30, 2022/2021 Increase (Decrease) 
 2022 2021 Amount Percent 
 Noninterest income 
 Loan servicing revenue $ 6,230 $ 6,278 $ (48) (0.8) % 
 Loan servicing asset revaluation (1,324) (5,878) 4,554 77.5 
 Net gains on sales of loans 9,275 18,860 (9,585) (50.8) 
 Net gain (loss) on loans accounted for under the fair value option 4,420 (1,030) 5,450 529.1 
 Equity method investments income (loss) 29,136 (1,250) 30,386 2,430.9 
 Equity security investments gains (losses), net 876 176 700 397.7 
 Lease income 2,516 2,527 (11) (0.4) 
 Management fee income 2,844 1,489 1,355 91.0 
 Other noninterest income 3,751 4,104 (353) (8.6) 
 Total noninterest income $ 57,724 $ 25,276 $ 32,448 128.4 % 

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 Nine Months Ended September 30, 2022/2021 Increase (Decrease) 
 2022 2021 Amount Percent 
 Noninterest income 
 Loan servicing revenue $ 19,063 $ 18,930 $ 133 0.7 % 
 Loan servicing asset revaluation (11,561) (7,566) (3,995) (52.8) 
 Net gains on sales of loans 35,882 47,023 (11,141) (23.7) 
 Net gain (loss) on loans accounted for under the fair value option 475 4,323 (3,848) (89.0) 
 Equity method investments income (loss) 146,068 (4,685) 150,753 3,217.8 
 Equity security investments gains (losses), net 2,487 44,534 (42,047) (94.4) 
 Lease income 7,529 7,742 (213) (2.8) 
 Management fee income 6,890 4,896 1,994 40.7 
 Other noninterest income 12,088 11,247 841 7.5 
 Total noninterest income $ 218,921 $ 126,444 $ 92,477 73.1 % 

 For the three months ended September 30, 2022, noninterest income increased by $32.4 million, or 128.4%, compared to the three months ended September 30, 2021. The increase over the prior year is the result of the $28.4 million Payrailz gain included in equity method investment income, combined with a decrease in the net loss on servicing asset revaluation of $4.6 million and a $5.5 million increase in net gains on loans accounted for under the fair value option. Partially offsetting the increase over the prior year was decreased net gains on sales of loans of $9.6 million. 
 For the nine months ended September 30, 2022, noninterest income increased by $92.5 million, or 73.1%, compared to the nine months ended September 30, 2021 . The increase over the prior year is also the result of the above mentioned Payrailz gain combined with the $120.5 million Finxact gain recognized in the second quarter of 2022. Partially offsetting the increase over the prior year was a decrease in equity security investment gains of $42.0 million, related to the 2021 Greenlight gain. Also partially offsetting the increase over the first nine months of 2021 was decreased net gains on sales of loans of $11.1 million, an increased loss on loan servicing asset revaluation of $4.0 million, and a decreased net gain on loans accounted for under the fair value option of $3.8 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 September 30, Three Months Ended June 30, Three Months Ended March 31, 
 2022 2021 2022 2021 2022 2021 
 Amount of loans and leases originated $ 1,005,235 $ 1,063,190 $ 959,635 $ 1,153,693 $ 865,063 $ 1,180,219 
 Guaranteed portions of loans sold 148,110 201,903 68,818 130,858 219,703 136,747 
 Outstanding balance of guaranteed loans sold (1) 
 2,671,705 2,731,031 2,681,079 2,694,931 2,786,403 2,843,963 

 
 Nine Months Ended September 30, For years ended December 31, 
 2022 2021 2021 2020 2019 2018 
 Amount of loans and leases originated 
 $ 2,829,933 $ 3,397,102 $ 4,480,725 $ 4,450,198 $ 2,001,886 $ 1,765,680 
 Guaranteed portions of loans sold 
 436,631 469,508 668,462 542,596 340,374 945,178 
 Outstanding balance of guaranteed loans sold (1) 
 2,671,705 2,731,031 2,756,915 2,819,625 2,746,480 3,045,460 

 (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. 
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 Changes in various components of noninterest income are discussed in more detail below. 
 Loan Servicing Asset Revaluation: The Company revalues its serviced loan portfolio at least quarterly. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as adequate compensation for servicing, the 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 most sensitive assumptions. For the three months ended September 30, 2022, there was a negative loan servicing revaluation adjustment of $1.3 million, compared to $5.9 million for the three months ended September 30, 2021, a decrease in expense of $4.6 million, or 77.5%. For the nine months ended September 30, 2022 there was negative loan servicing revaluation adjustment of $11.6 million compared to $7.6 million for the nine months ended September 30, 2021, an increase in expense of $4.0 million, or 52.8%. The decrease in the loss on valuation of the servicing asset compared to the third quarter of 2021 was principally the result of positive movements in market pricing, particularly as it relates to variable products, during the third quarter of 2022. The increase in the loss on loan servicing valuation when comparing to the first nine months of 2021 is principally the result of the emergence of weaker market conditions in 2022 than those experienced in the first nine months of the prior year. 
 Net Gains on Sales of Loans: For the three months ended September 30, 2022, net gains on sales of loans decreased $9.6 million, or 50.8%, compared to the three months ended September 30, 2021. The volume of guaranteed loans sold decreased $53.8 million, or 26.6%, for the three months ended September 30, 2022 to $148.1 million from $201.9 million in the three months ended September 30, 2021. For the nine months ended September 30, 2022, net gains on sales of loans decreased $11.1 million, or 23.7%, compared to the nine months ended September 30, 2021. For the nine months ended September 30, 2022, the volume of guaranteed loans sold decreased $32.9 million, or 7.0%, to $436.6 million from $469.5 million for the nine months ended September 30, 2021. The average net gain on loan sale premium decreased from 110% to 108% in the third quarters of 2021 and 2022, respectively, and decreased from 110% to 109% in the first nine months of 2021 and 2022, respectively. The decrease in net gains on sales of loans for both periods was principally the result of lower loan sales volume combined with negative market conditions beginning to materialize in 2022, as discussed above. Accordingly, these market trends influenced the Company's appetite for loan sales during periods of weaker premiums in the current year. 
 Net Gain (Loss) on Loans Accounted for Under the Fair Value Option : For the three months ended September 30, 2022, the Company had a net gain on loans accounted for under the fair value option of $4.4 million compared to a net loss of $1.0 million for the third quarter of 2021, a positive change of $5.5 million, or 529.1%. For the nine months ended September 30, 2022, the Company had a net gain on loans accounted for under the fair value option of $475 thousand compared to a net gain of $4.3 million for the same period of 2021, a negative change of $3.8 million, or 89.0%. The carrying amount of loans accounted for under the fair value option at September 30, 2022 and 2021 was $512.2 million (all classified as held for investment) and $725.4 million ($27.4 million classified as held for sale and $698.0 million classified as held for investment), respectively, a decrease of $213.2 million, or 29.4% . The increased net gain on loans accounted for under the fair value option during third quarter of 2022 compared to the third quarter of 2021 was largely the result of positive movements in market pricing, as discussed above relative to loan servicing, in combination with continued amortization of the underlying loan portfolio. The decreased net gain on loans accounted for under the fair value option during the first nine months of 2022 as compared to the prior comparative period is principally the result of the emergence of weaker market conditions than those experienced in the first nine months of 2021. 
 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. 
 
 
 
 
 
 
 
 
 
 
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 The following table shows the components of noninterest expense and the related dollar and percentage changes for the periods presented. 
 
 Three Months Ended September 30, 2022/2021 Increase (Decrease) 
 2022 2021 Amount Percent 
 Noninterest expense 
 Salaries and employee benefits $ 43,479 $ 28,202 $ 15,277 54.2 % 
 Non-employee expenses: 
 Travel expense 2,372 1,819 553 30.4 % 
 Professional services expense 2,505 4,251 (1,746) (41.1) 
 Advertising and marketing expense 2,621 1,631 990 60.7 
 Occupancy expense 2,519 2,042 477 23.4 
 Technology expense 7,770 6,150 1,620 26.3 
 Equipment expense 3,761 3,706 55 1.5 
 Other loan origination and maintenance expense 3,376 3,489 (113) (3.2) 
 Renewable energy tax credit investment impairment 7,721 60 7,661 12,768.3 
 FDIC insurance 2,697 1,670 1,027 61.5 
 Contributions and donations 191 523 (332) (63.5) 
 Other expense 4,036 1,916 2,120 110.6 
 Total non-employee expenses 39,569 27,257 12,312 45.2 % 
 Total noninterest expense $ 83,048 $ 55,459 $ 27,589 49.7 % 

 
 Nine Months Ended September 30, 2022/2021 Increase (Decrease) 
 2022 2021 Amount Percent 
 Noninterest expense 
 Salaries and employee benefits $ 128,262 $ 92,468 $ 35,794 38.7 % 
 Non-employee expenses: 
 Travel expense 6,627 4,027 2,600 64.6 
 Professional services expense 9,284 11,411 (2,127) (18.6) 
 Advertising and marketing expense 6,651 3,158 3,493 110.6 
 Occupancy expense 7,619 6,378 1,241 19.5 
 Technology expense 19,585 16,159 3,426 21.2 
 Equipment expense 11,361 11,128 233 2.1 
 Other loan origination and maintenance expense 9,511 10,123 (612) (6.0) 
 Renewable energy tax credit investment impairment 7,771 3,187 4,584 143.8 
 FDIC insurance 6,833 5,139 1,694 33.0 
 Contributions and donations 6,429 2,003 4,426 221.0 
 Other expense 9,708 6,108 3,600 58.9 
 Total non-employee expenses 101,379 78,821 22,558 28.6 % 
 Total noninterest expense $ 229,641 $ 171,289 $ 58,352 34.1 % 

 Total noninterest expense for the three and nine months ended September 30, 2022, increased $27.6 million, or 49.7%, and $58.4 million, or 34.1%, respectively, compared to the same periods in 2021. The increase in noninterest expense for the comparable three and nine month periods was largely driven by various components, as discussed below. 
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 Salaries and employee benefits : Total personnel expense for the three and nine months ended September 30, 2022 increased by $15.3 million, or 54.2%, and $35.8 million, or 38.7%, respectively, compared to the same periods in 2021. The increase in salaries and employee benefits was principally related to continued investment in human resources to support strategic and growth initiatives. Additional bonus accruals of $7.5 million and $3.0 million were included in both the second and third quarters of 2022 related to the earlier discussed Finxact and Payrailz gains, respectively, while the second quarter of 2021 included an additional $4.0 million bonus accrual, related to earlier mentioned Greenlight gain. Total full-time equivalent employees increased from 755 at September 30 , 2021, to 940 at September 30 , 2022. Salaries and employee benefits expense included $5.0 million and $15.1 million of stock-based compensation for the three and nine months ended September 30, 2022 , respectively, compared to $3.7 million and $12.8 million for the three and nine months ended September 30, 2021, respectively. Expenses related to the employee stock purchase program, stock grants, stock option compensation and restricted stock expense are all considered stock-based compensation. 
 Travel expense: For the nine months ended September 30, 2022, travel expenses increased $2.6 million, or 64.6%, compared to the same period in 2021 . Travel expenses increased primarily in relation to supporting both loan origination volume and the customer base as travel restrictions have eased combined with inflationary impacts on travel related costs. 
 Professional service expense: For the three and nine months ended September 30, 2022, professional service expenses decreased $1.7 million, or 41.1%, and $2.1 million, or 18.6%, respectively, compared to the same periods in 2021 . The decrease compared to the prior periods was largely driven by lower legal fees. 
 Advertising and marketing expense : For the three and nine months ended September 30, 2022, advertising and marketing expense increased $990 thousand, or 60.7%, and $3.5 million, or 110.6%, respectively, compared to the same periods in 2021. Increases were largely driven by a continuation of renewed marketing events. 
 Technology expense : For the three and nine months ended September 30, 2022, technology expense increased $1.6 million, or 26.3%, and $3.4 million, or 21.2%, respectively, compared to the same periods in 2021. This increase was primarily related to enhanced investments in the Company’s technology resources. 
 Renewable energy tax credit investment impairment: During the third quarter of 2022, the Company recognized $7.7 million in impairment charges related to a new 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. Partially offsetting this increase over the first nine months of 2021 was $3.1 million in impairment charges for a first quarter 2021 renewable energy tax credit investment. 
 Contributions and donations: For the nine months ended September 30, 2022, contributions and donations expense increased $4.4 million, or 221.0%, compared to the same period in 2021. This increase was related to a special charitable donation during the second quarter of 2022 of $5.0 million made in connection with the earlier discussed Finxact gain. 
 Income Tax Expense 
 For the three months ended September 30, 2022, income tax expense was $1.5 million compared to $9.4 million for the third quarter of 2021, and the Company’s effective tax rates were 3.4% and 21.7%, respectively. For the nine months ended September 30, 2022, income tax expense was $35.2 million compared to $26.2 million for the first nine months of 2021, and the Company’s effective tax rates were 16.8% and 16.0%, respectively. The lower level of income tax expense and effective tax rate for the third quarter of 2022 as compared to the same period in 2021 was principally the result of higher than anticipated investment tax credits related to renewable energy investments, arising from impacts of the passage of the Inflation Reduction Act of 2022 combined with higher than expected costs, as a result of the ongoing inflationary environment. The increase in income tax expense for first nine months of 2022 compared to the comparative period of 2021 was primarily from increased pretax income during the current period, largely a product of the earlier discussed Finxact and Payrailz gains. 
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 Results of Segment Operations 
 The Company’s operations are managed along two primary operating segments Banking and Fintech. A description of each segment and the methodologies used to measure financial performance is described in Note 11. Segments in the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements. Net income (loss) by operating segment is presented below: 
 
 Three Months Ended September 30, Nine Months Ended September 30, 
 2022 2021 2022 2021 
 Banking $ 17,519 $ 37,136 $ 59,114 $ 113,036 
 Fintech 27,077 (1,300) 120,011 29,127 
 Other (1,728) (1,997) (4,709) (5,315) 
 Consolidated net income $ 42,868 $ 33,839 $ 174,416 $ 136,848 

 Banking 
 For the three and nine months ended September 30, 2022, net income decreased $19.6 million, or 52.8%, and $53.9 million, or 47.7%, respectively, compared to the same periods of 2021. Key factors influencing this decrease are discussed below. 
 The provision for loan and lease credit losses for the three and nine months ended September 30, 2022, increased $9.9 million, or 228.1%, and $10.0 million, or 88.4%, respectively. See the analysis of provision for loan and lease credit losses included in the above section captioned “Provision for Loan and Lease Credit Losses” as it is entirely related to the Banking segment. 
 For the three and nine months ended September 30, 2022, noninterest income increased $2.1 million, or 8.5%, and decreased $18.1 million, or 21.9%, respectively, compared to the same periods of 2021. The decrease for the nine month comparative periods was principally driven by a decrease in net gains on sales of loans combined with an increase of losses in loan servicing asset revaluation and decrease in net 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. 
 For the three and nine months ended September 30, 2022, noninterest expense increased $26.1 million, or 49.7%, and $57.8 million, or 36.4%, respectively, compared to same periods 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, 2022, income tax expense decreased $8.0 million, or 85.6%, and $9.0 million, or 47.0%, respectively, compared to the same periods of 2021. This decrease relative to the Bank for both comparative periods is discussed in the above section captioned "Income Tax Expense" in regard to impacts of changes in anticipated investment tax credits related to renewable energy investments. 
 Fintech 
 For the three and nine months ended September 30, 2022, net income increased by $28.4 million, and $90.9 million, respectively, compared to same periods of 2021. The increase was principally due to the third and second quarters of 2022 equity method investment gains of $28.4 million and $120.5 million from the sale of Payrailz and Finxact, respectively. This increase for the comparative nine month periods was partially offset by the equity security investment gains arising from the second quarter of 2021 gain of $44.1 million arising from the Company’s investment in Greenlight. 
 For the three and nine months ended September 30, 2022, noninterest expense increased $1.3 million and $3.5 million, respectively, compared to the same period of 2021. This increase was largely due increased levels of salaries and benefits. 
 For the three and nine months ended September 30, 2022, income tax expense increased $622 thousand, or 301.9%, and $16.1 million, or 161.2%, respectively, compared to the same periods of 2021. This increase is a product of the above discussed increase in Fintech segment income for comparative periods. See the above section captioned “Income Tax Expense.” 
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 Discussion and Analysis of Financial Condition 
 September 30, 2022 vs. December 31, 2021 
 Total assets at September 30, 2022 were $9.31 billion, an increase of $1.10 billion, or 13.4%, compared to total assets of $8.21 billion at December 31, 2021. The growth in total assets was principally driven by the following: 
 • Cash and cash equivalents, comprised of cash and due from banks and federal funds sold was $403.4 million at September 30, 2022, an increase of $199.6 million, or 98.0%, compared to $203.8 million at December 31, 2021. This change reflects increased liquidity planning levels in the current rising rate environment and proceeds arising from the Payrailz and Finxact sales combined with growing deposit levels. 
 • Growth in total loans and leases held for investment and held for sale of $753.3 million resulting from strong origination activity in the first nine months of 2022 and holding loans available for sale for longer periods of time before sale, as discussed more fully below. Total originations during the first nine months of 2022 were $2.83 billion. 
 Loans held for sale decreased $578.9 million, or 51.8%, during the first nine months of 2022, from $1.12 billion at December 31, 2021, to $537.6 million at September 30, 2022. The decrease was primarily the result of a $754.7 million transfer of loans, including $696.6 million in guaranteed loans, from held for sale to held for investment in the third quarter of 2022. This transfer was largely due to the impact of recent and anticipated future market conditions in a rising rate environment influencing management's intent and ability to hold these loans for the foreseeable future. See “Results of Operations” discussion of “Net Gains on Sales of Loans” for additional information influencing managements intent to hold more loans for investment. 
 Loans and leases held for investment increased $1.33 billion, or 24.1%, during the first nine months of 2022, from $5.52 billion at December 31, 2021, to $6.85 billion at September 30, 2022. The increase was primarily the result of the above-mentioned loan originations in 2022 combined with increased levels of loans retained as held for investment. Excluding PPP loans, total loans and leases held for investment increased $1.57 billion, or 29.9%, during the first nine months of 2022. All PPP loans are classified as held for investment. 
 Other assets increased $48.1 million, or 19.2%, during the first nine months of 2022, from $250.3 million at December 31, 2022 to $298.4 million at September 30, 2022. This increase was principally comprised of full and partially funded commitments to equity method and equity security investments. 
 Total deposits were $8.40 billion at September 30, 2022, an increase of $1.29 billion, or 18.2%, from $7.11 billion at December 31, 2021. The increase in deposits is largely driven by significant loan origination efforts. 
 Borrowings decreased to $35.6 million at September 30, 2022 from $318.3 million at December 31, 2021. This decrease was related principally to net curtailments of borrowings through the PPPLF which was paid off by September 30, 2022 from $267.6 million at December 31, 2021. These PPPLF borrowings were used to help fund PPP loans. 
 Shareholders’ equity at September 30, 2022 was $802.2 million as compared to $715.1 million at December 31, 2021. The book value per share was $18.24 at September 30, 2022 compared to $16.39 at December 31, 2021. Average equity to average assets was 9.1% for the nine months ended September 30, 2022 compared to 8.8% for the year ended December 31, 2021. The increase in shareholders’ equity for the first nine months of 2022 was principally the result of $174.4 million in net income and stock-based compensation expense of $15.1 million, partially offset by other comprehensive loss associated with negative market impacts on the Company’s available-for-sale investment portfolio of $97.2 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. 
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 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 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 September 30, 2022 were $108.0 million, which represented a $27.8 million, or 34.7%, increase from December 31, 2021. These nonperforming assets at September 30, 2022 included $60.1 million in nonaccrual loans and leases and $1.2 million in foreclosed assets. Of the $108.0 million of nonperforming assets and TDRs, $65.3 million carried a government guarantee, leaving an unguaranteed exposure of $42.7 million in total nonperforming assets and TDRs at September 30, 2022. This represents an increase of $5.7 million, or 15.5%, from an unguaranteed exposure of $37.0 million at December 31, 2021. 
 The following table provides information with respect to nonperforming assets and troubled debt restructurings, excluding loans measured at fair value, at the dates indicated. 
 
 September 30, 2022 (1) 
 December 31, 2021 (1) 
 
 Nonaccrual loans and leases: 
 Total nonperforming loans and leases (all on nonaccrual) $ 60,064 $ 42,533 
 Total accruing loans and leases past due 90 days or more — — 
 Foreclosed assets 1,178 620 
 Total troubled debt restructurings 66,404 55,273 
 Less nonaccrual troubled debt restructurings (19,600) (18,210) 
 Total performing troubled debt restructurings 46,804 37,063 
 Total nonperforming assets and troubled debt restructurings $ 108,046 $ 80,216 
 Allowance for credit losses on loans and leases $ 78,291 $ 63,584 
 Total nonperforming loans and leases to total loans and leases held for investment 0.95 % 0.87 % 
 Total nonperforming loans and leases to total assets 0.68 % 0.56 % 
 Total nonperforming assets and troubled debt restructurings to total assets 1.23 % 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 130.35 % 149.49 % 

 (1) Excludes loans measured at fair value. 
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 September 30, 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) $ 45,730 $ 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 900 490 
 Total troubled debt restructurings guaranteed by the U.S. government 34,160 26,954 
 Less nonaccrual troubled debt restructurings guaranteed by the U.S. government (15,471) (10,770) 
 Total performing troubled debt restructurings guaranteed by U.S. government 18,689 16,184 
 Total nonperforming assets and troubled debt restructurings guaranteed by the U.S. government $ 65,319 $ 43,220 
 Allowance for credit losses on loans and leases $ 78,291 $ 63,584 
 Total nonperforming loans and leases not guaranteed by the U.S. government to total held for investment loans and leases 0.23 % 0.33 % 
 Total nonperforming loans and leases not guaranteed by the U.S. government to total assets 0.16 % 0.21 % 
 Total nonperforming assets and troubled debt restructurings not guaranteed by the U.S. government to total assets 0.49 % 0.49 % 
 Allowance for credit losses on loans and leases to total nonperforming loans and leases not guaranteed by the U.S. government 546.19 % 397.73 % 

 (1) Excludes loans measured at fair value. 
 Total nonperforming assets and TDRs, including loans measured at fair value, at September 30, 2022 were $164.0 million, which represented a $10.4 million, or 6.8%, increase from December 31, 2021. These nonperforming assets at September 30, 2022 included $90.3 million in nonaccrual loans and leases and $1.2 million in foreclosed assets. Of the $164.0 million of nonperforming assets and TDRs, $110.4 million carried a government guarantee, leaving an unguaranteed exposure of $53.6 million in total nonperforming assets and TDRs at September 30, 2022. This represents an increase of $1.1 million, or 2.1%, 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 loans and leases. 
 As a percentage of the Bank’s total capital, nonperforming loans and leases, excluding loans measured at fair value, represented 7.6% at September 30, 2022, compared to 6.0% at December 31, 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 both September 30, 2022 and December 31, 2021 were 1.8% and 2.3%, respectively. 
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 As of September 30, 2022, and December 31, 2021, potential problem (also referred to as criticized) and classified loans and leases, excluding loans measured at fair value, totaled $379.4 million and $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 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, 2022 , the portion of criticized and classified loans and leases guaranteed by the SBA or USDA totaled $191.8 million and total portfolio unguaranteed exposure risk was $187.6 million, or 5.0% of total held for investment unguaranteed exposure carried at historical cost. This compares to the December 31, 2021 portion of criticized and classified loans and leases guaranteed by the SBA or USDA which totaled $197.2 million and total portfolio unguaranteed exposure risk was $175.5 million, or 6.3% of total held for investment unguaranteed exposure carried at historical cost. As of September 30, 2022 , loans and leases carried at historical cost within the following verticals comprise the largest portion of the total potential problem and classified loans and leases: Wine and Craft Beverage at 11.7%, General Lending at 9.5%, Senior Care at 9.4%, Hotels at 8.5%, Healthcare at 8.2%, Educational Services at 8.0%, Fitness Centers at 5.2%, Sponsor Finance at 4.6%, Entertainment Centers at 4.5%, Agriculture at 4.5%, and Veterinary at 4.0%. As of December 31, 2021 , loans and leases carried at historical cost within the following verticals comprise the largest portion of the total potential problem and classified loans and leases: Educational Services at 16.1%, Wine and Craft Beverage at 13.7%, 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 and Sponsor Finance 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 divisio n. The majority of the $6.7 million increase in potential problem and classified loans and leases in the first nine months of 2022 was comprised of several relationships that did not have a government guarantee, largely related to some of the more recently matured verticals. The Company believes that its underwriting and credit quality standards have 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 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. 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 lon g term. At September 30, 2022, the Company had a total of $10.7 million in modified unguaranteed loans and leases on payment deferral with $362 thousand in accrued interest. 
 Management endeavors to be proactive in its approach to identify and resolve 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, 2022 , and December 31, 2021 , Risk Grade 5 loans and leases, excluding loans measured at fair value, totaled $259.9 million and $267.4 million, respectively. The decrease in Risk Grade 5 loans and leases, exclusive of loans measured at fair value, during the first nine months of 2022 was principally confined to three verticals: Educational Services ($27.1 million or 361.6%), Entertainment Centers ($13.9 million or 185.6%) and Hotels ($9.2 million or 122.9%). Partially offsetting the above decreases were increases in Risk Grade 5 loans principally concentrated in four ver ticals: Senior Care ($15.4 million or 205.3%), General Lending ($12.7 million or 168.8%), Sponsor Finance ($6.9 million or 92.4%) and Bioenergy ($4.1 million or 54.8%). The decrease in criticized loans in the first nine months of 2022 was due to principal paydowns and positive risk grade migration. Hotels, Sponsor Finance and Bioenergy are a part of the Company’s Specialty Lending division with the remaining above listed verticals within the Company’s Small Business Banking division. 
 At September 30, 2022 , approximately 100.0% of loans and leases classified as Risk Grade 5 are performing with no relationships having payments past 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, bo rrowers with continuing difficulties arising from the pandemic were provided additional relief through payment deferrals. At September 30, 2022, the Company had $16.6 million in unguaranteed loans on SBA payment assistance. 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. 
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 Allowance for Credit Losses on Loans and Leases 
 The ACL of $63.6 million at December 31, 2021, increased by $14.7 million, or 23.1%, to $78.3 million at September 30, 2022. The ACL as a percentage of loans and leases held for investment at historical cost amounted to 1.3% and 1.2% at December 31, 2021 and September 30, 2022, respectively. The increase in the ACL during the first nine months of 2022 was primarily due to loan growth, charge-off experience impacts, the previously discussed loan reclassification from held for sale to held for investment and changes in the macroeconomic outlook. See also the above section captioned “Provision for Loan and Lease Credit Losses” in “Results of Operations” for related information. The ACL for PPP loans and leases was $2.4 million and $37 thousand at December 31, 2021 and September 30, 2022, respectively. 
 Actual past due held for investment loans and leases, inclusive of loans measured at fair value, have decreased by $23.1 million since December 31, 2021 . Total loans and leases 90 or more days past due decreased $14.7 million, or 29.9%, compared to December 31, 2021 . This decrease was comprised of a $8.3 million decrease in unguaranteed exposure combined with a $6.4 million decrease in the guaranteed portion of past due loans compared to December 31, 2021 . At September 30, 2022 and December 31, 2021 , total held for investment unguaranteed loans and leases past due as a percentage of total held for investment unguaranteed loans and leases, inclusive of loans measured at fair value, was 0.2% and 0.6%, respectively. Total unguaranteed loans and leases past due were comprised of $6.5 million carried at historical cost, a decrease of $10.1 million, and $3.8 million measured at fair value, a decrease of $1.3 million, as of September 30, 2022 compared to December 31, 2021 . Management continues to actively monitor and work to improve asset quality. Management believes the ACL of $78.3 million at September 30, 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. Accordingly, 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 ACL, thus adversely affecting the Company’s operating results. Additional information on the ACL is presented in Note 5. Loans and Leases Held for Investment and Credit Quality of the condensed consolidated financial statements in this report. 
 
 Liquidity Management 
 Liquidity management refers to the ability to meet day-to-day cash flow requirements based primarily on activity in loan and deposit accounts of the Company’s customers. Liquidity is immediately available from four major sources: (a) cash on hand and on deposit at other banks; (b) the outstanding balance of federal funds sold; (c) the market value of unpledged investment securities; and (d) availability under lines of credit. At September 30, 2022, the total amount of these four items was $4.06 billion, or 43.6% of total assets, an increase of $644.1 million from $3.42 billion, or 41.6% of total assets, at December 31, 2021. 
 Loans and other assets are funded by loan sales, wholesale deposits and core deposits. To date, an increasing retail deposit base and a stable amount of brokered deposits have been adequate to meet loan obligations, while maintaining the desired level of immediate liquidity. The Company maintains an investment securities portfolio that is available for both immediate and secondary contingent liquidity 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, 2022, none of the investment securities portfolio was pledged to secure public deposits or pledged to retail repurchase agreements, leaving $1.00 billion available to pledge as collateral. 
 Contractual Obligations 
 The Company has entered into significant fixed and determinable contractual obligations for future payments. Other than normal changes in the ordinary course of the Company’s operations, there have been no significant changes in the types of contractual obligations or amounts due since December 31, 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. 
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 Off-Balance Sheet Arrangements 
 In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with GAAP, are not recorded in the consolidated financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of commitments to extend credit and standby letters of credit. For more information, see Note 10. Commitments and Contingencies in the 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. As of September 30, 2022, the balance sheet’s total cumulative gap position was asset-sensitive at 5.2%. 
 The interest rate gap method, however, addresses only the magnitude of asset and liability repricing timing differences as of the report date and does not address earnings, market value, changes in account behaviors based on the interest rate environment, nor growth. Therefore, management also uses an earnings simulation model to prepare, on a regular basis, earnings projections based on a range of instantaneous parallel interest rate shocks applied to a static balance sheet to measure interest rate risk. As of September 30, 2022, the Company’s interest rate risk profile under the instantaneous parallel interest rate shock scenarios remained asset-sensitive. For more information, see Item 3. Quantitative and Qualitative Disclosures About Market Risk. An asset-sensitive position means that net interest income will generally move in the same direction as interest rates. For instance, if interest rates increase, net interest income can be expected to increase, and if interest rates decrease, net interest income can be expected to decrease. The Company attempts to mitigate interest rate risk by match funding assets and liabilities with similar rate instruments. Asset/liability sensitivity is primarily derived from the prime-based loans that adjust as the prime interest rate changes, rates on cash accounts that adjusts as the federal funds rate changes and the longer duration of indeterminate term deposits. Note that the Company regularly models various forecasted rate projections with non-parallel shifts that are reflective of potential current rate environment outcomes. Under these scenarios, the Company’s interest rate risk profile may increase in asset sensitivity, decrease in asset sensitivity, or depending on the scenario and timing of anticipated rate changes, may transition to a liability sensitive interest rate risk profile. Regular, robust modeling of various interest rate outcomes allows the Company to properly assess and manage potential risks from various rate shifts. 
 
 Capital 
 The maintenance of appropriate levels of capital is a management priority and is monitored on a regular basis. The Company’s principal goals related to the maintenance of capital are the following: to provide adequate capital to support the Company’s risk profile consistent with the risk appetite approved by the Board of Directors; to provide financial flexibility to support future growth and client needs; comply with relevant laws, regulations, and supervisory guidance; to achieve optimal 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. 
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 Capital amounts and ratios as of September 30, 2022 and December 31, 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 - September 30, 2022 
 Common Equity Tier 1 (to Risk-Weighted Assets) $ 875,137 13.16 % $ 299,202 4.50 % N/A N/A 
 Total Capital (to Risk-Weighted Assets) 954,555 14.36 531,915 8.00 N/A N/A 
 Tier 1 Capital (to Risk-Weighted Assets) 875,137 13.16 398,937 6.00 N/A N/A 
 Tier 1 Capital (to Average Assets) 875,137 9.49 368,924 4.00 N/A N/A 
 Bank - September 30, 2022 
 Common Equity Tier 1 (to Risk-Weighted Assets) $ 707,007 11.08 % $ 287,034 4.50 % $ 414,605 6.50 % 
 Total Capital (to Risk-Weighted Assets) 786,427 12.33 510,283 8.00 637,854 10.00 
 Tier 1 Capital (to Risk-Weighted Assets) 707,007 11.08 382,712 6.00 510,283 8.00 
 Tier 1 Capital (to Average Assets) 707,007 7.74 365,261 4.00 456,576 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 

 (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. The Company’s most critical accounting policies and estimates are listed below. These estimates require the Company to make difficult, subjective or complex judgments about matters that are inherently uncertain. 
 • Allowance for credit losses; 
 • Valuation of loans accounted for under the fair value option; and 
 • Valuation of servicing assets. 
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 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.
Live Oak Bancshares, Inc. 10-Q

Item 2. Management’s Discussion and Analysis
