Live Oak Bancshares, Inc. 10-Q

Item 1. Financial Statements Live Oak Bancshares, Inc. Condensed Consolidated Balance Sheets As of March 31, 2023 (unaudited) and December 31, 2022* (Dollars in thousands) March 31, 2023 December 31, 2022 Assets Cash and due from banks $ 463,186 $ 280,239 Federal funds sold — 136,397 Certificates of deposit with other banks 4,000 4,000 Investment securities available-for-sale 1,149,691 1,014,719 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) 7,686,987 7,344,178 Allowance for credit losses on loans and leases ( 108,242 ) ( 96,566 ) Net loans and leases 7,578,745 7,247,612 Premises and equipment, net 268,138 263,290 Servicing assets 29,357 26,323 Other assets 337,888 328,308 Total assets $ 10,364,297 $ 9,855,498 Liabilities and Shareholders’ Equity Liabilities Deposits: Noninterest-bearing $ 176,439 $ 194,100 Interest-bearing 9,245,555 8,690,828 Total deposits 9,421,994 8,884,928 Borrowings 30,767 83,203 Other liabilities 88,729 76,334 Total liabilities 9,541,490 9,044,465 Shareholders’ equity 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 March 31, 2023 and December 31, 2022 — — Retained earnings 572,530 572,497 Accumulated other comprehensive loss ( 84,395 ) ( 92,318 ) Total shareholders’ equity 822,807 811,033 Total liabilities and shareholders’ equity $ 10,364,297 $ 9,855,498 * Derived from audited consolidated financial statements. See Notes to Unaudited Condensed Consolidated Financial Statements 1 Table of Contents Live Oak Bancshares, Inc. Condensed Consolidated Statements of Income For the three months ended March 31, 2023 and 2022 (unaudited) (Dollars in thousands, except per share data) Three Months Ended March 31, 2023 2022 Interest income Loans and fees on loans $ 139,052 $ 89,198 Investment securities, taxable 7,547 3,399 Other interest earning assets 4,817 185 Total interest income 151,416 92,782 Interest expense Deposits 67,595 14,348 Borrowings 1,804 655 Total interest expense 69,399 15,003 Net interest income 82,017 77,779 Provision for loan and lease credit losses 19,021 1,836 Net interest income after provision for loan and lease credit losses 62,996 75,943 Noninterest income Loan servicing revenue 6,380 6,356 Loan servicing asset revaluation 356 ( 1,569 ) Net gains on sales of loans 10,175 20,977 Net (loss) gain on loans accounted for under the fair value option ( 4,529 ) 516 Equity method investments income (loss) ( 2,952 ) ( 2,124 ) Equity security investments gains (losses), net 77 ( 44 ) Lease income 2,535 2,503 Management fee income 3,472 1,488 Other noninterest income 4,065 4,565 Total noninterest income 19,579 32,668 Noninterest expense Salaries and employee benefits 44,765 38,507 Travel expense 2,411 1,897 Professional services expense 927 2,791 Advertising and marketing expense 3,603 1,729 Occupancy expense 1,925 2,327 Technology expense 7,729 6,053 Equipment expense 3,818 3,816 Other loan origination and maintenance expense 3,927 3,113 Renewable energy tax credit investment impairment 69 — FDIC insurance 3,403 1,972 Contributions and donations 56 723 Other expense 6,329 2,786 Total noninterest expense 78,962 65,714 Income before taxes 3,613 42,897 Income tax expense 3,215 8,388 Net income $ 398 $ 34,509 Basic earnings per share $ 0.01 $ 0.79 Diluted earnings per share $ 0.01 $ 0.76 See Notes to Unaudited Condensed Consolidated Financial Statements 2 Table of Contents Live Oak Bancshares, Inc. Condensed Consolidated Statements of Comprehensive Income (Loss) For the three months ended March 31, 2023 and 2022 (unaudited) (Dollars in thousands) Three Months Ended March 31, 2023 2022 Net income $ 398 $ 34,509 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 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 3 Table of Contents Live Oak Bancshares, Inc. Condensed Consolidated Statements of Changes in Shareholders’ Equity For the three months ended March 31, 2023 and 2022 (unaudited) (Dollars in thousands) Three Months Ended Common stock Retained earnings Accumulated other comprehensive income (loss) Total equity Shares Amount Class A Class B Balance at December 31, 2022 44,061,244 — $ 330,854 $ 572,497 $ ( 92,318 ) $ 811,033 Net income — — — 398 — 398 Other comprehensive income — — — — 7,923 7,923 Issuance of restricted stock 162,874 — — — — — Tax withholding related to vesting of restricted stock and other — — ( 3,353 ) — — ( 3,353 ) Employee stock purchase program 31,059 — 631 — — 631 Stock option exercises 35,663 — 367 — — 367 Stock option based compensation expense — — 133 — — 133 Restricted stock compensation expense — — 6,040 — — 6,040 Adoption of ASU 2022-02 — — — 676 — 676 Transfer from retained earnings to other assets for pro rata portion of equity method investee stock compensation expense — — — 286 — 286 Cash dividends ($ 0.03 per share) — — — ( 1,327 ) — ( 1,327 ) Balance at March 31, 2023 44,290,840 — $ 334,672 $ 572,530 $ ( 84,395 ) $ 822,807 Balance at December 31, 2021 43,494,046 125,024 $ 312,294 $ 400,893 $ 1,946 $ 715,133 Net income — — — 34,509 — 34,509 Other comprehensive loss — — — — ( 38,452 ) ( 38,452 ) Issuance of restricted stock 95,537 — — — — — Tax withholding related to vesting of restricted stock and other — — ( 2,894 ) — — ( 2,894 ) Employee stock purchase program 11,119 — 534 — — 534 Stock option exercises 61,934 — 719 — — 719 Stock option based compensation expense — — 391 — — 391 Restricted stock compensation expense — — 4,563 — — 4,563 Non-voting common stock converted to voting common stock in private sale 125,024 ( 125,024 ) — — — — Transfer from retained earnings to other assets for pro rata portion of equity method investee stock compensation expense — — — 136 — 136 Cash dividends ($ 0.03 per share) — — — ( 1,312 ) — ( 1,312 ) Balance at March 31, 2022 43,787,660 — $ 315,607 $ 434,226 $ ( 36,506 ) $ 713,327 See Notes to Unaudited Condensed Consolidated Financial Statements 4 Table of Contents Live Oak Bancshares, Inc. Condensed Consolidated Statements of Cash Flows For the three months ended March 31, 2023 and 2022 (unaudited) (Dollars in thousands) Three Months Ended March 31, 2023 2022 Cash flows from operating activities Net income $ 398 $ 34,509 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 5,193 5,405 Provision for loan and lease credit losses 19,021 1,836 Amortization of premium on securities, net of accretion 171 1,421 Deferred tax (benefit) expense ( 5,541 ) 6,775 Originations of loans held for sale ( 191,466 ) ( 222,557 ) Proceeds from sales of loans held for sale 317,579 349,364 Net gains on sale of loans held for sale ( 10,175 ) ( 20,977 ) 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 Equity security investments (gains) losses, net ( 77 ) 44 Renewable energy tax credit investment impairment 69 — Stock option compensation expense 133 391 Restricted stock compensation expense 6,040 4,563 Stock based compensation excess tax (shortfall) benefit ( 411 ) 1,119 Lease right-of-use assets and liabilities, net ( 17 ) ( 12 ) Changes in assets and liabilities: Other assets 6,593 ( 3,095 ) Other liabilities 6,097 ( 1,260 ) 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 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 Maturities of certificates of deposits with other banks — 500 Loan and lease originations and principal collections, net ( 455,742 ) ( 243,463 ) Purchases of equity security investments ( 875 ) — Purchases of equity method investments ( 1,121 ) — Purchases of premises and equipment, net ( 10,405 ) ( 20,036 ) Net cash used by investing activities $ ( 592,854 ) $ ( 253,206 ) See Notes to Unaudited Condensed Consolidated Financial Statements 5 Table of Contents Live Oak Bancshares, Inc. Condensed Consolidated Statements of Cash Flows (Continued) For the three months ended March 31, 2023 and 2022 (unaudited) (Dollars in thousands) Three Months Ended March 31, 2023 2022 Cash flows from financing activities Net increase in deposits $ 537,066 $ 525,119 Proceeds from borrowings 2,156,020 12,026 Repayment of borrowings ( 2,208,456 ) ( 133,404 ) Stock option exercises 367 719 Employee stock purchase program 631 534 Withholding cash issued in lieu of restricted stock and other ( 3,353 ) ( 2,894 ) Shareholder dividend distributions ( 1,327 ) ( 1,312 ) Net cash provided by financing activities 480,948 400,788 Net increase in cash and cash equivalents 46,550 304,021 Cash and cash equivalents, beginning 416,636 203,750 Cash and cash equivalents, ending $ 463,186 $ 507,771 Supplemental disclosures of cash flow information Interest paid $ 69,027 $ 15,263 Income tax paid, net 182 8 Supplemental disclosures of noncash operating, investing, and financing activities 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 7,115 6,692 Net transfers between foreclosed real estate and SBA receivable — 72 Transfer of loans held for sale to loans and leases held for investment 35,742 70,649 Transfer of loans and leases held for investment to loans held for sale 139,883 110,452 Transfer from retained earnings to other assets for pro rata portion of equity method investee stock compensation expense 286 136 Equity method investment commitments 7,721 10,971 Equity security investment commitments 500 500 See Notes to Unaudited Condensed Consolidated Financial Statements 6 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Note 1. Basis of Presentation Nature of Operations Live Oak Bancshares, Inc. (collectively with its subsidiaries including Live Oak Banking Company, the “Company”) is a bank holding company headquartered in Wilmington, North Carolina incorporated under the laws of the State of North Carolina in December 2008. The Company conducts business operations primarily through its commercial bank subsidiary, Live Oak Banking Company (the “Bank”). The Bank was organized and incorporated under the laws of the State of North Carolina on February 25, 2008 and commenced operations on May 12, 2008. The Bank specializes in lending and deposit related services to small businesses nationwide. The Bank identifies and extends lending to credit-worthy borrowers both within specific industries, also called verticals, through expertise within those industries, and more broadly to select borrowers outside of those industries. A significant portion of the loans originated by the Bank are 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”), 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”). Live Oak Number One, Inc. holds properties foreclosed on by the Bank. LOCEF provides financing to entities for renewable energy applications. Live Oak Private Wealth provides high-net-worth individuals and families with strategic wealth and investment management services. During the first quarter of 2022, Jolley Asset Management, LLC (“JAM”) was merged into Live Oak Private Wealth. JAM was previously a wholly owned subsidiary of Live Oak Private Wealth. 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. 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 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 has less routinely generated gains and losses arising from its financial technology investments predominantly in its fintech segment. 7 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements General In the opinion of management, all adjustments necessary for a fair presentation of the financial position and results of operations for the periods presented have been included, and all intercompany transactions have been eliminated in consolidation. Results of operations for the 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 ” ). A summary description of the significant accounting policies followed by the Company is set forth in Note 1 of the Notes to Consolidated Financial Statements in the Company’s 2022 Form 10-K. These Unaudited Interim Condensed Consolidated Financial Statements should be read in conjunction with the audited consolidated financial statements and footnotes in the Company's 2022 Form 10-K. 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. Amounts in all tables in the Notes to Unaudited Condensed Consolidated Financial Statements have been presented in thousands, except percentage, time period, share and per share data or where otherwise indicated. Business Segments Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Management has determined that the Company has two reportable operating segments: Banking and Fintech, as discussed more fully in Note 11. Segments. 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 Certain reclassifications have been made to the prior period’s Unaudited Condensed Consolidated Financial Statements to place them on a comparable basis with the current year. Net income and shareholders’ equity previously reported were not affected by these reclassifications. 8 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Note 2. Recent Accounting Pronouncements In March 2020, the FASB issued Accounting Standards Update (“ASU”) No. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”). ASU 2020-04 provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. With the amendments, the ASU can be adopted by the Company as of March 12, 2020, through December 31, 2024. In December 2022, ASU 2022-06 “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848” was issued deferring the sunset date of Topic 848. The Company does not believe these standards will have a material impact on its consolidated financial statements. To address the discontinuance of LIBOR, the Company has stopped originating variable LIBOR-based loans effective December 31, 2021 and has started to negotiate loans using the preferred replacement index, the Secured Overnight Financing Rate (“SOFR”) or a relevant duration U.S. Treasury rate. For currently outstanding LIBOR-based loans, the timing and manner in which each customer’s contract transitions from LIBOR to another rate will vary on a case-by-case basis. The Company expects to complete all transitions by the second quarter of 2023 or at the next repricing date if later in 2023. In March 2022, the FASB issued ASU No. 2022-02 “Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings (“TDRs”) and Vintage Disclosures” (“ASU 2022-02”). ASU 2022-02 eliminates the accounting guidance for TDRs by creditors in ASC 310-40, Receivables – Troubled Debt Restructurings by Creditors , while enhancing disclosure requirements for certain loan refinancings and restructurings when a borrower is experiencing financial difficulty. Additionally, for public business entities, ASU 2022-02 requires that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of ASC 326-20, Financial Instruments – Credit Losses – Measured at Amortized Cost . The 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. 2022-03 “Fair Value Measurement (Topic 820) Fair Value Measurement of Equity Securities Subject to Contractual Restrictions” (“ASU 2022-03”). ASU 2022-03 indicates a contractual sale restriction on equity securities should not be considered in measuring fair value, however, disclosure should be made about such restrictions. The amendments in this standard will be effective for the Company on January 1, 2024. The Company does not believe this standard will have a material impact on its consolidated financial statements. 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. 9 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Note 3. Earnings Per Share Basic and diluted earnings per share are computed based on the weighted-average number of shares outstanding during each period. Diluted earnings per share reflects the potential dilution that could occur upon the exercise of stock options or upon the vesting of restricted stock grants, any of which would result in the issuance of common stock that would then share in the net income of the Company. Three Months Ended March 31, 2023 2022 Basic earnings per share: Net income $ 398 $ 34,509 Weighted-average basic shares outstanding 44,157,156 43,701,943 Basic earnings per share $ 0.01 $ 0.79 Diluted earnings per share: Net income, for diluted earnings per share $ 398 $ 34,509 Total weighted-average basic shares outstanding 44,157,156 43,701,943 Add effect of dilutive stock options and restricted stock grants 807,460 1,525,593 Total weighted-average diluted shares outstanding 44,964,616 45,227,536 Diluted earnings per share $ 0.01 $ 0.76 Anti-dilutive stock options and restricted shares 1,436,771 172,631 Note 4. Securities Available-for-Sale The carrying amount of securities and their approximate fair values are reflected in the following table: March 31, 2023 Amortized Cost Unrealized Gains Unrealized Losses Fair Value US government agencies $ 25,554 $ 17 $ 324 $ 25,247 Mortgage-backed securities 1,231,458 750 111,314 1,120,894 Municipal bonds 3,218 — 148 3,070 Other debt securities 500 — 20 480 Total $ 1,260,730 $ 767 $ 111,806 $ 1,149,691 December 31, 2022 US government agencies $ 16,080 $ — $ 412 $ 15,668 Mortgage-backed securities 1,116,387 270 121,083 995,574 Municipal bonds 3,223 — 246 2,977 Other debt securities 500 — — 500 Total $ 1,136,190 $ 270 $ 121,741 $ 1,014,719 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. 10 Table of Contents 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 March 31, 2023 Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses US government agencies $ 12,399 $ 206 $ 2,833 $ 118 $ 15,232 $ 324 Mortgage-backed securities 450,480 15,117 599,171 96,197 1,049,651 111,314 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 Less Than 12 Months 12 Months or More Total December 31, 2022 Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses US government agencies $ 15,668 $ 412 $ — $ — $ 15,668 $ 412 Mortgage-backed securities 513,639 29,060 456,972 92,023 970,611 121,083 Municipal bonds 2,884 241 93 5 2,977 246 Total $ 532,191 $ 29,713 $ 457,065 $ 92,028 $ 989,256 $ 121,741 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 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 March 31, 2023 and December 31, 2022 were backed by U.S. government sponsored enterprises (“GSEs”). 11 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements The following is a summary of investment securities by maturity: March 31, 2023 Available-for-Sale Amortized Cost Fair Value US government agencies Within one year $ 5,000 $ 5,000 One to five years 17,948 17,665 Five to ten years 2,606 2,582 Total 25,554 25,247 Mortgage-backed securities One to five years 153,608 148,399 Five to ten years 286,784 258,033 After 10 years 791,066 714,462 Total 1,231,458 1,120,894 Municipal bonds After 10 years 3,218 3,070 Total 3,218 3,070 Other debt securities Within one year 500 480 Total 500 480 Total $ 1,260,730 $ 1,149,691 Mortgage-backed securities are included in maturity categories based on their contractual maturity date. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. There were no securities pledged at March 31, 2023 or December 31, 2022. 12 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Other Other investments, largely comprised of non-marketable equity investments, are generally accounted for under the equity method or equity security accounting and are included in other assets in the accompanying Unaudited Condensed Consolidated Balance Sheets. The below tables provide additional information related to investments accounted for under these two methods. Equity Method Accounting 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 % Apiture, Inc. $ 59,179 40.3 % $ 60,320 40.3 % Canapi Ventures SBIC Fund, LP (1) (5) 18,386 2.9 % 19,246 2.9 % Canapi Ventures Fund, LP (2) (5) 2,292 1.5 % 2,382 1.5 % Canapi Ventures Fund II, LP (3) (5) 7,371 1.6 % 7,412 1.6 % Canapi Ventures SBIC Fund II, LP (4) (5) 7,907 2.9 % 7,981 3.7 % Other Fintech investments in private companies (6) 236 4.3 % 241 4.3 % Other (7) 20,720 Various 12,476 Various Total $ 116,091 $ 110,058 (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 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. 13 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Equity Security Accounting The carrying amount of the Company’s investments in non-marketable equity securities with no readily determinable fair value and amounts recognized in earnings on a cumulative basis as of 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) $ 77,585 $ 64,728 Carrying value adjustments: Impairment $ — — — Upward changes for observable prices (2) 50,492 — — Downward changes for observable prices ( 86 ) — — Net upward change $ 50,406 $ — $ — (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 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. 14 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Canapi Funds The Company’s limited partnership investments in the Canapi Funds focus on providing venture capital to new and emerging financial technology companies. After initial commitment and over the course of the investment period, the Company will make capital contributions and receive profit and return of capital distributions as a result of fund performance until the funds wind down. Non-marketable and Other Equity Investments The Company also has a limited interest in several non-marketable funds, including Small Business Investment Company (“SBIC”) and venture capital funds, which are accounted for as equity security investments. After initial commitment and over the course of the investment period, the Company will make capital contributions and receive profit and return of capital distributions as a result of fund performance until the funds wind down. While the partnership agreements allow the Company to remove the general partner, this right is not deemed to be substantive as the general partner can only be removed for cause. All investments are generally non-redeemable and distributions are expected to be received through the liquidation of the underlying investments throughout the life of the investment fund. Investments may only be sold or transferred subject to the notice and approval provisions of the underlying investment agreement. 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. 15 Table of Contents 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. Note 5. Loans and Leases Held for Investment and Credit Quality The following tables present total loans and leases held for investment and an aging analysis for the Company’s portfolio segments. Loans and leases are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Current or Less than 30 Days Past Due 30-89 Days Past Due 90 Days or More Past Due Total Past Due Total Carried at Amortized Cost Loans Accounted for Under the Fair Value Option (1) Total Loans and Leases March 31, 2023 Commercial & Industrial Small Business Banking $ 1,789,517 $ 10,307 $ 18,187 $ 28,494 $ 1,818,011 $ 169,820 $ 1,987,831 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 Total 3,385,733 15,207 26,026 41,233 3,426,966 244,742 3,671,708 Construction & Development Small Business Banking 490,781 2,271 — 2,271 493,052 — 493,052 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 Commercial Real Estate Small Business Banking 2,192,053 7,606 20,589 28,195 2,220,248 157,185 2,377,433 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 Commercial Land Small Business Banking 467,890 — 1,917 1,917 469,807 41,417 511,224 Total 467,890 — 1,917 1,917 469,807 41,417 511,224 Total $ 7,152,315 $ 25,084 $ 51,604 $ 76,688 $ 7,229,003 $ 466,950 $ 7,695,953 Net deferred fees ( 8,966 ) Loans and Leases, Net $ 7,686,987 Guaranteed Balance $ 2,703,028 $ 16,343 $ 39,169 $ 55,512 $ 2,758,540 $ 73,567 $ 2,832,107 % Guaranteed 37.8 % 65.2 % 75.9 % 72.4 % 38.2 % 15.8 % 36.8 % 16 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Current or Less than 30 Days Past Due 30-89 Days Past Due 90 Days or More Past Due Total Past Due Total Carried at Amortized Cost Loans Accounted for Under the Fair Value Option (1) Total Loans and Leases December 31, 2022 Commercial & Industrial Small Business Banking $ 1,719,165 $ 21,589 $ 16,221 $ 37,810 $ 1,756,975 $ 182,348 $ 1,939,323 Specialty Lending 1,022,615 398 266 664 1,023,279 29,084 1,052,363 Energy & Infrastructure 420,447 — 3,082 3,082 423,529 50,094 473,623 Paycheck Protection Program 13,134 — — — 13,134 — 13,134 Total 3,175,361 21,987 19,569 41,556 3,216,917 261,526 3,478,443 Construction & Development Small Business Banking 471,243 1,500 — 1,500 472,743 — 472,743 Specialty Lending 104,069 — — — 104,069 — 104,069 Energy & Infrastructure 13,753 — — — 13,753 — 13,753 Total 589,065 1,500 — 1,500 590,565 — 590,565 Commercial Real Estate Small Business Banking 2,137,028 12,082 5,771 17,853 2,154,881 166,595 2,321,476 Specialty Lending 319,419 — — — 319,419 2,050 321,469 Energy & Infrastructure 136,706 — 3,072 3,072 139,778 22,123 161,901 Total 2,593,153 12,082 8,843 20,925 2,614,078 190,768 2,804,846 Commercial Land Small Business Banking 429,014 1,663 1,917 3,580 432,594 42,164 474,758 Total 429,014 1,663 1,917 3,580 432,594 42,164 474,758 Total $ 6,786,593 $ 37,232 $ 30,329 $ 67,561 $ 6,854,154 $ 494,458 $ 7,348,612 Net deferred fees ( 4,434 ) Loans and Leases, Net $ 7,344,178 Guaranteed Balance $ 2,657,770 $ 20,199 $ 26,026 $ 46,225 $ 2,703,995 $ 67,268 $ 2,771,263 % Guaranteed 39.2 % 54.3 % 85.8 % 68.4 % 39.5 % 13.6 % 37.7 % (1) Retained portions of government guaranteed loans sold prior to January 1, 2021 are carried at fair value under FASB ASC Subtopic 825-10, Financial Instruments: Overall . See Note 9. Fair Value of Financial Instruments for additional information. 17 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Credit Quality Indicators The following tables present asset quality indicators by portfolio class and origination year. See Note 3. Loans and Leases Held for Investment and Credit Quality in the Company’s 2022 Form 10-K for additional discussion around the asset quality indicators that the Company uses to manage and monitor credit risk. Term Loans and Leases Amortized Cost Basis by Origination Year 2023 2022 2021 2020 2019 Prior Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Total (1) March 31, 2023 Small Business Banking Risk Grades 1 - 4 $ 257,416 $ 1,445,051 $ 1,365,169 $ 770,548 $ 416,518 $ 387,877 $ 60,243 $ 3,642 $ 4,706,464 Risk Grade 5 1,590 29,486 22,580 36,894 38,434 49,296 15,360 1,090 194,730 Risk Grades 6 - 8 — 6,497 8,004 19,603 23,794 40,603 1,423 — 99,924 Total 259,006 1,481,034 1,395,753 827,045 478,746 477,776 77,026 4,732 5,001,118 Specialty Lending Risk Grades 1 - 4 190,959 612,051 358,803 128,285 21,907 6,888 159,105 7,590 1,485,588 Risk Grade 5 — 31,853 54,804 17,331 13,437 4,255 13,692 5,000 140,372 Risk Grades 6 - 8 — — 7,479 1,328 5,319 166 676 — 14,968 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 Risk Grades 1 - 4 — — 5,851 4,932 — — — — 10,783 Total — — 5,851 4,932 — — — — 10,783 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 18 Table of Contents 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 Amortized Cost Basis Revolving Loans Converted to Term Total (1) December 31, 2022 Small Business Banking Risk Grades 1 - 4 $ 1,427,182 $ 1,400,726 $ 795,647 $ 426,401 $ 217,893 $ 204,933 $ 65,455 $ 1,738 $ 4,539,975 Risk Grade 5 15,942 17,745 40,202 45,712 26,124 27,212 13,210 204 186,351 Risk Grades 6 - 8 1,806 4,277 17,845 23,470 14,094 27,215 1,638 522 90,867 Total 1,444,930 1,422,748 853,694 495,583 258,111 259,360 80,303 2,464 4,817,193 Specialty Lending Risk Grades 1 - 4 635,079 355,785 144,545 25,849 6,574 788 153,062 31,504 1,353,186 Risk Grade 5 7,341 33,272 12,329 10,201 4,399 — 6,619 248 74,409 Risk Grades 6 - 8 — 11,433 416 5,577 166 — 1,343 237 19,172 Total 642,420 400,490 157,290 41,627 11,139 788 161,024 31,989 1,446,767 Energy & Infrastructure Risk Grades 1 - 4 199,338 176,855 39,600 51,190 23,374 19,694 12,751 351 523,153 Risk Grade 5 4,024 4,409 500 6,976 4,706 5,142 — — 25,757 Risk Grades 6 - 8 — 3,082 16,589 — 8,479 — — — 28,150 Total 203,362 184,346 56,689 58,166 36,559 24,836 12,751 351 577,060 Paycheck Protection Program Risk Grades 1 - 4 — 7,421 5,713 — — — — — 13,134 Total — 7,421 5,713 — — — — — 13,134 Total $ 2,290,712 $ 2,015,005 $ 1,073,386 $ 595,376 $ 305,809 $ 284,984 $ 254,078 $ 34,804 $ 6,854,154 (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: March 31, 2023 Loan and Lease Balance (1) Guaranteed Balance Unguaranteed Balance % Guaranteed Risk Grades 1 - 4 $ 6,724,781 $ 2,540,259 $ 4,184,522 37.8 % Risk Grade 5 370,848 126,323 244,525 34.1 Risk Grades 6 - 8 133,374 91,958 41,416 68.9 Total $ 7,229,003 $ 2,758,540 $ 4,470,463 38.2 % December 31, 2022 Loan and Lease Balance (1) Guaranteed Balance Unguaranteed Balance % Guaranteed Risk Grades 1 - 4 $ 6,429,448 $ 2,508,229 $ 3,921,219 39.0 % Risk Grade 5 286,517 115,573 170,944 40.3 Risk Grades 6 - 8 138,189 80,193 57,996 58.0 Total $ 6,854,154 $ 2,703,995 $ 4,150,159 39.5 % (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. 19 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Nonaccrual Loans and Leases 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 $ 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 (1) Guaranteed Balance Unguaranteed Balance Unguaranteed Exposure with No ACL Commercial & Industrial Small Business Banking $ 28,681 $ 24,187 $ 4,494 $ 407 Specialty Lending 7,982 5,094 2,888 — Energy & Infrastructure 3,082 2,794 288 288 Total 39,745 32,075 7,670 695 Commercial Real Estate 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 Commercial Land Small Business Banking 6,704 5,455 1,249 196 Total 6,704 5,455 1,249 196 Total $ 85,698 $ 63,696 $ 22,002 $ 7,294 December 31, 2022 Loan and Lease Balance (1) Guaranteed Balance Unguaranteed Balance Unguaranteed Exposure with No ACL Commercial & Industrial Small Business Banking $ 22,321 $ 19,302 $ 3,019 $ 407 Specialty Lending 3,647 384 3,263 — Energy & Infrastructure 3,082 2,794 288 288 Total 29,050 22,480 6,570 695 Commercial Real Estate Small Business Banking 34,520 23,830 10,690 3,611 Energy & Infrastructure 3,072 2,799 273 — Total 37,592 26,629 10,963 3,611 Commercial Land Small Business Banking 6,750 5,499 1,251 196 Total 6,750 5,499 1,251 196 Total $ 73,392 $ 54,608 $ 18,784 $ 4,502 (1) Excludes nonaccrual loans accounted for under the fair value option. See Note 9. Fair Value of Financial Instruments for additional information. 20 Table of Contents 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 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 Energy & Infrastructure 3,022 — — 227 — — — Total 10,753 1,126 — 1,931 295 — 1,257 Commercial Real Estate Small Business Banking 17,036 2,079 — 8,191 417 — 173 Total 17,036 2,079 — 8,191 417 — 173 Commercial Land Small Business Banking 1,743 — — 202 — — — Total 1,743 — — 202 — — — Total $ 29,532 $ 3,205 $ — $ 10,324 $ 712 $ — $ 1,430 Total Collateral Dependent Loans Unguaranteed Portion December 31, 2022 Real Estate Business Assets Other Real Estate Business Assets Other Allowance for Credit Losses Commercial & Industrial Small Business Banking $ 2,730 $ — $ — $ 414 $ — $ — $ — Specialty Lending — 371 — — 371 — 291 Energy & Infrastructure 16,378 — — 13,583 — — — Total 19,108 371 — 13,997 371 — 291 Commercial Real Estate Small Business Banking 15,286 — — 6,440 — — 152 Total 15,286 — — 6,440 — — 152 Commercial Land Small Business Banking 1,743 — — 202 — — — Total 1,743 — — 202 — — — Total $ 36,137 $ 371 $ — $ 20,639 $ 371 $ — $ 443 21 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Allowance for Credit Losses - Loans and Leases See Note 1. Organization and Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements in the Company’s 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: Three Months Ended Commercial & Industrial Construction & Development Commercial Real Estate Commercial Land Total 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 ) Recoveries 23 — — — 23 Provision 13,343 2,019 2,658 1,001 19,021 Ending Balance $ 72,058 $ 6,954 $ 25,062 $ 4,168 $ 108,242 March 31, 2022 Beginning Balance $ 37,770 $ 3,435 $ 19,068 $ 3,311 $ 63,584 Charge offs ( 2,823 ) — — ( 334 ) ( 3,157 ) Recoveries 145 — 650 — 795 Provision ( 930 ) 667 1,896 203 1,836 Ending Balance $ 34,162 $ 4,102 $ 21,614 $ 3,180 $ 63,058 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 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 Energy & Infrastructure — 13,517 — 2.35 Total $ 4,183 $ 13,517 $ 3,436 2.67 % As of March 31, 2023, the Company had no commitments to lend additional funds to borrowers included in the previous table. 22 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements 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 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) Number of Loans Recorded investment at period end Number of Loans Recorded investment at period end Number of Loans Recorded investment at period end Number of Loans Recorded investment at period end Number of Loans Recorded investment at period end Commercial & Industrial Small Business Banking — $ — 2 $ 1,015 1 $ 350 3 $ 3,809 6 $ 5,174 Total — — 2 1,015 1 350 3 3,809 6 5,174 Commercial Real Estate Small Business Banking — — — — — — 1 4,847 1 4,847 Total — — — — — — 1 4,847 1 4,847 Total — $ — 2 $ 1,015 1 $ 350 4 $ 8,656 7 $ 10,021 (1) Excludes loans accounted for under the fair value option. See Note 9. Fair Value of Financial Instruments for additional information. Restructurings made to improve a loan’s performance have varying degrees of success. 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. 23 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Note 6. Leases Lessor Equipment Leasing The Company purchases new equipment for the purpose of leasing such equipment to customers within its verticals. Equipment purchased to fulfill commitments to commercial renewable energy projects is rented out under operating leases while leases of equipment outside of the renewable energy vertical are generally direct financing leases. Accordingly, leased assets under operating leases are included in premises and equipment while leased assets under direct financing leases are included in loans and leases held for investment in the accompanying Unaudited Condensed Consolidated Balance Sheets. Direct Financing Leases Interest income on direct financing leases is recognized when earned. Unearned interest is recognized over the lease term on a basis which results in a constant rate of return on the unrecovered lease investment. The term of each lease is generally 3 to 7 years which is consistent with the useful life of the equipment with no residual value. The net investment in direct finance leases included in loans and leases held for investment are as follows: March 31, 2023 December 31, 2022 Gross direct finance lease payments receivable $ 3,760 $ 4,284 Less – unearned interest ( 402 ) ( 479 ) Net investment in direct financing leases $ 3,358 $ 3,805 Future minimum lease payments under finance leases are as follows: As of March 31, 2023 Amount 2023 $ 1,301 2024 1,352 2025 990 2026 117 Total $ 3,760 Interest income of $ 73 thousand and $ 115 thousand was recognized in the three months ended March 31, 2023 and 2022, respectively. Operating Leases The term of each operating lease is generally 10 to 15 years. The Company retains ownership of the equipment and associated tax benefits such as investment tax credits and accelerated depreciation. At the end of the lease term, the lessee has the option to renew the lease for two additional terms or purchase the equipment at the then-current fair market value. Rental revenue from operating leases is recognized on a straight-line basis over the term of the lease. Rental equipment is recorded at cost and depreciated to an estimated residual value on a straight-line basis over the estimated useful life. The useful lives generally range from 20 to 25 years and residual values generally range from 20 % to 50 %, however, they are subject to periodic evaluation. Changes in useful lives or residual values will impact depreciation expense and any gain or loss from the sale of used equipment. The estimated useful lives and residual values of the Company's leasing equipment are based on industry disposal experience and the Company's expectations for future sale prices. If the Company decides to sell or otherwise dispose of rental equipment, it is carried at the lower of cost or fair value less costs to sell or dispose. Repair and maintenance costs that do not extend the lives of the rental equipment are charged to equipment expense at the time the costs are incurred. 24 Table of Contents 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 March 31, 2023 Amount 2023 $ 6,914 2024 8,808 2025 8,935 2026 8,923 2027 8,690 Thereafter 13,563 Total $ 55,833 Note 7. Servicing Assets 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 $ 2.26 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 March 31, 2023 2022 Balance at beginning of period $ 26,323 $ 33,574 Additions, net 2,678 4,281 Fair value changes: Due to changes in valuation inputs or assumptions 2,624 1,388 Decay due to increases in principal paydowns or runoff ( 2,268 ) ( 2,957 ) Balance at end of period $ 29,357 $ 36,286 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. The fair value of servicing rights is highly sensitive to changes in underlying assumptions. Changes in prepayment speed assumptions typically have the most significant impact on the fair value of servicing rights. Generally, as interest rates rise on variable rate loans, loan prepayments increase due to an increase in refinance activity, which results in a decrease in the fair value of servicing assets, however, weakening economic conditions or significant declines in interest rates can also increase loan prepayment activity. Measurement of fair value is limited to the conditions existing and the assumptions used as of a particular point in time, and those assumptions may not be appropriate if they are applied at a different time. 25 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Note 8. Borrowings Total outstanding borrowings consisted of the following: March 31, 2023 December 31, 2022 Borrowings In March 2021, the Company entered into a 60 -month term loan agreement of $ 50.0 million with a third party correspondent bank. The loan accrues interest at a fixed rate of 2.95 % with a monthly payment sufficient to fully amortize the loan, with all remaining unpaid principal and interest due at maturity on March 30, 2026 . The Company paid the Lender a non-refundable $ 325 thousand loan origination fee upon signing of the Note that is presented as a direct deduction from the carrying amount of the loan and will be amortized into interest expense over the life of the loan. $ 30,767 $ 33,203 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. — 50,000 Total borrowings $ 30,767 $ 83,203 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. Note 9. Fair Value of Financial Instruments Fair Value Hierarchy There are three levels of inputs in the fair value hierarchy that may be used to measure fair value. Financial instruments are considered Level 1 when valuation can be based on quoted prices in active markets for identical assets or liabilities. Level 2 financial instruments are valued using quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or models using inputs that are observable or can be corroborated by observable market data of substantially the full term of the assets or liabilities. Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable and when determination of the fair value requires significant management judgment or estimation. Recurring Fair Value The table below provides a rollforward of the Level 3 equity warrant asset fair values. Three Months Ended March 31, Equity Warrant Assets 2023 2022 Balance at beginning of period $ 2,210 $ 1,672 New equity warrant assets 153 656 Changes in fair value, net ( 176 ) — Balance at end of period $ 2,187 $ 2,328 26 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis. March 31, 2023 Total Level 1 Level 2 Level 3 Investment securities available-for-sale US government agencies $ 25,247 $ — $ 25,247 $ — Mortgage-backed securities 1,120,894 — 1,120,894 — Municipal bonds (1) 3,070 — 2,987 83 Other debt securities (2) 480 — — 480 Loans held for investment 466,950 — — 466,950 Servicing assets (3) 29,357 — — 29,357 Mutual fund 1,672 — 1,672 — Equity warrant assets 2,187 — — 2,187 Total assets at fair value $ 1,649,857 $ — $ 1,150,800 $ 499,057 December 31, 2022 Total Level 1 Level 2 Level 3 Investment securities available-for-sale US government agencies $ 15,668 $ — $ 15,668 $ — Mortgage-backed securities 995,574 — 995,574 — Municipal bonds (1) 2,977 — 2,884 93 Other debt securities 500 — 500 — Loans held for investment 494,458 — — 494,458 Servicing assets (3) 26,323 — — 26,323 Mutual fund 1,656 — 1,656 — Equity warrant assets 2,210 — — 2,210 Total assets at fair value $ 1,539,366 $ — $ 1,016,282 $ 523,084 (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. For additional information on the valuation techniques and significant inputs for Level 2 and Level 3 assets and liabilities that are measured at fair value on a recurring basis, see Note 10. Fair Value of Financial Instruments in the Company’s 2022 Form 10-K. Fair Value Option 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. Not electing fair value generally results in a larger discount being recorded on the date of the sale. This discount is subsequently accreted into interest income over the underlying loan’s remaining term using the effective interest method. Management made this change of election in alignment with its ongoing effort to reduce volatility and drive more predictable revenue. In accordance with GAAP, any loans for which fair value was previously elected continue to be measured as such. 27 Table of Contents 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 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 Fair Value Carrying Amount Unpaid Principal Balance Difference Fair Value Carrying Amount Unpaid Principal Balance Difference Fair Value Carrying Amount Unpaid Principal Balance Difference Fair Value Option Elections Loans held for investment $ 466,950 $ 489,578 $ ( 22,628 ) $ 52,161 $ 55,587 $ ( 3,426 ) $ 32,898 $ 34,642 $ ( 1,744 ) $ 466,950 $ 489,578 $ ( 22,628 ) $ 52,161 $ 55,587 $ ( 3,426 ) $ 32,898 $ 34,642 $ ( 1,744 ) December 31, 2022 Total Loans Nonaccruals 90 Days or More Past Due Fair Value Carrying Amount Unpaid Principal Balance Difference Fair Value Carrying Amount Unpaid Principal Balance Difference Fair Value Carrying Amount Unpaid Principal Balance Difference Fair Value Option Elections Loans held for investment $ 494,458 $ 513,219 $ ( 18,761 ) $ 44,890 $ 46,993 $ ( 2,103 ) $ 24,663 $ 26,321 $ ( 1,658 ) $ 494,458 $ 513,219 $ ( 18,761 ) $ 44,890 $ 46,993 $ ( 2,103 ) $ 24,663 $ 26,321 $ ( 1,658 ) The following table presents the net gains (losses) from changes in fair value. Three Months Ended March 31, Gains (Losses) on Loans Accounted for under the Fair Value Option 2023 2022 Loans held for sale $ — $ ( 170 ) Loans held for investment ( 4,529 ) 686 $ ( 4,529 ) $ 516 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 March 31, Loans held for sale 2023 2022 Balance at beginning of period $ — $ 25,310 Repurchases — 65 Fair value changes — ( 170 ) Settlements — ( 149 ) Balance at end of period $ — $ 25,056 28 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Three Months Ended March 31, Loans held for investment 2023 2022 Balance at beginning of period $ 494,458 $ 645,201 Repurchases 11,834 1,525 Fair value changes ( 4,529 ) 686 Settlements ( 34,813 ) ( 46,841 ) Balance at end of period $ 466,950 $ 600,571 Non-Recurring Fair Value 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 Total assets at fair value $ 8,125 $ — $ — $ 8,125 December 31, 2022 Total Level 1 Level 2 Level 3 Collateral-dependent loans $ 4,840 $ — $ — $ 4,840 Total assets at fair value $ 4,840 $ — $ — $ 4,840 For additional information on the valuation techniques and significant inputs for Level 2 and Level 3 assets that are measured at fair value on a non-recurring basis, see Note 10. Fair Value of Financial Instruments in the Company’s 2022 Form 10-K. Level 3 Analysis For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of 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 $ 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 % 2.1 % Discount rate 6.3 % - 9.8 % 8.8 % Prepayment speed 14.9 % 14.9 % Discounted appraisals Appraisal adjustments (2) 0.0 % - 84.0 % 59.0 % Equity warrant assets $ 2,187 Black-Scholes option pricing model Volatility 26.8 % - 90.0 % 35.9 % Risk-free interest rate 3.6 % - 3.7 % 3.6 % Marketability discount 20.0 % 20.0 % Remaining life 2 - 10 years 7.0 years Non-recurring fair value Collateral-dependent loans $ 8,125 Discounted appraisals Appraisal adjustments (2) 10.0 % - 92.0 % 48.7 % 29 Table of Contents 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 Unobservable Inputs Range Weighted Average (1) Recurring fair value Municipal bond $ 93 Discounted expected cash flows Discount rate 6.0 % N/A Prepayment speed 5.0 % N/A Loans held for investment $ 494,458 Discounted expected cash flows Loss rate 0.0 % - 79.3 % 1.9 % Discount rate 7.5 % - 11.2 % 10.0 % Prepayment speed 16.5 % 16.5 % Discounted appraisals Appraisal adjustments 0.0 % - 77.3 % 28.6 % Equity warrant assets $ 2,210 Black-Scholes option pricing model Volatility 26.5 % - 90.0 % 34.2 % Risk-free interest rate 3.9 % - 4.0 % 3.9 % Marketability discount 20.0 % 20.0 % Remaining life 3 - 10 years 7.7 years Non-recurring fair value Collateral-dependent loans $ 4,840 Discounted appraisals Appraisal adjustments (2) 10.0 % - 66.5 % 34.2 % (1) Weighted averages are determined by the relative fair value of the instruments or the relative contribution to the instruments fair value. (2) Appraisals may be adjusted by management for customized discounting criteria, estimated sales costs, and other qualitative adjustments. Estimated Fair Value of Other Financial Instruments GAAP also requires disclosure of the fair value of financial instruments carried at book value on the Unaudited Condensed Consolidated Balance Sheets. The carrying amounts and estimated fair values of the Company’s financial instruments not measured at fair value on a recurring or non-recurring basis are as follows: March 31, 2023 Carrying Amount Quoted Price In Active Markets for Identical Assets /Liabilities (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Fair Value Financial assets Cash and due from banks $ 463,186 $ 463,186 $ — $ — $ 463,186 Certificates of deposit with other banks 4,000 4,000 — — 4,000 Loans held for sale 533,292 — — 553,270 553,270 Loans and leases held for investment, net of allowance for credit losses on loans and leases 7,111,795 — — 7,430,287 7,430,287 Financial liabilities Deposits 9,421,994 — 9,237,147 — 9,237,147 Borrowings 30,767 — — 30,025 30,025 30 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements December 31, 2022 Carrying Amount Quoted Price In Active Markets for Identical Assets /Liabilities (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Fair Value Financial assets Cash and due from banks $ 280,239 $ 280,239 $ — $ — $ 280,239 Federal funds sold 136,397 136,397 — — 136,397 Certificates of deposit with other banks 4,000 4,000 — — 4,000 Loans held for sale 554,610 — — 577,254 577,254 Loans and leases held for investment, net of allowance for credit losses on loans and leases 6,753,154 — — 6,652,936 6,652,936 Financial liabilities Deposits 8,884,928 — 8,532,615 — 8,532,615 Borrowings 83,203 — — 82,258 82,258 Note 10. Commitments and Contingencies Litigation In the normal course of business, the Company is involved in various legal proceedings. Management believes that the outcome of such proceedings will not materially affect the financial position, results of operations or cash flows of the Company. Financial Instruments with Off-Balance-Sheet Risk The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, credit risk in excess of the amount recognized in the balance sheet. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as for on-balance-sheet instruments. A summary of the Company’s commitments is as follows: March 31, 2023 December 31, 2022 Commitments to extend credit $ 2,905,792 $ 2,731,866 Standby letters of credit 24,422 26,454 Airplane purchase agreement commitments 21,000 24,000 Total unfunded off-balance-sheet credit risk $ 2,951,214 $ 2,782,320 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the party. Collateral held varies, but may include accounts receivable, inventory, property and equipment, residential real estate and income-producing commercial properties. Commitment letters are issued after approval of the loan by the Credit Department and generally expire 90 days after issuance. 31 Table of Contents 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. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held varies as specified above and is required in instances which the Company deems necessary. 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-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 other financial institutions that exceed federally-insured limits. Note 11. Segments The Company's management reporting process measures the performance of its operating segments based on internal operating structure, which is subject to change from time-to-time. Accordingly, the Company operates two reportable segments for management reporting purposes as discussed below: Banking - This segment specializes in providing financing services to small businesses nationwide in targeted industries and deposit-related services to small businesses, consumers and other customers nationwide. The primary source of revenue for this segment is net interest income and secondarily the origination and sale of government guaranteed loans. Fintech - This segment is involved in making strategic investments into emerging financial technology companies. The primary sources of revenue for this segment are principally gains and losses on equity method and equity security investments and management fees. The Fintech segment is comprised of the Company's direct wholly owned subsidiaries Live Oak Ventures and Canapi Advisors, and the investments held by those entities, as well as the Bank's investment in Apiture. 32 Table of Contents 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 three months ended March 31, 2023 Interest income $ 151,269 $ 12 $ 135 $ 151,416 Interest expense 69,077 — 322 69,399 Net interest income (loss) 82,192 12 ( 187 ) 82,017 Provision for loan and lease credit losses 19,021 — — 19,021 Noninterest income 16,997 2,039 543 19,579 Noninterest expense 74,483 2,256 2,223 78,962 Income tax expense (benefit) 3,297 156 ( 238 ) 3,215 Net income (loss) $ 2,388 $ ( 361 ) $ ( 1,629 ) $ 398 Total assets $ 10,181,253 $ 124,450 $ 58,594 $ 10,364,297 As of and for the three months ended March 31, 2022 Interest income $ 92,746 $ 36 $ — $ 92,782 Interest expense 14,530 — 473 15,003 Net interest income (loss) 78,216 36 ( 473 ) 77,779 Provision for loan and lease credit losses 1,836 — — 1,836 Noninterest income 31,935 237 496 32,668 Noninterest expense 61,399 2,168 2,147 65,714 Income tax expense (benefit) 9,076 ( 146 ) ( 542 ) 8,388 Net income (loss) $ 37,840 $ ( 1,749 ) $ ( 1,582 ) $ 34,509 Total assets $ 8,450,425 $ 121,471 $ 48,070 $ 8,619,966 33 Table of Contents