What changed in this filing

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Item 1. Financial Statements

2023-08-02 compared with 2023-05-03 · 331 added, 180 removed, 957 unchanged (35% of the section changed)

2 unchanged sentences

Condensed Consolidated Balance Sheets

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

As of June 30, 2023 (unaudited) and December 31, 2022*

(Dollars in thousands)

21 unchanged sentences

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

Preferred stock, no par value, 1,000,000 shares authorized, none issued or outstanding at June 30, 2023 and December 31, 2022

Class A common stock, no par value, 100,000,000 shares authorized, 44,351,715 and 44,061,244 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively

341,032 330,854

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

Class B common stock, no par value, 10,000,000 shares authorized, none issued or outstanding at June 30, 2023 and December 31, 2022

Retained earnings 589,036 572,497

6 unchanged sentences

Condensed Consolidated Statements of Income

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

For the three and six months ended June 30, 2023 and 2022 (unaudited)

(Dollars in thousands, except per share data)

Three Months Ended

June 30, Six Months Ended

2023 2022 2023 2022

Interest income

14 unchanged sentences

Net gains on sales of loans 10,804 5,630 20,979 26,607

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

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

Net gain (loss) on loans accounted for under the fair value option 1,728 ( 4,461 ) ( 2,801 ) ( 3,945 )

Equity method investments (loss) income ( 2,055 ) 119,056 ( 5,007 ) 116,932

Equity security investments gains (losses), net 121 1,655 198 1,611

24 unchanged sentences

Live Oak Bancshares, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

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

Condensed Consolidated Statements of Comprehensive Income

For the three and six months ended June 30, 2023 and 2022 (unaudited)

(Dollars in thousands)

Three Months Ended

June 30, Six Months Ended

2023 2022 2023 2022

Net income $ 17,544 $ 97,039 $ 17,942 $ 131,548

Other comprehensive income (loss) before tax:

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

Other comprehensive loss before tax:

Net unrealized loss on investment securities available-for-sale during the period ( 17,348 ) ( 29,967 ) ( 6,916 ) ( 80,561 )

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 )

Other comprehensive loss before tax ( 17,348 ) ( 29,967 ) ( 6,916 ) ( 80,561 )

Income tax benefit 4,163 7,190 1,654 19,332

Other comprehensive loss, net of tax ( 13,185 ) ( 22,777 ) ( 5,262 ) ( 61,229 )

Total comprehensive income $ 4,359 $ 74,262 $ 12,680 $ 70,319

See Notes to Unaudited Condensed Consolidated Financial Statements

1 unchanged sentence

Condensed Consolidated Statements of Changes in Shareholders’ Equity

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

For the three and six months ended June 30, 2023 and 2022 (unaudited)

(Dollars in thousands)

3 unchanged sentences

comprehensive

income (loss) Total

Shares Amount

Class A Class B

Balance at March 31, 2023

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

Net income — — — 17,544 — 17,544

Other comprehensive loss — — — — ( 13,185 ) ( 13,185 )

Issuance of restricted stock 38,145 — — — — —

Tax withholding related to vesting of restricted stock and other

— — ( 249 ) — — ( 249 )

Stock option exercises 22,730 — 297 — — 297

Stock option compensation expense — — 4 — — 4

Restricted stock compensation expense — — 6,308 — — 6,308

Transfer from retained earnings to other assets for pro rata portion of equity method investee stock compensation expense — — — 292 — 292

Cash dividends ($ 0.03 per share)

— — — ( 1,330 ) — ( 1,330 )

Balance at June 30, 2023

44,351,715 — $ 341,032 $ 589,036 $ ( 97,580 ) $ 832,488

Balance at March 31, 2022

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

Net income — — — 97,039 — 97,039

Other comprehensive loss — — — — ( 22,777 ) ( 22,777 )

Issuance of restricted stock 17,156 — — — — —

Tax withholding related to vesting of restricted stock and other

— — ( 197 ) — — ( 197 )

Stock option exercises 49,195 — 434 — — 434

Stock option compensation expense — — 234 — — 234

Restricted stock compensation expense — — 4,846 — — 4,846

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

— — — 71 — 71

Cash dividends ($ 0.03 per share)

— — — ( 1,315 ) — ( 1,315 )

Balance at June 30, 2022

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

Live Oak Bancshares, Inc.

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

For the three and six months ended June 30, 2023 and 2022 (unaudited)

(Dollars in thousands)

Six Months Ended

Common stock Retained

earnings Accumulated

comprehensive

income (loss)

4 unchanged sentences

Net income — — — 17,942 — 17,942

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

Other comprehensive loss — — — — ( 5,262 ) ( 5,262 )

Issuance of restricted stock 201,019 — — — — —

10 unchanged sentences

— — — ( 2,657 ) — ( 2,657 )

Balance at March 31, 2023

Balance at June 30, 2023

44,351,715 — $ 341,032 $ 589,036 $ ( 97,580 ) $ 832,488

15 unchanged sentences

— — — ( 2,627 ) — ( 2,627 )

Balance at March 31, 2022

Balance at June 30, 2022

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

2 unchanged sentences

Condensed Consolidated Statements of Cash Flows

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

For the six months ended June 30, 2023 and 2022 (unaudited)

(Dollars in thousands)

Three Months Ended

Six Months Ended

Cash flows from operating activities

9 unchanged sentences

Net loss on sale of foreclosed assets — 41

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 loans accounted for under fair value option 2,801 3,945

Net (increase) decrease in servicing assets ( 4,719 ) 4,913

Net loss on disposal of property and equipment 402 22

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

Equity method investments loss (income) 5,007 ( 116,932 )

Equity security investments (gains) losses, net ( 198 ) ( 1,611 )

16 unchanged sentences

Purchases of equity method investments ( 4,323 ) —

Proceeds from sale of equity method investments — 125,321

Proceeds from sale of premises and equipment — 2

Purchases of premises and equipment, net ( 16,968 ) ( 28,231 )

3 unchanged sentences

Condensed Consolidated Statements of Cash Flows (Continued)

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

For the six months ended June 30, 2023 and 2022 (unaudited)

(Dollars in thousands)

Three Months Ended

Six Months Ended

Cash flows from financing activities

14 unchanged sentences

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 )

Unrealized holding losses on investment securities available-for-sale, net of taxes $ ( 5,262 ) $ ( 61,229 )

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

14,908 11,278

Net transfers between foreclosed real estate and SBA receivable — 55

13 unchanged sentences

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.

The Bank specializes in providing lending and deposit related services to small businesses nationwide.

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.

These loans are to small businesses and professionals with what the Bank believes are lower risk characteristics.

Industries, or “verticals,” on which the Bank focuses its lending efforts are carefully selected.

The Bank also lends more broadly to select borrowers outside of those verticals.

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

22 unchanged sentences

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.

Results of operations for the three and six months ended June 30, 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.

12 unchanged sentences

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.

These changes, based on the continued maturity of internal data, resulted in a $ 1.5 million increase in the ACL in the first quarter of 2023.

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.

These changes resulted in a $ 2.4 million increase in the reserve on unfunded commitments in the first quarter of 2023.

These refinements have been accounted for as 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.

Live Oak Bancshares, Inc.

5 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.

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.

With the amendments, the ASU can be adopted by the Company as of March 12, 2020, through December 31, 2024.

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.

To address the discontinuance of LIBOR, the Company stopped originating variable LIBOR-based loans effective December 31, 2021 and 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.

As of June 30, 2023, the Company has transitioned nearly all its LIBOR-based loan exposure to an alternative index.

The remaining LIBOR-based loans will transition to an alternative index at their next repricing date.

In March 2022, the FASB issued ASU No.

21 unchanged sentences

Three Months Ended

June 30, Six Months Ended

2023 2022 2023 2022

Basic earnings per share:

11 unchanged sentences

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

March 31, 2023 Amortized

June 30, 2023 Amortized

US government agencies $ 31,032 $ — $ 536 $ 30,496

9 unchanged sentences

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.

During the three and six months ended June 30, 2023, two mortgage-backed securities totaling $ 2.7 million were settled.

During the three months ended June 30, 2022, nine mortgage-backed securities totaling $ 18.8 million were settled.

During the six months ended June 30, 2022, eighteen mortgage-backed securities totaling $ 32.7 million were settled.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Accrued interest receivable on available-for-sale securities totaled $ 3.4 million and $ 2.9 million at June 30, 2023 and December 31, 2022, respectively, and is included in other assets in the accompanying Unaudited Condensed Consolidated Balance Sheets.

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

June 30, 2023 Fair

US government agencies $ 23,832 $ 246 $ 6,664 $ 290 $ 30,496 $ 536

11 unchanged sentences

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.

At June 30, 2023, there were 359 mortgage-backed securities, two US government agency securities and two municipal bonds in unrealized loss positions for greater than 12 months.

There were 88 mortgage-backed securities, seven US government agency securities, 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.

1 unchanged sentence

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.

All mortgage-backed securities in the Company’s portfolio at June 30, 2023 and December 31, 2022 were backed by U.S.

government sponsored enterprises (“GSEs”).

2 unchanged sentences

The following is a summary of investment securities by maturity:

March 31, 2023

June 30, 2023

Available-for-Sale

6 unchanged sentences

Mortgage-backed securities

Within one year 629 626

One to five years 173,870 163,603

3 unchanged sentences

Municipal bonds

Five to ten years 3,114 2,951

After 10 years 98 84

6 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 March 31, 2023 or December 31, 2022.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

There were no securities pledged at June 30, 2023 or December 31, 2022.

Other investments, largely comprised of non-marketable equity investments, are generally accounted for under the equity method or equity security accounting and are included in other assets in the accompanying Unaudited Condensed Consolidated Balance Sheets.

The below tables provide additional information related to investments accounted for under these two methods.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Equity Method Accounting

The carrying amount and ownership percentage of each equity investment 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

The carrying amount and ownership percentage of each equity investment over which the Company has significant influence at June 30, 2023 and December 31, 2022 is reflected in the following table:

June 30, 2023 December 31, 2022

Amount Ownership % Amount Ownership %

13 unchanged sentences

Total $ 113,963 $ 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.

(1) Includes unfunded commitments of $ 5.4 million and $ 5.5 million as of June 30, 2023 and December 31, 2022, respectively.

(2) Includes unfunded commitments of $ 613 thousand and $ 617 thousand as of June 30, 2023 and December 31, 2022, respectively.

(3) Includes unfunded commitments of $ 6.9 million as of June 30, 2023 and December 31, 2022.

(4) Includes unfunded commitments of $ 7.6 million and $ 7.5 million as of June 30, 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.

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

As of June 30, 2023, the investment has been moved to equity security as the preferred shares do not qualify as in-substance common stock.

(7) As of June 30, 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 CSP1 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”), Cape Fear Collective Impact Opportunity 2 LLC (“Cape Fear Collective 2”) and OTR Fund I, LLC ("OTR") which the Company holds 99.0 %, 32.3 %, and 11.5 % of limited member interests, respectively.

As of June 30, 2023, there was an unfunded commitment of $ 7.7 million for Estrella Landing.

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.

Also included within Other investments are Cape Fear Collective and Cape Fear Collective 2, which the Company holds 99.0 % and 32.3 % of limited member interests, respectively.

As of December 31, 2022 an unfunded commitment of $ 2.6 million was recorded as a liability for HEP, and as of June 30, 2023, this commitment has been funded.

Managing control of the above 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 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

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 June 30, 2023 and as of and for the six months ended June 30, 2023 and 2022 is reflected in the following table:

As of and for the six month period ended

Cumulative Adjustments June 30, 2023 June 30, 2022

Carrying value (1)

3 unchanged sentences

Upward changes for observable prices (2)

50,492 — 1,492

Downward changes for observable prices ( 86 ) — —

Net upward change $ 50,406 $ — $ 1,492

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

(1) Includes $ 2.8 million and $ 3.2 million in unfunded commitments as of June 30, 2023, and June 30, 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.

For the three and six months ended June 30, 2023, the Company recognized unrealized losses on all equity securities held at the reporting date of $ 20 thousand and $ 4 thousand, respectively.

For the three and six months ended June 30, 2022, the Company recognized unrealized gains on all equity securities held at the reporting date of $ 1.5 million and $ 1.4 million, respectively.

Variable Interest Entities

3 unchanged sentences

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.

The Company has equity interests 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.

4 unchanged sentences

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.

The Company also has equity interests 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.

3 unchanged sentences

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.

The Company also has limited interests in several non-marketable funds, including Small Business Investment Company (“SBIC”) and venture capital funds, which are accounted for as equity security investments.

After the 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.

3 unchanged sentences

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)

The Company’s maximum exposure to loss from unconsolidated VIEs includes the investment recorded on the Company’s Unaudited Condensed Consolidated Balance Sheets.

For solar ITC investments, the balance sheet figures are net of any impairment recognized, and includes 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 loss from these investments is remote, the maximum exposure for solar tax credit investments was determined by assuming a scenario where related tax credits were recaptured.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

The following table provides a summary of the VIEs that the Company has not consolidated as of June 30, 2023 and December 31, 2022:

June 30, 2023 Investment Carrying Amount Maximum Exposure to Loss Liability Recognized Classification

Solar tax credit investments $ 4,079 $ 19,203 $ — Other assets (1)

Affordable housing 15,964 15,964 7,721 Other assets & other liabilities (2)

6 unchanged sentences

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

(1) Maximum exposure to loss represents $ 4.1 million of current investments and a scenario in which related tax credits are recaptured, collectively totaling $ 19.2 million.

(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.

(3) Maximum exposure to loss represents $ 5.2 million of current investments and a scenario in which related tax credits are recaptured, collectively totaling $ 24.3 million.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Loans and Leases Held for Investment and Credit Quality

7 unchanged sentences

Total Loans and Leases

March 31, 2023

June 30, 2023

Commercial & Industrial

66 unchanged sentences

Converted to Term Total (1)

March 31, 2023

June 30, 2023

Small Business Banking

17 unchanged sentences

Total $ 908,280 $ 2,275,577 $ 1,906,297 $ 979,393 $ 540,737 $ 487,731 $ 290,945 $ 22,881 $ 7,411,841

Current Period Gross Charge-offs

Year-To-Date Gross Charge-offs

Small Business Banking $ — $ 1,426 $ 621 $ 255 $ 586 $ 513 $ 50 $ — $ 3,451

27 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 $ 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.

(1) Excludes $ 441.8 million and $ 494.5 million of loans accounted for under the fair value option as of June 30, 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

June 30, 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 $ 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.

(1) Excludes $ 441.8 million and $ 494.5 million of loans accounted for under the fair value option as of June 30, 2023 and December 31, 2022, respectively.

Live Oak Bancshares, Inc.

1 unchanged sentence

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

As of June 30, 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 and six months ended June 30, 2023 and 2022.

Accrued interest receivable on loans totaled $ 51.8 million and $ 46.5 million at June 30, 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 June 30, 2023 and December 31, 2022 are as follows:

June 30, 2023 Loan and Lease

Balance Unguaranteed Balance Unguaranteed

7 unchanged sentences

Small Business Banking 35,410 23,529 11,881 5,651

Specialty Lending 12,232 — 12,232 —

Energy & Infrastructure 3,072 2,799 273 —

24 unchanged sentences

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:

When a loan or lease is placed on nonaccrual status, any accrued interest is reversed from loan interest income.

The following table summarizes the amount of accrued interest reversed during the periods presented:

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 2023 2022

Commercial & Industrial $ 963 $ 141 $ 1,342 $ 310

Commercial Real Estate 294 4 467 182

Commercial Land — — — 105

Total $ 1,257 $ 145 $ 1,809 $ 597

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 June 30, 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

June 30, 2023 Real Estate Business Assets Other Real Estate Business Assets Other Allowance for Credit Losses

Commercial & Industrial

Small Business Banking $ 5,549 $ — $ — $ 1,085 $ — $ — $ 490

Specialty Lending — 7,964 — — 7,964 — 5,858

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

30 unchanged sentences

Real Estate Commercial

March 31, 2023

June 30, 2023

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

Charge offs ( 2,198 ) — ( 278 ) — ( 2,476 )

Recoveries 558 — 764 — 1,322

Provision 8,989 ( 526 ) 4,360 205 13,028

Ending Balance $ 79,407 $ 6,428 $ 29,908 $ 4,373 $ 120,116

June 30, 2022

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

Charge offs ( 1,812 ) — ( 433 ) ( 318 ) ( 2,563 )

Recoveries 35 — 66 — 101

Provision 8,793 ( 598 ) ( 3,407 ) 479 5,267

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

Six Months Ended Commercial

& Industrial Construction &

Development Commercial

Real Estate Commercial

June 30, 2023

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

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

3 unchanged sentences

Ending Balance $ 79,407 $ 6,428 $ 29,908 $ 4,373 $ 120,116

March 31, 2022

June 30, 2022

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

3 unchanged sentences

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

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.

During the three and six months ended June 30, 2023, the ACL increased as a result of continued loan growth, combined with portfolio trends and changes in the macroeconomic outlook.

Additionally, during the first quarter of 2023, 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 during the six months ended June 30, 2023.

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.

During the three and six month periods ended June 30, 2022, the ACL increased primarily as a result of the charge-offs that contributed to increased loss given default rates.

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.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Loan Modifications for Borrowers Experiencing Financial Difficulty

2 unchanged sentences

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

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

Three Months Ended June 30, 2023 Other-Than-Insignificant

Payment Delay Term Extension Interest Rate Reduction

Combination - Term Extension & Payment Delay % of Total Class of

Financing Receivable

1 unchanged sentence

Specialty Lending — 4,427 — — 0.26

Total $ — $ 4,427 $ — $ 361 0.27 %

Six Months Ended June 30, 2023 Other-Than-Insignificant

Payment Delay Term Extension Interest Rate Reduction Combination - Term Extension & Payment Delay % of Total Class of

Financing Receivable

Small Business Banking $ — $ — $ 3,436 $ 361 0.08 %

Specialty Lending — 244 — 4,183 0.26

Energy & Infrastructure — 13,517 — — 2.14

Total $ — $ 13,761 $ 3,436 $ 4,544 2.48 %

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

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.

As of June 30, 2023, the Company had commitments to lend additional funds to these borrowers totaling $ 5.4 million.

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 June 30, 2023.

Current 30-89 Days

4 unchanged sentences

Total $ 21,741 $ — $ — $ —

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

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

Three Months Ended June 30, 2023

Weighted Average

2 unchanged sentences

Small Business Banking — % 161

Specialty Lending — 72

Six Months Ended June 30, 2023

Weighted Average

Interest Rate Reduction Weighted Average

Term Extension (in Months)

Small Business Banking 1.45 % 161

Specialty Lending — 72

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.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

There were no loans that were modified on or after January 1, 2023, the date the Company adopted ASU 2022-02, through June 30, 2023 that subsequently defaulted during the periods presented.

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

4 unchanged sentences

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

Three Months Ended March 31, 2022

Three Months Ended June 30, 2022

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

9 unchanged sentences

Commercial & Industrial

Specialty Lending — $ — 1 $ 734 — $ — — $ — 1 $ 734

Total — — 1 734 — — — — 1 734

Total — $ — 1 $ 734 — $ — — $ — 1 $ 734

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

Fair Value of Financial Instruments for additional information.

Six Months Ended June 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 $ 3,119 2 $ 1,528 1 $ 527 6 $ 5,174

Specialty Lending — — 1 734 — — — — 1 734

Total — — 4 3,853 2 1,528 1 527 7 5,908

3 unchanged sentences

Total — $ — 4 $ 3,853 3 $ 6,375 1 $ 527 8 $ 10,755

(1) Includes one small business banking loan with extend amortization and a rate concession TDR.

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

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.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Concessions made to improve a loan’s performance have varying degrees of success.

Two TDRs that were modified within the twelve months ended June 30, 2022 subsequently defaulted during the three months ended June 30, 2022.

The two TDR defaults were Commercial & Industrial Small Business Banking loans.

One of the defaults had previously been modified to extend amortization and had a recorded investment of $ 349 thousand at June 30, 2022.

The second default had previously been modified for a payment deferral and had a recorded investment of $ 2.1 million at June 30, 2022.

There was one TDR that was modified within the twelve months ended June 30, 2022 that subsequently defaulted during the six months ended June 30, 2022.

The TDR had previously been modified for a payment default and had a recorded investment of $ 633 thousand at June 30, 2022.

Lessor Equipment Leasing

The Company purchases new equipment for the purpose of leasing such equipment to customers within its verticals.

The Company may purchase 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.

5 unchanged sentences

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

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

Gross direct finance lease payments receivable $ 3,196 $ 4,284

2 unchanged sentences

Future minimum lease payments under finance leases are as follows:

As of March 31, 2023

As of June 30, 2023

Total $ 3,196

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

Interest income of $ 66 thousand and $ 93 thousand was recognized in the three months ended June 30, 2023 and 2022, respectively.

Interest income of $ 139 thousand and $ 208 thousand was recognized in the six months ended June 30, 2023 and 2022, respectively.

Operating Leases

2 unchanged sentences

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.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Rental revenue from operating leases is recognized on a straight-line basis over the term of the lease.

5 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.

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.

As of June 30, 2023 and December 31, 2022, the Company had a net investment of $ 109.4 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 June 30, 2023 and December 31, 2022 and accumulated depreciation was $ 54.0 million and $ 49.2 million as of June 30, 2023 and December 31, 2022, respectively.

Depreciation expense recognized on these assets was $ 2.4 million for the three months ended June 30, 2023 and 2022.

Depreciation expense recognized on these assets was $ 4.8 million for the six months ended June 30, 2023 and 2022.

Lease income of $ 2.4 million was recognized in the three months ended June 30, 2023 and 2022.

Lease income of $ 4.8 million and $ 4.7 million was recognized in the six months ended June 30, 2023 and 2022, respectively.

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

As of March 31, 2023

As of June 30, 2023

Thereafter 13,562

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 $ 2.26 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 unpaid principal balance of loans serviced for others requiring recognition of a servicing asset was $ 2.38 billion and $ 2.67 billion at June 30, 2023 and December 31, 2022, respectively.

The unpaid principal balance for all loans serviced for others was $ 3.81 billion and $ 3.48 billion at June 30, 2023 and December 31, 2022, respectively.

The following summarizes the activity pertaining to servicing rights:

Three Months Ended

June 30, Six Months Ended

2023 2022 2023 2022

Balance at beginning of period $ 29,357 $ 36,286 $ 26,323 $ 33,574

4 unchanged sentences

Balance at end of period $ 31,042 $ 28,661 $ 31,042 $ 28,661

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.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

The fair value of servicing rights was determined using a weighted average discount rate of 17.3 % on June 30, 2023 and 16.2 % on June 30, 2022.

The fair value of servicing rights was determined using a weighted average prepayment speed of 15.8 % on June 30, 2023 and 15.9 % on June 30, 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.

3 unchanged sentences

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.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Total outstanding borrowings consisted of the following:

5 unchanged sentences

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.

The Company paid down the balance in full on January 3, 2023 and there is $ 100.0 million of available credit remaining at June 30, 2023.

Total borrowings $ 28,317 $ 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.

As of June 30, 2023 the Company’s unused borrowing capacity was $ 3.77 billion, remaining consistent with March 31, 2023.

Unused borrowing capacity consists of access through the Federal Reserve Bank's discount window, available lines of credit with the Federal Home Loan Bank and other correspondent banks as well as access to a repurchase agreement.

As of December 31, 2022 the Company's unused borrowing capacity was $ 3.55 billion based upon securities and loans identified as available for collateral and $ 4.88 billion based principally upon the stated available limits from sources mentioned above.

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

9 unchanged sentences

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.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Recurring Fair Value

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

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

Equity Warrant Assets 2023 2022 2023 2022

2 unchanged sentences

Changes in fair value, net 194 46 18 46

Settlements ( 221 ) — ( 221 ) —

Balance at end of period $ 2,251 $ 2,422 $ 2,251 $ 2,422

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

June 30, 2023 Total Level 1 Level 2 Level 3

Investment securities available-for-sale

23 unchanged sentences

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.

(1) During the three and six months ended June 30, 2023, the Company recorded a level 3 fair value adjustment gain of $ 1 thousand and loss of $ 9 thousand, respectively.

During the three and six months ended June 30, 2022, the Company recorded a level 3 fair value adjustment loss of $ 1 thousand and $ 3 thousand, respectively.

(2) During the three and six months ended June 30, 2023, the Company recorded a level 3 fair value adjustment loss of $ 2 thousand and $ 22 thousand, respectively.

During the three and six months ended June 30, 2022, the Company recorded a level 3 fair value adjustment loss of $ 10 thousand.

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

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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.

7 unchanged sentences

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 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

There were no loans accounted for under the fair value option that were 90 days or more past due and still accruing interest at June 30, 2023 or December 31, 2022.

The unpaid principal balance of unguaranteed exposure for nonaccruals was $ 10.7 million and $ 7.2 million at June 30, 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 June 30, 2023 and December 31, 2022.

June 30, 2023

Total Loans Nonaccruals 90 Days or More Past Due

20 unchanged sentences

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

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

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

2 unchanged sentences

$ 1,728 $ ( 4,461 ) $ ( 2,801 ) $ ( 3,945 )

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.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Losses related to borrower-specific credit risk were $ 291 thousand and $ 3.5 million for the three and six months ended June 30, 2023, respectively, and $ 711 thousand and $ 2.8 million for the three and six months ended June 30, 2022, respectively.

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

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

Loans held for sale 2023 2022 2023 2022

4 unchanged sentences

Balance at end of period $ — $ 23,452 $ — $ 23,452

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

Loans held for investment 2023 2022 2023 2022

7 unchanged sentences

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

March 31, 2023 Total Level 1 Level 2 Level 3

June 30, 2023 Total Level 1 Level 2 Level 3

Collateral-dependent loans $ 7,085 $ — $ — $ 7,085

5 unchanged sentences

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 March 31, 2023 and December 31, 2022 the significant unobservable inputs used in the fair value measurements were as follows:

March 31, 2023

For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of June 30, 2023 and December 31, 2022, the significant unobservable inputs used in the fair value measurements were as follows:

June 30, 2023

Level 3 Assets with Significant Unobservable Inputs

7 unchanged sentences

Prepayment speed 12.6 % 12.6 %

Discounted appraisals Appraisal adjustments (2)

0.0 % - 84.0 %

Equity warrant assets $ 2,251 Black-Scholes option pricing model Volatility 26.8 % - 90.0 %

5 unchanged sentences

10.0 % - 100.0 %

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 2022

20 unchanged sentences

(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:

March 31, 2023 Carrying

June 30, 2023 Carrying

Identical Assets

10 unchanged sentences

Borrowings 28,317 — — 27,684 27,684

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

Financial Instruments with Off-Balance-Sheet Risk

16 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 90 days after issuance.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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

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

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 $ 4.3 million and $ 1.5 million at March 31, 2023 and December 31, 2022, respectively.

The allowance for off-balance-sheet credit exposures was $ 4.8 million and $ 1.5 million at June 30, 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.

At June 30, 2023, the Company has paid and was committed to approximately $ 7.0 million of the total estimated amount.

As of June 30, 2023 and December 31, 2022, the Company recorded unfunded commitments to provide capital contributions for on-balance-sheet investments in the amount of $ 31.0 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.

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-eight relationships that have a retained unguaranteed exposure of $ 932.0 million of which $ 578.3 million of the unguaranteed exposure has been disbursed.

Additionally, the Company has future minimum lease payments receivable under non-cancelable operating leases totaling $ 52.8 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.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

The following tables provide financial information for the Company's segments.

1 unchanged sentence

Banking Fintech Other Consolidated

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

As of and for the three months ended June 30, 2023

Interest income $ 169,586 $ 8 $ 118 $ 169,712

7 unchanged sentences

Total assets $ 10,642,872 $ 124,459 $ 51,865 $ 10,819,196

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

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

Interest income $ 99,215 $ 36 $ ( 4 ) $ 99,247

7 unchanged sentences

Total assets $ 8,963,851 $ 158,930 $ ( 1,884 ) $ 9,120,897

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Banking Fintech Other Consolidated

As of and for the six months ended June 30, 2023

Interest income $ 320,855 $ 20 $ 253 $ 321,128

Interest expense 154,180 — 629 154,809

Net interest income (loss) 166,675 20 ( 376 ) 166,319

Provision for loan and lease credit losses 32,049 — — 32,049

Noninterest income 38,485 4,037 1,213 43,735

Noninterest expense 146,399 4,963 4,057 155,419

Income tax expense (benefit) 4,701 182 ( 239 ) 4,644

Net income (loss) $ 22,011 $ ( 1,088 ) $ ( 2,981 ) $ 17,942

Total assets $ 10,642,872 $ 124,459 $ 51,865 $ 10,819,196

As of and for the six months ended June 30, 2022

Interest income $ 191,961 $ 72 $ ( 4 ) $ 192,029

Interest expense 33,380 — 936 34,316

Net interest income (loss) 158,581 72 ( 940 ) 157,713

Provision for loan and lease credit losses 7,103 — — 7,103

Noninterest income 37,103 122,898 1,196 161,197

Noninterest expense 138,178 4,314 4,101 146,593

Income tax expense (benefit) 8,808 25,722 ( 864 ) 33,666

Net income (loss) $ 41,595 $ 92,934 $ ( 2,981 ) $ 131,548

Total assets $ 8,963,851 $ 158,930 $ ( 1,884 ) $ 9,120,897

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