Live Oak Bancshares, Inc. 10-K

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 71 Table of Contents Report of Independent Registered Public Accounting Firm To the Shareholders, Board of Directors, and Audit and Risk Committee Live Oak Bancshares, Inc. Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Live Oak Bancshares, Inc. (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 23, 2023, expressed an unqualified opinion thereon. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current-period audit of the consolidated financial statements that were communicated or required to be communicated to the Audit and Risk Committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. 72 Table of Contents Allowance for Credit Losses (ACL) The Company’s allowance for credit losses (ACL) for expected credit losses on loans and leases was $96.6 million as of December 31, 2022. The determination of the ACL has been identified by the Company as a critical accounting estimate. The ACL is based on relevant information from internal and external resources on past events, 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 the Company’s portfolio. As further described in Notes 1 and 3 to the consolidated financial statements, the Company estimates its ACL on a pooled basis for loans and leases that share risk characteristics and on an individual basis for those that do not. For those evaluated on a pooled basis, the Company’s historical credit loss experience, combined with reasonable and supportable forecasts, supports the underlying assumptions for the estimation of a quantitative component of the ACL. In addition, there is a qualitative factor component of the ACL based on additional internal and external indicators that adjust for differences in current risk characteristics not considered within the quantitative modeling. The Company estimates reserves on individually evaluated loans and leases using a discounted cash flow methodology or through the evaluation of collateral values. The estimation of the ACL is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. We identified the Company’s estimate of the ACL as a critical audit matter. The principal considerations for that determination were the degree of subjectivity and judgment required to audit management’s identification of individually evaluated loans and leases and quantification of the related ACL, management’s selection of assumptions for both the quantitative and qualitative factor components of the ACL for the pooled loans and leases and our use of an auditor’s specialist. This was particularly true for the areas considered by management in establishing the qualitative factors, as well as the level assigned by management to each qualitative factor. The primary procedures we performed to address this critical audit matter included the following: • We evaluated the design and tested the operating effectiveness of controls relating to management’s determination of the ACL, including controls over: ◦ The credit administration function to ensure the timely and complete identification of individually evaluated loans and leases; ◦ Management’s review of portfolio trends that might impact the calculation of the ACL, and; ◦ Management’s review of the ACL, including the review of the qualitative components of the ACL. • We tested the completeness of the individually evaluated loan and lease population, including testing the modifications for potential troubled debt restructurings, substandard or worse rated loans and leases, non-accrual loans and leases and past due loans and leases. • We tested the calculation of losses on a sample of identified individually evaluated loans and leases, including assessing the reasonableness of the significant assumptions including any adjustments made to appraisals for discounts, selling costs, and other unobservable adjustments. • We involved the firm’s internal valuation specialists to assist in: ◦ Evaluating the appropriateness of forecast inputs and assumptions, and; ◦ Testing the design of the model calculation through a re-performance of the discounted cash flow on a sample basis. • We evaluated the reasonableness of management’s application of qualitative factor adjustments to the ACL, including the comparison of factors considered by management to third party or internal sources as well as evaluated the appropriateness and level of the qualitative factor adjustments. • We inspected overall trends in credit quality by comparing the Company’s year-over-year and quarterly changes in qualitative factors and the ACL. • We evaluated subsequent events and transactions and considered whether they corroborated or contradicted the Company’s conclusion. 73 Table of Contents Loans Held at Fair Value As described in Notes 1 and 10 to the consolidated financial statements, the Company had $494.5 million of loans held for investment as of December 31, 2022, representing retained participating interests of government guaranteed loans, for which management elected the fair value option. The valuation of loans accounted for under the fair value option has been identified by the Company as a critical accounting estimate. The fair values of loans are determined by discounting estimated cash flows and incorporating measurements of probability of default, loss given default, prepayments, estimated outstanding exposure at default, and the effective interest rate. If the loan is collateral dependent, the fair value is determined based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date. Fair value of the loan’s collateral is determined by appraisal, independent valuation, or management’s estimation of fair value, which is then adjusted for the cost related to the liquidation of the collateral. We identified the Company’s estimate of the fair value of loans for which the fair value option has been elected as a critical audit matter. The principal considerations for that determination were the high degree of subjectivity and auditor judgment required to assess the reasonableness of the assumptions, calculations in the valuation model related to the credit component of fair value, and our use of an auditor’s specialist. The primary procedures we performed to address this critical audit matter included the following: • We obtained an understanding of the Company’s process for establishing the fair value measurement, including the implementation of the model and basis for development and related adjustments of the qualitative factor components for the credit risk. • We evaluated the design and tested the operating effectiveness of controls relating to the determination of the discount related to credit risk, including management’s assessment of the adjustments applied to determine the qualitative component. • We involved the firm’s internal valuation specialists to assist in: ◦ Evaluating the appropriateness of forecast inputs and assumptions, and; ◦ Testing the design of the model calculation through a re-performance of discounted cash flows on loans accounted for under the fair value option. Servicing Assets The Company’s servicing assets were $26.3 million as of December 31, 2022. As described within Notes 1, 5, and 10 to the consolidated financial statements, the Company recognizes servicing assets, which represent the portion of the servicing spread that exceeds adequate compensation for the servicing function of the sold portion of loans originated by the Company. The valuation of the servicing asset has been identified by the Company as a critical accounting estimate. The Company accounts for the servicing assets at fair value with changes in the fair value reported in loan servicing asset revaluation within the consolidated statements of income. The determination of the servicing assets’ fair value is based on a valuation model that incorporates assumptions 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. The fair value of servicing rights is sensitive to changes in underlying assumptions. Prepayment speeds are one of the most significant assumptions. We identified the Company’s valuation of the servicing asset as a critical audit matter. The principal considerations for that determination were the high degree of auditor judgment required to assess the reasonableness of certain assumptions used in the valuation model and our use of an auditor’s specialist. For instance, prepayment speeds and default rates are unobservable inputs developed using proprietary information from management’s internal valuation specialists’ database. In particular, the assumptions around prepayment speeds are the most subjective and provide the most sensitivity to the servicing rights. The primary procedures we performed to address this critical audit matter included the following: • We evaluated the design and tested the operating effectiveness of controls relating to the valuation of servicing assets, including controls over: ◦ Management’s valuation model, which is designed to ensure the completeness and accuracy of data used in the model, and; ◦ The determination of significant inputs and assumptions, including unobservable inputs such as prepayment speeds, used in the model. 74 Table of Contents • We involved the firm’s internal valuation specialists to assist in: ◦ Evaluating the methodologies and assumptions used by management, including assessing the reasonableness of significant unobservable inputs such as prepayment speeds and assumptions of the valuation model, and; ◦ Independently calculating the discounted cash flows at the individual loan level for a sample of loans and comparing the results to management’s estimate. • We inspected overall trends for the discount rate, prepayment speed, and servicing asset to compare the quarterly change, over a twelve-quarter period, and how the Company’s discount rate assumptions compared to observable market interest rate trends. / S / FORVIS, LLP (Formerly, Dixon Hughes Goodman LLP) We have served as the Company's auditor since 2010. Greenville, North Carolina February 23, 2023 75 Table of Contents Report of Independent Registered Public Accounting Firm To the Shareholders, Board of Directors, and Audit and Risk Committee Live Oak Bancshares, Inc. Opinion on the Internal Control over Financial Reporting We have audited Live Oak Bancshares, Inc.’s (the “Company”) internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of December 31, 2022 and 2021, and for each of the three years in the period ended December 31, 2022, and our report dated February 23, 2023, expressed an unqualified opinion on those consolidated financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definitions and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of reliable financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. / S / FORVIS, LLP (Formerly, Dixon Hughes Goodman LLP) Greenville, North Carolina February 23, 2023 76 Table of Contents Live Oak Bancshares, Inc. Consolidated Balance Sheets (Dollars in thousands) December 31, 2022 December 31, 2021 Assets Cash and due from banks $ 280,239 $ 187,203 Federal funds sold 136,397 16,547 Certificates of deposit with other banks 4,000 4,750 Investment securities available-for-sale 1,014,719 906,052 Loans held for sale (includes $ 25,310 measured at fair value at December 31, 2021) 554,610 1,116,519 Loans and leases held for investment (includes $ 494,458 and $ 645,201 measured at fair value, respectively) 7,344,178 5,521,262 Allowance for credit losses on loans and leases ( 96,566 ) ( 63,584 ) Net loans and leases 7,247,612 5,457,678 Premises and equipment, net 263,290 240,196 Foreclosed assets — 620 Servicing assets 26,323 33,574 Other assets 328,308 250,254 Total assets $ 9,855,498 $ 8,213,393 Liabilities and Shareholders’ Equity Liabilities Deposits: Noninterest-bearing $ 194,100 $ 89,279 Interest-bearing 8,690,828 7,022,765 Total deposits 8,884,928 7,112,044 Borrowings 83,203 318,289 Other liabilities 76,334 67,927 Total liabilities 9,044,465 7,498,260 Shareholders’ equity Preferred stock, no par value, 1,000,000 authorized, none issued or outstanding at December 31, 2022 and December 31, 2021 — — Class A common stock, no par value, 100,000,000 shares authorized, 44,061,244 and 43,494,046 , shares issued and outstanding at December 31, 2022 and December 31, 2021, respectively 330,854 310,970 Class B common stock, no par value, 10,000,000 shares authorized, none issued or outstanding at December 31, 2022 and 125,024 shares issued and outstanding at December 31, 2021 — 1,324 Retained earnings 572,497 400,893 Accumulated other comprehensive (loss) income ( 92,318 ) 1,946 Total shareholders’ equity 811,033 715,133 Total liabilities and shareholders’ equity $ 9,855,498 $ 8,213,393 See Notes to Consolidated Financial Statements 77 Table of Contents Live Oak Bancshares, Inc. Consolidated Statements of Income (Dollars in thousands, except per share data) Years Ended December 31, 2022 2021 2020 Interest income Loans and fees on loans $ 418,545 $ 347,738 $ 270,770 Investment securities, taxable 19,667 12,533 15,016 Other interest earning assets 6,261 942 2,622 Total interest income 444,473 361,213 288,408 Interest expense Deposits 115,035 59,740 89,726 Borrowings 1,937 4,688 3,959 Total interest expense 116,972 64,428 93,685 Net interest income 327,501 296,785 194,723 Provision for loan and lease credit losses 40,943 15,210 40,658 Net interest income after provision for loan and lease credit losses 286,558 281,575 154,065 Noninterest income Loan servicing revenue 25,359 25,219 26,600 Loan servicing asset revaluation ( 16,577 ) ( 11,726 ) ( 9,958 ) Net gains on sales of loans 43,244 67,280 49,473 Net gain (loss) on loans accounted for under the fair value option 1,046 4,257 ( 13,083 ) Equity method investments income (loss) 144,250 ( 1,716 ) ( 14,691 ) Equity security investments gains (losses), net 3,355 44,752 14,909 Gain on sale of investment securities available-for-sale, net — — 1,880 Lease income 10,084 10,263 10,508 Management fee income 10,090 6,378 6,352 Other noninterest income 17,141 15,493 14,010 Total noninterest income 237,992 160,200 86,000 Noninterest expense Salaries and employee benefits 170,822 124,932 112,525 Travel expense 8,499 5,809 3,451 Professional services expense 11,737 15,135 6,359 Advertising and marketing expense 10,543 5,002 3,510 Occupancy expense 11,088 8,423 8,757 Technology expense 28,434 22,648 15,681 Equipment expense 15,120 14,869 15,394 Other loan origination and maintenance expense 13,168 13,529 10,790 Renewable energy tax credit investment impairment 16,217 3,187 — FDIC insurance 9,756 7,070 7,473 Contributions and donations 6,462 2,331 1,238 Other expense 12,380 8,052 7,498 Total noninterest expense 314,226 230,987 192,676 Income before taxes 210,324 210,788 47,389 Income tax expense (benefit) 34,116 43,793 ( 12,154 ) Net income $ 176,208 $ 166,995 $ 59,543 Basic earnings per share $ 4.02 $ 3.87 $ 1.46 Diluted earnings per share $ 3.92 $ 3.71 $ 1.43 See Notes to Consolidated Financial Statements 78 Table of Contents Live Oak Bancshares, Inc. Consolidated Statements of Comprehensive Income (Dollars in thousands) Years Ended December 31, 2022 2021 2020 Net income $ 176,208 $ 166,995 $ 59,543 Other comprehensive (loss) income before tax: Net unrealized (loss) gain on investment securities available-for-sale during the period ( 124,032 ) ( 25,738 ) 14,752 Reclassification adjustment for gain on sale of securities available- for-sale included in net income — — ( 1,880 ) Other comprehensive (loss) income before tax ( 124,032 ) ( 25,738 ) 12,872 Income tax benefit (expense) 29,768 6,177 ( 3,089 ) Other comprehensive (loss) income, net of tax ( 94,264 ) ( 19,561 ) 9,783 Total comprehensive income $ 81,944 $ 147,434 $ 69,326 See Notes to Consolidated Financial Statements 79 Table of Contents Live Oak Bancshares, Inc. Consolidated Statements of Changes in Shareholders’ Equity (Dollars in thousands, except per share data) Common stock Retained earnings Accumulated other comprehensive income (loss) Total equity Shares Amount Class A Class B Balance at December 31, 2019 37,401,443 2,915,531 $ 340,397 $ 180,265 $ 11,724 $ 532,386 Net income — — — 59,543 — 59,543 Other comprehensive income — — — — 9,783 9,783 Issuance of restricted stock 1,510,066 — — — — — Tax withholding related to vesting of restricted stock and other — — ( 49,229 ) — — ( 49,229 ) Employee stock purchase program 39,253 — 520 — — 520 Non-voting common stock converted to voting common stock in private sale 1,807,774 ( 1,807,774 ) — — — — Cumulative effect of accounting change for Accounting Standards Update 2016-13 — — — 822 — 822 Stock option exercises 496,226 — 3,069 — — 3,069 Stock option based compensation expense — — 1,594 — — 1,594 Restricted stock expense — — 13,146 — — 13,146 Issuance of common stock in connection with acquisition of wholly-owned subsidiary 89,927 — 1,122 — — 1,122 Cash dividends ($ 0.12 per share) — — — ( 4,906 ) — ( 4,906 ) Balance at December 31, 2020 41,344,689 1,107,757 $ 310,619 $ 235,724 $ 21,507 $ 567,850 Net income — — — 166,995 — 166,995 Other comprehensive loss — — — — ( 19,561 ) ( 19,561 ) Issuance of restricted stock 453,127 — — — — — Tax withholding related to vesting of restricted stock and other — — ( 19,151 ) — — ( 19,151 ) Employee stock purchase program 13,674 — 670 — — 670 Non-voting common stock converted to voting common stock in private sale 982,733 ( 982,733 ) — — — — Stock option exercises 709,823 — 4,158 — — 4,158 Stock option based compensation expense — — 1,379 — — 1,379 Restricted stock expense — — 15,572 — — 15,572 Transfer from retained earnings to other assets for pro rata portion of equity method investee stock compensation expense — — — 3,360 — 3,360 Repurchase and retirement of shares securing a note receivable ( 10,000 ) — ( 953 ) — — ( 953 ) Cash dividends ($ 0.12 per share) — — — ( 5,186 ) — ( 5,186 ) Balance at December 31, 2021 43,494,046 125,024 $ 312,294 $ 400,893 $ 1,946 $ 715,133 Net income — — — 176,208 — 176,208 Other comprehensive loss — — — — ( 94,264 ) ( 94,264 ) Issuance of restricted stock 211,235 — — — — — Tax withholding related to vesting of restricted stock and other — — ( 4,972 ) — — ( 4,972 ) Employee stock purchase program 29,383 — 1,067 — — 1,067 Non-voting common stock converted to voting common stock in private sale 125,024 ( 125,024 ) — — — — Stock option exercises 201,556 — 2,118 — — 2,118 Stock option based compensation expense — — 942 — — 942 Restricted stock expense — — 19,405 — — 19,405 Transfer from retained earnings to other assets for pro rata portion of equity method investee stock compensation expense — — — 662 — 662 Cash dividends ($ 0.12 per share) — — — ( 5,266 ) — ( 5,266 ) Balance at December 31, 2022 44,061,244 — $ 330,854 $ 572,497 $ ( 92,318 ) $ 811,033 See Notes to Consolidated Financial Statements 80 Table of Contents Live Oak Bancshares, Inc. Consolidated Statements of Cash Flows (Dollars in thousands) Years Ended December 31, 2022 2021 2020 Cash flows from operating activities Net income $ 176,208 $ 166,995 $ 59,543 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization 20,779 21,366 21,688 Provision for loan and lease credit losses 40,943 15,210 40,658 Amortization of premium on securities, net of accretion 3,420 6,461 3,359 Deferred tax expense (benefit) 27,129 24,808 ( 17,447 ) Originations of loans held for sale ( 1,042,061 ) ( 1,364,168 ) ( 1,183,152 ) Proceeds from sales of loans held for sale 1,067,758 1,092,222 875,393 Net gains on sale of loans held for sale ( 43,244 ) ( 67,280 ) ( 49,473 ) Net (gain) loss on sale of foreclosed assets ( 24 ) ( 779 ) 12 Net (gain) loss on loans accounted for under fair value option ( 1,046 ) ( 4,257 ) 13,083 Net decrease in servicing assets 7,251 344 1,447 Gain on sale of investment securities available-for-sale, net — — ( 1,880 ) Net (gain) loss on sale or disposal of long lived asset — ( 114 ) 6 Net loss (gain) on disposal of premises and equipment 31 ( 48 ) 38 Impairment on premises and equipment, net — 904 1,263 Equity method investments (income) loss ( 144,250 ) 1,716 14,691 Equity security investments (gains) losses, net ( 3,355 ) ( 44,752 ) ( 14,909 ) Renewable energy tax credit investment impairment 16,217 3,187 — Stock option compensation expense 942 1,379 1,594 Restricted stock compensation expense 19,405 15,572 13,146 Stock based compensation excess tax benefit 531 9,340 22,043 Business combination contingent consideration fair value adjustment ( 86 ) 99 163 Lease right-of-use assets and liabilities, net 232 ( 26 ) 42 Changes in assets and liabilities: Other assets ( 15,889 ) 1,754 ( 64,323 ) Other liabilities ( 6,406 ) 350 2,018 Net cash provided (used) by operating activities 124,485 ( 119,717 ) ( 260,997 ) Cash flows from investing activities Purchases of investment securities available-for-sale ( 397,346 ) ( 428,246 ) ( 396,187 ) Proceeds from sales, maturities, calls, and principal paydowns of investment securities available-for-sale 161,227 240,093 197,527 Proceeds from SBA reimbursement/sale of foreclosed assets, net 1,837 6,786 5,282 Business combination, net of cash acquired — — ( 895 ) Maturities of certificates of deposit with other banks 750 1,750 750 Loan and lease originations and principal collections, net ( 1,268,871 ) 8,824 ( 2,414,016 ) Proceeds from sale of long lived asset — 8,988 9,063 Purchases of equity security investments ( 9,283 ) — — Purchases of equity method investments ( 35,955 ) — — Proceeds from sale of equity security investments 625 15,000 — Proceeds from sale of equity method investments 148,423 — — Proceeds from sale of premises and equipment — 84 4 Purchases of premises and equipment, net ( 43,751 ) ( 3,082 ) ( 20,989 ) Net cash used by investing activities ( 1,442,344 ) ( 149,803 ) ( 2,619,461 ) See Notes to Consolidated Financial Statements 81 Table of Contents Live Oak Bancshares, Inc. Consolidated Statements of Cash Flows (Continued) (Dollars in thousands) Years Ended December 31, 2022 2021 2020 Cash flows from financing activities Net increase in deposits $ 1,772,884 $ 1,399,216 $ 1,485,848 Proceeds from borrowings 62,096 602,848 1,828,033 Repayment of borrowings ( 297,182 ) ( 1,826,652 ) ( 285,954 ) Stock option exercises 2,118 4,158 3,069 Employee stock purchase program 1,067 670 520 Withholding cash issued in lieu of restricted stock and other ( 4,972 ) ( 19,151 ) ( 49,229 ) Repurchase and retirement of shares — ( 953 ) — Shareholder dividend distributions ( 5,266 ) ( 5,186 ) ( 4,906 ) Net cash provided by financing activities 1,530,745 154,950 2,977,381 Net increase (decrease) in cash and cash equivalents 212,886 ( 114,570 ) 96,923 Cash and cash equivalents, beginning 203,750 318,320 221,397 Cash and cash equivalents, ending $ 416,636 $ 203,750 $ 318,320 Supplemental disclosure of cash flow information Interest paid $ 117,516 $ 66,844 $ 91,801 Income tax paid, net 24,708 19,722 11,486 Supplemental disclosures of noncash operating, investing, and financing activities Unrealized holding (losses) gains on investment securities available-for-sale, net of taxes $ ( 94,264 ) $ ( 19,561 ) $ 9,783 Transfers from loans and leases to foreclosed real estate and other repossessions or SBA receivable 18,496 13,346 16,091 Net transfers between foreclosed real estate and SBA receivable ( 15 ) ( 1,643 ) 252 Transfer aircraft from premises and equipment, net to held for sale assets — — 17,943 Transfer of loans held for sale to loans and leases held for investment 930,612 638,696 295,981 Transfer of loans and leases held for investment to loans held for sale 468,042 338,873 97,341 Transfer from retained earnings to other assets for pro rata portion of equity method investee stock compensation expense 662 3,360 — Equity method investment commitments 17,022 — 2,940 Equity security investment commitments 394 2,245 — Business combination: Assets acquired (excluding goodwill) — — 2,523 Liabilities assumed — — 2,074 Goodwill recorded — — 1,797 See Notes to Consolidated Financial Statements 82 Table of Contents Live Oak Bancshares, Inc. Notes to Consolidated Financial Statements Note 1. Organization and Summary of Significant Accounting Policies Organization Live Oak Bancshares, Inc. (collectively with its subsidiaries including Live Oak Banking Company, the “Company”) is a bank holding company headquartered in Wilmington, North Carolina incorporated under the laws of North Carolina in December 2008. The Company conducts business operations primarily through its commercial bank subsidiary, Live Oak Banking Company (the “Bank”). The Bank was organized and incorporated under the laws of the State of North Carolina on February 25, 2008 and commenced operations on May 12, 2008. The Bank has satellite sales offices across the United States. The Bank specializes in lending and deposit related services to small businesses nationwide. The Bank identifies and extends lending to credit-worthy borrowers both within 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 partially guaranteed by the Small Business Administration (“SBA”) under the 7(a) Loan Program and the U.S. Department of Agriculture (“USDA”) Rural Energy for America Program (“REAP”), Water and Environmental Program (“WEP”), Business & Industry (“B&I”) and Community Facilities loan programs. The Company’s wholly owned material subsidiaries are the Bank, Government Loan Solutions (“GLS”), Live Oak Grove, LLC (“Grove”), Live Oak Ventures, Inc. (“Live Oak Ventures”), and Canapi Advisors, LLC (“Canapi Advisors”). GLS is a management and technology consulting firm that 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 focused on providing venture capital to new and emerging financial technology companies. 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. 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. See Business Combination discussion below for more information on the acquisition of JAM in 2020. 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. Basis of Presentation Dollar amounts in all tables in the Notes to Consolidated Financial Statements have been presented in thousands, except percentage, time period, stock option, share and per share data. The accounting and reporting policies of the Company and the Bank follow United States generally accepted accounting principles (“GAAP”) and general practices within the financial services industry. The following is a description of the significant accounting and reporting policies the Company follows in preparing and presenting its consolidated financial statements. The Company has evaluated subsequent events for potential recognition and/or disclosure through the date these consolidated financial statements were issued. Consolidation Policy The consolidated financial statements include the financial statements of the Company and its directly and indirectly wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. 83 Table of Contents Live Oak Bancshares, Inc. Notes to Consolidated Financial Statements The Company evaluates its relationships with other entities to identify whether they are a voting interest entity or variable interest entity (“VIE”). Voting interest entities are entities that generally (1) have sufficient equity to finance their activities and (2) provide the equity investors with power to make significant decisions relating to the entity’s operations. A voting interest entity is consolidated if the Company holds majority voting rights. The Company is considered to hold a controlling financial interest in a VIE when it is the primary beneficiary. A primary beneficiary has both (1) the power to direct the activities that most significantly impact the VIE’s economic performance, and (2) the obligation to absorb losses or receive benefits of a VIE that could potentially be significant to a VIE. The parties that make investment and investment decisions, or parties that can unilaterally remove those decision makers are deemed to have the power to direct the activities of a VIE. The Company considers all of its economic interests in the VIE when determining whether it has the obligation to absorb losses or the right to receive benefits from the VIE. For details on the Company’s VIE investments refer to Note 2. Securities, “Variable Interest Entities.” Business Combinations Business combinations are accounted for by applying the acquisition method in accordance with Accounting Standards Codification (ASC) 805, Business Combinations. Under the acquisition method, identifiable assets acquired and liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date are measured at their fair values as of that date, and are recognized separately from any resulting goodwill. Results of operations of the acquired entities are included in the consolidated statements of income and comprehensive income from the date of acquisition. Any subsequent measurement-period adjustments are recorded within 12 months of the acquisition date. On April 1, 2020, the Company acquired 100 % of the equity interests of JAM, a registered investment advisor based in Rocky Mount, North Carolina. Goodwill, intangible assets and contingent consideration of $ 1.8 million, $ 2.3 million and $ 2.1 million, respectively, were recorded by the Company as a result of this transaction. Intangible assets are almost entirely comprised of customer relationships that are being amortized using the straight-line method over 15 years. As a result of this acquisition, the Bank's wholly owned subsidiary Live Oak Private Wealth, broadened service offerings to existing high-net-worth individuals and families, attracted new clients from an expanded footprint and benefited from economies of scale. The acquisition did not materially impact the Company's financial position, results of operations or cash flows. Given the impact of the above acquisition was immaterial to the Company and its results of operations, additional disclosures have not been included . 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 two reportable operating segments: Banking and Fintech, as discussed more fully in Note 16. Segments. Use of Estimates In preparing financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for credit losses on loans and leases, valuations of loans at fair value and servicing assets. Cash and Cash Equivalents For the purpose of presentation in the consolidated statements of cash flows, cash and cash equivalents are defined as those amounts included in the balance sheet caption “cash and due from banks” and “federal funds sold.” Cash and cash equivalents have an initial maturity of three months or less. To comply with banking regulations, the Company is required to maintain certain average cash reserve balances. The daily average cash reserve requirement was suspended for the years ended December 31, 2022 and 2021. 84 Table of Contents Live Oak Bancshares, Inc. Notes to Consolidated Financial Statements Certificates of Deposit with other Banks Certificates of deposit with other banks have maturities ranging from September 2023 through December 2023 and bear interest at rates ranging from 0.20 % to 3.55 %. All investments in certificates of deposit are with FDIC insured financial institutions and none exceed the maximum insurable amount of $ 250 thousand. Investments Debt Securities Debt securities that management has the positive intent and ability to hold to maturity are classified as held-to-maturity and recorded at amortized cost. Securities that may be sold prior to maturity are classified as available-for-sale and recorded at fair value. Unrealized gains and losses for available-for-sale investment securities, other than certain credit-related impairment losses, are excluded from earnings and reported in other comprehensive income. The Company’s entire portfolio of debt securities is classified as available-for-sale for the periods presented. Purchase premiums and discounts on debt securities are recognized in interest income using the interest method over the terms of the securities. Gains and losses on the sales of these securities are typically recorded on the trade date and are determined using the specific identification method. When debt securities are in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. Debt securities that do not meet the aforementioned criteria are evaluated to determine whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected from the security is less than the amortized cost basis, a credit loss exists and an allowance for credit losses (“ACL”) is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an ACL is recognized in other comprehensive income. Changes in the ACL are recorded as provision for, or reversal of, credit loss expense. Losses are charged against the allowance when management believes the uncollectibility of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Management has made the accounting policy election to exclude accrued interest receivable on available-for-sale debt securities from the estimate of credit losses. Securities are charged-off against the allowance or, in the absence of any allowance, written down through income when deemed uncollectible by management or when either of the aforementioned criteria regarding intent or requirement to sell is met. Equity Investments Equity investments are generally non-marketable investments and are included in the other assets line in the consolidated balance sheets. Earnings impacts are reflected in the equity method investments income (loss) and equity security investments gains (losses), net line items on the consolidated statements of income . The Company generally accounts for equity investments either under the equity method or equity security accounting. Investments through which there is significant influence but not control over the investee are accounted for under the equity method. The determination of whether the Company has significant influence over an investee requires judgement based on the facts and circumstances of each investment including level of ownership, power to control and legal structure. Significant influence is generally presumed to exist in privately held companies where the Company owns at least 20 %, or 5 % for limited partnerships or limited liability companies in certain circumstances, or circumstances where there is ability to exercise significant influence over the investee’s operating and financial policies through board involvement or other influence. Under the equity method, the Company recognizes its proportionate share of the results of operations of the investee based on most current information available. In instances where cash distributions vary at different points and/or are not directly linked to the Company’s ownership percentage, the investee’s net income or loss is allocated using the hypothetical liquidation at book value (“HLBV”) method. 85 Table of Contents Live Oak Bancshares, Inc. Notes to Consolidated Financial Statements Investments through which the Company is not able to exercise significant influence over the investee are accounted for as equity securities whereby investments are measured at fair value with changes in fair value recognized in net income, unless those investments have no readily determinable fair value. Investments without a readily determinable fair value are measured at cost minus impairment, if any, plus or minus changes in value resulting from observable price changes arising from orderly transactions . Management considers a range of factors when adjusting the fair value of these investments, including, but not limited to, the term and nature of the investment, market conditions, values for comparable securities, current and projected operating performance, exit strategies, financing transactions subsequent to the acquisition of the investment and a discount for certain investments that have lock-up restrictions or other features that indicate a discount to fair value is warranted. For equity securities not accounted for at fair value, any impairment is recognized with the full charge recorded in earnings. To determine whether such equity security is impaired, the Company considers various indicators of impairment, including (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Federal Home Loan Bank Stock Membership in the Federal Home Loan Bank of Atlanta (“FHLB”) requires ownership of FHLB stock. FHLB stock is restricted because it may only be sold to the FHLB and all sales must be at par. FHLB stock is carried at cost minus impairment, if any, and is recorded within other assets in the consolidated balance sheets. FHLB stock was $ 4.1 million and $ 3.9 million at December 31, 2022 and 2021, respectively. Loans and Leases Fair Value Option Prior to 2021, management evaluated retained participating interests in government guaranteed loans for the fair value option election. Those loans for which the fair value option were elected are measured at fair value and classified as either held for sale or held for investment, as outlined below. Not electing fair value generally results in a larger discount being recorded on the date of the sale. This discount will subsequently be 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 accounting standards, any loans for which fair value was previously elected continue to be measured as such. 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. The changes in fair value of loans are reported in noninterest income. Fair value of loans includes adjustments for historical credit losses, market liquidity, and economic conditions. The credit loss adjustment is estimated using a discounted cash flow (“DCF”) methodology for each loan which incorporates measurements of (i) probability of default (“PD”), which is the likelihood a loan or lease will stop performing, (ii) loss given default (“LGD”), which is the expected loss rate for loans or leases in default, (iii) prepayments, (iv) the estimated outstanding exposure at default (“EAD”), and (v) the effective interest rate (“EIR”). PD rates are calculated using the number of defaults divided by the number of loans available to default for 1-year observation periods over the lifetime of data available for a certain pool. LGD rates are calculated by dividing the lifetime net charge-offs for each pool by the pool’s average outstanding balance. PD and LGD rates are adjusted for forecasted national unemployment rates during a reasonable and supportable forecast period. Management has determined that four quarters represents a reasonable and supportable forecast period and adjusted loss rates revert back to a historical loss rate over four quarters on a straight-line basis. Expected losses are calculated as the product of PD, LGD, and EAD. Expected losses are discounted using the loan or lease EIR, adjusted for prepayments. Market liquidity and economic condition adjustments are estimated using the sale prices of similar loans based on rate, term, and asset size. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. 86 Table of Contents Live Oak Bancshares, Inc. Notes to Consolidated Financial Statements Held for Sale Management designates loans as held for sale based on its intent to sell loans, or portions of loans, in established secondary markets or to participant banks and credit unions. Salability requirements of government guaranteed portions include, but are not limited to, full disbursement of the loan commitment amount. Loans held for sale are carried at either fair value, if the fair value option is elected, or the lower of cost or estimated fair value determined on a loan-by-loan basis. Net unrealized losses, if any, on loans without a fair value election, are recognized through a valuation allowance and recorded as a charge to noninterest income. The cost basis of loans held for sale includes unamortized loan origination fees and costs. The pro-rata portion, based on the percent of the total loan sold, of the remaining deferred fees and costs are recognized as an adjustment to the gain on sale. Transfers of loans, or portions of loans that meet the definition of a participating interest are accounted for as sales on the transaction settlement date when control has been surrendered. Control is deemed surrendered when the loans have been (1) legally isolated from the Company, (2) the transferee obtains the right to pledge or transfer the loans free of conditions that constrain it from using that right, and (3) the Company does not maintain effective control over the loans through a repurchase agreement or other means. If the transfer is accounted for as a sale, the loans are derecognized from the Company’s consolidated balance sheet and a gain or loss is recognized in net gains on sales of loans line item on the consolidated statements of income. The gain on sale recognized in income is the sum of the premium on the guaranteed loan and the fair value of the servicing assets recognized, less the discount recorded on the unguaranteed portion of the loan retained, and any fair value fluctuations in associated exchange-traded interest rate futures contracts. If the transfer does not satisfy the aforementioned control criteria, the transaction is recorded as a secured borrowing with the transferred loans remaining on the Company’s consolidated balance sheet and proceeds recognized as a liability. In accordance with SBA and USDA regulation, the Bank is required to retain 10 % and 7.5 % of the principal balance of any SBA 7(a) or USDA loan, respectively, comprised of unguaranteed dollars. With written consent from the SBA, the Bank may sell down to a 5 % exposure comprised of unguaranteed dollars. The Company occasionally transfers loans between the held for sale and held for investment classifications based on its intent and ability to hold or sell loans. Management’s intent to sell may be impacted by secondary market conditions, loan credit quality, or other factors. The following summarizes the activity pertaining to loans held for sale for the years ended December 31, 2022 and 2021: 2022 2021 Balance at beginning of year $ 1,116,519 $ 1,175,470 Originations 1,042,061 1,364,168 Proceeds from sale ( 1,067,758 ) ( 1,092,222 ) Gain on sale of loans 43,244 67,280 Principal collections, net of deferred fees and costs ( 116,886 ) ( 98,354 ) Non-cash transfers, net ( 462,570 ) ( 299,823 ) Balance at end of period $ 554,610 $ 1,116,519 Held for Investment Loans and leases receivable that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are classified as held for investment and generally reported at their outstanding principal amount, net of unearned income unless the fair value option has been elected. For such loans not carried at fair value, loan origination fees and direct origination costs are deferred and recognized as an adjustment of the loan yield using the interest method. Discounts and premiums on any purchased loans are amortized to income using the interest method over the remaining period to contractual maturity, adjusted for anticipated prepayments. Interest income on loans and leases is recognized as earned on a daily accrual basis at the applicable interest rate. 87 Table of Contents Live Oak Bancshares, Inc. Notes to Consolidated Financial Statements Loans and leases designated as held for investment include those identified as more beneficial to hold for the long term as well as the required retention amount defined by the SBA and USDA. Loans and leases held for investment also consist of certain guaranteed and unguaranteed credits including those designated as troubled debt restructurings, nonaccrual, non-marketable, and risk grade 5 or worse as defined by internal risk rating metrics. Nonaccrual and Past Due Loans Past due status of loans and leases is determined based on contractual terms. Loans and leases are placed in nonaccrual status and the accrual of interest is discontinued if they become 90 days delinquent or there is evidence that the borrower’s ability to make the required payments is not probable. When interest accrual is discontinued, all unpaid accrued interest is reversed against current interest income. Loans and leases, or portions thereof, are charged off when deemed uncollectible. Troubled Debt Restructurings A loan or lease is accounted for as a troubled debt restructuring (“TDR”) if the Company, for reasons related to the borrower’s financial difficulties, restructures a loan or lease, and grants a concession to the borrower that it would not otherwise grant. A TDR typically involves a more than short-term modification of terms such as a reduction of the interest rate below the current market rate for a loan or lease with similar risk characteristics or the waiving of certain financial covenants without corresponding offsetting compensation or additional support. Al lowance for Credit Losses The Company adopted ASC 326, Measurement of Credit Losses on Financial Instruments (“ASC 326”) on January 1, 2020. Upon adoption, the Company recorded a net increase to retained earnings of $ 822 thousand, comprised of a $ 1.3 million decrease in the allowance for credit losses combined with a $ 499 thousand increase in reserve on unfunded commitments. The ACL is a valuation account that is deducted from the amortized cost basis of loans and leases to present a net amount expected to be collected. The ACL is not applicable to loans held for sale and loans accounted for under the fair value option. Loans and leases are charged-off against the ACL when management believes the uncollectibility of a loan or lease balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. The Company’s ACL on loans and leases is estimated using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. As a result, the impact of loss mitigation strategies, such as loan modifications and restructurings, are captured in the estimates of loss given default and probability of default. The Company’s historical credit loss experience provides the basis for the estimation of expected credit losses. The ACL is measured on a pooled basis using a quantitative modeling process when similar risk characteristics are present in the portfolio. The Company has identified pools based on industry, which aggregates into divisions, and whether the receivable is secured by real estate or another form of collateral. Additional information related to the portfolio segments can be found in Note 3. Loans and Leases Held for Investment and Credit Quality. Expected credit losses for pooled loans and leases are estimated using a DCF methodology for each loan which incorporates measurements of PD, LGD, prepayments, the estimated outstanding EAD, and the EIR. PD rates are calculated using the number of defaults divided by the number of loans available to default for 1-year observation periods over the lifetime of data available for a certain pool. LGD rates are calculated by dividing the lifetime net charge-offs for each pool by the pool’s average outstanding balance. PD and LGD rates are adjusted for forecasted national unemployment rates during a reasonable and supportable forecast period. Management has determined that four quarters represents a reasonable and supportable forecast period and adjusted loss rates revert back to a historical loss rate over four quarters on a straight-line basis. Expected losses are calculated as the product of PD, LGD, and EAD. Expected losses are discounted using the loan or lease EIR, adjusted for prepayments. 88 Table of Contents Live Oak Bancshares, Inc. Notes to Consolidated Financial Statements Management adjusts historical loss information for differences in current risk characteristics that are not considered within the quantitative modeling processes but are relevant in assessing the expected credit losses within the loan and lease pools. These qualitative factor adjustments generally increase management’s estimate of expected credit losses based upon the estimated level of risk. The various risk factors considered in qualitative adjustments include risk grading, delinquency levels, pool age, portfolio mix and growth rates, and the status of servicing efforts which may be impacted by natural disasters or health pandemics. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. Loans or leases that do not share risk characteristics are evaluated on an individual basis and are excluded from the pooled evaluation. This generally occurs when, based on current information and events, it is probable that the Company will be unable to collect all interest and principal payments due according to the originally contracted, or reasonably modified, terms of the loan or lease agreement. The Company has determined that loans and leases meeting the criteria defined below must be reviewed quarterly to determine if they should be evaluated for expected credit losses on an individual basis. • All commercial loans and leases classified substandard or worse. • Any loan or lease that is on nonaccrual, or any loan or lease that is delinquent greater than 90 days past due and still accruing interest. • Any loan or lease that was restructured with an interest rate concession and now meets the definition of a TDR. The Company estimates reserves on individually evaluated loans and leases using a DCF methodology or through the evaluation of collateral values. During the quarter ended September 30, 2021, management updated the Company’s policy for estimating expected credit losses on certain relationships that would otherwise meet the criteria for individual evaluation. Relationships with unguaranteed exposure of less than $ 250 thousand are now collectively evaluated using an average of loss rates applied to individually evaluated relationships with unguaranteed exposure between $ 250 thousand and $ 1.0 million. The impact of this change on the ACL was not considered material. Expected credit losses are estimated over the contractual term of the loan or lease, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless management has a reasonable expectation at the reporting date that a TDR will be executed with an individual borrower or the extension or renewal options are included in the contract at the reporting date and are not unconditionally cancellable by the Company. When the ACL, for pooled or individually evaluated loans and leases, is estimated using the DCF method, the effective interest rate used to discount expected cash flows is adjusted for expected prepayments. When management determines that foreclosure is probable or when the borrower is experiencing financial difficulty at the reporting date and repayment is expected to be provided substantially through the operation or sale of the collateral, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. Allowance for Off-Balance Sheet Credit Exposures Expected credit losses on off-balance sheet credit exposures is estimated over the contractual period in which the Company is exposed to such losses, unless the obligation to extend credit is unconditionally cancellable. The estimate of off-balance sheet credit exposures includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated losses. The estimate is influenced by historical loss experience, adjusted for current risk characteristics, and economic forecasts. The balance of the allowance for off-balance sheet credit exposures was $ 1.5 million and $ 739 thousand at December 31, 2022 and 2021, respectively, and is recorded in other expense in the consolidated statements of income and other liabilities in the consolidated balance sheets. 89 Table of Contents Live Oak Bancshares, Inc. Notes to Consolidated Financial Statements 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 leased out under operating leases while leases of equipment outside of the renewable energy vertical are generally direct financing leases. Accordingly, leased assets under operating leases are included in premises and equipment while leased assets under direct financing leases are included in loans and leases held for investment in the consolidated balance sheets. Direct Financing Leases Interest income on direct financing leases is recognized when earned. Unearned interest is recognized over the lease term on a basis which results in a constant rate of return on the unrecovered lease investment. The term of each lease is generally 3 - 7 years which is consistent with the useful life of the equipment with no residual value. The Company records expected credit losses on direct finance leases within the ACL. Operating Leases The term of each operating lease is generally 10 to 15 years. The Company retains ownership of the equipment and associated tax benefits such as investment tax credits and accelerated depreciation. At the end of the lease term, the lessee has the option to renew the lease for two additional terms or purchase the equipment at 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 direct operating expenses at the time the costs are incurred. The Company evaluates the carrying value of rental equipment for impairment whenever events or circumstances have occurred that would indicate the carrying amount may not be fully recoverable. 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. During the year ended December 31, 2021, the Company recognized impairment expense of $ 904 thousand related to rental equipment. No impairment expense was recorded for the years ended December 31, 2022 and 2020. 90 Table of Contents Live Oak Bancshares, Inc. Notes to Consolidated Financial Statements Premises and Equipment All premises and equipment, excluding land, are carried at cost, less accumulated depreciation. Land is carried at cost. Additions and major replacements or improvements which extend useful lives of property or equipment are capitalized. Maintenance, repairs, and minor improvements are expensed as incurred. Upon retirement or other disposition of the assets, the cost and related depreciation are derecognized and any resulting gain or loss is reflected in income. Leasehold improvements are amortized over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter. Depreciation is computed by the straight-line method over the following generally estimated useful lives: Years Buildings 39 Transportation 5 - 10 Land improvements 10 - 15 Furniture and equipment 5 - 10 Hardware and software 3 - 5 Solar panels 20 - 25 Foreclosed Assets Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at fair value less anticipated cost to sell at the date of foreclosure, establishing a new cost basis. Any write down at the time of transfer to foreclosed assets is charged to the allowance for credit losses on loans and leases. After foreclosure, valuations are periodically performed by management, and the real estate is carried at the lower of the carrying amount or fair value, less cost to sell. Subsequent write downs are charged to other expense. Costs relating to improvement of the property are capitalized while holding costs of the property are charged to other loan origination and maintenance expense in the period incurred. Servicing Assets All sales of loans are executed on a servicing retained basis. The standard SBA loan sale agreement is structured to provide the Company with a “servicing spread” paid from a portion of the interest cash flow of the loan. SBA regulations require the Bank to retain a portion of the cash flow from the interest payments received for a sold loan. The SBA retention requirement is at least 100 basis points in servicing spread while the Company's standard USDA loan sale agreement specifies a servicing spread of 40 basis points. The portion of the servicing spread that exceeds adequate compensation for the servicing function is recognized as a servicing asset, while any that is less is considered a servicing liability. Industry practice recognizes adequate compensation for servicing SBA and USDA loans as 40 basis points. The fair value of the servicing asset is measured at the discounted present value of the excess servicing spread over the expected life of the related loan using appropriate discount rates and assumptions based on industry statistics for prepayment speeds. Servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets and are carried at fair value. Generally, purchased servicing rights are capitalized at the cost to acquire the rights. For sales of loans, a portion of the cost of originating the loan is allocated to the servicing right based on fair value. Fair value is based on market prices for comparable servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. 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. Capitalized servicing rights are carried at fair value as of the reporting date. Changes to fair value are reported in loan servicing asset revaluation in the consolidated statements of income. Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned. 91 Table of Contents Live Oak Bancshares, Inc. Notes to Consolidated Financial Statements Derivative Financial Instruments Interest Rate Futures Contracts The Company may use exchange-traded interest rate futures contracts to manage interest rate risk that may impact expected gains arising from future secondary market loan sales. All derivative contracts were closed out in December 2020 and there was no further activity in subsequent periods. The Company had not designated any derivative as a hedging instrument under applicable accounting guidance. Changes in fair value of the derivative contracts is recorded as a component of net gains on sales of loans on the consolidated statements of income. The Company recognized a loss of $ 2.6 million on the derivative contracts for the year ended December 31, 2020, respectively. Equity Warrant Assets In connection with negotiated credit facilities and certain other services, the Company may obtain equity warrant assets giving the Company the right to acquire stock in private companies in certain verticals. These assets are held for prospective investment gains and are not used to hedge any economic risks. Further, the Company does not use other derivative instruments to hedge economic risks stemming from equity warrant assets. Equity warrant assets in certain private client companies are recorded as derivatives when they contain net settlement terms and other qualifying criteria. Equity warrant assets entitle the Company to purchase a specific number of shares of stock at a specific price within a specific time period, generally 10 years. Certain equity warrant assets contain contingent provisions, which adjust the underlying number of shares or purchase price upon the occurrence of certain future events to prevent dilution of the Company’s implied ownership represented by the warrants. Certain warrant agreements contain net share settlement provisions, which permit the receipt of, upon exercise, a share count equal to the intrinsic value of the warrant divided by the share price (otherwise known as a “cashless” exercise). These equity warrant assets are recorded at fair value and are classified as derivative assets, a component of other assets, on the consolidated balance sheets at the time they are obtained. The grant date fair values of equity warrant assets classified as derivatives received in connection with the issuance of a credit facility are deemed to be loan fees and recognized as an adjustment of loan yield through loan interest income. Similar to other loan fees, the yield adjustment related to grant date fair value of warrants is recognized over the life of that credit facility. Any changes in fair value from the grant date fair value of equity warrant assets classified as derivatives are recognized as increases or decreases to other assets on the consolidated balance sheets and as net gains or losses on derivative instruments, in other noninterest income, a component of consolidated net income. When a portfolio company is acquired, the Company may exercise these equity warrant assets for shares or cash. The fair value of equity warrant assets classified as derivatives is reviewed and updated quarterly using a Black-Scholes option pricing model. For those equity warrant assets that do not contain net share settlement provisions, the Company considers these to be equity investments without readily determinable market values and records the asset at cost, subject to periodic impairment testing. Goodwill and Intangible Assets Goodwill is the purchase premium after adjusting for the fair value of net assets acquired. Goodwill is not amortized but is reviewed for potential impairment on an annual basis, or when events or circumstances indicate a potential impairment, at the related reporting unit level. The goodwill impairment test involves comparing the fair value of the reporting unit with its carrying value, including goodwill. If the fair value of the reporting unit exceeds its carrying value, goodwill of the reporting unit is considered not impaired; however, if the carrying value of the reporting unit exceeds its fair value, an impairment charge must be recorded. An impairment loss recognized cannot exceed the amount of goodwill assigned to a reporting unit. An impairment loss establishes a new basis in the goodwill and subsequent reversals of goodwill impairment losses are not permitted under applicable accounting guidance. 92 Table of Contents Live Oak Bancshares, Inc. Notes to Consolidated Financial Statements For intangible assets subject to amortization, the recoverability test is performed when a triggering event occurs and an impairment loss is recognized if the carrying value of the intangible asset is not recoverable and exceeds fair value. The carrying value of the intangible asset is considered not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use of the asset. Intangible assets deemed to have indefinite useful lives are not subject to amortization. An impairment loss is recognized if the carrying value of the intangible asset with an indefinite life exceeds its fair value. The carrying amounts and accumulated amortization of all intangible assets as of December 31, 2022 was $ 1.9 million and $ 421 thousand, respectively, while at December 31, 2021 the balances were $ 2.0 million and $ 268 thousand, respectively, all as a result of the JAM acquisition discussed earlier under Business Combinations. The Company had no impairment charges related to business combinations in 2022, 2021 or 2020. Long-Lived Assets Impairment Evaluation The Company evaluates the carrying value of long-lived 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. If the carrying amount is not fully recoverable, an impairment loss is recognized to reduce the carrying amount to fair value. Long-Lived Assets Reclassified to Held for Sale During 2020, the Company determined that retention of two of its aircraft was ineffective in serving the needs of an expanding nationwide customer base. As a result of the determination to sell, the Company began marketing the aircraft for sale and accordingly reclassified them from premises and equipment, net to other assets. The total amount reclassified out of premises and equipment was $ 19.2 million and after assessment of fair value, $ 1.3 million of that balance was recognized as impairment expense included in the other expense line item in the 2020 consolidated statement of income. Prior to December 31, 2020, one aircraft was sold for a minimal incremental loss with one remaining in other assets with a carrying amount of $ 8.9 million at December 31, 2020. In 2021, the remaining held for sale aircraft was sold with a gain of $ 114 thousand. Common Stock On June 11, 2014, the Company amended its Articles of Incorporation to create two classes of common stock. These two classes are identified as Class A and Class B or Voting Common Stock and Non-Voting Common Stock, respectively, in the accompanying consolidated balance sheets and statements of changes in shareholders’ equity. Voting and Non-Voting Common Stock holders have identical rights and privileges, with the exception that Non-Voting Common shares have no voting power except in limited circumstances. Stock splits or dividends of Voting and Non-Voting Common Shares shall be in like stock (voting for voting and non-voting for non-voting). Any number of Non-Voting Common Stock may be converted to an equal number of Voting Common Stock at the option of the holder; provided that holder is not the initial transferee or an affiliate of initial transferee and other conditions are met. During 2022, 125,024 shares of Class B common stock (non-voting) were converted to Class A common stock (voting) in connection with private sales. During 2021, 982,733 shares of Class B common stock (non-voting) were converted to Class A common stock (voting) in connection with private sales. This conversion decreased the value of Class B common stock (non-voting) and increased the value of Class A common stock (voting) by $ 1.3 million and $ 10.4 million during 2022 and 2021, respectively. Advertising Expense Marketing costs are recognized in the month the event or advertisement takes place. These costs are included in advertising and marketing expense as presented in the consolidated statements of income. 93 Table of Contents Live Oak Bancshares, Inc. Notes to Consolidated Financial Statements Income Taxes Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities (excluding deferred tax assets and liabilities related to business combinations or components of other comprehensive income). Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. The effect of a change in tax rates on deferred assets and liabilities is recognized in income taxes during the period that includes the enactment date. A valuation allowance, if needed, reduces deferred tax assets to the expected amount more likely than not to be realized. Realization of deferred tax assets is dependent upon the level of historical income, prudent and feasible tax planning strategies, reversals of deferred tax liabilities and estimates of future taxable income. The Company uses the flow-through method of accounting for its solar investment tax credit investments, none of which qualify for proportional amortization. Under the flow-through method, investment tax credits are recognized as a reduction to income tax expense immediately in the period that the credit is generated, to the extent permitted by tax law. In accounting for any temporary difference that arise, the Company has elected the income statement method whereby deferred taxes are adjusted through income tax expense. The Company evaluates uncertain tax positions at the end of each reporting period. The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefit recognized in the financial statements from any such position is measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Interest and/or penalties related to income taxes are reported as a component of income tax expense. Comprehensive Income Annual comprehensive income reflects the change in the Company’s equity during the year arising from transactions and events other than investment by and distributions to shareholders. The only components of other comprehensive income consist of realized and unrealized gains and losses related to investment securities available-for-sale. Stock Compensation Plans The Company recognizes compensation cost based on the fair value of the equity or liability instruments issued. The expense measures the cost of employee services received in exchange for stock options and restricted stock based on the grant-date fair value of the award and recognizes the cost over the vesting period for all awards within an individual grant, including ones with graded vesting features. The fair value of the restricted stock awards or units with a market price condition and implied service period are calculated using the Monte Carlo Simulation method. The impact of forfeitures on stock-based compensation expense is recognized as forfeitures occur. See Note 12. Benefit Plans for further discussion and detail. Fair Value of Financial Instruments GAAP defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company determines the fair values of its financial instruments based on the fair value hierarchy established per GAAP which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. See Note 10. Fair Value of Financial Instruments for further discussion and detail. 94 Table of Contents Live Oak Bancshares, Inc. Notes to Consolidated Financial Statements Earnings Per Share Basic and diluted earnings per share are computed based on the weighted average number of shares outstanding during each period. Diluted earnings per share reflects the potential dilution that could occur, upon the exercise of stock options or upon the vesting of restricted stock grants, any of which would result in the issuance of common stock that would then share in the net income of the Company. December 31, 2022 2021 2020 Basic earnings per share: Net income $ 176,208 $ 166,995 $ 59,543 Weighted-average basic shares outstanding 43,862,291 43,169,935 40,677,496 Basic earnings per share $ 4.02 $ 3.87 $ 1.46 Diluted earnings per share: Net income, for diluted earnings per share $ 176,208 $ 166,995 $ 59,543 Total weighted-average basic shares outstanding 43,862,291 43,169,935 40,677,496 Add effect of dilutive stock options and restricted stock grants 1,044,019 1,901,369 1,093,754 Total weighted-average diluted shares outstanding 44,906,310 45,071,304 41,771,250 Diluted earnings per share $ 3.92 $ 3.71 $ 1.43 Anti-dilutive stock options and restricted shares 1,413,738 37,401 2,179 Revenue Recognition The Company offers various services to customers that generate revenue. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. Incremental costs of obtaining a contract are expensed when incurred when the amortization period is one year or less. As of December 31, 2022, 2021 and 2020, remaining performance obligations consisted primarily of serviced based revenues for contracts with an original expected length of two years or less. Service based revenues are included in other noninterest income and consist of other recurring revenue streams from services provided by the Bank for advisory and successful transactions, GLS to its clients for settlement, accounting and valuation for government guaranteed loan sales and holdings, fund investment advisory services performed by Canapi Advisors, and investment management and financial planning services provided by Live Oak Private Wealth. Service Based Revenues In addition to lending and related activities, the Bank’s specialized industry teams also provide advisory services to certain Government Contracting clients. Performance obligations are satisfied over the contract period and revenue is recognized monthly. In 2021, the Company stopped offering advisory services to new Government Contracting clients. GLS provides services when requested by clients. Each requested service represents a specific performance obligation with a transaction price outlined by GLS' fee schedule. Revenue is recognized as the requested services are completed and payment is generally received the following month. Canapi Advisors provides investment advisory services to four financial technology venture funds where its performance obligations are satisfied over time. Fund management fees are based upon the contractual terms of the limited partnership agreements and are recognized as earned over the specified contract period, which is generally equal to the life of the individual fund. Fund management fees are calculated as a percentage of committed capital, net of any permitted offsets, and are collected in advance and recognized quarterly. 95 Table of Contents Live Oak Bancshares, Inc. Notes to Consolidated Financial Statements Live Oak Private Wealth’s investment management and financial planning performance obligations are generally satisfied over time. Fees are recognized quarterly based on the quarter-end market value of the managed assets as valued by the custodian of the customer’s assets and the applicable fee rate. Payment is generally received within a quarter of service delivery. The Company does not earn performance-based incentives from investment management and financial planning services. Contracts with customers may be terminated at any time by either party. Reclassifications Certain reclassifications have been made to the prior period’s consolidated financial statements to place them on a comparable basis with the current year. Net income and shareholders’ equity previously reported were not affected by these reclassifications . Loan and Lease Classes During the fourth quarter of 2022, management made changes to loan and lease classes to align the presentation in the credit quality disclosures in Note 3. Loans and Leases Held for Investment and Credit Quality with the Company’s method for monitoring and assessing credit risk. As a result, loans and leases to customers that operate renewable energy projects, lodging facilities, and municipalities were reclassified from the Specialty Lending class into the Energy & Infrastructure class. Recent Accounting Pronouncements The following is a summary of recent authoritative pronouncements that could impact the accounting, reporting, and/or disclosure of financial information by the Company. In March 2020, the FASB issued Accounting Standards Update (“ASU”) No. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”). ASU 2020-04 provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. With the amendments, the ASU can be adopted by the Company as of March 12, 2020 through December 31, 2024. In December 2022, ASU 2022-06 “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848” was issued deferring the sunset date of Topic 848. The Company does not believe these standards will have a material impact on 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 complete all transitions by the second quarter of 2023 or at the next repricing date if later in 2023. In March 2022, the FASB issued ASU No. 2022-02 “Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures” (“ASU 2022-02”). ASU 2022-02 eliminates the accounting guidance for TDRs by creditors in ASC 310-40, Receivables – Troubled Debt Restructurings by Creditors , while enhancing disclosure requirements for certain loan refinancings and restructurings when a borrower is experiencing financial difficulty. Additionally, for public business entities, ASU 2022-02 requires that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of ASC 326-20, Financial Instruments – Credit Losses – Measured at Amortized Cost . The amendments in this standard will be effective for the Company on January 1, 2023. The Company does not believe this standard will have a material impact on its consolidated financial statements. In June 2022, the FASB issued ASU No. 2022-03 “Fair Value Measurement (Topic 820) Fair Value Measurement of Equity Securities Subject to Contractual Restrictions” (“ASU 2022-03”). ASU 2022-03 indicates a contractual sale restriction on equity securities should not be considered in measuring fair value, however, disclosure should be made about such restrictions. The amendments in this standard will be effective for the Company on January 1, 2024. The Company does not believe this standard will have a material impact on its consolidated financial statements. 96 Table of Contents Live Oak Bancshares, Inc. Notes to Consolidated Financial Statements Note 2. Securities Available-for-Sale The carrying amount of securities and their approximate fair values are reflected in the following table: December 31, 2022 Amortized Cost Unrealized Gains Unrealized Losses Fair Value US government agencies $ 16,080 $ — $ 412 $ 15,668 Mortgage-backed securities 1,116,387 270 121,083 995,574 Municipal bonds 3,223 — 246 2,977 Other debt securities 500 — — 500 Total $ 1,136,190 $ 270 $ 121,741 $ 1,014,719 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 year ended December 31, 2022, two securities totaling $ 7.5 million matured and twenty securities totaling $ 36.5 million were paid out. During the year ended December 31, 2021, one security totaling $ 5.0 million matured and twelve securities totaling $ 33.1 million were paid out. During the year ended December 31, 2020, four securities totaling $ 12.0 million matured and twenty securities totaling $ 29.6 million were sold resulting in a net gain of $ 1.9 million, which consisted of $ 2.0 million gross realized gains and $ 136 thousand gross realized losses. The following tables show debt securities available-for-sale in an unrealized loss position for which an allowance for credit losses 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 December 31, 2022 Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses US government agencies $ 15,668 $ 412 $ — $ — $ 15,668 $ 412 Mortgage-backed securities 513,639 29,060 456,972 92,023 970,611 121,083 Municipal bonds 2,884 241 93 5 2,977 246 Total $ 532,191 $ 29,713 $ 457,065 $ 92,028 $ 989,256 $ 121,741 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 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. 97 Table of Contents Live Oak Bancshares, Inc. Notes to Consolidated Financial Statements At December 31, 2022, there were 185 mortgage-backed securities and one municipal bond in unrealized loss positions for greater than 12 months. There were 236 mortgage-backed securities, five US government agencies, and one municipal bond in unrealized loss positions for less than 12 months. Unrealized losses at December 31, 2021 consisted of 31 mortgage-backed securities and one municipal bond for greater than 12 months and 142 mortgage-backed securities in unrealized loss positions for less than 12 months. These unrealized losses are primarily the result of non-credit-related volatility in the market and 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 these securities for a sufficient period of time to recover unrealized losses, none of the losses have been recognized in the Company’s consolidated statement of income. All mortgage-backed securities in the Company’s portfolio at December 31, 2022 and 2021 were backed by U.S. government sponsored enterprises (“GSEs”). The following is a summary of investment securities by maturity: December 31, 2022 Available-for-sale Amortized Cost Fair Value US government agencies One to five years $ 12,948 $ 12,578 Five to ten years 3,132 3,090 Total 16,080 15,668 Mortgage-backed securities One to five years 113,726 108,045 Five to ten years 254,975 225,028 After 10 years 747,686 662,501 Total 1,116,387 995,574 Municipal bonds After 10 years 3,223 2,977 Total 3,223 2,977 Other debt securities Within one year 500 500 Total 500 500 Total $ 1,136,190 $ 1,014,719 The table above reflects contractual maturities. Actual results will differ as the loans underlying the mortgage-backed securities may repay sooner than scheduled. There were no investment securities pledged at December 31, 2022 or 2021. 98 Table of Contents Live Oak Bancshares, Inc. Notes to Consolidated Financial Statements Equity Investments Equity investments, largely comprised of non-marketable equity investments, are generally accounted for under either the equity method or equity security accounting. The below tables provide additional information related to investments accounted for under these two methods. Equity Method Accounting The carrying amount and ownership percentage of each equity method investment at December 31, 2022 and 2021 is reflected in the following table: 2022 2021 Amount Ownership % Amount Ownership % Apiture, Inc. $ 60,320 40.3 % $ 52,323 39.1 % Canapi Ventures SBIC Fund, LP (1) (5) 19,246 2.9 % 19,431 2.9 % Canapi Ventures Fund, LP (2) (5) 2,382 1.5 % 2,402 1.5 % Canapi Ventures Fund II, LP (3) (5) 7,412 1.6 % — N/A Canapi Ventures SBIC Fund II, LP (4) (5) 7,981 3.7 % — N/A Other fintech investments in private companies (6) 241 4.3 % 5,330 Various Other (7) 12,476 Various 4,664 Various Total $ 110,058 $ 84,150 (1) Includes unfunded commitments of $ 5.5 million and $ 6.8 million as of December 31, 2022 and 2021, respectively. (2) Includes unfunded commitments of $ 617 thousand and $ 770 thousand as of December 31, 2022 and 2021, respectively. (3) Includes unfunded commitments of $ 6.9 million as of December 31, 2022. There were no unfunded commitments as of December 31, 2021. (4) Includes unfunded commitments of $ 7.5 million as of December 31, 2022. There were no unfunded commitments as of December 31, 2021. (5) Investees are accounted for under equity method due to the Company's participation as an investment advisor. All Canapi Fund investments are unconsolidated VIEs. See Variable Interest Entities section below. (6) As of December 31, 2022, Other Fintech investments include Kwipped, Inc. On August 31, 2022, the Company sold its investment in Payrailz, LLC, resulting in a pre-tax gain of $ 28.4 million, and on April 1, 2022, the Company sold its investment in Finxact, Inc. resulting in a pre-tax gain of $ 120.8 million. As of December 31, 2021 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. (7) As of December 31, 2022, Other investments include solar income tax credit investments in Green Sun Tenant LLC (“Green Sun”), SVA 2021-2 TE Holdco LLC (“Sun Vest”), and EG5 CSPI Holding LLC (“HEP”), which the Company holds a 99.0 % limited member interest in all investments. Also included within Other investments are Cape Fear Collective Impact Opportunity 1 LLC (“Cape Fear Collective 1”) and Cape Fear Collective Impact Opportunity 2 LLC (“Cape Fear Collective 2”), which the Company holds 99.0 % and 32.3 % limited member interests, respectively. As of December 31, 2022, an unfunded commitment of $ 2.6 million was recorded as a liability for HEP. As of December 31, 2021, Other investments included Green Sun and Cape Fear Collective 1, each with limited member interests of 99.0 %. There were no unfunded commitments as of December 31, 2021. All Other investments are unconsolidated VIEs. See Variable Interest Entities section below. 99 Table of Contents Live Oak Bancshares, Inc. Notes to Consolidated Financial Statements Equity Security Accounting The carrying amount of the Company’s investments in non-marketable equity securities with no readily determinable fair value and amounts recognized in earnings on a cumulative basis as of December 31, 2022 and for the years ended December 31, 2022, 2021 and 2020 is reflected in the following table: Cumulative Adjustments 2022 2021 2020 Carrying value (1) $ 76,438 $ 63,321 $ 31,146 Carrying value adjustments: Impairment $ — — — — Upward changes for observable prices (2) 50,492 2,022 30,197 14,558 Downward changes for observable prices ( 86 ) — — — Net upward change $ 50,406 $ 2,022 $ 30,197 $ 14,558 (1) Includes $ 3.0 million, $ 2.8 million and $ 522 thousand in unfunded commitments for the years ended December 31, 2022, 2021 and 2020, respectively. (2) Cumulative adjustments excludes $ 13.9 million in realized cash gains for the sale of an investment in the second quarter of 2021. For the twelve months ended December 31, 2022, 2021 and 2020, the Company recognized unrealized gains on all equity securities still held at the reporting date of $ 1.9 million, $ 44.0 million, and $ 14.6 million, respectively. Variable Interest Entities Variable interests are defined as contractual ownership or other interests in an entity that change with fluctuations in the fair value of an entity's net asset value. The primary beneficiary consolidates the VIE. The primary beneficiary is defined as the enterprise that has both the power to direct the activities of the VIE that most significantly impact the entity's economic performance and the obligation to absorb losses or the right to receive benefits that could be significant to the VIE. Solar Renewable Energy Tax Credit Investments The Company has limited interest in several limited liability companies that own and operate solar renewable energy projects which are accounted for as equity method investments. Over the course of the investments, the Company will receive federal and state tax credits, tax-related benefits, and excess cash available for distribution, if any. The Company may be called to sell its interest in the limited partnerships through a call option once all investment tax credits have been recognized. Canapi Funds The Company’s limited partnership investments in the Canapi Funds focus on providing venture capital to new and emerging financial technology companies. After initial commitment and over the course of the investment period, the Company will make capital contributions and receive profit and return of capital distributions as a result of fund performance until the funds wind down. These fund investments are accounted for under the equity method due to the Company’s participation as an investment advisor. 100 Table of Contents Live Oak Bancshares, Inc. Notes to Consolidated Financial Statements Non-marketable and Other Equity Investments The Company also has a limited interest in several non-marketable funds, including Small Business Investment Company (“SBIC”) and venture capital funds, which are accounted for as equity security investments. After initial commitment and over the course of the investment period, the Company will make capital contributions and receive profit and return of capital distributions as a result of fund performance until the funds wind down. While the partnership agreements allow the Company to remove the general partner, this right is not deemed to be substantive as the general partner can only be removed for cause. All investments are generally non-redeemable and distributions are expected to be received through the liquidation of the underlying investments throughout the life of the investment fund. Investments may only be sold or transferred subject to the notice and approval provisions of the underlying investment agreement. Additionally, the Company has a limited interest in two limited liability companies that invest in the acquisition, rehabilitation, or new construction of local qualified housing projects which are accounted for as equity method investments. The above investments meet the criteria of a VIE, however, the Company is not the primary beneficiary of the entities, as it does not have the power to direct the activities that most significantly impact the economic performance of the entities. The Company’s investment in the unconsolidated VIEs are carried in other assets on the consolidated balance sheets and the Company’s unfunded capital and other commitments related to the unconsolidated VIEs are carried in other liabilities on the consolidated balance sheets. The Company’s maximum exposure to loss from unconsolidated VIEs includes the investment recorded on the Company’s consolidated balance sheets, net of any impairment recognized, and previously recorded tax credits which remain subject to recapture by taxing authorities based on compliance features required to be met at the project level. While the Company believes the potential for losses from this investment is remote, the maximum exposure was determined by assuming a scenario where related tax credits were recaptured. The following table provides a summary of the VIEs that the Company has not consolidated as of December 31, 2022 and 2021: December 31, 2022 Carrying Amount Maximum Exposure to Loss Liability Recognized Classification Solar tax credit investments $ 5,221 $ 24,295 $ 2,641 Other assets & other liabilities (1) Canapi Funds 37,021 37,021 20,474 Other assets & other liabilities Non-marketable and other equity investments 15,764 15,764 3,033 Other assets & other liabilities December 31, 2021 Carrying Amount Maximum Exposure to Loss Liability Recognized Classification Solar tax credit investments $ 708 $ 4,100 $ — Other assets (2) Canapi Funds 21,833 21,833 7,608 Other assets & other liabilities Non-marketable and other equity investments 13,225 13,225 2,758 Other assets & other liabilities (1) Maximum exposure to loss represents $ 5.2 million of current investments and a scenario in which $ 24.3 million in related tax credits are recaptured. (2) Maximum exposure to loss represents $ 708 thousand of current investments and a scenario in which $ 4.1 million in related tax credits are recaptured. 101 Table of Contents Live Oak Bancshares, Inc. Notes to Consolidated Financial Statements Note 3. Loans and Leases Held for Investment and Credit Quality Loan and Lease Portfolio Segments & Classes The following describes the risk characteristics relevant to each of the portfolio segments. 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 government guarantee on these loans, when applicable, is an important factor in mitigating risk. The Bank’s lease portfolio is included in the C&I segment. 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. 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, 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 owner occupied 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 loan 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, 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. The loan and lease portfolio is further grouped into one of the following classes (also referred to as divisions): Small Business Banking, Specialty Lending, Energy & Infrastructure (“E&I”), or Paycheck Protection Program. Small Business Banking includes loans to customers in verticals that generally have traditional loan structures. Specialty Lending includes loans to customers in verticals that generally have atypical ownership structures as well as complex collateral arrangements, underwriting requirements, and servicing needs. E&I includes loans to customers that operate renewable energy projects, lodging facilities, and municipalities. E&I loans often utilize USDA or tax-exempt loan structures. Paycheck Protection Program (“PPP”) includes all loans originated under the PPP pursuant to the Coronavirus Aid, Relief, and Economic Security Act’s (“CARES Act”) economic relief program and carry a 100 % government guarantee. These loans and lease classes were determined based on industry risk characteristics and management’s method for monitoring credit risk and managing those lending divisions. 102 Table of Contents Live Oak Bancshares, Inc. Notes to Consolidated Financial Statements Past Due Loans and Leases Loans and leases are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans and leases less than 30 days past due and accruing are included within current loans and leases shown below. The following tables show an age analysis of past due loans and leases as of the dates presented. December 31, 2022 Current 30-89 Days Past Due 90 Days or More Past Due Total Past Due Total Carried at Amortized Cost Loans Accounted for Under the Fair Value Option (1) Total Loans and Leases Commercial & Industrial Small Business Banking $ 1,719,165 $ 21,589 $ 16,221 $ 37,810 $ 1,756,975 $ 182,348 $ 1,939,323 Specialty Lending 1,022,615 398 266 664 1,023,279 29,084 1,052,363 Energy & Infrastructure 420,447 — 3,082 3,082 423,529 50,094 473,623 Paycheck Protection Program 13,134 — — — 13,134 — 13,134 Total 3,175,361 21,987 19,569 41,556 3,216,917 261,526 3,478,443 Construction & Development Small Business Banking 471,243 1,500 — 1,500 472,743 — 472,743 Specialty Lending 104,069 — — — 104,069 — 104,069 Energy & Infrastructure 13,753 — — — 13,753 — 13,753 Total 589,065 1,500 — 1,500 590,565 — 590,565 Commercial Real Estate Small Business Banking 2,137,028 12,082 5,771 17,853 2,154,881 166,595 2,321,476 Specialty Lending 319,419 — — — 319,419 2,050 321,469 Energy & Infrastructure 136,706 — 3,072 3,072 139,778 22,123 161,901 Total 2,593,153 12,082 8,843 20,925 2,614,078 190,768 2,804,846 Commercial Land Small Business Banking 429,014 1,663 1,917 3,580 432,594 42,164 474,758 Total 429,014 1,663 1,917 3,580 432,594 42,164 474,758 Total $ 6,786,593 $ 37,232 $ 30,329 $ 67,561 $ 6,854,154 $ 494,458 $ 7,348,612 Net deferred fees $ ( 4,434 ) Loan and Leases, Net $ 7,344,178 Guaranteed Balance $ 2,657,770 $ 20,199 $ 26,026 $ 46,225 $ 2,703,995 $ 67,268 $ 2,771,263 % Guaranteed 39.2 % 54.3 % 85.8 % 68.4 % 39.5 % 13.6 % 37.7 % 103 Table of Contents Live Oak Bancshares, Inc. Notes to Consolidated Financial Statements December 31, 2021 Current 30-89 Days Past Due 90 Days or More Past Due Total Past Due Total Carried at Amortized Cost Loans Accounted for Under the Fair Value Option (1) Total Loans and Leases Commercial & Industrial Small Business Banking $ 1,103,915 $ 13,171 $ 7,320 $ 20,491 $ 1,124,406 $ 248,806 $ 1,373,212 Specialty Lending 642,444 — — — 642,444 30,947 673,391 Energy & Infrastructure 232,923 — — — 232,923 33,578 266,501 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 40,805 — — — 40,805 — 40,805 Energy & Infrastructure 41,209 — — — 41,209 — 41,209 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 153,716 — — — 153,716 2,349 156,065 Energy & Infrastructure 131,657 — 2,315 2,315 133,972 17,132 151,104 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 ) Loan and Leases, Net $ 5,521,262 Guaranteed Balance $ 2,037,509 $ 18,421 $ 16,440 $ 34,861 $ 2,072,370 $ 77,722 $ 2,150,092 % Guaranteed 42.2 % 69.7 % 65.2 % 67.5 % 42.5 % 12.0 % 38.9 % (1) Retained portions of government guaranteed loans sold prior to January 1, 2021 are carried at fair value under FASB ASC Subtopic 825-10, Financial Instruments: Overall. See Note 10. Fair Value of Financial Instruments for additional information. Credit Quality Indicators The Bank uses internal loan and lease reviews to assess the performance of individual loans and leases. Each loan and lease is assigned a risk grade during the origination and closing process. Subsequent to origination, loans and lease risk grades are continually evaluated as information becomes available. The Bank performs an annual review of each borrower’s financial performance to validate the accuracy of the assigned risk grade. Additionally, the loan and lease portfolio is subject to annual independent review by an external firm. 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. These loans and leases will typically have multiple demonstrated sources of repayment with no significant identifiable risk to collection, exhibit well-qualified management, and have liquid financial statements relative to both direct and indirect obligations. 104 Table of Contents Live Oak Bancshares, Inc. Notes to Consolidated Financial Statements Quality (2 Rated): These loans and leases are of very high credit quality, with strong, well-documented sources of repayment. These loans and leases exhibit very strong, well defined primary and secondary sources of repayment, with no significant identifiable risk of collection and have internally generated cash flow that more than adequately covers current maturities of long-term debt. Satisfactory (3 Rated): These loans and leases exhibit satisfactory credit risk and have excellent sources of repayment, with no significant identifiable risk of collection. These loans and leases have documented historical cash flow that meets or exceeds required minimum Bank guidelines, or that can be supplemented with verifiable cash flow from other sources. They have adequate secondary sources to liquidate the debt, including combinations of liquidity, liquidation of collateral, or liquidation value to the net worth of the borrower or guarantor. Acceptable (4 Rated): These loans and leases show signs of weakness in either adequate sources of repayment or collateral but have demonstrated mitigating factors that minimize the risk of delinquency or loss. These loans and leases may have unproved, insufficient or marginal primary sources of repayment that appear sufficient to service the debt at this time. Repayment weaknesses may be due to minor operational issues, financial trends, or reliance on projected performance. They may also contain marginal or unproven secondary sources to liquidate the debt, including combinations of liquidation of collateral and liquidation value to the net worth of the borrower or guarantor. Special mention (5 Rated): These loans and leases show signs of weaknesses in either adequate sources of repayment or collateral. These loans and leases may contain underwriting guideline tolerances and/or exceptions with no mitigating factors; and/or instances where adverse economic conditions develop subsequent to origination that do not jeopardize liquidation of the debt but substantially increase the level of risk. Substandard (6 Rated): Loans and leases graded Substandard are inadequately protected by current sound net worth, paying capacity of the obligor, or pledged collateral. Loans and leases classified as Substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt; are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. These loans and leases are consistently not meeting the repayment schedule. Doubtful (7 Rated): Loans and leases graded Doubtful have all the weaknesses inherent in those classified as Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. The ability of the borrower to service the debt is extremely weak, overdue status is constant, the debt has been placed on non-accrual status, and no definite repayment schedule exists. Once the loss position is determined, the amount is charged off. Loss (8 Rated): Loss rated loans and leases are considered uncollectible and of such little value that their continuance as assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this credit even though partial recovery may be affected in the future. 105 Table of Contents Live Oak Bancshares, Inc. Notes to Consolidated Financial Statements The following tables present credit quality indicators by portfolio class: Term Loans and Leases Amortized Cost Basis by Origination Year December 31, 2022 2022 2021 2020 2019 2018 Prior Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Total (1) Small Business Banking Risk Grades 1 - 4 $ 1,427,182 $ 1,400,726 $ 795,647 $ 426,401 $ 217,893 $ 204,933 $ 65,455 $ 1,738 $ 4,539,975 Risk Grade 5 15,942 17,745 40,202 45,712 26,124 27,212 13,210 204 186,351 Risk Grades 6 - 8 1,806 4,277 17,845 23,470 14,094 27,215 1,638 522 90,867 Total 1,444,930 1,422,748 853,694 495,583 258,111 259,360 80,303 2,464 4,817,193 Specialty Lending Risk Grades 1 - 4 635,079 355,785 144,545 25,849 6,574 788 153,062 31,504 1,353,186 Risk Grade 5 7,341 33,272 12,329 10,201 4,399 — 6,619 248 74,409 Risk Grades 6 - 8 — 11,433 416 5,577 166 — 1,343 237 19,172 Total 642,420 400,490 157,290 41,627 11,139 788 161,024 31,989 1,446,767 Energy & Infrastructure Risk Grades 1 - 4 199,338 176,855 39,600 51,190 23,374 19,694 12,751 351 523,153 Risk Grade 5 4,024 4,409 500 6,976 4,706 5,142 — — 25,757 Risk Grades 6 - 8 — 3,082 16,589 — 8,479 — — — 28,150 Total 203,362 184,346 56,689 58,166 36,559 24,836 12,751 351 577,060 Paycheck Protection Program Risk Grades 1 - 4 — 7,421 5,713 — — — — — 13,134 Total — 7,421 5,713 — — — — — 13,134 Total $ 2,290,712 $ 2,015,005 $ 1,073,386 $ 595,376 $ 305,809 $ 284,984 $ 254,078 $ 34,804 $ 6,854,154 Term Loans and Leases Amortized Cost Basis by Origination Year December 31, 2021 2021 2020 2019 2018 2017 Prior Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Total (1) 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 - 4 467,751 168,067 43,598 10,413 1,145 — 126,845 1,816 819,635 Risk Grade 5 2,250 729 1,042 5,560 690 — 2,953 848 14,072 Risk Grades 6 - 8 — 17 3,166 — — — 75 — 3,258 Total 470,001 168,813 47,806 15,973 1,835 — 129,873 2,664 836,965 Energy & Infrastructure Risk Grades 1 - 4 177,100 70,343 30,380 32,040 37,558 — 7,044 — 354,465 Risk Grade 5 — 16,947 4,455 4,854 16,414 — — — 42,670 Risk Grades 6 - 8 — — — 8,654 — 2,315 — — 10,969 Total 177,100 87,290 34,835 45,548 53,972 2,315 7,044 — 408,104 Paycheck Protection Program Risk Grades 1 - 4 204,803 63,572 — — — — — — 268,375 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 (1) Excludes $ 494.5 million and $ 645.2 million of loans accounted for under the fair value option as of December 31, 2022 and December 31, 2021, respectively. 106 Table of Contents Live Oak Bancshares, Inc. Notes to Consolidated Financial Statements The following tables present guaranteed and unguaranteed loan and lease balances by asset quality indicator: December 31, 2022 Loan and Lease Balance (1) Guaranteed Balance Unguaranteed Balance % Guaranteed Risk Grades 1 - 4 $ 6,429,448 $ 2,508,229 $ 3,921,219 39.0 % Risk Grade 5 286,517 115,573 170,944 40.3 Risk Grades 6 - 8 138,189 80,193 57,996 58.0 Total $ 6,854,154 $ 2,703,995 $ 4,150,159 39.5 % December 31, 2021 Loan and Lease Balance (1) Guaranteed Balance Unguaranteed Balance % Guaranteed Risk Grades 1 - 4 $ 4,508,932 $ 1,875,152 $ 2,633,780 41.6 % Risk Grade 5 267,418 134,221 133,197 50.2 Risk Grades 6 - 8 105,315 62,997 42,318 59.8 Total $ 4,881,665 $ 2,072,370 $ 2,809,295 42.5 % (1) Excludes $ 494.5 million and $ 645.2 million of loans accounted for under the fair value option as of December 31, 2022 and 2021, respectively. Nonaccrual Loans and Leases As of December 31, 2022 and December 31, 2021 there were no loans greater than 90 days past due and still accruing. There was no interest income recognized on nonaccrual loans and leases during the twelve months ended December 31, 2022 and 2021. Nonaccrual loans and leases are generally included in the held for investment portfolio. Accrued interest receivable on loans totaled $ 46.5 million and $ 31.0 million at December 31, 2022 and December 31, 2021, respectively, and is included in other assets in the accompanying consolidated balance sheets. Nonaccrual loans and leases as of December 31, 2022 and December 31, 2021 are as follows: December 31, 2022 Loan and Lease Balance (1) Guaranteed Balance Unguaranteed Balance Unguaranteed Exposure with No ACL Commercial & Industrial Small Business Banking $ 22,321 $ 19,302 $ 3,019 $ 407 Specialty Lending 3,647 384 3,263 — Energy & Infrastructure 3,082 2,794 288 288 Total 29,050 22,480 6,570 695 Commercial Real Estate Small Business Banking 34,520 23,830 10,690 3,611 Energy & Infrastructure 3,072 2,799 273 — Total 37,592 26,629 10,963 3,611 Commercial Land Small Business Banking 6,750 5,499 1,251 196 Total 6,750 5,499 1,251 196 Total $ 73,392 $ 54,608 $ 18,784 $ 4,502 107 Table of Contents Live Oak Bancshares, Inc. Notes to Consolidated Financial Statements December 31, 2021 Loan and Lease Balance (1) 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 Energy & Infrastructure 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 10. Fair Value of Financial Instruments for additional information. The following tables present the amortized cost basis of collateral-dependent loans and leases which are individually evaluated to determine expected credit losses, as of December 31, 2022 and 2021: Total Collateral Dependent Loans Unguaranteed Portion December 31, 2022 Real Estate Business Assets Other Real Estate Business Assets Other Allowance for Credit Losses Commercial & Industrial Small Business Banking $ 2,730 $ — $ — $ 414 $ — $ — $ — Specialty Lending — 371 — — 371 — 291 Energy & Infrastructure 16,378 — — 13,583 — — — Total 19,108 371 — 13,997 371 — 291 Commercial Real Estate Small Business Banking 15,286 — — 6,440 — — 152 Total 15,286 — — 6,440 — — 152 Commercial Land Small Business Banking 1,743 — — 202 — — — Total 1,743 — — 202 — — — Total $ 36,137 $ 371 $ — $ 20,639 $ 371 $ — $ 443 108 Table of Contents Live Oak Bancshares, Inc. Notes to 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 Energy & Infrastructure 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 Credit Losses – Loans and Leases On January 1, 2020, the Company adopted ASC 326. The Company maintains the ACL at levels management believes represents the future expected credit losses in the loan and lease portfolios as of the balance sheet date. See Note 1. Organization and Summary of Significant Accounting Policies for a description of the methodologies used to estimate credit losses under ASC 326. The following tables detail activity in the allowance for credit losses for the periods presented: Commercial & Industrial Construction & Development Commercial Real Estate Commercial Land Total December 31, 2022 Beginning Balance $ 37,770 $ 3,435 $ 19,068 $ 3,311 $ 63,584 Charge offs ( 8,262 ) — ( 1,463 ) ( 652 ) ( 10,377 ) Recoveries 1,039 3 1,363 11 2,416 Provision 34,448 1,663 3,933 899 40,943 Ending Balance $ 64,995 $ 5,101 $ 22,901 $ 3,569 $ 96,566 December 31, 2021 Beginning Balance $ 26,941 $ 5,663 $ 18,148 $ 1,554 $ 52,306 Charge offs ( 2,912 ) ( 262 ) ( 2,731 ) ( 12 ) ( 5,917 ) Recoveries 172 — 1,813 — 1,985 Provision 13,569 ( 1,966 ) 1,838 1,769 15,210 Ending Balance $ 37,770 $ 3,435 $ 19,068 $ 3,311 $ 63,584 December 31, 2020 Beginning Balance, prior to adoption of ASC 326 $ 15,757 $ 2,732 $ 8,427 $ 1,318 $ 28,234 Impact of adopting ASC 326 ( 4,561 ) 1,131 1,916 193 ( 1,321 ) Charge offs ( 4,401 ) — ( 10,347 ) ( 644 ) ( 15,392 ) Recoveries 84 — 28 15 127 Provision 20,062 1,800 18,124 672 40,658 Ending Balance $ 26,941 $ 5,663 $ 18,148 $ 1,554 $ 52,306 109 Table of Contents Live Oak Bancshares, Inc. Notes to Consolidated Financial Statements During the year ended December 31, 2022, the ACL increased primarily as a result of loan growth, charge-off experience impacts, and changes in the macroeconomic outlook. Loss rates are adjusted for twelve month forecasted unemployment followed by a twelve-month straight-line reversion period. During the year ended December 31, 2021, increases to the ACL were primarily related to loan growth which has outpaced the improvement in forecasted unemployment rates and other conditions related to 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 net charge-offs during the period . During the year ended December 31, 2020, increases to the ACL were primarily related to the severity of forecasted unemployment rates and ongoing developments as a result of the COVID-19 pandemic. Unemployment rates were forecasted for twelve months followed by a twelve-month straight-line reversion period. Additionally, the provision expense was impacted by loan and lease growth and net charge-offs during the period. The following table represents the types of TDRs that were made during the periods presented: Twelve months ended December 31, 2022 Interest Only Payment Deferral Extend Amortization Other (1) Total TDRs (2) Number of Loans Recorded investment at period end Number of Loans Recorded investment at period end Number of Loans Recorded investment at period end Number of Loans Recorded investment at period end Number of Loans Recorded investment at period end Commercial & Industrial Small Business Banking — $ — 7 $ 8,795 3 $ 1,442 1 $ 490 11 $ 10,727 Specialty Lending — — 1 4,183 — — — — 1 4,183 Energy & Infrastructure — — — — 1 13,517 1 13,517 Total — — 8 12,978 4 14,959 1 490 13 28,427 Commercial Real Estate Small Business Banking 1 3,677 1 797 1 4,364 — — 3 8,838 Total 1 3,677 1 797 1 4,364 — — 3 8,838 Construction & Development Small Business Banking — — — — — — 2 3,081 2 3,081 Total — — — — — — 2 3,081 2 3,081 Total 1 $ 3,677 9 $ 13,775 5 $ 19,323 3 $ 3,571 18 $ 40,346 (1) Includes one small business banking loan with extend amortization and a rate concession ($ 490 thousand) and two small business banking loans with extended amortization and interest only ($ 3.1 million). (2) Excludes loans accounted for under the fair value option. See Note 10. Fair Value of Financial Instruments for additional information. 110 Table of Contents Live Oak Bancshares, Inc. Notes to Consolidated Financial Statements Twelve months ended December 31, 2021 Interest Only Payment Deferral Extend Amortization Other (1) Total TDRs (2) Number of Loans Recorded investment at period end Number of Loans Recorded investment at period end Number of Loans Recorded investment at period end Number of Loans Recorded investment at period end Number of Loans Recorded investment at period end Commercial & Industrial Small Business Banking — $ — 3 $ 6,097 1 $ 496 — $ — 4 $ 6,593 Total — — 3 6,097 1 496 — — 4 6,593 Commercial Real Estate Small Business Banking — — 5 6,613 — — 1 3,124 6 9,737 Total — — 5 6,613 — — 1 3,124 6 9,737 Total — $ — 8 $ 12,710 1 $ 496 1 $ 3,124 10 $ 16,330 (1) Includes one small business banking loan with extended amortization and a rate concession TDR ($ 3.1 million). (2) Excludes loans accounted for under the fair value option. See Note 10. Fair Value of Financial Instruments for additional information. Twelve months ended December 31, 2020 Interest Only Payment Deferral Extend Amortization Other (1) Total TDRs (2) Number of Loans Recorded investment at period end Number of Loans Recorded investment at period end Number of Loans Recorded investment at period end Number of Loans Recorded investment at period end Number of Loans Recorded investment at period end Commercial & Industrial Small Business Banking — $ — 6 $ 1,895 — $ — 1 $ 170 7 $ 2,065 Specialty Lending — — — — 2 423 — — 2 423 Total — — 6 1,895 2 423 1 170 9 2,488 Construction & Development Small Business Banking — — — — 1 1,787 — — 1 1,787 Total — — — — 1 1,787 — — 1 1,787 Commercial Real Estate Small Business Banking — — 2 3,738 — — — — 2 3,738 Energy & Infrastructure — — 1 3,627 — — 2 12,219 3 15,846 Total — — 3 7,365 — — 2 12,219 5 19,584 Commercial Land Small Business Banking — — — — 1 4,865 — — 1 4,865 Total — — — — 1 4,865 — — 1 4,865 Total — $ — 9 $ 9,260 4 $ 7,075 3 $ 12,389 16 $ 28,724 (1) Includes one small business banking interest only and rate concession TDR ($ 170 thousand), and two energy & infrastructure interest only and rate concession TDRs ($ 12.2 million). (2) Excludes loans accounted for under the fair value option. See Note 10. Fair Value of Financial Instruments for additional information. 111 Table of Contents Live Oak Bancshares, Inc. Notes to Consolidated Financial Statements Restructurings made to improve a loan’s performance have varying degrees of success. The following tables present TDRs that were modified within the twelve months ended December 31, 2022 that subsequently defaulted during the period: Twelve Months Ended December 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 $ 940 2 $ 318 — $ — 4 $ 1,258 Total — $ — 2 $ 940 2 $ 318 — $ — 4 $ 1,258 (1) Excludes loans accounted for under the fair value option. See Note 10. Fair Value of Financial Instruments for additional information. One TDR that was modified within the twelve months ended December 31, 2021 subsequently defaulted during the twelve months ended December 31, 2021. The TDR that defaulted was a commercial real estate small business banking loan that had previously been modified for a payment deferral and had a recorded investment of $ 50 thousand at December 31, 2021. No TDRs were modified within the twelve months ended December 31, 2020 subsequently defaulted during the twelve months ended December 31, 2020. Note 4. Leases Lessor 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 The gross lease payments receivable and the net investment included in accounts receivable for such leases are as follows: As of December 31, 2022 2021 Gross direct finance lease payments receivable $ 4,284 $ 7,333 Less - unearned interest ( 479 ) ( 998 ) Net investment in direct financing leases $ 3,805 $ 6,335 Future minimum lease payments receivable under direct finance leases are as follows: As of December 31, 2022 Amount 2023 $ 1,803 2024 1,374 2025 990 2026 117 Total $ 4,284 Interest income of $ 393 thousand, $ 669 thousand and $ 838 thousand was recognized in the twelve months ended December 31, 2022 , 2021 and 2020 , respectively. 112 Table of Contents Live Oak Bancshares, Inc. Notes to Consolidated Financial Statements Operating Leases As of December 31, 2022 and 2021 , the Company had a net investment of $ 114.2 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 December 31, 2022 and 2021 and accumulated depreciation was $ 49.2 million and $ 39.5 million as of December 31, 2022 and 2021 , respectively. Depreciation expense recognized on these assets for the twelve months ended December 31, 2022 , 2021 and 2020 was $ 9.7 million, $ 9.7 million and $ 9.8 million, respectively. Lease income of $ 9.5 million was recognized in the twelve months ended December 31, 2022, 2021 and 2020. A maturity analysis of future minimum lease payments receivable under non-cancelable operating leases is as follows: As of December 31, 2022 Amount 2023 $ 9,041 2024 8,808 2025 8,935 2026 8,923 2027 8,690 Thereafter 13,563 Total $ 57,960 Lessee Lease Arrangements The Company determines if an arrangement is or contains a lease at inception. If it is determined to be or contain a lease, then the lease is classified as an operating or finance lease. Right-of-use assets represent the Company's right to use an underlying asset for the lease term. Lease liabilities represent the Company's obligation to make lease payments arising from the lease. When recognizing right-of-use assets and liabilities, the Company accounts for lease and non-lease components separately because such amounts are readily determinable under the lease contracts. Right-of-use assets and liabilities are measured on commencement date based on the present value of the lease payments over the lease term, discounted using the discount rate for the lease at commencement. The discount rate is the rate implicit in the lease, however, if that is not readily determinable, the Company will use its incremental borrowing rate. The right-of-use asset also includes any lease payments made before the commencement date and initial direct costs and excludes any lease incentives received. The lease terms may include options to extend or terminate the lease when it is reasonably certain that the option will be exercised. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company does not apply the recognition and measurement requirements to any short-term leases (terms of twelve months or less). Operating leases are included in other assets and other liabilities in the consolidated balance sheets. Finance leases are included in other assets and borrowings in the consolidated balance sheets. Lease expense for operating leases and finance leases is included in occupancy expense in the consolidated statements of income and interest expense for finance leases is included in borrowings interest expense in the consolidated statements of income. The Company has operating leases for real property, land, copiers and other equipment. These leases have remaining lease terms of less than 1 year to 24 years, some of which include options to extend the leases for up to 20 years, and some of which include options to terminate the leases. The Company has concluded that it is reasonably certain it will exercise the options to extend for only one lease, which was therefore recognized as part of the right-of-use asset and lease liability. The Company had a finance lease for fitness equipment, which matured during the year ended December 31, 2022. 113 Table of Contents Live Oak Bancshares, Inc. Notes to Consolidated Financial Statements The components of lease expense are as follows: December 31, 2022 December 31, 2021 Operating lease cost $ 1,224 $ 635 Short-term lease cost 99 96 Finance lease cost: Amortization of right-of-use assets 4 3 Interest expense on lease liabilities — — Total net lease cost $ 1,327 $ 734 Supplemental disclosure for the consolidated balance sheets related to operating and finance leases is as follows: December 31, 2022 December 31, 2021 Operating lease right-of-use asset $ 2,118 $ 2,228 Operating lease liability 2,558 2,436 Finance lease right-of-use asset — 4 Finance lease liability — 4 The weighted average remaining lease term and weighted average discount rate for leases are as follows: December 31, 2022 December 31, 2021 Weighted average remaining lease term (years) Operating leases 10.62 12.35 Finance lease 0 0.92 Weighted average discount rate Operating leases 3.14 % 2.74 % Finance lease — % 3.10 % A maturity analysis of operating lease liabilities is as follows: As of December 31, 2022 Operating Leases 2023 $ 696 2024 421 2025 244 2026 197 2027 201 Thereafter 1,438 Total lease payments 3,197 Less: imputed interest ( 639 ) Total lease liabilities $ 2,558 114 Table of Contents Live Oak Bancshares, Inc. Notes to Consolidated Financial Statements Note 5. Servicing Assets Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of loans serviced for others requiring recognition of a servicing asset were $ 2.67 billion, $ 2.29 billion and $ 2.21 billion at December 31, 2022, 2021 and 2020 , respectively. The unpaid principal balance for all loans serviced for others was $ 3.48 billion, $ 3.30 billion and $ 3.21 billion at December 31, 2022, 2021 and 2020 , respectively. The following summarizes the activity pertaining to servicing rights: 2022 2021 Balance at beginning of period $ 33,574 $ 33,918 Additions, net 9,326 11,382 Fair value changes: Due to changes in valuation inputs or assumptions ( 5,934 ) ( 982 ) Decay due to increases in principal paydowns or runoff ( 10,643 ) ( 10,744 ) Balance at end of period $ 26,323 $ 33,574 The fair value of servicing rights was determined using a weighted average discount rate of 20.8 % on December 31, 2022 and 13.2 % on December 31, 2021. The fair value of servicing rights was determined using a weighted average prepayment speed of 15.7 % on December 31, 2022 and 16.2 % on December 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 of income. The fair value of servicing rights is highly sensitive to changes in underlying assumptions. Changes in prepayment speed assumptions have the most significant impact on the fair value of servicing rights. Generally, as interest rates rise on variable rate loans, loan prepayments increase due to an increase in refinance activity, which results in a decrease in the fair value of servicing assets. 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. 115 Table of Contents Live Oak Bancshares, Inc. Notes to Consolidated Financial Statements Note 6. Premises and Equipment Components of Premises and Equipment Components of premises and equipment and total accumulated depreciation at December 31, 2022 and 2021 are as follows: 2022 2021 Buildings $ 54,746 $ 54,746 Land improvements 5,180 5,180 Furniture and equipment 19,117 18,683 Hardware and software 10,264 8,399 Leasehold improvements 7,705 8,106 Land 15,982 8,650 Transportation 49,766 49,766 Solar panels 163,391 163,391 Deposits on fixed assets 33,966 712 Premises and equipment, total 360,117 317,633 Less accumulated depreciation ( 96,827 ) ( 77,437 ) Premises and equipment, net of depreciation $ 263,290 $ 240,196 Deposits on fixed assets at December 31, 2022 consist primarily of software development costs, plane deposits and campus improvement costs. Depreciation expense for the years ended December 31, 2022, 2021 and 2020 amounted to $ 20.6 million, $ 21.2 million and $ 21.6 million, respectively. In 2022, the Company purchased a building and land adjacent to its main campus for $ 18.3 million. The building with a value of $ 11.3 million is temporarily idle and therefore included in deposits on fixed assets at December 31, 2022 as the Company formalizes plans for its campus expansion. 116 Table of Contents Live Oak Bancshares, Inc. Notes to Consolidated Financial Statements Note 7. Deposits The types of deposits at December 31, 2022 and 2021 are: 2022 2021 Noninterest-bearing deposits $ 194,100 $ 89,279 Interest-bearing deposits: Money market 128,443 105,628 Savings 4,096,576 3,507,354 Time deposits 4,465,809 3,409,783 Total 8,690,828 7,022,765 Total deposits $ 8,884,928 $ 7,112,044 The aggregate amount of time deposits in denominations of $250 thousand or more at December 31, 2022 and 2021 was approximately $ 629.1 million and $ 564.8 million, respectively. At December 31, 2022 the scheduled maturities of total time deposits are as follows: Year Amount 2023 $ 2,350,669 2024 620,558 2025 431,735 2026 356,022 2027 266,189 Thereafter 440,636 Total $ 4,465,809 117 Table of Contents Live Oak Bancshares, Inc. Notes to Consolidated Financial Statements Note 8. Borrowings Total outstanding borrowings consisted of the following: December 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. $ 33,203 $ 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 thirty-five basis points and matures at various dates equal to the maturity date of the PPPLF collateral pledged to secure the advance, 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. The borrowing was paid in full at September 30, 2022. — 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, 2025 . 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. The Company paid down this balance in full on May 20, 2022 and there is $ 100.0 million of available credit remaining at December 31, 2022. — 8,000 On December 30, 2022, the Company made an advance of $ 50.0 million on an overnight Fed Funds line of credit that is unsecured with an interest rate of 4.65 % with $ 50.0 million of available credit remaining at December 31, 2022. 50,000 — Other long term debt (1) — 5 Total borrowings $ 83,203 $ 318,289 (1) Includes finance leases paid in full November 1, 2022. The Company may purchase federal funds through unsecured federal funds lines of credit with various correspondent banks, which totaled $ 164.5 million and $ 167.5 million as of December 31, 2022 and 2021, respectively. 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 $ 50.0 million in outstanding balances on the lines of credit as of December 31, 2022, and no outstanding balance on the lines of credit as of December 31, 2021. 118 Table of Contents Live Oak Bancshares, Inc. Notes to Consolidated Financial Statements The Company has entered into a repurchase agreement with a third party for up to $ 5.0 million as of December 31, 2022 and 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 no outstanding balance on the repurchase agreement as of December 31, 2022 and 2021. 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. As of December 31, 2022 and 2021, there was $ 2.31 billion and $ 2.02 billion, respectively, of potential borrowing capacity available under this agreement. There is no collateral pledged and no advances outstanding as of December 31, 2022 or 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 $ 2.81 billion and $ 2.44 billion as of December 31, 2022 and 2021, respectively. At December 31, 2022 and 2021, the Company had approximately $ 2.35 billion and $ 2.04 billion, respectively, in borrowing capacity available under these arrangements with no outstanding balance as of December 31, 2022 or 2021. Note 9. Income Taxes The components of income tax expense for the years ended December 31 are as follows: 2022 2021 2020 Current income tax expense: Federal $ 3,686 $ 12,774 $ 2,071 State 3,301 6,211 3,222 Total current tax expense 6,987 18,985 5,293 Deferred income tax expense (benefit): Federal 23,838 22,886 ( 12,946 ) State 3,291 1,922 ( 4,501 ) Total deferred tax expense (benefit) 27,129 24,808 ( 17,447 ) Income tax expense (benefit), as reported $ 34,116 $ 43,793 $ ( 12,154 ) Reported income tax expense (benefit) differed from the amounts computed by applying the U.S. federal statutory income tax rate of 21 % in 2022, 2021 and 2020 to income before income taxes as follows: 2022 2021 2020 Income tax expense computed at the statutory rate $ 44,168 $ 44,266 $ 9,952 State income tax expense (benefit), net of federal 5,899 6,426 ( 1,009 ) Stock-based compensation expense 73 ( 4,689 ) ( 17,489 ) Decrease in taxes due to investment tax credit ( 16,361 ) ( 3,392 ) — Amended return net benefits ( 3,261 ) — — Net operating loss carryback arising from CARES Act — — ( 3,732 ) Other 3,598 1,182 124 Total income tax expense (benefit) $ 34,116 $ 43,793 $ ( 12,154 ) 119 Table of Contents Live Oak Bancshares, Inc. Notes to Consolidated Financial Statements Components of deferred tax assets and liabilities are as follows: 2022 2021 Deferred tax assets: Net unrealized losses on securities available for sale $ 29,153 $ — Allowance for loan and lease losses 27,159 19,918 Stock-based compensation expense 5,248 3,720 Capitalized research and experimentation costs 3,780 — Accrued expenses 1,070 2,247 Operating lease liabilities 618 584 Goodwill and intangibles 14 71 Mark to market on loans held for sale — 24,213 Deferred loan fees and costs, net — 3,388 Other 1,147 1,474 Total deferred tax assets 68,189 55,615 Deferred tax liabilities: Premises and equipment 39,054 41,038 Net unrealized gains on non-marketable and other equity securities 22,309 23,273 Mark to market on loans held for sale 14,036 — Unguaranteed loan discount 4,309 6,171 Deferred loan fees and costs, net 1,332 — Operating lease right-of-use assets 511 534 Net unrealized gains on securities available for sale — 614 Other 13 — Total deferred tax liabilities 81,564 71,630 Net deferred tax (liability) asset $ ( 13,375 ) $ ( 16,015 ) The Company assesses the realizability of deferred tax assets at each reporting period and considers whether it is more likely than not that a deferred tax asset will not be realized. The realization of a deferred tax asset is dependent upon the generation of future taxable income during periods in which the related temporary difference becomes deductible or realizable prior to its expiration. The Company considers projected future taxable income, scheduled reversal of deferred tax liabilities, cessation of investing in renewable energy assets that generate investment tax credits and tax planning strategies in making this assessment. Based on these considerations, management believes it is more likely than not that the deferred tax assets will be realized. ASC 740, Income Taxes, defines the threshold for recognizing the benefits of tax return positions in the financial statements as "more-likely-than-not" to be sustained by the taxing authority. The Company does not have material uncertain tax positions, interest or penalties recorded in the consolidated balance sheets or statements of income as of or for the years ended December 31, 2022, 2021 and 2020. The Company files a consolidated income tax return in the U.S. federal tax jurisdiction. Generally, the Company’s federal and state tax returns are no longer subject to examination by the taxing authorities for years prior to 2015. 120 Table of Contents Live Oak Bancshares, Inc. Notes to Consolidated Financial Statements Note 10. Fair Value of Financial Instruments Fair Value Hierarchy There are three levels of inputs in the fair value hierarchy that may be used to measure fair value. Financial instruments are considered Level 1 when valuation can be based on quoted prices in active markets for identical assets or liabilities. Level 2 financial instruments are valued using quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or models using inputs that are observable or can be corroborated by observable market data of substantially the full term of the assets or liabilities. Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable and when determination of the fair value requires significant management judgment or estimation. Recurring Fair Value The following sections provide a description of the valuation methodologies used for instruments measured at fair value on a recurring basis, as well as the general classification of such instruments pursuant to the fair value hierarchy: Investment securities : Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, discounted cash flow or at net asset value per share. Level 2 securities would include U.S. government agency securities, mortgage-backed securities, obligations of states and political subdivisions and certain corporate, asset backed 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. Loans held for sale: The fair values of loans held for sale accounted for under the fair value option are determined by discounting estimated cash flows using interest rates approximating prevailing market rates for similar loans adjusted to reflect the inherent credit risk. Due to the nature of the valuation inputs, loans held for sale are classified within Level 3 of the valuation hierarchy. Loans held for investment: The fair values of loans held for investment accounted for under the fair value option are typically determined based on discounted cash flow analyses using market-based interest rate spreads. Discounted cash flow analyses are adjusted, as appropriate, to reflect current market conditions and borrower-specific credit risk. If the loan is collateral dependent, the fair value is determined based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date. Fair value of the loan’s collateral is determined by appraisals, independent valuation, or management’s estimation of fair value which is then adjusted for the cost related to liquidation of the collateral. Due to the nature of the valuation inputs, loans held for investment are classified within Level 3 of the valuation hierarchy. Servicing assets: Servicing rights do not trade in an active, open market with readily observable prices. While sales of servicing rights do occur, the precise terms and conditions typically are not readily available. Accordingly, the Company estimates the fair value of servicing rights using discounted cash flow models incorporating numerous assumptions from the perspective of a market participant including servicing income, servicing costs, market discount rates and prepayment speeds. Due to the nature of the valuation inputs, servicing rights are classified within Level 3 of the valuation hierarchy. Mutual fund: The mutual fund is registered with the Securities and Exchange Commission as a closed-end, non-diversified management investment company and operates as an interval fund. The fund primarily invests in the unguaranteed portion of SBA504 first lien loans secured by owner-occupied commercial real estate. This investment is valued using quoted prices in markets that are not active and is classified as Level 2 within the valuation hierarchy. 121 Table of Contents Live Oak Bancshares, Inc. Notes to Consolidated Financial Statements Equity warrant assets: Fair value measurements of equity warrant assets of private companies are priced based on a Black-Scholes option pricing model to estimate the asset value by using stated strike prices, option expiration dates, risk-free interest rates and option volatility assumptions. Option volatility assumptions used in the Black-Scholes model are based on public companies that operate in similar industries as the companies in the Company’s private company portfolio. Option expiration dates are modified to account for estimates of actual life relative to stated expiration. Values are further adjusted for a general lack of liquidity due to the private nature of the associated underlying company. The Company classifies equity warrant assets within Level 3 of the valuation hierarchy. The table below provides a rollforward of the Level 3 equity warrant asset fair values. Twelve months ended December 31, Equity Warrant Assets 2022 2021 Balance at beginning of period $ 1,672 $ 908 Issuances 833 229 Net gains on derivative instruments 671 1,088 Settlements ( 966 ) ( 553 ) Balance at end of period $ 2,210 $ 1,672 The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis. December 31, 2022 Total Level 1 Level 2 Level 3 Investment securities available-for-sale US government agencies $ 15,668 $ — $ 15,668 $ — Mortgage-backed securities 995,574 — 995,574 — Municipal bonds (1) 2,977 — 2,884 93 Other debt securities 500 — 500 — Loans held for investment 494,458 — — 494,458 Servicing assets (2) 26,323 — — 26,323 Mutual fund 1,656 — 1,656 — Equity warrant assets 2,210 — — 2,210 Total assets at fair value $ 1,539,366 $ — $ 1,016,282 $ 523,084 122 Table of Contents Live Oak Bancshares, Inc. Notes to Consolidated Financial Statements December 31, 2021 Total Level 1 Level 2 Level 3 Investment securities available-for-sale US government agencies $ 10,637 $ — $ 10,637 $ — Mortgage-backed securities 889,339 — 889,339 — Municipal bonds (1) 3,576 — 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 — — 33,574 Mutual fund 2,379 — 2,379 — Equity warrant assets 1,672 — — 1,672 Total assets at fair value $ 1,614,188 $ — $ 908,335 $ 705,853 (1) During the year ended December 31, 2022, the Company recorded a principal paydown of $ 1 thousand and a fair value adjustment loss of $ 2 thousand. During the year ended December 31, 2021, the Company recorded a principal paydown of $ 1 thousand and a fair value adjustment gain of $ 1 thousand. (2) See Note 5 for a rollforward of recurring Level 3 fair values for servicing assets. 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 on loans accounted for under the fair value option is recognized in loans and fees on loans on the Company’s consolidated statements of income. 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 accounting standards, any loans for which fair value was previously elected will continue to be measured as such. There were no loans accounted for under the fair value option that were 90 days or more past due and still accruing interest at December 31, 2022 or 2021. The unpaid principal balance of unguaranteed exposure for nonaccruals was $ 7.2 million and $ 6.9 million at December 31, 2022 and 2021, respectively. 123 Table of Contents Live Oak Bancshares, Inc. Notes to Consolidated Financial Statements 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 December 31, 2022 and December 31, 2021. December 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 investment $ 494,458 $ 513,219 $ ( 18,761 ) $ 44,890 $ 46,993 $ ( 2,103 ) $ 24,663 $ 26,321 $ ( 1,658 ) $ 494,458 $ 513,219 $ ( 18,761 ) $ 44,890 $ 46,993 $ ( 2,103 ) $ 24,663 $ 26,321 $ ( 1,658 ) 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. Twelve Months Ended December 31, Gains (Losses) on Loans Accounted for under the Fair Value Option 2022 2021 Loans held for sale $ 1,521 $ 502 Loans held for investment ( 475 ) 3,755 $ 1,046 $ 4,257 Losses related to borrower-specific credit risk were $ 1.9 million and $ 1.5 million for the twelve months ended December 31, 2022 and 2021, respectively. 124 Table of Contents Live Oak Bancshares, Inc. Notes to Consolidated Financial Statements The following tables summarize the activity pertaining to loans accounted for under the fair value option. Twelve Months Ended December 31, Loans held for sale 2022 2021 Balance at beginning of period $ 25,310 $ 36,111 Repurchases & Issuances 65 — Fair value changes 1,521 502 Transfers ( 26,219 ) — Settlements ( 677 ) ( 11,303 ) Balance at end of period $ — $ 25,310 Twelve Months Ended December 31, Loans held for investment 2022 2021 Balance at beginning of period $ 645,201 $ 815,374 Repurchases & Issuances 18,629 37,159 Fair value changes ( 475 ) 3,755 Transfers 26,219 — Settlements ( 195,116 ) ( 211,087 ) Balance at end of period $ 494,458 $ 645,201 Non-recurring Fair Value The following sections provide a description of the valuation methodologies used for instruments measured at fair value on a non-recurring basis, as well as the general classification of such instruments pursuant to the fair value hierarchy: Collateral-dependent loans : Loans are considered collateral-dependent when the Company has determined that foreclosure of the collateral is probable or when a borrower is experiencing financial difficulty and the loan is expected to be repaid substantially through the operation or sale of collateral. A collateral-dependent loan’s ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date. Fair value of the loan’s collateral is determined by appraisals, independent valuation, or management’s estimation of fair value which is then adjusted for the cost related to liquidation of the collateral. Collateral-dependent loans are generally classified as Level 3 based on management’s judgment and estimation. Loans with agreed upon sales prices are classified as Level 1. 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. 125 Table of Contents Live Oak Bancshares, Inc. Notes to Consolidated Financial Statements The tables below present the recorded amount of assets and liabilities measured at fair value on a non-recurring basis. December 31, 2022 Total Level 1 Level 2 Level 3 Collateral-dependent loans $ 4,840 $ — $ — $ 4,840 Total assets at fair value $ 4,840 $ — $ — $ 4,840 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 Level 3 Analysis For Level 3 assets and liabilities measured at fair value as of December 31, 2022 and December 31, 2021, the significant unobservable inputs used in the fair value measurements were as follows: December 31, 2022 Level 3 Assets with Significant Unobservable Inputs Fair Value Valuation Technique Significant Unobservable Inputs Range Weighted Average (1) Recurring fair value Municipal bond $ 93 Discounted expected cash flows Discount rate 6.0 % N/A Prepayment speed 5.0 % N/A Loans held for investment $ 494,458 Discounted expected cash flows Loss rate 0.0 % - 79.3 % 1.9 % Discount rate 7.5 % - 11.2 % 10.0 % Prepayment speed 16.5 % 16.5 % Discounted appraisals Appraisal adjustments (2) 0.0 % - 77.3 % 28.6 % Equity warrant assets $ 2,210 Black-Scholes option pricing model Volatility 26.5 % - 90.0 % 34.2 % Risk-free interest rate 3.9 % - 4.0 % 3.9 % Marketability discount 20.0 % 20.0 % Remaining life 3 - 10 years 7.7 years Non-recurring fair value Collateral-dependent loans $ 4,840 Discounted appraisals Appraisal adjustments (2) 10.0 % - 66.5 % 34.2 % 126 Table of Contents Live Oak Bancshares, Inc. Notes to Consolidated Financial Statements December 31, 2021 Level 3 Assets with Significant Unobservable Inputs Fair Value Valuation Technique Significant Unobservable Inputs Range Weighted Average (1) Recurring fair value Municipal bond $ 96 Discounted expected cash flows Discount rate 4.8 % N/A Prepayment speed 5.0 % N/A Loans held for sale $ 25,310 Discounted expected cash flows Discount rate 6.2 % - 21.9 % 6.6 % Prepayment speed 17.4 % 17.4 % Loans held for investment $ 645,201 Discounted expected cash flows Loss rate 0.0 % - 70.2 % 1.5 % Discount rate 6.2 % - 21.9 % 6.6 % Prepayment speed 17.4 % 17.4 % Discounted appraisals Appraisal adjustments (2) 10.0 % - 85.0 % 16.2 % Equity warrant assets $ 1,672 Black-Scholes option pricing model Volatility 26.2 % - 88.2 % 39.2 % Risk-free interest rate 1.3 % - 1.5 % 1.5 % Marketability discount 20.0 % 20.0 % Remaining life 4 - 10 years 7.5 years Non-recurring fair value Collateral-dependent loans $ 1,567 Discounted appraisals Appraisal adjustments (2) 10.0 % - 99.0 % 32.9 % Foreclosed assets $ 620 Discounted appraisals Appraisal adjustments (2) 9.0 % - 10.0 % 9.5 % (1) Weighted averages are determined by the relative fair value of the instruments or the relative contribution to the instruments fair value. (2) Appraisals may be adjusted by management for customized discounting criteria, estimated sales costs, and other qualitative adjustments. Estimated Fair Value of Other Financial Instruments GAAP also requires disclosure of fair value information about financial instruments carried at book value on the consolidated 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. 127 Table of Contents Live Oak Bancshares, Inc. Notes to Consolidated Financial Statements The carrying amounts and estimated fair values of the Company’s financial instruments are as follows: December 31, 2022 Carrying Amount Quoted Price In Active Markets for Identical Assets/Liabilities (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Fair Value Financial assets Cash and due from banks $ 280,239 $ 280,239 $ — $ — $ 280,239 Federal funds sold 136,397 136,397 — — 136,397 Certificates of deposit with other banks 4,000 4,000 — — 4,000 Loans held for sale 554,610 — — 577,254 577,254 Loans and leases held for investment, net of allowance for credit losses on loans and leases 6,753,154 — — 6,652,936 6,652,936 Financial liabilities Deposits 8,884,928 — 8,532,615 — 8,532,615 Borrowings 83,203 — — 82,258 82,258 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 — — 312,036 312,036 128 Table of Contents Live Oak Bancshares, Inc. Notes to Consolidated Financial Statements Note 11. Commitments and Contingencies Litigation In the ordinary course of operations, the Company is at times involved in legal proceedings. In the opinion of management, as of December 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. 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 alleged 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 alleged 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 sought 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 settlement became effective on June 11, 2022. Financial Instruments with Off-balance-sheet Risk The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, credit risk in excess of the amount recognized in the balance sheet. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as for on-balance-sheet instruments. A summary of the Company’s commitments is as follows: December 31, 2022 December 31, 2021 Commitments to extend credit $ 2,731,866 $ 2,634,387 Standby letters of credit 26,454 10,753 Airplane purchase agreement commitments 24,000 — Total unfunded off-balance sheet credit risk $ 2,782,320 $ 2,645,140 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. Commitment letters are issued after approval of the loan by the Credit 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. 129 Table of Contents Live Oak Bancshares, Inc. Notes to Consolidated Financial Statements As of December 31, 2022 and 2021, the Company had unfunded commitments to provide capital contributions for on-balance sheet instruments in the amount of $ 26.1 million and $ 10.4 million, respectively. Concentrations of Credit Risk 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 exposure exceeds $ 20.0 million, except for 23 relationships that have a retained unguaranteed exposure of $ 701.9 million of which $ 440.9 million of the unguaranteed exposure has been disbursed. Additionally, the Company has future minimum lease payments receivable under non-cancelable operating leases totaling $ 58.0 million, of which no relationships exceed $ 20.0 million. The Company from time-to-time may have cash and cash equivalents on deposit with financial institutions that exceed federally-insured limits. Note 12. Benefit Plans Defined Contribution Plan The Company maintains an employee benefit plan pursuant to Section 401(k) of the Internal Revenue Code. The plan covers substantially all employees. Participants may contribute a percentage of compensation, subject to a maximum allowed under the Code. In addition, the Company makes certain matching contributions and may make additional contributions at the discretion of the board of directors. Company expense relating to the plan for the years ended December 31, 2022, 2021 and 2020 amounted to $ 6.3 million, $ 4.4 million and $ 3.9 million, respectively. Flexible Benefits Plan The Company maintains a Flexible Benefits Plan which covers substantially all employees. Participants may set aside pre-tax dollars to provide for future expenses such as dependent care. Employee Stock Purchase Plan The Company adopted an Employee Stock Purchase Plan on October 8, 2014, which plan was most recently amended and restated as of March 22, 2021 and approved by the Company’s shareholders on May 11, 2021 (“ESPP”), within the meaning of Section 423 of the Internal Revenue Code of 1986, as amended. Under this plan, eligible employees are able to purchase available shares with post-tax dollars as of the grant date. In order for employees to be eligible to participate in this plan 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 was $ 188 thousand, $ 118 thousand and $ 92 thousand for fiscal years 2022, 2021 and 2020, respectively. Stock Option Plans On March 20, 2015, the Company adopted the 2015 Omnibus Stock Incentive Plan which replaced the previously existing Amended Incentive Stock Option Plan and Nonstatutory Stock Option Plan. Subsequently on May 24, 2016, the 2015 Omnibus Stock Incentive Plan was amended and restated, and on May 15, 2018, the 2015 Omnibus Stock Incentive Plan was amended, to authorize awards covering a maximum of 7,000,000 and 8,750,000 common voting shares, respectively. On May 11, 2021, the Amended and Restated 2015 Omnibus Stock Incentive Plan was amended to authorize awards covering a maximum of 10,750,000 common voting shares. Options or restricted shares granted under the Amended and Restated 2015 Omnibus Stock Incentive Plan (the “Plan”) expire no more than 10 years from date of grant. Exercise prices under the Plan are set by the Board of Directors at the date of grant but shall not be less than 100 % of fair market value of the related stock at the date of the grant. Forfeitures are recognized as they occur. 130 Table of Contents Live Oak Bancshares, Inc. Notes to Consolidated Financial Statements Compensation cost relating to share-based payment transactions are recognized in the financial statements with measurement based upon the fair value of the equity or liability instruments issued. For the years ended December 31, 2022, 2021 and 2020 the Company recognized $ 753 thousand, $ 1.3 million and $ 1.5 million in compensation expense for stock options, respectively. Stock option activity under the Plan during the year ended December 31, 2022 is summarized below. Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term Aggregate Intrinsic Value Outstanding at December 31, 2021 1,062,681 $ 12.94 Exercised ( 228,941 ) 13.58 Forfeited ( 8,626 ) 15.75 Outstanding at December 31, 2022 825,114 $ 12.73 2.28 $ 14,412,142 Exercisable at December 31, 2022 787,354 $ 12.67 2.24 $ 13,803,102 The following is a summary of non-vested stock option activity for the Company for the years ended December 31, 2022, 2021 and 2020. Shares Weighted Average Grant Date Fair Value Non-vested at December 31, 2019 1,485,396 $ 4.73 Vested ( 387,867 ) 3.05 Forfeited ( 74,893 ) 4.52 Non-vested at December 31, 2020 1,022,636 5.38 Vested ( 592,693 ) 4.35 Forfeited ( 47,093 ) 7.28 Non-vested at December 31, 2021 382,850 6.75 Vested ( 336,464 ) 6.85 Forfeited ( 8,626 ) 6.95 Non-vested at December 31, 2022 37,760 $ 6.60 The total intrinsic value of options exercised during the years ended December 31, 2022, 2021 and 2020 was $ 7.0 million, $ 46.3 million and $ 15.9 million, respectively. At December 31, 2022, unrecognized compensation costs relating to stock options amounted to $ 25 thousand which will be recognized over a weighted average period of 0.27 years. There were no options granted in 2022, 2021 or 2020. Restricted Stock Plan In 2010, the Company adopted a Restricted Stock Plan. Under this plan, a total of 1,350,000 shares of Common Stock were available for issuance to eligible employees. Restricted stock grants vested in equal installments ranging from immediate vesting to over a seven year period from the date of the grant. Under the 2015 Omnibus Stock Incentive Plan, which replaced the previously existing Restricted Stock Plan, during 2020, 586,132 restricted stock units were granted to eligible employees and outside directors at a weighted average grant date fair value of $ 17.78 . During 2021, 1,329,508 restricted stock units were granted to eligible employees and outside directors at a weighted average grant date fair value of $ 58.19 . The vesting of these grants was time based and had no market price conditions. During 2022, 885,939 restricted stock units were granted to eligible employees and outside directors at a weighted average grant date fair value of $ 37.75 , of which the vesting of all grants was time based. 131 Table of Contents Live Oak Bancshares, Inc. Notes to Consolidated Financial Statements The fair value of each restricted stock unit is based on the market value of the Company’s stock on the date of the grant. Restricted stock awards are authorized in the form of restricted stock awards or units (“RSUs”) and restricted stock awards or units with a market price condition (“Market RSUs”). 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 may have a restriction based on the passage of time and may have non-market-related performance criteria, but also have a restriction based on market price criteria related to the Company’s share price closing at or above a specified price for at least twenty ( 20 ) consecutive trading days at any time prior to the expiration date of the grants. For the outstanding Market RSUs as of December 31, 2020, the market price conditions ranged from $ 45.00 to $ 55.00 per share. The non-market-related performance criteria had all been satisfied as of December 31, 2020. 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. The following is a summary of non-vested RSU stock activity for the Company for the year ended December 31, 2022. Shares Weighted Average Grant Date Fair Value Non-vested at December 31, 2021 1,907,513 $ 46.12 Granted 885,939 37.75 Vested ( 314,703 ) 41.62 Forfeited ( 69,051 ) 46.23 Non-vested at December 31, 2022 2,409,698 $ 43.63 During 2021 and 2020, the Company granted 1,329,508 and 586,132 RSUs, respectively. The weighted average grant date fair value for RSUs granted in 2021 and 2020 were $ 58.19 and $ 17.78 respectively. For the years ended December 31, 2022, 2021 and 2020 the Company recognized $ 19.4 million, $ 11.4 million and $ 3.5 million in compensation expense for RSUs, respectively. At December 31, 2022, unrecognized compensation costs relating to RSUs amounted to $ 88.1 million which will be recognized over a weighted average period of 4.18 years. 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. For the years ended December 31, 2021 and 2020, the Company recognized $ 4.2 million and $ 9.7 million, respectively, in compensation expense for Market RSUs. For the year ended December 31, 2021, 575,500 Market RSUs met the performance stock price conditions for the $ 45.00 , $ 48.00 $ 50.00 and $ 55.00 stock price for twenty consecutive days. The remaining expense of $ 3.7 million was fully recognized due to the accelerated vesting. For the year ended December 31, 2020, 2,513,233 Market RSUs met the performance stock price conditions for the $ 34.00 $ 35.00 $ 38.00 and $ 40.00 stock price for twenty consecutive days. The remaining expense of $ 2.4 million was fully recognized due to the accelerated vesting. There were no remaining Market RSUs at year end December 31, 2022 and 2021. 132 Table of Contents Live Oak Bancshares, Inc. Notes to Consolidated Financial Statements Employee Incentive Compensation The Company has an incentive compensation framework whereby full-time employees are eligible to receive an annual cash bonus payment plus the opportunity for an annual long-term incentive (“LTI”) equity grant in the form of RSUs. Both cash bonus and LTI equity grants are based on each individual’s base pay and overall Company performance. LTI grants are also influenced by each individual’s tiered target as a percent of base pay. Total expenses related to the cash bonus for employees were $ 9.4 million, $ 7.7 million and $ 6.7 million for the years ended December 31, 2022, 2021 and 2020, respectively. In addition, for the years ended December 31, 2022, 2021 and 2020 the Company had discretionary special bonuses related to fintech investment gains and PPP loan efforts of $ 10.5 million, $ 4.0 million and $ 7.2 million, respectively, to most full-time employees. Note 13. Regulatory Matters Dividends The Bank, as a North Carolina banking corporation, may pay dividends to shareholders provided the bank does not make distributions that reduce its capital below its applicable required capital, pursuant to North Carolina General Statutes Section 53C-4-7. However, regulatory authorities may limit payment of dividends by any bank when it is determined that such a limitation is in the public interest and is necessary to ensure financial soundness of the bank. Capital Requirements The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. The Basel III Capital Rules, a comprehensive capital framework for U.S. banking organizations, includes quantitative measures designed to ensure capital adequacy. The Basel III Rules require the Company and the Bank to maintain (i) a minimum common equity Tier 1 ratio minimum of 4.50 percent plus a 2.50 percent “capital conservation buffer” (effectively resulting in minimum common equity Tier 1 ratio of 7.00 percent), (ii) Tier 1 risk-based capital minimum of 6.00 percent plus the capital conservation buffer (effectively resulting in a minimum Tier 1 risk-based capital ratio of 8.50 percent), (iii) total risk-based capital ratio minimum of 8.00 percent plus the capital conservation buffer (effectively resulting in a minimum total risk-based capital ratio of 10.5 percent) and (iv) Tier 1 leverage capital ratio minimum of 4.00 percent. The capital conservation buffer is designed to absorb losses during periods of economic stress and effectively increases the minimum required risk-weighted capital ratios. Failure to meet minimum capital requirements may result in certain actions by regulators that could have a direct material effect on the consolidated financial statements. As discussed in Note 1. Organization and Summary of Significant Accounting Policies, the Company recorded a cumulative effect increase to retained earnings totaling $ 822 thousand on January 1, 2020 as a result of the adoption of ASC 326. The Company did not elect the federal banking agencies’ transition option that allowed banking organizations to phase in the day one effects of ASC 326 on their regulatory capital ratios over multiple years. Federal bank regulatory agencies have issued an interim final rule that permits banks to neutralize the regulatory capital effects of participating in the PPPLF and clarify that PPP loans have a zero percent risk weight under applicable risk-based capital rules. Specifically, a bank may exclude all PPP loans pledged as collateral to the PPPLF from its average total consolidated assets for the purposes of calculating its leverage ratio, while PPP loans that are not pledged as collateral to the PPPLF will be included. Accordingly, the Company’s PPP loans are excluded from the calculation of the leverage ratio as of December 31, 2022 and 2021. Based on the most recent notification from the Federal Deposit Insurance Corporation, the Bank is well capitalized under the regulatory framework for prompt corrective action. As of December 31, 2022, the Company and the Bank met all capital adequacy requirements to which they are subject and were not aware of any conditions or events that would change each entity’s well capitalized status. 133 Table of Contents Live Oak Bancshares, Inc. Notes to Consolidated Financial Statements Capital amounts and ratios as of December 31, 2022 and 2021, are presented in the following table. Actual Minimum Capital Requirement Minimum To Be Well Capitalized Amount Ratio Amount Ratio Amount Ratio Consolidated - December 31, 2022 Common Equity Tier 1 (to Risk-Weighted Assets) $ 888,235 12.47 % $ 320,446 4.50 % N/A N/A Total Capital (to Risk-Weighted Assets) $ 977,360 13.73 % $ 569,681 8.00 % N/A N/A Tier 1 Capital (to Risk-Weighted Assets) $ 888,235 12.47 % $ 427,261 6.00 % N/A N/A Tier 1 Capital (to Average Assets) $ 888,235 9.26 % $ 383,499 4.00 % N/A N/A Bank - December 31, 2022 Common Equity Tier 1 (to Risk-Weighted Assets) $ 730,092 10.70 % $ 307,179 4.50 % $ 443,703 6.50 % Total Capital (to Risk-Weighted Assets) $ 815,577 11.95 % $ 546,096 8.00 % $ 682,620 10.00 % Tier 1 Capital (to Risk-Weighted Assets) $ 730,092 10.70 % $ 409,572 6.00 % $ 546,096 8.00 % Tier 1 Capital (to Average Assets) $ 730,092 7.70 % $ 379,396 4.00 % $ 474,245 5.00 % 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 % 134 Table of Contents Live Oak Bancshares, Inc. Notes to Consolidated Financial Statements Note 14. Transactions with Related Parties The Company has entered into transactions with its directors, officers, significant shareholders, their affiliates, and equity method investments (“related parties”). The following table provides related party loan activity during 2022. Amount Balance as of December 31, 2021 $ 17,089 Loan originations 19,172 Loan repayments ( 14,523 ) Balance as of December 31, 2022 $ 21,738 Deposits from related parties held by the Company as of December 31, 2022 and 2021 amounted to $ 63.5 million and $ 40.3 million, respectively. Transactions with related parties include the following equity method investments: Apiture, Inc. (“Apiture”), Canapi Funds, Cape Fear Collective 1 & 2, Green Sun, Sunvest, and HEP. Apiture is a digital banking solution for financial institutions. The Canapi Funds are investment funds which focus on providing venture capital to new and emerging financial technology companies. Each of Cape Fear Collective 1 & 2 is a “qualified housing project” within the meaning of 12 CFR 362.3 and serves as a special purpose vehicle to purchase residential homes available for sale in the community. Green Sun, Sunvest, and HEP are solar income tax credit projects. See Note 2. Securities, section captioned “Equity Method Accounting,” for further detail on equity method investments. During the years ended December 31, 2022, 2021 and 2020, the Company paid Apiture $ 2.0 million, $ 1.2 million and $ 377 thousand, respectively, for professional services. During 2022, 2021 and 2020, the Company recognized income from Apiture of $ 438 thousand, $ 601 thousand and $ 782 thousand, respectively, for shared services and rent. During the years ended December 31, 2022, 2021 and 2020, the Company made charitable contributions in the amounts of $ 310 thousand, $ 352 thousand and $ 282 thousand, respectively, to Collective Impact in New Hanover County, a 501(c)(3) charitable organization (“Collective Impact”). Cape Fear Collective Ventures, LLC, a wholly owned subsidiary of Collective Impact, manages each of Cape Fear Collective 1 & 2. Note 15. Significant Equity Method Investments In accordance with Rules 3-09 and 4-08(g) of Regulation S-X, the Company must assess whether any of its equity method investments are significant equity method investments. In evaluating the significance of these investments, the Company performed the income test, the investment test and the asset test described in S-X 3-05 and S-X 1-02(w). Rule 3-09 of Regulation S-X requires separate audited financial statements of an equity method investee in an annual report if either the income or investment test exceeds 20%. As of December 31, 2022, 2021 and 2020, none of our investments were considered a significant subsidiary under Rule 3-09. Rule 4-08(g) of Regulation S-X requires summarized financial information in an annual report if any of the three tests exceeds 10%. Under the income test, the Company’s proportionate share of its equity method investees' aggregated net losses exceeded the applicable threshold of 10% for the year ended December 31, 2020, and are accordingly required to provide summarized financial information for these investees for all periods presented in this Form 10-K. 135 Table of Contents Live Oak Bancshares, Inc. Notes to Consolidated Financial Statements The following table provides summarized balance sheet information for the Company’s combined equity method investments as of December 31, 2022 and 2021. The Company’s equity method investments are included in the other assets line on the consolidated balance sheet and are largely concentrated in new or emerging financial service technology companies and solar investment tax credits. As of December 31, Balance sheet data 2022 2021 Current assets $ 58,683 $ 90,629 Noncurrent assets 889,677 776,171 Total assets $ 948,360 $ 866,800 Current liabilities $ 16,947 $ 37,730 Noncurrent liabilities 16,799 14,052 Total liabilities 33,746 51,782 Equity interests 914,614 815,018 Total liabilities and equity $ 948,360 $ 866,800 The following table provides summarized income statement information for the Company’s combined equity method investments for the years ended December 31, 2022, 2021 and 2020. Years ended December 31, Summary of operations 2022 2021 2020 Total revenues $ 74,908 $ 79,016 $ 68,038 Net (loss) income ( 65,208 ) 215,792 ( 68,406 ) Note 16. 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 operates two reportable segments for management reporting purposes as discussed below: Banking - This segment specializes in providing financing services to small businesses nationwide in targeted industries and 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 origination and 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 equity method and equity security investments and management fees. The Fintech segment is comprised of the Company's direct wholly owned subsidiaries Live Oak Ventures and Canapi Advisors, and the investments held by those entities, as well as the Bank's investment in Apiture. 136 Table of Contents Live Oak Bancshares, Inc. Notes to Consolidated Financial Statements The following tables provide financial information for the Company's segments. The information provided under the caption “Other” represents operations not considered to be reportable segments and/or general operating expenses of the Company, and includes the parent company, other non-bank subsidiaries and elimination adjustments to reconcile the results of the operating segments to the consolidated financial statements prepared in conformity with GAAP. Banking Fintech Other Consolidated As of and for the year ended December 31, 2022 Interest income $ 444,307 $ 93 $ 73 $ 444,473 Interest expense 115,324 — 1,648 116,972 Net interest income 328,983 93 ( 1,575 ) 327,501 Provision for loan and lease credit losses 40,943 — — 40,943 Noninterest income 80,562 155,028 2,402 237,992 Noninterest expense 296,891 9,413 7,922 314,226 Income tax (benefit) expense ( 226 ) 36,016 ( 1,674 ) 34,116 Net income (loss) $ 71,937 $ 109,692 $ ( 5,421 ) $ 176,208 Total assets $ 9,672,458 $ 124,249 $ 58,791 $ 9,855,498 As of and for the year ended December 31, 2021 Interest income $ 360,986 $ 201 $ 26 $ 361,213 Interest expense 63,119 — 1,309 64,428 Net interest income 297,867 201 ( 1,283 ) 296,785 Provision for loan and lease credit losses 15,210 — — 15,210 Noninterest income 114,363 43,141 2,696 160,200 Noninterest expense 215,819 5,395 9,773 230,987 Income tax expense (benefit) 35,539 10,280 ( 2,026 ) 43,793 Net income (loss) $ 145,662 $ 27,667 $ ( 6,334 ) $ 166,995 Total assets $ 8,053,212 $ 121,889 $ 38,292 $ 8,213,393 As of and for the year ended December 31, 2020 Interest income $ 288,305 $ — $ 103 $ 288,408 Interest expense 93,313 — 372 93,685 Net interest income 194,992 — ( 269 ) 194,723 Provision for loan and lease credit losses 40,658 — — 40,658 Noninterest income 77,512 6,567 1,921 86,000 Noninterest expense 181,555 5,510 5,611 192,676 Income tax (benefit) expense ( 7,171 ) 2,989 ( 7,972 ) ( 12,154 ) Net income (loss) $ 57,462 $ ( 1,932 ) $ 4,013 $ 59,543 Total assets $ 7,767,013 $ 83,946 $ 21,344 $ 7,872,303 137 Table of Contents Live Oak Bancshares, Inc. Notes to Consolidated Financial Statements Note 17. Parent Company Only Financial Statements The following balance sheets, statements of income and statements of cash flows are for Live Oak Bancshares, Inc. Balance Sheets As of December 31, 2022 2021 Assets Cash and cash equivalents $ 103,238 $ 10,635 Investment in subsidiaries 704,905 723,803 Other assets 50,801 40,149 Total assets $ 858,944 $ 774,587 Liabilities and Shareholders' Equity Borrowings $ 33,203 $ 50,734 Other liabilities 14,708 8,720 Total liabilities 47,911 59,454 Shareholders' equity: Common stock 330,854 312,294 Retained earnings 572,497 400,893 Accumulated other comprehensive (loss) income ( 92,318 ) 1,946 Total shareholders' equity 811,033 715,133 Total liabilities and shareholders' equity $ 858,944 $ 774,587 Statements of Income Years ended December 31, 2022 2021 2020 Interest income $ 73 $ 25 $ 91 Interest expense 1,648 1,309 372 Net interest loss ( 1,575 ) ( 1,284 ) ( 281 ) Noninterest income: Other noninterest income ( 107 ) 716 252 Total noninterest income ( 107 ) 716 252 Noninterest expense: Salaries and employee benefits 1,444 5,120 17,250 Professional services expense 1,163 679 750 Other expense 1,907 789 1,167 Total noninterest expense 4,514 6,588 19,167 Net loss before equity in undistributed income of subsidiaries ( 6,196 ) ( 7,156 ) ( 19,196 ) Income tax benefit ( 1,358 ) ( 1,615 ) ( 7,785 ) Net loss ( 4,838 ) ( 5,541 ) ( 11,411 ) Equity in undistributed income of subsidiaries in excess of dividends from subsidiaries 181,046 172,536 70,954 Net income attributable to Live Oak Bancshares, Inc. $ 176,208 $ 166,995 $ 59,543 138 Table of Contents Live Oak Bancshares, Inc. Notes to Consolidated Financial Statements Statements of Cash Flows Years ended December 31, 2022 2021 2020 Cash flows from operating activities Net income $ 176,208 $ 166,995 $ 59,543 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Equity in undistributed net income of subsidiaries in excess of dividends of subsidiaries ( 181,046 ) ( 172,536 ) ( 70,954 ) Subsidiary vesting of restricted stock and other ( 14,862 ) 2,679 43,507 Deferred income tax 434 30,070 1,163 Stock option compensation expense 942 1,379 1,594 Restricted stock compensation expense 19,405 15,572 13,146 Business combination contingent consideration fair value adjustments ( 86 ) 99 163 Net change in other assets ( 2,846 ) ( 22,645 ) ( 6,182 ) Net change in other liabilities ( 1,626 ) ( 11,243 ) ( 525 ) Net cash (used in) provided by operating activities ( 3,477 ) 10,370 41,455 Cash flows from investing activities Capital return on (investment in) subsidiaries 121,750 ( 26,407 ) ( 6,354 ) Purchases of equity security investments ( 182 ) ( 84 ) ( 17 ) Purchases of equity method investments ( 904 ) ( 237 ) ( 507 ) Business combination, net of cash acquired — — ( 895 ) Net cash provided by (used in) investing activities 120,664 ( 26,728 ) ( 7,773 ) Cash flows from financing activities Proceeds from borrowings 12,096 57,675 70,000 Repayment of borrowings ( 29,627 ) ( 21,429 ) ( 55,512 ) Stock option exercises 2,118 4,158 3,069 Employee stock purchase program 1,067 670 520 Withholding cash issued in lieu of restricted stock and other ( 4,972 ) ( 19,151 ) ( 49,229 ) Repurchase and retirement of shares — ( 953 ) — Shareholder dividend distributions ( 5,266 ) ( 5,186 ) ( 4,906 ) Net cash (used in) provided by financing activities ( 24,584 ) 15,784 ( 36,058 ) Net change in cash and cash equivalents 92,603 ( 574 ) ( 2,376 ) Cash and cash equivalents at beginning of year 10,635 11,209 13,585 Cash and cash equivalents at end of year $ 103,238 $ 10,635 $ 11,209 139 Table of Contents Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.