What changed in this filing

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Item 1. Financial Statements

2023-05-03 compared with 2022-11-02 · 333 added, 515 removed, 804 unchanged (51% of the section changed)

2 unchanged sentences

Condensed Consolidated Balance Sheets

As of September 30, 2022 (unaudited) and December 31, 2021*

As of March 31, 2023 (unaudited) and December 31, 2022*

(Dollars in thousands)

September 30,

2023 December 31,

3 unchanged sentences

Investment securities available-for-sale 1,149,691 1,014,719

Loans held for sale (includes $ 25,310 measured at fair value at December 31, 2021)

537,649 1,116,519

Loans held for sale 533,292 554,610

Loans and leases held for investment (includes $ 466,950 and $ 494,458 measured at fair value, respectively)

3 unchanged sentences

Premises and equipment, net 268,138 263,290

Foreclosed assets 1,178 620

Servicing assets 29,357 26,323

9 unchanged sentences

Shareholders’ equity

Preferred stock, no par value, 1,000,000 shares authorized, none issued or outstanding at September 30, 2022 and December 31, 2021

Class A common stock, no par value, 100,000,000 shares authorized, 43,981,350 and 43,494,046 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively

Preferred stock, no par value, 1,000,000 shares authorized, none issued or outstanding at March 31, 2023 and December 31, 2022

Class A common stock, no par value, 100,000,000 shares authorized, 44,290,840 and 44,061,244 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively

334,672 330,854

Class B common stock, no par value, 10,000,000 shares authorized, none issued or outstanding at September 30, 2022 and 125,024 shares issued and outstanding at December 31, 2021

Class B common stock, no par value, 10,000,000 shares authorized, none issued or outstanding at March 31, 2023 and December 31, 2022

Retained earnings 572,530 572,497

Accumulated other comprehensive (loss) income ( 95,242 ) 1,946

Accumulated other comprehensive loss ( 84,395 ) ( 92,318 )

Total shareholders’ equity 822,807 811,033

4 unchanged sentences

Condensed Consolidated Statements of Income

For the three and nine months ended September 30, 2022 and 2021 (unaudited)

For the three months ended March 31, 2023 and 2022 (unaudited)

(Dollars in thousands, except per share data)

Three Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 2022 2021

Interest income

14 unchanged sentences

Net gains on sales of loans 10,175 20,977

Net gain (loss) on loans accounted for under the fair value option 4,420 ( 1,030 ) 475 4,323

Net (loss) gain on loans accounted for under the fair value option ( 4,529 ) 516

Equity method investments income (loss) ( 2,952 ) ( 2,124 )

25 unchanged sentences

Live Oak Bancshares, Inc.

Condensed Consolidated Statements of Comprehensive Income

For the three and nine months ended September 30, 2022 and 2021 (unaudited)

Condensed Consolidated Statements of Comprehensive Income (Loss)

For the three months ended March 31, 2023 and 2022 (unaudited)

(Dollars in thousands)

Three Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 2022 2021

Net income $ 398 $ 34,509

Other comprehensive loss before tax:

Net unrealized loss on investment securities available-for-sale during the period ( 47,318 ) ( 6,656 ) ( 127,879 ) ( 17,687 )

Other comprehensive income (loss) before tax:

Net unrealized gain (loss) on investment securities available-for-sale during the period 10,432 ( 50,594 )

Reclassification adjustment for gain on sale of securities available-for-sale included in net income — —

Other comprehensive loss before tax ( 47,318 ) ( 6,656 ) ( 127,879 ) ( 17,687 )

Income tax benefit 11,359 1,598 30,691 4,245

Other comprehensive loss, net of tax ( 35,959 ) ( 5,058 ) ( 97,188 ) ( 13,442 )

Total comprehensive income $ 6,909 $ 28,781 $ 77,228 $ 123,406

Other comprehensive income (loss) before tax 10,432 ( 50,594 )

Income tax (expense) benefit ( 2,509 ) 12,142

Other comprehensive income (loss), net of tax 7,923 ( 38,452 )

Total comprehensive income (loss) $ 8,321 $ ( 3,943 )

See Notes to Unaudited Condensed Consolidated Financial Statements

1 unchanged sentence

Condensed Consolidated Statements of Changes in Shareholders’ Equity

For the three and nine months ended September 30, 2022 and 2021 (unaudited)

For the three months ended March 31, 2023 and 2022 (unaudited)

(Dollars in thousands)

3 unchanged sentences

comprehensive

income (loss) Total

Shares Amount

Class A Class B

Balance at June 30, 2022

43,854,011 — $ 320,924 $ 530,021 $ ( 59,283 ) $ 791,662

Net income — — — 42,868 — 42,868

Other comprehensive loss — — — — ( 35,959 ) ( 35,959 )

Issuance of restricted stock 59,603 — — — — —

Tax withholding related to vesting of restricted stock and other

— — ( 1,362 ) — — ( 1,362 )

Employee stock purchase program 18,264 — 532 — — 532

Stock option exercises 49,472 — 497 — — 497

Stock option compensation expense — — 261 — — 261

Restricted stock compensation expense — — 4,780 — — 4,780

Transfer from retained earnings to other assets for pro rata portion of equity method investee stock compensation expense — — — 208 — 208

Cash dividends ($ 0.03 per share)

— — — ( 1,319 ) — ( 1,319 )

Balance at September 30, 2022

43,981,350 — $ 325,632 $ 571,778 $ ( 95,242 ) $ 802,168

Balance at June 30, 2021 42,754,133 510,327 $ 305,213 $ 339,011 $ 13,123 $ 657,347

Net income — — — 33,839 — 33,839

Other comprehensive loss — — — — ( 5,058 ) ( 5,058 )

Issuance of restricted stock 16,819 — — — — —

Tax withholding related to vesting of restricted stock and other

— — ( 504 ) — — ( 504 )

Employee stock purchase program 7,988 — 374 — — 374

Stock option exercises 91,747 — 693 — — 693

Stock option compensation expense — — 384 — — 384

Restricted stock compensation expense — — 3,329 — — 3,329

Transfer from retained earnings to other assets for pro rata portion of equity method investee stock compensation expense

— — — 320 — 320

Cash dividends ($ 0.03 per share)

— — — ( 1,301 ) — ( 1,301 )

Balance at September 30, 2021

42,870,687 510,327 $ 309,489 $ 371,869 $ 8,065 $ 689,423

See Notes to Unaudited Condensed Consolidated Financial Statements

Live Oak Bancshares, Inc.

Condensed Consolidated Statements of Changes in Shareholders’ Equity (Continued)

For the three and nine months ended September 30, 2022 and 2021 (unaudited)

(Dollars in thousands)

Nine Months Ended

Common stock Retained

earnings Accumulated

comprehensive

income (loss)

4 unchanged sentences

Net income — — — 398 — 398

Other comprehensive loss — — — — ( 97,188 ) ( 97,188 )

Other comprehensive income — — — — 7,923 7,923

Issuance of restricted stock 162,874 — — — — —

3 unchanged sentences

Stock option exercises 35,663 — 367 — — 367

Stock option compensation expense — — 886 — — 886

Stock option based compensation expense — — 133 — — 133

Restricted stock compensation expense — — 6,040 — — 6,040

Non-voting common stock converted to voting common stock in private sale

Adoption of ASU 2022-02

— — — 676 — 676

2 unchanged sentences

— — — ( 1,327 ) — ( 1,327 )

Balance at September 30, 2022

Balance at March 31, 2023

44,290,840 — $ 334,672 $ 572,530 $ ( 84,395 ) $ 822,807

8 unchanged sentences

Stock option exercises 61,934 — 719 — — 719

Stock option compensation expense — — 1,081 — — 1,081

Stock option based compensation expense — — 391 — — 391

Restricted stock compensation expense — — 4,563 — — 4,563

4 unchanged sentences

— — — ( 1,312 ) — ( 1,312 )

Balance at September 30, 2021

Balance at March 31, 2022

43,787,660 — $ 315,607 $ 434,226 $ ( 36,506 ) $ 713,327

2 unchanged sentences

Condensed Consolidated Statements of Cash Flows

For the nine months ended September 30, 2022 and 2021 (unaudited)

For the three months ended March 31, 2023 and 2022 (unaudited)

(Dollars in thousands)

Nine Months Ended

September 30,

Three Months Ended

Cash flows from operating activities

Net income $ 398 $ 34,509

Adjustments to reconcile net income to net cash provided (used) by operating activities:

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization 5,193 5,405

1 unchanged sentence

Amortization of premium on securities, net of accretion 171 1,421

Deferred tax expense 17,258 9,493

Deferred tax (benefit) expense ( 5,541 ) 6,775

Originations of loans held for sale ( 191,466 ) ( 222,557 )

1 unchanged sentence

Net gains on sale of loans held for sale ( 10,175 ) ( 20,977 )

Net loss (gain) on sale of foreclosed assets 49 ( 798 )

Net gain on loans accounted for under fair value option ( 475 ) ( 4,323 )

Net decrease (increase) in servicing assets 4,493 ( 50 )

Net gain on disposal of long-lived asset — ( 114 )

Net loss (gain) on disposal of property and equipment 31 ( 48 )

Impairment on premises and equipment, net — 904

Net loss on sale of foreclosed assets — 17

Net loss (gain) on loans accounted for under fair value option 4,529 ( 516 )

Net increase in servicing assets ( 3,034 ) ( 2,712 )

Net loss on disposal of property and equipment 402 —

Equity method investments (income) loss 2,952 2,124

3 unchanged sentences

Restricted stock compensation expense 6,040 4,563

Stock based compensation excess tax benefit 876 8,882

Stock based compensation excess tax (shortfall) benefit ( 411 ) 1,119

Lease right-of-use assets and liabilities, net ( 17 ) ( 12 )

2 unchanged sentences

Other liabilities 6,097 ( 1,260 )

Net cash provided (used) by operating activities 98,328 ( 134,208 )

Net cash provided by operating activities 158,456 156,439

Cash flows from investing activities

Purchases of investment securities available-for-sale ( 146,030 ) ( 37,837 )

Proceeds from sales, maturities, calls, and principal paydown of investment securities available-for-sale 129,840 183,740

Proceeds from maturities, calls, and principal paydown of investment securities available-for-sale 21,319 47,297

Proceeds from SBA reimbursement/sale of foreclosed assets, net — 333

1 unchanged sentence

Loan and lease originations and principal collections, net ( 455,742 ) ( 243,463 )

Proceeds from sale of long-lived asset — 8,988

Purchases of equity security investments ( 875 ) —

Purchases of equity method investments ( 1,121 ) —

Proceeds from sale of equity security investment 369 15,000

Proceeds from sale of equity method investments 147,713 —

Purchases of premises and equipment, net ( 10,405 ) ( 20,036 )

Net cash (used) provided by investing activities $ ( 903,217 ) $ 48,059

Net cash used by investing activities $ ( 592,854 ) $ ( 253,206 )

See Notes to Unaudited Condensed Consolidated Financial Statements

1 unchanged sentence

Condensed Consolidated Statements of Cash Flows (Continued)

For the nine months ended September 30, 2022 and 2021 (unaudited)

For the three months ended March 31, 2023 and 2022 (unaudited)

(Dollars in thousands)

Nine Months Ended

September 30,

Three Months Ended

Cash flows from financing activities

14 unchanged sentences

Supplemental disclosures of noncash operating, investing, and financing activities

Unrealized holding losses on investment securities available-for-sale, net of taxes $ ( 97,188 ) $ ( 13,442 )

Unrealized holding gains (losses) on investment securities available-for-sale, net of taxes $ 7,923 $ ( 38,452 )

Transfers from loans and leases to foreclosed real estate and other repossessions or SBA receivable

14,880 10,782

Net transfers between foreclosed real estate and SBA receivable — 72

2 unchanged sentences

Transfer from retained earnings to other assets for pro rata portion of equity method investee stock compensation expense

Recording of secured borrowing — 3,993

Equity method investment commitments 7,721 10,971

12 unchanged sentences

A significant portion of the loans originated by the Bank are guaranteed by the Small Business Administration (“SBA”) under the 7(a) Loan Program and the U.S.

Department of Agriculture’s ( “ USDA”) Rural Energy for America Program ("REAP"), Water and Environmental Program (“WEP”) and Business & Industry ( “ B&I”) loan programs.

The Company’s wholly owned subsidiaries include the Bank, Government Loan Solutions, Inc.

Department of Agriculture’s ( “ 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 subsidiaries are the Bank, Government Loan Solutions, Inc.

(“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”).

6 unchanged sentences

TLH was formed in the third quarter of 2022 to hold land adjacent to the Bank's headquarters consisting of wetlands and other protected property for the use and enjoyment of the Bank's employees and customers.

GLS is a management and technology consulting firm that advises and offers solutions and services to participants in the government guaranteed lending sector.

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 Company generates revenue primarily from net interest income and secondarily through the origination and sale of government guaranteed loans.

Income from the retention of loans is comprised of interest income.

Income from the sale of loans is comprised of net gains on sales of loans along with loan servicing revenue and revaluation of related servicing assets.

Income from the retention of loans is comprised principally of interest income.

Income from the sale of loans is comprised of loan servicing revenue and revaluation of related servicing rights along with net gains on sales of loans.

Offsetting these revenues are the cost of funding sources, provision for loan and lease credit losses, any costs related to foreclosed assets and other operating costs such as salaries and employee benefits, travel, professional services, advertising and marketing and tax expense.

The Company also generates gains and losses arising from its financial technology investments in its fintech segment.

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

Live Oak Bancshares, Inc.

1 unchanged sentence

In the opinion of management, all adjustments necessary for a fair presentation of the financial position and results of operations for the periods presented have been included, and all intercompany transactions have been eliminated in consolidation.

Results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2022.

The Unaudited Condensed Consolidated Balance Sheet as of December 31, 2021 has been derived from the audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the Securities Exchange Commission on February 24, 2022 (SEC File No.

Results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2023.

The Condensed Consolidated Balance Sheet as of December 31, 2022 has been derived from the audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the Securities Exchange Commission ( “ SEC ” ) on February 23, 2023 (SEC File No.

001-37497) (the “ 2022 Form 10-K ” ).

1 unchanged sentence

These Unaudited Interim Condensed Consolidated Financial Statements should be read in conjunction with the audited consolidated financial statements and footnotes in the Company's 2022 Form 10-K.

The preparation of financial statements in conformity with United States generally accepted accounting principles ( “ GAAP ” ) requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period.

The preparation of financial statements in conformity with United States ( “ US ” ) generally accepted accounting principles ( “ GAAP ” ) requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period.

Actual results could differ significantly from those estimates.

4 unchanged sentences

Banking and Fintech, as discussed more fully in Note 11.

In determining the appropriateness of a segment definition, the Company considers the criteria of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 280, Segment Reporting .

Changes in Accounting Estimates

During the first quarter of 2023, the Company refined its allowance for credit losses (“ACL”) methodology for estimating probability of default ( “ PD ” ) and loss given default ( “ LGD ” ).

Additionally, the Company began using internally calculated prepayment rates based on its historical information.

These changes, based on the continued maturity of internal data, resulted in a $ 1.5 million increase in the ACL.

The Company also refined its methodology for estimating its reserve on unfunded loan commitments by incorporating historical utilization rates on unused lines of credit and updating probability assumptions related to construction loan commitments.

These changes resulted in a $ 2.4 million increase in the reserve on unfunded commitments.

These refinements represent changes in accounting estimates under Financial Accounting Standards Board ( “ FASB ” ) Accounting Standards Codification ( “ ASC ” ) 250, Accounting Changes and Error Corrections , with prospective application beginning in the period of change.

Reclassifications

1 unchanged sentence

Net income and shareholders’ equity previously reported were not affected by these reclassifications.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Recent Accounting Pronouncements

3 unchanged sentences

ASU 2020-04 provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting.

The amendments are effective for and can be adopted by the Company as of March 12, 2020 , through December 31, 2022.

The Company does not expect this standard will have a material impact on its consolidated financial statements.

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.

2 unchanged sentences

The Company expects to complete all transitions by the second quarter of 2023 or at the next repricing date if later in 2023.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

In March 2022, the FASB issued ASU No.

3 unchanged sentences

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.

The Company adopted the standard on January 1, 2023 using the modified retrospective method resulting in a net increase to retained earnings of $ 676 thousand.

In June 2022, the FASB issued ASU No.

3 unchanged sentences

The Company does not believe this standard will have a material impact on its consolidated financial statements.

In March 2023, the FASB issued ASU No.

2023-02 “Investments-Equity Method and Joint Ventures (Topic 323):

Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method” (“ASU 2023-02”).

ASU 2023-02 permits companies to account for tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method if certain conditions are met.

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.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Earnings Per Share

2 unchanged sentences

Three Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 2022 2021

Basic earnings per share:

9 unchanged sentences

Anti-dilutive stock options and restricted shares 1,436,771 172,631

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Available-for-Sale

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

September 30, 2022 Amortized

March 31, 2023 Amortized

US government agencies $ 25,554 $ 17 $ 324 $ 25,247

9 unchanged sentences

Total $ 1,136,190 $ 270 $ 121,741 $ 1,014,719

During the three months ended September 30, 2022, two mortgage-backed securities totaling $ 3.8 million were settled.

During the three months ended September 30, 2021, two mortgage-backed securities totaling $ 6.2 million were settled.

During the nine months ended September 30, 2022, twenty mortgage-backed securities totaling $ 36.5 million were settled.

During the nine months ended September 30, 2021, one US government agency matured at $ 5.0 million and eight mortgage-backed securities totaling $ 23.1 million were settled.

Accrued interest receivable on available-for-sale securities totaled $ 2.9 million and $ 1.9 million at September 30, 2022 and December 31, 2021, respectively, and is included in other assets in the accompanying Unaudited Condensed Consolidated Balance Sheets.

During the three months ended March 31, 2023, no securities were sold or settled.

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

Accrued interest receivable on available-for-sale securities totaled $ 3.4 million and $ 2.9 million at March 31, 2023 and December 31, 2022, respectively, and is included in other assets in the accompanying Unaudited Condensed Consolidated Balance Sheets.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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

September 30, 2022 Fair

March 31, 2023 Fair

US government agencies $ 12,399 $ 206 $ 2,833 $ 118 $ 15,232 $ 324

1 unchanged sentence

Municipal bonds 2,987 133 83 15 3,070 148

Other debt securities 480 20 — — 480 20

Total $ 466,346 $ 15,476 $ 602,087 $ 96,330 $ 1,068,433 $ 111,806

1 unchanged sentence

December 31, 2022 Fair

US government agencies $ 15,668 $ 412 $ — $ — $ 15,668 $ 412

Mortgage-backed securities 513,639 29,060 456,972 92,023 970,611 121,083

1 unchanged sentence

Total $ 532,191 $ 29,713 $ 457,065 $ 92,028 $ 989,256 $ 121,741

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Management evaluates available-for-sale debt securities to determine whether the unrealized loss is due to credit-related factors or non-credit-related factors.

The evaluation considers the extent to which the security’s fair value is less than cost, the financial condition and near-term prospects of the issuer, and intent and ability of the Company to retain its investment in the security for a period of time sufficient to allow for any anticipated recovery in fair value.

At September 30, 2022, there were one hundred twenty-eight mortgage-backed securities and one municipal bond in unrealized loss positions for greater than 12 months.

There were six US government agency securities, two hundred eighty-three mortgage-backed securities, and one municipal bond in unrealized loss positions for less than 12 months.

Unrealized losses at December 31, 2021 were comprised of thirty-one mortgage-backed securities and one municipal bond in unrealized loss positions for greater than 12 months, and one hundred forty-two mortgage-backed securities in unrealized loss positions for less than 12 months.

At March 31, 2023, there were 279 mortgage-backed securities, one US government agency security and one municipal bond in unrealized loss positions for greater than 12 months.

There were 154 mortgage-backed securities, four US government agency securities, one municipal bond and one other debt security in unrealized loss positions for less than 12 months.

Unrealized losses at December 31, 2022 were comprised of 185 mortgage-backed securities and one municipal bond in unrealized loss positions for greater than 12 months and 236 mortgage-backed securities, five US government agency securities and one municipal bond 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 issuers' ability to honor redemption obligations and the Company has the intent and ability to hold the securities for a sufficient period of time to recover unrealized losses, none of the losses have been recognized in the Company’s Unaudited Condensed Consolidated Statements of Income.

All mortgage-backed securities in the Company’s portfolio at September 30, 2022 and December 31, 2021 were backed by U.S.

All mortgage-backed securities in the Company’s portfolio at March 31, 2023 and December 31, 2022 were backed by U.S.

government sponsored enterprises (“GSEs”).

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

The following is a summary of investment securities by maturity:

September 30, 2022

March 31, 2023

Available-for-Sale

Amortized Cost Fair Value

US government agencies

1 unchanged sentence

One to five years 17,948 17,665

Five to ten years 2,606 2,582

Total 25,554 25,247

13 unchanged sentences

Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.

There were no securities pledged at September 30, 2022 or December 31, 2021.

There were no securities pledged at March 31, 2023 or December 31, 2022.

Live Oak Bancshares, Inc.

3 unchanged sentences

Equity Method Accounting

The carrying amount and ownership percentage of each equity investment over which the Company has significant influence at September 30, 2022 and December 31, 2021 is reflected in the following table:

September 30, 2022 December 31, 2021

The carrying amount and ownership percentage of each equity investment over which the Company has significant influence at March 31, 2023 and December 31, 2022 is reflected in the following table:

March 31, 2023 December 31, 2022

Amount Ownership % Amount Ownership %

6 unchanged sentences

Canapi Ventures Fund II, LP (3) (5)

7,451 1.6 % — N/A

7,371 1.6 % 7,412 1.6 %

Canapi Ventures SBIC Fund II, LP (4) (5)

8,000 3.7 % — N/A

7,907 2.9 % 7,981 3.7 %

Other Fintech investments in private companies (6)

240 Various 5,330 Various

236 4.3 % 241 4.3 %

20,720 Various 12,476 Various

Total $ 116,091 $ 110,058

(1) Includes unfunded commitments of $ 5.5 million and $ 6.8 million as of September 30, 2022 and December 31, 2021, respectively.

(2) Includes unfunded commitments of $ 632 thousand and $ 770 thousand as of September 30, 2022 and December 31, 2021, respectively.

(3) Includes unfunded commitments of $ 6.8 million as of September 30, 2022.

There were no unfunded commitments as of December 31, 2021.

(4) Includes unfunded commitments of $ 7.9 million as of September 30, 2022.

There were no unfunded commitments as of December 31, 2021.

(1) Includes unfunded commitments of $ 5.5 million as of March 31, 2023 and December 31, 2022.

(2) Includes unfunded commitments of $ 617 thousand as of March 31, 2023 and December 31, 2022.

(3) Includes unfunded commitments of $ 6.9 million as of March 31, 2023 and December 31, 2022.

(4) Includes unfunded commitments of $ 7.6 million and $ 7.5 million as of March 31, 2023 and December 31, 2022, respectively.

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

(6) As of September 30, 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 $ 120.5 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) Other includes affordable housing and solar income tax credit projects.

(6) As of March 31, 2023 and December 31, 2022, Other Fintech investments include Kwipped, Inc.

The investment is accounted for under the equity method due to the Company's ability to exercise significant influence through executive management's board involvement.

(7) As of March 31, 2023, Other investments include low income housing tax credit (“LIHTC”) in Estrella Landing Apartments LLC (“Estrella Landing”), in which the company holds a 99.9 % limited member interest.

Also included in Other investments are 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 are Cape Fear Collective Impact Opportunity 1 LLC (“Cape Fear Collective”) 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 March 31, 2023, there were unfunded commitments of $ 7.7 million and $ 2.6 million for Estrella Landing and HEP, respectively.

The Company also has an unrecorded commitment related to a solar income tax credit investment for $ 18.1 million.

As of December 31, 2022, Other investments include Green Sun, Sun Vest and HEP, which the Company holds a 99.0 % limited member interest in all investments.

Also included within Other investments are Cape Fear Collective and 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.

Managing control of the LIHTC, Solar ITC investments & Cape Fear Collective investments resides with the managing members.

Live Oak Bancshares, Inc.

1 unchanged sentence

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 September 30, 2022 and as of and for the nine months ended September 30, 2022 and 2021 is reflected in the following table:

As of and for the nine month period ended

Cumulative Adjustments September 30, 2022 September 30, 2021

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 March 31, 2023 and as of and for the three months ended March 31, 2023 and 2022 is reflected in the following table:

As of and for the three month period ended

Cumulative Adjustments March 31, 2023 March 31, 2022

Carrying value (1)

3 unchanged sentences

Upward changes for observable prices (2)

50,492 2,022 30,197

Downward changes for observable prices ( 86 ) — —

Net upward change $ 50,406 $ — $ —

(1) Includes $ 3.1 million and $ 2.6 million in unfunded commitments as of September 30, 2022, and September 30, 2021, respectively.

(1) Includes $ 3.3 million and $ 3.2 million in unfunded commitments as of March 31, 2023, and March 31, 2022, respectively.

(2) Cumulative adjustments excludes $ 13.9 million in realized gains for sale of an investment in the second quarter of 2021.

For the three and nine months ended September 30, 2022, the Company recognized unrealized gains on all equity securities held at the reporting date of $ 493 thousand and $ 1.9 million, respectively.

For the three and nine months ended September 30, 2021, the Company recognized unrealized gains on all equity securities held at the reporting date of $ 12 thousand and $ 44.0 million, respectively.

For the three months ended March 31, 2023 and 2022, the Company recognized unrealized gains (losses) on all equity securities held at the reporting date of $ 16 thousand and $( 62 ) thousand, 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 (a “VIE”).

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 an equity 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.

Affordable Housing

The Company has an equity investment in a limited liability company ("LIHTC") that qualifies as an affordable housing project, managed by an unrelated general partner.

The Company accounts for the investment under the proportional amortization method.

Under this method an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance as a component of income tax expense.

The Company also has an equity 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.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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.

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.

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.

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 and the Company’s unfunded capital and other commitments related to the unconsolidated VIEs are carried in other liabilities on the unaudited condensed consolidated balance sheets.

The Company’s maximum exposure to loss from unconsolidated VIEs includes the investment recorded on the Company’s unaudited condensed 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 for solar tax credit investments 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 March 31, 2023 and December 31, 2022:

March 31, 2023 Investment Carrying Amount Maximum Exposure to Loss Liability Recognized Classification

Solar tax credit investments $ 4,758 $ 19,882 $ 2,641 Other assets & other liabilities (1)

Affordable housing 15,961 15,961 7,721 Other assets & other liabilities (2)

Canapi Funds 35,956 35,956 20,576 Other assets & other liabilities

Non-marketable and other equity investments 9,022 9,022 3,308 Other assets & other liabilities

December 31, 2022 Investment Carrying Amount Maximum Exposure to Loss Liability Recognized Classification

Solar tax credit investments $ 5,221 $ 24,295 $ 2,641 Other assets & other liabilities (3)

Affordable housing 7,255 7,255 — Other assets

Canapi Funds 37,021 37,021 20,474 Other assets & other liabilities

Non-marketable and other equity investments 8,509 8,509 3,033 Other assets & other liabilities

(1) Maximum exposure to loss represents $ 4.8 million of current investments and a scenario in which $ 19.9 million in related tax credits are recaptured.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(2) Maximum exposure to loss represents $ 16.0 million of investments.

As there are no tax credits allocated in the current year, there is no increase to the maximum exposure to loss related to recaptured tax credits on the $ 8.8 million LIHTC investment.

(3) 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.

Loans and Leases Held for Investment and Credit Quality

7 unchanged sentences

Total Loans and Leases

September 30, 2022

March 31, 2023

Commercial & Industrial

1 unchanged sentence

Specialty Lending 1,163,485 1,020 4,757 5,777 1,169,262 26,935 1,196,197

Energy & Infrastructure 421,948 3,880 3,082 6,962 428,910 47,987 476,897

Paycheck Protection Program 10,783 — — — 10,783 — 10,783

3 unchanged sentences

Specialty Lending 114,892 — — — 114,892 — 114,892

Energy & Infrastructure 13,618 — — — 13,618 — 13,618

Total 619,291 2,271 — 2,271 621,562 — 621,562

2 unchanged sentences

Specialty Lending 356,774 — — — 356,774 2,269 359,043

Energy & Infrastructure 130,574 — 3,072 3,072 133,646 21,337 154,983

Total 2,679,401 7,606 23,661 31,267 2,710,668 180,791 2,891,459

19 unchanged sentences

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

3 unchanged sentences

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

2 unchanged sentences

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

18 unchanged sentences

Converted to Term Total (1)

September 30, 2022

March 31, 2023

Small Business Banking

8 unchanged sentences

Total 190,959 643,904 421,086 146,944 40,663 11,309 173,473 12,590 1,640,928

Energy & Infrastructure

Risk Grades 1-4 34,168 173,313 169,219 39,425 50,932 42,243 12,646 — 521,946

Risk Grade 5 — 4,024 1,291 13,517 7,123 9,791 — — 35,746

Risk Grades 6 - 8 — — 6,463 3,572 — 8,447 — — 18,482

Total 34,168 177,337 176,973 56,514 58,055 60,481 12,646 — 576,174

Paycheck Protection Program

2 unchanged sentences

Total $ 484,133 $ 2,302,275 $ 1,999,663 $ 1,035,435 $ 577,464 $ 549,566 $ 263,145 $ 17,322 $ 7,229,003

Current Period Gross Charge-offs

Small Business Banking $ — $ 459 $ 197 $ 72 $ 70 $ 415 $ 50 $ — $ 1,263

Specialty Lending — — 4,315 514 — — 600 — 5,429

Total $ — $ 459 $ 4,512 $ 586 $ 70 $ 415 $ 650 $ — $ 6,692

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Term Loans and Leases Amortized Cost Basis by Origination Year

2022 2021 2020 2019 2018 Prior Revolving Loans

12 unchanged sentences

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

2 unchanged sentences

Total $ 2,290,712 $ 2,015,005 $ 1,073,386 $ 595,376 $ 305,809 $ 284,984 $ 254,078 $ 34,804 $ 6,854,154

(1) Excludes $ 512.2 million and $ 645.2 million of loans accounted for under the fair value option as of September 30, 2022 and December 31, 2021, respectively.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(1) Excludes $ 467.0 million and $ 494.5 million of loans accounted for under the fair value option as of March 31, 2023 and December 31, 2022, respectively.

The following tables present guaranteed and unguaranteed loan and lease balances by asset quality indicator:

September 30, 2022 Loan and Lease

March 31, 2023 Loan and Lease

Guaranteed Balance Unguaranteed Balance % Guaranteed

9 unchanged sentences

Total $ 6,854,154 $ 2,703,995 $ 4,150,159 39.5 %

(1) Excludes $ 512.2 million and $ 645.2 million of loans accounted for under the fair value option as of September 30, 2022 and December 31, 2021, respectively.

(1) Excludes $ 467.0 million and $ 494.5 million of loans accounted for under the fair value option as of March 31, 2023 and December 31, 2022, respectively.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Nonaccrual Loans and Leases

As of September 30, 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 three and nine months ended September 30, 2022 and 2021.

As of March 31, 2023 and December 31, 2022 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 three months ended March 31, 2023 and 2022.

Nonaccrual loans and leases are generally included in the held for investment portfolio.

Accrued interest receivable on loans totaled $ 36.1 million and $ 31.0 million at September 30, 2022 and December 31, 2021 , respectively, and is included in other assets in the accompanying Unaudited Condensed Consolidated Balance Sheets.

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

September 30, 2022 Loan and Lease

Accrued interest receivable on loans totaled $ 49.9 million and $ 46.5 million at March 31, 2023 and December 31, 2022 , respectively, and is included in other assets in the accompanying Unaudited Condensed Consolidated Balance Sheets.

Nonaccrual loans and leases held for investment as of March 31, 2023 and December 31, 2022 are as follows:

March 31, 2023 Loan and Lease

Balance Unguaranteed Balance Unguaranteed

3 unchanged sentences

Specialty Lending 7,982 5,094 2,888 —

Total 21,579 18,663 2,916 407

Construction & Development

Small Business Banking 23 — 23 —

Energy & Infrastructure 3,082 2,794 288 288

Total 39,745 32,075 7,670 695

1 unchanged sentence

Small Business Banking 36,177 23,367 12,810 6,403

Energy & Infrastructure 3,072 2,799 273 —

Total 39,249 26,166 13,083 6,403

3 unchanged sentences

Total $ 85,698 $ 63,696 $ 22,002 $ 7,294

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 2022 Loan and Lease

3 unchanged sentences

Small Business Banking $ 22,321 $ 19,302 $ 3,019 $ 407

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 —

Specialty Lending 3,647 384 3,263 —

Energy & Infrastructure 3,082 2,794 288 288

Total 29,050 22,480 6,570 695

1 unchanged sentence

Small Business Banking 34,520 23,830 10,690 3,611

Specialty Lending 2,315 507 1,808 1,808

Energy & Infrastructure 3,072 2,799 273 —

Total 37,592 26,629 10,963 3,611

5 unchanged sentences

Fair Value of Financial Instruments for additional information.

The following table presents the amortized cost basis of collateral-dependent loans and leases, which are individually evaluated to determine expected credit losses, as of September 30, 2022 and December 31, 2021:

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

The following table presents the amortized cost basis of collateral-dependent loans and leases, which are individually evaluated to determine expected credit losses, as of March 31, 2023 and December 31, 2022:

Total Collateral Dependent Loans Unguaranteed Portion

September 30, 2022 Real Estate Business Assets Other Real Estate Business Assets Other Allowance for Credit Losses

March 31, 2023 Real Estate Business Assets Other Real Estate Business Assets Other Allowance for Credit Losses

Commercial & Industrial

Small Business Banking $ 7,731 $ 1,126 $ — $ 1,704 $ 295 $ — $ 1,257

Total 2,730 9,227 25 414 300 25 132

Construction & Development

Small Business Banking 6 — — 6 — — 6

Energy & Infrastructure 3,022 — — 227 — — —

Total 10,753 1,126 — 1,931 295 — 1,257

6 unchanged sentences

Total $ 29,532 $ 3,205 $ — $ 10,324 $ 712 $ — $ 1,430

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Total Collateral Dependent Loans Unguaranteed Portion

2 unchanged sentences

Small Business Banking $ 2,730 $ — $ — $ 414 $ — $ — $ —

Total 698 7,475 — 152 449 — 235

Construction & Development

Specialty Lending — 371 — — 371 — 291

Energy & Infrastructure 16,378 — — 13,583 — — —

Total 19,108 371 — 13,997 371 — 291

1 unchanged sentence

Small Business Banking 15,286 — — 6,440 — — 152

Specialty Lending 512 — — 6 — — —

Total 15,286 — — 6,440 — — 152

3 unchanged sentences

Total $ 36,137 $ 371 $ — $ 20,639 $ 371 $ — $ 443

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Allowance for Credit Losses - Loans and Leases

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

Organization and Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements in the Company’s 2022 Form 10-K for a description of the methodologies used to estimate the ACL.

The following table details activity in the ACL by portfolio segment allowance for the periods presented:

3 unchanged sentences

Real Estate Commercial

September 30, 2022

Beginning Balance $ 41,178 $ 3,504 $ 17,840 $ 3,341 $ 65,863

Charge offs ( 1,528 ) — ( 945 ) — ( 2,473 )

Recoveries 240 — 481 11 732

Provision 9,023 1,982 3,155 9 14,169

Ending Balance $ 48,913 $ 5,486 $ 20,531 $ 3,361 $ 78,291

September 30, 2021

Beginning Balance $ 27,439 $ 6,232 $ 22,162 $ 2,014 $ 57,847

Charge offs ( 2,535 ) — — — ( 2,535 )

Recoveries 12 — 38 — 50

Provision 3,883 ( 1,941 ) 2,392 ( 15 ) 4,319

Ending Balance $ 28,799 $ 4,291 $ 24,592 $ 1,999 $ 59,681

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Nine Months Ended Commercial

& Industrial Construction &

Development Commercial

Real Estate Commercial

September 30, 2022

March 31, 2023

Beginning Balance $ 64,995 $ 5,101 $ 22,901 $ 3,569 $ 96,566

Adoption of ASU 2022-02 ( 25 ) ( 166 ) ( 83 ) ( 402 ) ( 676 )

Charge offs ( 6,278 ) — ( 414 ) — ( 6,692 )

2 unchanged sentences

Ending Balance $ 72,058 $ 6,954 $ 25,062 $ 4,168 $ 108,242

September 30, 2021

March 31, 2022

Beginning Balance $ 37,770 $ 3,435 $ 19,068 $ 3,311 $ 63,584

3 unchanged sentences

Ending Balance $ 34,162 $ 4,102 $ 21,614 $ 3,180 $ 63,058

During the three and nine months ended September 30, 2022, the ACL increased primarily as a result of loan growth, charge-off experience impacts, a transfer of $ 729.5 million in loans carried at amortized cost, including $ 694.0 million in guaranteed loans, from held for sale to held for investment and changes in the macroeconomic outlook.

During the three months ended March 31, 2023, the ACL increased as a result of continued loan growth, combined with portfolio trends and changes in the macroeconomic outlook.

Additionally, certain assumptions were refined, drawing more heavily on internal data, in the calculations of PD, LGD, and prepayment rates.

These refinements increased the ACL by $ 1.5 million.

Loss rates are adjusted for twelve month forecasted unemployment followed by a twelve-month straight-line reversion period.

During the three and nine month periods ended September 30, 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 periods.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Troubled Debt Restructurings

The following tables present the types of loans modified as troubled debt restructurings (“TDRs”):

Three Months Ended September 30, 2022

Interest Only Payment Deferral Extend Amortization Other (1)

Total TDRs (2)

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

Commercial & Industrial

Small Business Banking — $ — 3 $ 7,074 1 $ 146 — $ — 4 $ 7,220

Total — — 3 7,074 1 146 — — 4 7,220

Construction & Development

Small Business Banking — — — — — — 2 2,518 2 2,518

Total — — — — — — 2 2,518 2 2,518

Total — $ — 3 $ 7,074 1 $ 146 2 $ 2,518 6 $ 9,738

(1) Includes two Small Business Banking loans with extended amortization and interest only.

(2) Excludes loans accounted for under the fair value option.

Fair Value of Financial Instruments for additional information.

Nine Months Ended September 30, 2022

Interest Only Payment Deferral Extend Amortization Other (1)

Total TDRs (2)

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

Commercial & Industrial

During the three month period ended March 31, 2022, the ACL decreased primarily as a result of the charge-off of one large relationship as well as continued improvements in forecasted unemployment and default expectations.

These decreases were offset by overall loan growth.

Loss rates are adjusted for twelve month forecasted unemployment followed by a twelve-month straight-line reversion period.

Additionally, the provision expense was impacted by net charge-offs during the period.

Loan Modifications for Borrowers Experiencing Financial Difficulty

The Company may agree to modify the contractual terms of a loan to a borrower experiencing financial difficulty as a part of ongoing loss mitigation strategies.

These modifications may result in an interest rate reduction, term extension, an other-than-insignificant payment delay, or a combination thereof.

The Company typically does not offer principal forgiveness.

The following tables summarize the amortized cost basis of loans that were modified during the period presented.

Three Months Ended March 31, 2023 Other-Than-Insignificant

Payment Delay Term Extension Interest Rate Reduction % of Total Class of

Financing Receivable

Small Business Banking $ — $ — $ 3,436 0.07 %

Specialty Lending 4,183 — — 0.25

Total — — 7 10,926 3 1,674 1 527 11 13,127

Commercial Real Estate

Small Business Banking — — — — 1 4,847 — — 1 4,847

Total — — — — 1 4,847 — — 1 4,847

Construction & Development

Small Business Banking — — — — — — 2 2,518 2 2,518

Total — — — — — — 2 2,518 2 2,518

Energy & Infrastructure — 13,517 — 2.35

Total $ 4,183 $ 13,517 $ 3,436 2.67 %

(1) Includes one Small Business Banking loan with extended amortization and a rate concession, two Small Business Banking loans with extended amortization and interest only.

(2) Excludes loans accounted for under the fair value option.

Fair Value of Financial Instruments for additional information.

As of March 31, 2023, the Company had no commitments to lend additional funds to borrowers included in the previous table.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Three Months Ended September 30, 2021

Interest Only Payment Deferral Extend Amortization Other Total TDRs (1)

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

Commercial Real Estate

The following table presents an aging analysis of loans that were modified on or after January 1, 2023, the date the Company adopted ASU 2022-02, through March 31, 2023.

Current 30-89 Days

Past Due 90 Days or More Past Due Total Past Due

Small Business Banking $ 3,436 $ — $ — $ —

Specialty Lending 4,183 — — —

Energy & Infrastructure 13,517 — — —

Total $ 21,136 $ — $ — $ —

The following tables summarize the financial impacts of loan modifications made to borrowers experiencing financial difficulty during the period.

Three Months Ended March 31, 2023

Weighted Average

Interest Rate Reduction Weighted Average

Term Extension (in Months)

Small Business Banking 1.45 % 0

Energy & Infrastructure — 12

Total 1.45 % 12

(1) Excludes loans accounted for under the fair value option.

Fair Value of Financial Instruments for additional information.

Nine Months Ended September 30, 2021

Interest Only Payment Deferral Extend Amortization Other (1)

Total TDRs (2)

There were no loans that were modified on or after January 1, 2023, the date the Company adopted ASU 2022-02, through March 31, 2023 that subsequently defaulted during the period presented.

The Company’s ACL is estimated using lifetime historical loan performance adjusted to reflect current conditions and reasonable and supportable forecasts.

Upon determination that a modified loan, or portion of a modified loan, has subsequently been deemed uncollectible, the uncollectible portion is written off.

The amortized cost basis is reduced by the uncollectible amount and the ACL is adjusted by the same amount.

As a result, the impact of loss mitigation strategies is captured in the estimates of PD and LGD.

Troubled Debt Restructurings

The following tables present the types of loans modified as troubled debt restructurings (“TDRs”):

Three Months Ended March 31, 2022

Interest Only Payment Deferral Extend Amortization Other Total TDRs (1)

Loans Recorded investment at

14 unchanged sentences

Total — $ — 2 $ 1,015 1 $ 350 4 $ 8,656 7 $ 10,021

(1) Includes one Small Business Banking loan with extended amortization and a rate concession.

(1) Excludes loans accounted for under the fair value option.

1 unchanged sentence

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 September 30, 2022 that subsequently defaulted during the period:

Three Months Ended September 30, 2022

Interest Only Payment Deferral Extend Amortization Other Total TDRs (1)

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

Commercial & Industrial

Small Business Banking — $ — — $ — 1 $ 146 — $ — 1 $ 146

Total — $ — — $ — 1 $ 146 — $ — 1 $ 146

(1) Excludes loans accounted for under the fair value option.

Fair Value of Financial Instruments for additional information.

There were no TDRs that were modified within the twelve months ended March 31, 2022 that subsequently defaulted during the three months ended March 31, 2022.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2022

Interest Only Payment Deferral Extend Amortization Other Total TDRs (1)

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

Commercial & Industrial

Small Business Banking — $ — 2 $ 2,737 2 $ 496 — $ — 4 $ 3,233

Total — $ — 2 $ 2,737 2 $ 496 — $ — 4 $ 3,233

(1) Excludes loans accounted for under the fair value option.

Fair Value of Financial Instruments for additional information.

No TDRs that were modified within the twelve months ended September 30, 2021 subsequently defaulted during the three months ended September 30, 2021.

The following table presents TDRs that were modified within the twelve months ended September 30, 2021 that subsequently defaulted during the period:

Nine Months Ended September 30, 2021

Interest Only Payment Deferral Extend Amortization Other Total TDRs (1)

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

Commercial Real Estate

Small Business Banking — $ — 1 $ 50 — $ — — $ — 1 $ 50

Total — $ — 1 $ 50 — $ — — $ — 1 $ 50

(1) Excludes loans accounted for under the fair value option.

Fair Value of Financial Instruments for additional information.

Lessor Equipment Leasing

2 unchanged sentences

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 accompanying Unaudited Condensed Consolidated Balance Sheets.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Direct Financing Leases

3 unchanged sentences

The net investment in direct finance leases included in loans and leases held for investment are as follows:

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

Gross direct finance lease payments receivable $ 3,760 $ 4,284

2 unchanged sentences

Future minimum lease payments under finance leases are as follows:

As of September 30, 2022

As of March 31, 2023

Total $ 3,760

Interest income of $ 101 thousand and $ 159 thousand was recognized in the three months ended September 30, 2022 and 2021, respectively.

Interest income of $ 309 thousand and $ 517 thousand was recognized in the nine months ended September 30, 2022 and 2021, respectively.

Interest income of $ 73 thousand and $ 115 thousand was recognized in the three months ended March 31, 2023 and 2022, respectively.

Operating Leases

9 unchanged sentences

Repair and maintenance costs that do not extend the lives of the rental equipment are charged to equipment expense at the time the costs are incurred.

As of September 30, 2022 and December 31, 2021, the Company had a net investment of $ 116.6 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 September 30, 2022 and December 31, 2021 and accumulated depreciation was $ 46.8 million and $ 39.5 million as of September 30, 2022 and December 31, 2021, respectively.

Depreciation expense recognized on these assets for the three months ended September 30, 2022 and 2021 was $ 2.4 million.

Depreciation expense recognized on these assets for the nine months ended September 30, 2022 and 2021 was $ 7.3 million.

Lease income of $ 2.4 million was recognized in the three months ended September 30, 2022 and 2021.

Lease income of $ 7.1 million and $ 7.2 million was recognized in the nine months ended September 30, 2022 and 2021, respectively.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

As of March 31, 2023 and December 31, 2022, the Company had a net investment of $ 111.8 million and $ 114.2 million, respectively, in assets included in premises and equipment that are subject to operating leases.

Of the net investment, the gross balance of the assets was $ 163.4 million as of March 31, 2023 and December 31, 2022 and accumulated depreciation was $ 51.6 million and $ 49.2 million as of March 31, 2023 and December 31, 2022, respectively.

Depreciation expense recognized on these assets for the three months ended March 31, 2023 and 2022 was $ 2.4 million, respectively.

Lease income of $ 2.4 million was recognized in the three months ended March 31, 2023 and 2022.

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

As of September 30, 2022

As of March 31, 2023

Thereafter 13,563

2 unchanged sentences

Loans serviced for others are not included in the accompanying Unaudited Condensed Consolidated Balance Sheets.

The unpaid principal balance of loans serviced for others requiring recognition of a servicing asset was $ 2.22 billion and $ 2.29 billion at September 30, 2022 and December 31, 2021, respectively.

The unpaid principal balance for all loans serviced for others was $ 3.35 billion and $ 3.30 billion at September 30, 2022 and December 31, 2021, respectively.

The unpaid principal balance of loans serviced for others requiring recognition of a servicing asset was $ 2.26 billion and $ 2.67 billion at March 31, 2023 and December 31, 2022, respectively.

The unpaid principal balance for all loans serviced for others was $ 3.62 billion and $ 3.48 billion at March 31, 2023 and December 31, 2022, respectively.

The following summarizes the activity pertaining to servicing rights:

Three Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 2022 2021

Balance at beginning of period $ 26,323 $ 33,574

4 unchanged sentences

Balance at end of period $ 29,357 $ 36,286

The fair value of servicing rights was determined using a weighted average discount rate of 15.1 % on September 30, 2022 and 12.3 % on September 30, 2021.

The fair value of servicing rights was determined using a weighted average prepayment speed of 16.1 % on September 30, 2022 and 16.7 % on September 30, 2021, with the actual rate depending on the stratification of the specific right.

The fair value of servicing rights was determined using a weighted average discount rate of 17.7 % on March 31, 2023 and 11.7 % on March 31, 2022.

The fair value of servicing rights was determined using a weighted average prepayment speed of 15.3 % on March 31, 2023 and 16.1 % on March 31, 2022, 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 Unaudited Condensed Consolidated Statements of Income.

6 unchanged sentences

Total outstanding borrowings consisted of the following:

September 30,

2023 December 31,

3 unchanged sentences

$ 30,767 $ 33,203

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 35 basis points and matures at various dates equal to the maturity date of the PPPLF collateral pledged to secure the advance, ranging from February 9, 2026 to April 14, 2026 , and will be accelerated on and to the extent of any 7(a) loan forgiveness reimbursement by the SBA for any PPPLF collateral or the date of purchase by the SBA from the borrower of any PPPLF collateral.

On the maturity date of each advance, the Company shall repay the advance plus accrued interest.

The remaining $ 18.5 million borrowing was paid in full at September 30, 2022.

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 %.

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.

In September 2022, the Company extended the maturity for an additional 12 months, and paid the Lender an additional $ 250 thousand loan origination fee that will be amortized into interest expense over the life of the loan.

Payments are interest only with all principal and accrued interest due at maturity on October 10, 2025.

The Company took 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 September 30, 2022.

Other short term debt (1)

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 a variable interest rate of 4.65 %.

The Company paid down the balance in full on January 3, 2023 and there is $ 100.0 million of available credit remaining at March 31, 2023.

Total borrowings $ 30,767 $ 83,203

(1) Includes finance leases.

The Company may purchase federal funds through unsecured federal funds lines of credit with various correspondent banks, which totaled $ 167.5 million of available funding as of September 30, 2022 and December 31, 2021.

These lines are intended for short-term borrowings and are subject to restrictions limiting the frequency and terms of advances.

These lines of credit are payable on demand and bear interest based upon the daily federal funds rate.

The Company had no outstanding balances on the lines of credit as of September 30, 2022 and December 31, 2021.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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

At September 30, 2022 and December 31, 2021, the Company had approximately $ 2.26 billion and $ 2.02 billion, respectively, in borrowing capacity available under these agreements.

There are no advances outstanding and no collateral pledged as of September 30, 2022 and December 31, 2021.

The Company may borrow funds through the Federal Reserve Bank’s discount window.

These borrowings are secured by a blanket floating lien on qualifying loans with a balance of $ 2.81 billion and $ 2.44 billion as of September 30, 2022 and December 31, 2021, respectively.

At September 30, 2022 and December 31, 2021, the Company had approximately $ 2.37 billion and $ 2.04 billion, respectively, in borrowing capacity available under these arrangements with no outstanding balance as of September 30, 2022 and December 31, 2021.

As of March 31, 2023 and December 31, 2022, the Company’s unused borrowing capacity was $ 3.77 billion and $ 4.88 billion, respectively, which consisted of access through the Federal Reserve Bank's discount window, available lines of credit with the FHLB and other correspondent banks as well as access to a repurchase agreement.

New borrowing capacity added in the first quarter of 2023 was from the Bank Term Funding Program (“BTFP”).

Under the BTFP, advances must be secured by pledging eligible securities owned by the Company on March 12, 2023.

BTFP advances can be requested for a term of up to one year at a fixed market rate until the program ends March 11, 2024.

Fair Value of Financial Instruments

8 unchanged sentences

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

Three Months Ended September 30, Nine Months Ended September 30,

Three Months Ended March 31,

Equity Warrant Assets 2023 2022

Balance at beginning of period $ 2,210 $ 1,672

Issuances 14 135 718 172

Net gains on derivative instruments 121 310 167 1,080

Settlements — ( 353 ) — ( 488 )

New equity warrant assets 153 656

Changes in fair value, net ( 176 ) —

Balance at end of period $ 2,187 $ 2,328

2 unchanged sentences

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

September 30, 2022 Total Level 1 Level 2 Level 3

March 31, 2023 Total Level 1 Level 2 Level 3

Investment securities available-for-sale

17 unchanged sentences

Other debt securities

2,500 — 2,500 —

Loans held for sale 25,310 — — 25,310

Loans held for investment 494,458 — — 494,458

4 unchanged sentences

Total assets at fair value $ 1,539,366 $ — $ 1,016,282 $ 523,084

(1) During the three and nine months ended September 30, 2022, the Company recorded a fair value adjustment gain of $ 1 thousand and a loss of $ 2 thousand, respectively.

During the three and nine months ended September 30, 2021, the Company recorded a $ 1 thousand fair value adjustment gain.

(1) During the three months ended March 31, 2023, the Company recorded a level 3 fair value adjustment loss of $ 10 thousand.

During the three months ended March 31, 2022, the Company recorded a level 3 fair value adjustment loss of $ 2 thousand.

(2) During the three months ended March 31, 2023, the Company recorded a level 3 fair value adjustment loss of $ 20 thousand.

There was no fair value adjustment during the three months ended March 31, 2022.

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

2 unchanged sentences

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.

Until the first quarter of 2021, the Company had historically elected to account for retained participating interests of all government guaranteed loans under the fair value option in order to align the accounting presentation with the Company’s viewpoint of the economics of the loans.

Interest income is recognized in the same manner on loans reported at fair value as on non-fair value loans, except in regard to origination fees and costs which are recognized immediately upon fair value election.

Beginning in the first quarter of 2021, the Company chose not to elect fair value for all retained participating interests arising from new government guaranteed loan sales.

Not electing fair value generally results in a larger discount being recorded on the date of the sale.

1 unchanged sentence

Management made this change of election in alignment with its ongoing effort to reduce volatility and drive more predictable revenue.

In accordance with GAAP, any loans for which fair value was previously elected will continue to be measured as such.

In accordance with GAAP, any loans for which fair value was previously elected continue to be measured as such.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

There were no loans accounted for under the fair value option that were 90 days or more past due and still accruing interest at September 30, 2022 or December 31, 2021.

The unpaid principal balance of unguaranteed exposure for nonaccruals was $ 3.7 million and $ 6.9 million at September 30, 2022 and December 31, 2021, respectively.

The following tables provide more information about the fair value carrying amount and the unpaid principal outstanding of loans accounted for under the fair value option at September 30, 2022 and December 31, 2021.

September 30, 2022

There were no loans accounted for under the fair value option that were 90 days or more past due and still accruing interest at March 31, 2023 or December 31, 2022.

The unpaid principal balance of unguaranteed exposure for nonaccruals was $ 9.9 million and $ 7.2 million at March 31, 2023 and December 31, 2022, respectively.

The following tables provide more information about the fair value carrying amount and the unpaid principal outstanding of loans accounted for under the fair value option at March 31, 2023 and December 31, 2022.

March 31, 2023

Total Loans Nonaccruals 90 Days or More Past Due

17 unchanged sentences

Fair Value Option Elections

Loans held for sale $ 25,310 $ 26,831 $ ( 1,521 ) $ — $ — $ — $ — $ — $ —

Loans held for investment $ 494,458 $ 513,219 $ ( 18,761 ) $ 44,890 $ 46,993 $ ( 2,103 ) $ 24,663 $ 26,321 $ ( 1,658 )

1 unchanged sentence

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

Three Months Ended September 30, Nine Months Ended September 30,

Three Months Ended March 31,

Gains (Losses) on Loans Accounted for under the Fair Value Option 2023 2022

2 unchanged sentences

$ ( 4,529 ) $ 516

Gains and (losses) related to borrower-specific credit risk were $ 451 thousand and $( 2.4 ) million for the three and nine months ended September 30, 2022, respectively, and $ 81 thousand and $( 212 ) thousand for the three and nine months ended September 30, 2021, respectively.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Losses related to borrower-specific credit risk were $ 3.2 million and $ 2.1 million for the three months ended March 31, 2023 and 2022, respectively.

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

Three Months Ended September 30, Nine Months Ended September 30,

Three Months Ended March 31,

Loans held for sale 2023 2022

2 unchanged sentences

Fair value changes — ( 170 )

Transfers to held for investment, net ( 24,768 ) — ( 26,219 ) ( 6,415 )

Settlements — ( 149 )

Balance at end of period $ — $ 25,056

Three Months Ended September 30, Nine Months Ended September 30,

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Three Months Ended March 31,

Loans held for investment 2023 2022

2 unchanged sentences

Fair value changes ( 4,529 ) 686

Transfers from held for sale, net 24,768 — 26,219 6,415

Settlements ( 34,813 ) ( 46,841 )

1 unchanged sentence

Non-Recurring Fair Value

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

September 30, 2022 Total Level 1 Level 2 Level 3

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

The Company has no liabilities recorded at fair value on a non-recurring basis.

March 31, 2023 Total Level 1 Level 2 Level 3

Collateral-dependent loans $ 8,125 $ — $ — $ 8,125

Foreclosed assets 1,178 — — 1,178

Total assets at fair value $ 8,125 $ — $ — $ 8,125

1 unchanged sentence

Collateral-dependent loans $ 4,840 $ — $ — $ 4,840

Foreclosed assets 620 — — 620

Total assets at fair value $ 4,840 $ — $ — $ 4,840

1 unchanged sentence

Fair Value of Financial Instruments in the Company’s 2022 Form 10-K.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Level 3 Analysis

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

September 30, 2022

Level 3 Assets with Significant

Unobservable Inputs Fair Value Valuation Technique Significant

For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of March 31, 2023 and December 31, 2022 the significant unobservable inputs used in the fair value measurements were as follows:

March 31, 2023

Level 3 Assets with Significant Unobservable Inputs

Fair Value Valuation Technique Significant Unobservable Inputs Range Weighted Average (1)

Recurring fair value

Municipal bond $ 94 Discounted expected cash flows Discount rate

Prepayment speed 6.0 %

Loans held for investment

$ 512,183 Discounted expected cash flows

Discounted appraisals Loss rate

Municipal bond $ 83 Discounted expected cash flows Discount rate 5.7 % N/A

Prepayment speed 5.0 % N/A

Other debt security $ 480 Discounted expected cash flows Discount rate 6.8 % N/A

Loans held for investment $ 466,950 Discounted expected cash flows Loss rate 0.0 % - 82.1 %

Discount rate 6.3 % - 9.8 %

Prepayment speed 14.9 % 14.9 %

Appraisal adjustments 0 % to 69.4 %

11.1 % to 21.0 %

10.0 % to 100.0 %

Discounted appraisals Appraisal adjustments (2)

0.0 % - 84.0 %

Equity warrant assets $ 2,187 Black-Scholes option pricing model Volatility 26.8 % - 90.0 %

1 unchanged sentence

Marketability discount 20.0 % 20.0 %

Remaining life 26.1 % to 81.3 %

3.8 % to 4.0 %

Remaining life 2 - 10 years

Non-recurring fair value

Collateral-dependent loans

$ 1,264 Discounted appraisals Appraisal adjustments (1)

10.0 % to 100.0 %

Foreclosed assets $ 1,178 Discounted appraisals Appraisal adjustments (1)

Collateral-dependent loans $ 8,125 Discounted appraisals Appraisal adjustments (2)

10.0 % - 92.0 %

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 2022

Level 3 Assets with Significant

Unobservable Inputs

Fair Value Valuation Technique Significant

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

Prepayment speed 4.8 %

Loans held for sale $ 25,310 Discounted expected cash flows Discount rate

Prepayment speed 6.2 % to 21.9 %

Municipal bond $ 93 Discounted expected cash flows Discount rate 6.0 % N/A

Prepayment speed 5.0 % N/A

Loans held for investment

$ 645,201 Discounted expected cash flows

Discounted appraisals Loss rate

$ 494,458 Discounted expected cash flows Loss rate 0.0 % - 79.3 %

Discount rate 7.5 % - 11.2 %

Prepayment speed 16.5 % 16.5 %

Appraisal adjustments 0.0 % to 70.2 %

6.2 % to 21.9 %

10.0 % to 85.0 %

Discounted appraisals Appraisal adjustments 0.0 % - 77.3 %

Equity warrant assets $ 2,210 Black-Scholes option pricing model Volatility 26.5 % - 90.0 %

1 unchanged sentence

Marketability discount 20.0 % 20.0 %

Remaining life 26.2 % to 88.2 %

1.3 % to 1.5 %

Remaining life 3 - 10 years

Non-recurring fair value

1 unchanged sentence

$ 4,840 Discounted appraisals Appraisal adjustments (2)

10.0 % to 99.0 %

Foreclosed assets $ 620 Discounted appraisals Appraisal adjustments (1)

9.0 % to 10.0 %

10.0 % - 66.5 %

(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.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Estimated Fair Value of Other Financial Instruments

1 unchanged sentence

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

September 30, 2022 Carrying

March 31, 2023 Carrying

Identical Assets

4 unchanged sentences

Cash and due from banks $ 463,186 $ 463,186 $ — $ — $ 463,186

Federal funds sold 68,324 68,324 — — 68,324

Certificates of deposit with other banks 4,000 4,000 — — 4,000

4 unchanged sentences

Borrowings 30,767 — — 30,025 30,025

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 2022 Carrying

15 unchanged sentences

Management believes that the outcome of such proceedings will not materially affect the financial position, results of operations or cash flows of the Company.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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.

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

5 unchanged sentences

A summary of the Company’s commitments is as follows:

September 30,

2023 December 31,

9 unchanged sentences

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.

Commitment letters are issued after approval of the loan by the Credit Department and generally expire 90 days after issuance.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party.

2 unchanged sentences

Collateral held varies as specified above and is required in instances which the Company deems necessary.

The allowance for off-balance sheet credit exposures was $ 1.1 million and $ 739 thousand at September 30, 2022 and December 31, 2021, respectively.

As of September 30, 2022 and December 31, 2021, the Company recorded unfunded commitments to provide capital contributions for on-balance-sheet investments in the amount of $ 23.9 million and $ 10.4 million, respectively.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

The allowance for off-balance-sheet credit exposures was $ 4.3 million and $ 1.5 million at March 31, 2023 and December 31, 2022, respectively.

The Company is in the early phase of constructing a new facility to accommodate expansion of its main campus.

The total estimated cost to complete the construction program is approximately $ 33.6 million.

At March 31, 2023, the Company was committed to approximately $ 3.9 million of the total estimated amount.

As of March 31, 2023 and December 31, 2022, the Company recorded unfunded commitments to provide capital contributions for on-balance-sheet investments in the amount of $ 34.2 million and $ 26.1 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 unguaranteed exposure exceeds $ 20.0 million, except for twenty-two relationships that have a retained unguaranteed exposure of $ 656.3 million of which $ 381.8 million of the unguaranteed exposure has been disbursed.

The Company does not have a significant number of credits to any single borrower or group of related borrowers whereby their retained unguaranteed exposure exceeds $ 20.0 million, except for twenty-six relationships that have a retained unguaranteed exposure of $ 867.9 million of which $ 499.5 million of the unguaranteed exposure has been disbursed.

Additionally, the Company has future minimum lease payments receivable under non-cancelable operating leases totaling $ 55.8 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.

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

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.

5 unchanged sentences

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.

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 unaudited condensed consolidated financial statements prepared in conformity with GAAP.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Banking Fintech Other Consolidated

As of and for the three months ended September 30, 2022

Interest income $ 115,819 $ 8 $ 7 $ 115,834

Interest expense 31,581 — 367 31,948

Net interest income (loss) 84,238 8 ( 360 ) 83,886

Provision for loan and lease credit losses 14,169 — — 14,169

Noninterest income 27,268 29,980 476 57,724

Noninterest expense 78,474 2,495 2,079 83,048

Income tax expense (benefit) 1,344 416 ( 235 ) 1,525

Net income (loss) $ 17,519 $ 27,077 $ ( 1,728 ) $ 42,868

Total assets $ 9,140,943 $ 163,304 $ 10,403 $ 9,314,650

As of and for the three months ended September 30, 2021

Interest income $ 92,783 $ — $ 3 $ 92,786

Interest expense 14,667 — 384 15,051

Net interest income (loss) 78,116 — ( 381 ) 77,735

Provision for loan and lease credit losses 4,319 — — 4,319

Noninterest income 25,125 ( 283 ) 434 25,276

Noninterest expense 52,423 1,223 1,813 55,459

Income tax expense (benefit) 9,363 ( 206 ) 237 9,394

Net income (loss) $ 37,136 $ ( 1,300 ) $ ( 1,997 ) $ 33,839

Total assets $ 7,984,677 $ 113,117 $ 39,547 $ 8,137,341

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed 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 Unaudited Condensed Consolidated Financial Statements prepared in conformity with GAAP.

Banking Fintech Other Consolidated

As of and for the nine months ended September 30, 2022

As of and for the three months ended March 31, 2023

Interest income $ 151,269 $ 12 $ 135 $ 151,416

7 unchanged sentences

Total assets $ 10,181,253 $ 124,450 $ 58,594 $ 10,364,297

As of and for the nine months ended September 30, 2021

As of and for the three months ended March 31, 2022

Interest income $ 92,746 $ 36 $ — $ 92,782

8 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements