Live Oak Bancshares, Inc. 10-Q

Item 1. Financial Statements Live Oak Bancshares, Inc. Condensed Consolidated Balance Sheets As of September 30, 2023 (unaudited) and December 31, 2022* (Dollars in thousands) September 30, 2023 December 31, 2022 Assets Cash and due from banks $ 534,774 $ 280,239 Federal funds sold — 136,397 Certificates of deposit with other banks 3,750 4,000 Investment securities available-for-sale 1,099,878 1,014,719 Loans held for sale 572,604 554,610 Loans and leases held for investment (includes $ 410,128 and $ 494,458 measured at fair value, respectively) 8,202,631 7,344,178 Allowance for credit losses on loans and leases ( 121,273 ) ( 96,566 ) Net loans and leases 8,081,358 7,247,612 Premises and equipment, net 258,041 263,290 Foreclosed assets 6,701 — Servicing assets 47,127 26,323 Other assets 346,227 328,308 Total assets $ 10,950,460 $ 9,855,498 Liabilities and shareholders’ equity Liabilities Deposits: Noninterest-bearing $ 239,536 $ 194,100 Interest-bearing 9,764,106 8,690,828 Total deposits 10,003,642 8,884,928 Borrowings 25,847 83,203 Other liabilities 70,603 76,334 Total liabilities 10,100,092 9,044,465 Shareholders’ equity Preferred stock, no par value, 1,000,000 shares authorized, none issued or outstanding at September 30, 2023 and December 31, 2022 — — Class A common stock, no par value, 100,000,000 shares authorized, 44,480,215 and 44,061,244 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively 340,929 330,854 Class B common stock, no par value, 10,000,000 shares authorized, none issued or outstanding at September 30, 2023 and December 31, 2022 — — Retained earnings 627,759 572,497 Accumulated other comprehensive loss ( 118,320 ) ( 92,318 ) Total shareholders’ equity 850,368 811,033 Total liabilities and shareholders’ equity $ 10,950,460 $ 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 and nine months ended September 30, 2023 and 2022 (unaudited) (Dollars in thousands, except per share data) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Interest income Loans and fees on loans $ 162,722 $ 107,880 $ 454,136 $ 291,235 Investment securities, taxable 8,701 5,506 24,751 12,951 Other interest earning assets 9,188 2,448 22,852 3,677 Total interest income 180,611 115,834 501,739 307,863 Interest expense Deposits 90,914 31,553 243,512 64,678 Borrowings 287 395 2,498 1,586 Total interest expense 91,201 31,948 246,010 66,264 Net interest income 89,410 83,886 255,729 241,599 Provision for loan and lease credit losses 10,279 14,169 42,328 21,272 Net interest income after provision for loan and lease credit losses 79,131 69,717 213,401 220,327 Noninterest income Loan servicing revenue 6,990 6,230 20,057 19,063 Loan servicing asset revaluation 11,335 ( 1,324 ) 8,860 ( 11,561 ) Net gains on sales of loans 12,675 9,275 33,654 35,882 Net (loss) gain on loans accounted for under the fair value option ( 568 ) 4,420 ( 3,369 ) 475 Equity method investments (loss) income ( 1,034 ) 29,136 ( 6,041 ) 146,068 Equity security investments (losses) gains, net ( 783 ) 876 ( 585 ) 2,487 Lease income 2,498 2,516 7,568 7,529 Management fee income 3,277 2,844 10,015 6,890 Other noninterest income 3,501 3,751 11,467 12,088 Total noninterest income 37,891 57,724 81,626 218,921 Noninterest expense Salaries and employee benefits 42,947 43,479 130,778 128,262 Travel expense 2,197 2,372 7,378 6,627 Professional services expense 1,762 2,505 4,685 9,284 Advertising and marketing expense 3,446 2,621 10,058 6,651 Occupancy expense 2,129 2,519 6,259 7,619 Technology expense 7,722 7,770 23,456 19,585 Equipment expense 3,676 3,761 11,517 11,361 Other loan origination and maintenance expense 3,498 3,376 10,867 9,511 Renewable energy tax credit investment impairment — 7,721 69 7,771 FDIC insurance 4,115 2,697 12,579 6,833 Contributions and donations — 191 — 6,429 Other expense 2,770 4,036 12,035 9,708 Total noninterest expense 74,262 83,048 229,681 229,641 Income before taxes 42,760 44,393 65,346 209,607 Income tax expense 2,967 1,525 7,611 35,191 Net income $ 39,793 $ 42,868 $ 57,735 $ 174,416 Basic earnings per share $ 0.89 $ 0.97 $ 1.30 $ 3.98 Diluted earnings per share $ 0.88 $ 0.96 $ 1.28 $ 3.88 See Notes to Unaudited Condensed Consolidated Financial Statements 2 Table of Contents Live Oak Bancshares, Inc. Condensed Consolidated Statements of Comprehensive Income For the three and nine months ended September 30, 2023 and 2022 (unaudited) (Dollars in thousands) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Net income $ 39,793 $ 42,868 $ 57,735 $ 174,416 Other comprehensive loss before tax: Net unrealized loss on investment securities available-for-sale during the period ( 27,297 ) ( 47,318 ) ( 34,213 ) ( 127,879 ) Reclassification adjustment for gain on sale of securities available-for-sale included in net income — — — — Other comprehensive loss before tax ( 27,297 ) ( 47,318 ) ( 34,213 ) ( 127,879 ) Income tax benefit 6,557 11,359 8,211 30,691 Other comprehensive loss, net of tax ( 20,740 ) ( 35,959 ) ( 26,002 ) ( 97,188 ) Total comprehensive income $ 19,053 $ 6,909 $ 31,733 $ 77,228 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 and nine months ended September 30, 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 June 30, 2023 44,351,715 — $ 341,032 $ 589,036 $ ( 97,580 ) $ 832,488 Net income — — — 39,793 — 39,793 Other comprehensive loss — — — — ( 20,740 ) ( 20,740 ) Issuance of restricted stock 63,694 — — — — — Tax withholding related to vesting of restricted stock and other — — ( 1,348 ) — — ( 1,348 ) Employee stock purchase program 28,015 — 765 — — 765 Stock option exercises 36,791 — 263 — — 263 Stock option compensation expense — — 135 — — 135 Restricted stock compensation expense — — 82 — — 82 Transfer from retained earnings to other assets for pro rata portion of equity method investee stock compensation expense — — — 263 — 263 Cash dividends ($ 0.03 per share) — — — ( 1,333 ) — ( 1,333 ) Balance at September 30, 2023 44,480,215 — $ 340,929 $ 627,759 $ ( 118,320 ) $ 850,368 Balance at June 30, 2022 43,854,011 — $ 320,924 $ 530,021 $ ( 59,283 ) $ 791,662 Net income — — — 42,868 — 42,868 Other comprehensive loss — — — — ( 35,959 ) ( 35,959 ) Issuance of restricted stock 59,603 — — — — — Tax withholding related to vesting of restricted stock and other — — ( 1,362 ) — — ( 1,362 ) Employee stock purchase program 18,264 — 532 — — 532 Stock option exercises 49,472 — 497 — — 497 Stock option compensation expense — — 261 — — 261 Restricted stock compensation expense — — 4,780 — — 4,780 Transfer from retained earnings to other assets for pro rata portion of equity method investee stock compensation expense — — — 208 — 208 Cash dividends ($ 0.03 per share) — — — ( 1,319 ) — ( 1,319 ) Balance at September 30, 2022 43,981,350 — $ 325,632 $ 571,778 $ ( 95,242 ) $ 802,168 4 Table of Contents Live Oak Bancshares, Inc. Condensed Consolidated Statements of Changes in Shareholders’ Equity (Continued) For the three and nine months ended September 30, 2023 and 2022 (unaudited) (Dollars in thousands) Nine 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 — — — 57,735 — 57,735 Other comprehensive loss — — — — ( 26,002 ) ( 26,002 ) Issuance of restricted stock 264,713 — — — — — Tax withholding related to vesting of restricted stock and other — — ( 4,950 ) — — ( 4,950 ) Employee stock purchase program 59,074 — 1,396 — — 1,396 Stock option exercises 95,184 — 926 — — 926 Stock option based compensation expense — — 272 — — 272 Restricted stock compensation expense — — 12,431 — — 12,431 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 — — — 841 — 841 Cash dividends ($ 0.09 per share) — — — ( 3,990 ) — ( 3,990 ) Balance at September 30, 2023 44,480,215 — $ 340,929 $ 627,759 $ ( 118,320 ) $ 850,368 Balance at December 31, 2021 43,494,046 125,024 $ 312,294 $ 400,893 $ 1,946 $ 715,133 Net income — — — 174,416 — 174,416 Other comprehensive loss — — — — ( 97,188 ) ( 97,188 ) Issuance of restricted stock 172,296 — — — — — Tax withholding related to vesting of restricted stock and other — — ( 4,453 ) — — ( 4,453 ) Employee stock purchase program 29,383 — 1,066 — — 1,066 Stock option exercises 160,601 — 1,650 — — 1,650 Stock option based compensation expense — — 886 — — 886 Restricted stock compensation expense — — 14,189 — — 14,189 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 — — — 415 — 415 Cash dividends ($ 0.09 per share) — — — ( 3,946 ) — ( 3,946 ) Balance at September 30, 2022 43,981,350 — $ 325,632 $ 571,778 $ ( 95,242 ) $ 802,168 See Notes to Unaudited Condensed Consolidated Financial Statements 5 Table of Contents Live Oak Bancshares, Inc. Condensed Consolidated Statements of Cash Flows For the nine months ended September 30, 2023 and 2022 (unaudited) (Dollars in thousands) Nine Months Ended September 30, 2023 2022 Cash flows from operating activities Net income $ 57,735 $ 174,416 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 15,941 15,626 Provision for loan and lease credit losses 42,328 21,272 Amortization of premium on securities, net of accretion 63 3,019 Deferred tax (benefit) expense ( 13,164 ) 17,258 Originations of loans held for sale ( 642,722 ) ( 787,633 ) Proceeds from sales of loans held for sale 985,287 796,286 Net gains on sale of loans held for sale ( 33,654 ) ( 35,882 ) Net loss on sale of foreclosed assets — 49 Net loss (gain) on loans accounted for under fair value option 3,369 ( 475 ) Net (increase) decrease in servicing assets ( 20,804 ) 4,493 Net loss on disposal of property and equipment 377 31 Equity method investments loss (income) 6,041 ( 146,068 ) Equity security investments losses (gains), net 585 ( 2,487 ) Renewable energy tax credit investment impairment 69 7,771 Stock option compensation expense 272 886 Restricted stock compensation expense 12,431 14,189 Stock based compensation excess tax (shortfall) benefit ( 915 ) 876 Lease right-of-use assets and liabilities, net ( 52 ) 252 Changes in assets and liabilities: Other assets 37,571 12,377 Other liabilities ( 933 ) 2,072 Net cash provided by operating activities 449,825 98,328 Cash flows from investing activities Purchases of investment securities available-for-sale ( 198,676 ) ( 360,058 ) Proceeds from maturities, calls, and principal paydown of investment securities available-for-sale 79,241 129,840 Proceeds from SBA reimbursement/sale of foreclosed assets, net — 432 Maturities of certificates of deposits with other banks 250 500 Loan and lease originations and principal collections, net ( 1,240,536 ) ( 746,991 ) Purchases of equity security investments ( 3,359 ) ( 9,213 ) Purchases of equity method investments ( 5,094 ) ( 30,178 ) Proceeds from sale of equity security investment — 369 Proceeds from sale of equity method investments 6,878 147,713 Proceeds from sale of premises and equipment 100 — Purchases of premises and equipment, net ( 25,231 ) ( 35,631 ) Net cash used by investing activities ( 1,386,427 ) ( 903,217 ) See Notes to Unaudited Condensed Consolidated Financial Statements 6 Table of Contents Live Oak Bancshares, Inc. Condensed Consolidated Statements of Cash Flows (Continued) For the nine months ended September 30, 2023 and 2022 (unaudited) (Dollars in thousands) Nine Months Ended September 30, 2023 2022 Cash flows from financing activities Net increase in deposits $ 1,118,714 $ 1,292,865 Proceeds from borrowings 2,906,056 12,074 Repayment of borrowings ( 2,963,412 ) ( 294,747 ) Stock option exercises 926 1,650 Employee stock purchase program 1,396 1,066 Withholding cash issued in lieu of restricted stock and other ( 4,950 ) ( 4,453 ) Shareholder dividend distributions ( 3,990 ) ( 3,946 ) Net cash provided by financing activities 1,054,740 1,004,509 Net increase in cash and cash equivalents 118,138 199,620 Cash and cash equivalents, beginning 416,636 203,750 Cash and cash equivalents, ending $ 534,774 $ 403,370 Supplemental disclosures of cash flow information Interest paid $ 245,091 $ 66,975 Income tax paid, net 1,689 17,128 Supplemental disclosures of noncash investing and financing activities Unrealized holding losses on investment securities available-for-sale, net of taxes $ ( 26,002 ) $ ( 97,188 ) Transfers from loans and leases to foreclosed assets or SBA receivable 34,864 14,880 Net transfers between foreclosed assets and SBA receivable — 139 Transfer aircraft from premises and equipment, net to other assets 14,177 — Transfer of loans held for sale to loans and leases held for investment 65,734 843,639 Transfer of loans and leases held for investment to loans held for sale 458,868 356,429 Transfer from retained earnings to other assets for pro rata portion of equity method investee stock compensation expense 841 415 Equity method investment commitments 7,721 14,732 Equity security investment commitments — 394 See Notes to Unaudited Condensed Consolidated Financial Statements 7 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 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. (“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. 8 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 and nine months ended September 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. 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 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 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 in the first quarter of 2023. During the third quarter of 2023, the Company changed the valuation techniques used to estimate the fair value of servicing rights and loans measured at fair value as a result of rising interest rates and their impacts on market conditions. The changes include aligning our net servicing income and loan fair value estimates with changes in forward interest rate curves. Loan fair value estimates were also revised to utilize market participant credit loss information. These revisions provide estimates that the Company believes are more representative of fair value while transitioning from unobservable inputs to those that are more observable. These estimate changes were implemented as of July 1, 2023 and resulted in one-time adjustments to increase the estimated value of the servicing asset by $ 13.7 million and loans measured at fair value by $ 1.3 million. This adjustment also increased noninterest income by a corresponding $ 15.0 million. 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. 9 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Long-Lived Asset Reclassified to Held for Sale During the third quarter of 2023, the Company determined retention of one of its aircraft was ineffective in serving the needs of an expanding nationwide customer base. As a result of this determination, the Company marketed the aircraft for sale. In September 2023, the Company entered into a sale and purchase agreement with a third party with expected total proceeds, net of estimated expenses, of $ 18.6 million. The carrying amount of the aircraft of $ 14.2 million is reflected in the September 30, 2023 Unaudited Condensed Consolidated Balance Sheet in the "Other assets" line item. Subsequent to September 30, 2023, the aircraft was sold for a gain of $ 4.4 million. Reclassifications During the third quarter of 2023, management reclassified all Search Fund Lending loans from the Specialty Lending division to the Small Business Banking division to better align with the underlying risk characteristics and management's methods for managing the Sponsor Finance business. This resulted in a reclassification of $ 297.2 million between loan classes as of December 31, 2022. 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. 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 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. As of September 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. 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. 10 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 September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Basic earnings per share: Net income $ 39,793 $ 42,868 $ 57,735 $ 174,416 Weighted-average basic shares outstanding 44,408,997 43,914,920 44,298,798 43,814,648 Basic earnings per share $ 0.89 $ 0.97 $ 1.30 $ 3.98 Diluted earnings per share: Net income, for diluted earnings per share $ 39,793 $ 42,868 $ 57,735 $ 174,416 Total weighted-average basic shares outstanding 44,408,997 43,914,920 44,298,798 43,814,648 Add effect of dilutive stock options and restricted stock grants 859,748 882,189 724,941 1,128,784 Total weighted-average diluted shares outstanding 45,268,745 44,797,109 45,023,739 44,943,432 Diluted earnings per share $ 0.88 $ 0.96 $ 1.28 $ 3.88 Anti-dilutive stock options and restricted shares 700,768 1,335,254 700,768 1,335,254 Note 4. Securities Available-for-Sale The carrying amount of securities and their approximate fair values are reflected in the following table: September 30, 2023 Amortized Cost Unrealized Gains Unrealized Losses Fair Value US government agencies $ 30,799 $ — $ 615 $ 30,184 Mortgage-backed securities 1,221,556 66 154,811 1,066,811 Municipal bonds 3,207 — 324 2,883 Total $ 1,255,562 $ 66 $ 155,750 $ 1,099,878 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 September 30, 2023, two mortgage-backed securities totaling $ 4.3 million were settled. During the nine months ended September 30, 2023, four mortgage-backed securities totaling $ 7.0 million were settled. During the three months ended September 30, 2022, two mortgage-backed securities totaling $ 3.8 million were settled. During the nine months ended September 30, 2022, twenty mortgage-backed securities totaling $ 36.5 million were settled. 11 Table of Contents 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 September 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 September 30, 2023 Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses US government agencies $ 17,666 $ 176 $ 12,518 $ 439 $ 30,184 $ 615 Mortgage-backed securities 218,425 10,744 842,233 144,067 1,060,658 154,811 Municipal bonds — — 2,883 324 2,883 324 Total $ 236,091 $ 10,920 $ 857,634 $ 144,830 $ 1,093,725 $ 155,750 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 September 30, 2023, there were 405 mortgage-backed securities, four US government agency securities and two municipal bonds in unrealized loss positions for greater than 12 months. There were 49 mortgage-backed securities and five US government agency securities in unrealized loss positions for less than 12 months. Unrealized losses at December 31, 2022 were comprised of 185 mortgage-backed securities and one municipal bond in unrealized loss positions for greater than 12 months and 236 mortgage-backed securities, five US government agency securities and one municipal bond in unrealized loss positions for less than 12 months. These unrealized losses are primarily the result of non-credit-related volatility in the market and market interest rates. Since none of the unrealized losses relate to marketability of the securities or the issuers' ability to honor redemption obligations and the Company has the intent and ability to hold the securities for a sufficient period of time to recover unrealized losses, none of the losses have been recognized in the Company’s Unaudited Condensed Consolidated Statements of Income. All mortgage-backed securities in the Company’s portfolio at September 30, 2023 and December 31, 2022 were backed by U.S. government sponsored enterprises (“GSEs”). 12 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements The following is a summary of investment securities by maturity: September 30, 2023 Available-for-Sale Amortized Cost Fair Value US government agencies Within one year $ 8,000 $ 7,954 One to five years 20,424 19,969 Five to ten years 2,375 2,261 Total 30,799 30,184 Mortgage-backed securities Within one year 12,519 12,452 One to five years 169,796 158,003 Five to ten years 249,343 212,178 After 10 years 789,898 684,178 Total 1,221,556 1,066,811 Municipal bonds Five to ten years 3,109 2,799 After 10 years 98 84 Total 3,207 2,883 Total $ 1,255,562 $ 1,099,878 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 September 30, 2023 or December 31, 2022. 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. 13 Table of Contents 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 September 30, 2023 and December 31, 2022 is reflected in the following table: September 30, 2023 December 31, 2022 Amount Ownership % Amount Ownership % Apiture, Inc. $ 56,559 40.3 % $ 60,320 40.3 % Canapi Ventures SBIC Fund, LP (1) (5) 18,214 2.9 19,246 2.9 Canapi Ventures Fund, LP (2) (5) 2,272 1.5 2,382 1.5 Canapi Ventures Fund II, LP (3) (5) 7,297 1.6 7,412 1.6 Canapi Ventures SBIC Fund II, LP (4) (5) 7,816 2.9 7,981 3.7 Other Fintech investments in private companies (6) — — 241 4.3 Other (7) 20,217 Various 12,476 Various Total $ 112,375 $ 110,058 (1) Includes unfunded commitments of $ 5.1 million and $ 5.5 million as of September 30, 2023 and December 31, 2022, respectively. (2) Includes unfunded commitments of $ 613 thousand and $ 617 thousand as of September 30, 2023 and December 31, 2022, respectively. (3) Includes unfunded commitments of $ 6.7 million as of September 30, 2023 and December 31, 2022. (4) Includes unfunded commitments of $ 7.4 million and $ 7.5 million as of September 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 December 31, 2022, Other Fintech investments include Kwipped, Inc. As of September 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 September 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 September 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 $ 18.2 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 % 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 September 30, 2023, this commitment has been funded. Managing control of the above investments resides with the managing members. 14 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 September 30, 2023 and as of and for the nine months ended September 30, 2023 and 2022 is reflected in the following table: As of and for the nine month period ended Cumulative Adjustments September 30, 2023 September 30, 2022 Carrying value (1) $ 78,508 $ 76,438 Carrying value adjustments: Impairment $ — — — Upward changes for observable prices (2) 50,492 — 2,022 Downward changes for observable prices ( 1,085 ) ( 999 ) — Net upward change $ 49,407 $ ( 999 ) $ 2,022 (1) Includes $ 2.6 million and $ 3.1 million in unfunded commitments as of September 30, 2023, and September 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 and nine months ended September 30, 2023, the Company recognized unrealized losses on all equity securities held at the reporting date of $ 1.0 million. For the three and nine months ended September 30, 2022, the Company recognized unrealized gains on all equity securities held at the reporting date of $ 493 thousand and $ 1.9 million, respectively. 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 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. 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 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. 15 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 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. 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. All 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. 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. 16 Table of Contents 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 September 30, 2023 and December 31, 2022: September 30, 2023 Investment Carrying Amount Maximum Exposure to Loss Liability Recognized Classification Solar tax credit investments $ 3,713 $ 18,837 $ — Other assets (1) Affordable housing 15,888 15,888 7,721 Other assets & other liabilities (2) Canapi Funds 35,599 35,599 19,755 Other assets & other liabilities Non-marketable and other equity investments 9,007 9,007 2,616 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 $ 3.7 million of current investments and a scenario in which related tax credits are recaptured, collectively totaling $ 15.1 million. (2) Maximum exposure to loss represents $ 15.9 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 related tax credits are recaptured, collectively totaling $ 19.1 million. 17 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements 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 September 30, 2023 Commercial & Industrial Small Business Banking $ 2,103,484 $ 10,603 $ 29,857 $ 40,460 $ 2,143,944 $ 164,631 $ 2,308,575 Specialty Lending 1,024,183 — — — 1,024,183 8,307 1,032,490 Energy & Infrastructure 644,163 3,746 3,082 6,828 650,991 47,300 698,291 Paycheck Protection Program 6,750 — — — 6,750 — 6,750 Total 3,778,580 14,349 32,939 47,288 3,825,868 220,238 4,046,106 Construction & Development Small Business Banking 491,744 — — — 491,744 — 491,744 Specialty Lending 97,095 — — — 97,095 — 97,095 Energy & Infrastructure 6,882 — — — 6,882 — 6,882 Total 595,721 — — — 595,721 — 595,721 Commercial Real Estate Small Business Banking 2,258,327 28,349 20,132 48,481 2,306,808 133,911 2,440,719 Specialty Lending 404,734 — 12,232 12,232 416,966 139 417,105 Energy & Infrastructure 149,805 — 3,072 3,072 152,877 17,880 170,757 Total 2,812,866 28,349 35,436 63,785 2,876,651 151,930 3,028,581 Commercial Land Small Business Banking 508,804 — 1,917 1,917 510,721 37,960 548,681 Total 508,804 — 1,917 1,917 510,721 37,960 548,681 Total $ 7,695,971 $ 42,698 $ 70,292 $ 112,990 $ 7,808,961 $ 410,128 $ 8,219,089 Retained Loan Discount ( 33,783 ) Net Deferred Cost 17,325 Loans and Leases, Net $ 8,202,631 Guaranteed Balance $ 2,705,805 $ 30,694 $ 47,673 $ 78,367 $ 2,784,172 $ 66,707 $ 2,850,879 % Guaranteed 35.2 % 71.9 % 67.8 % 69.4 % 35.7 % 16.3 % 34.7 % 18 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 $ 1,987,508 $ 21,987 $ 16,487 $ 38,474 $ 2,025,982 $ 195,856 $ 2,221,838 Specialty Lending 754,272 — — — 754,272 15,576 769,848 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 2,149,662 12,082 5,771 17,853 2,167,515 168,409 2,335,924 Specialty Lending 306,785 — — — 306,785 236 307,021 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 Retained Loan Discount ( 23,893 ) Net Deferred Cost 19,459 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. 19 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) September 30, 2023 Small Business Banking Risk Grades 1 - 4 $ 746,767 $ 1,499,758 $ 1,324,936 $ 728,706 $ 376,392 $ 314,869 $ 78,699 $ 10,914 $ 5,081,041 Risk Grade 5 2,600 47,299 33,895 46,180 29,658 51,047 21,687 1,082 233,448 Risk Grades 6 - 8 — 26,028 28,514 26,827 25,152 29,946 2,261 — 138,728 Total 749,367 1,573,085 1,387,345 801,713 431,202 395,862 102,647 11,996 5,453,217 Specialty Lending Risk Grades 1 - 4 480,389 408,420 257,867 60,173 9,216 119 165,929 16,593 1,398,706 Risk Grade 5 1,250 40,018 32,703 6,730 10,465 — 19,763 7,111 118,040 Risk Grades 6 - 8 — — 16,396 — — — 5,102 — 21,498 Total 481,639 448,438 306,966 66,903 19,681 119 190,794 23,704 1,538,244 Energy & Infrastructure Risk Grades 1-4 318,582 152,921 152,400 38,975 50,442 28,683 12,822 — 754,825 Risk Grade 5 — — 2,625 13,485 7,188 10,315 — — 33,613 Risk Grades 6 - 8 — 4,024 6,336 3,564 — 8,388 — — 22,312 Total 318,582 156,945 161,361 56,024 57,630 47,386 12,822 — 810,750 Paycheck Protection Program Risk Grades 1 - 4 — — 3,532 3,218 — — — — 6,750 Total — — 3,532 3,218 — — — — 6,750 Total $ 1,549,588 $ 2,178,468 $ 1,859,204 $ 927,858 $ 508,513 $ 443,367 $ 306,263 $ 35,700 $ 7,808,961 Year-To-Date Gross Charge-offs Small Business Banking $ — $ 2,018 $ 5,226 $ 1,009 $ 788 $ 523 $ 1,013 $ — $ 10,577 Specialty Lending — — — — — — 7,966 — 7,966 Total $ — $ 2,018 $ 5,226 $ 1,009 $ 788 $ 523 $ 8,979 $ — $ 18,543 20 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 $ 1,499,309 $ 1,490,346 $ 857,380 $ 438,907 $ 224,199 $ 204,933 $ 75,005 $ 1,773 $ 4,791,852 Risk Grade 5 15,942 22,295 45,541 46,655 30,523 27,212 15,549 452 204,169 Risk Grades 6 - 8 1,806 8,777 18,261 29,047 14,260 27,215 2,688 759 102,813 Total 1,517,057 1,521,418 921,182 514,609 268,982 259,360 93,242 2,984 5,098,834 Specialty Lending Risk Grades 1 - 4 562,952 266,165 82,812 13,343 268 788 143,512 31,469 1,101,309 Risk Grade 5 7,341 28,722 6,990 9,258 — — 4,280 — 56,591 Risk Grades 6 - 8 — 6,933 — — — — 293 — 7,226 Total 570,293 301,820 89,802 22,601 268 788 148,085 31,469 1,165,126 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 $ 410.1 million and $ 494.5 million of loans accounted for under the fair value option as of September 30, 2023 and December 31, 2022, respectively. The following tables present guaranteed and unguaranteed loan and lease balances by asset quality indicator: September 30, 2023 Loan and Lease Balance (1) Guaranteed Balance Unguaranteed Balance % Guaranteed Risk Grades 1 - 4 $ 7,241,322 $ 2,557,146 $ 4,684,176 35.3 % Risk Grade 5 385,101 123,431 261,670 32.1 Risk Grades 6 - 8 182,538 103,595 78,943 56.8 Total $ 7,808,961 $ 2,784,172 $ 5,024,789 35.7 % 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 $ 410.1 million and $ 494.5 million of loans accounted for under the fair value option as of September 30, 2023 and December 31, 2022, respectively. 21 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Nonaccrual Loans and Leases As of September 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 nine months ended September 30, 2023 and 2022. Accrued interest receivable on loans totaled $ 59.0 million and $ 46.5 million at September 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 September 30, 2023 and December 31, 2022 are as follows: September 30, 2023 Loan and Lease Balance (1) Guaranteed Balance Unguaranteed Balance Unguaranteed Exposure with No ACL Commercial & Industrial Small Business Banking $ 34,535 $ 29,113 $ 5,422 $ 407 Energy & Infrastructure 6,828 2,794 4,034 2,560 Total 41,363 31,907 9,456 2,967 Commercial Real Estate Small Business Banking 35,816 25,766 10,050 3,680 Specialty Lending 12,232 — 12,232 — Energy & Infrastructure 3,072 2,799 273 — Total 51,120 28,565 22,555 3,680 Commercial Land Small Business Banking 6,609 5,365 1,244 196 Total 6,609 5,365 1,244 196 Total $ 99,092 $ 65,837 $ 33,255 $ 6,843 December 31, 2022 Loan and Lease Balance (1) Guaranteed Balance Unguaranteed Balance Unguaranteed Exposure with No ACL Commercial & Industrial Small Business Banking $ 25,968 $ 19,686 $ 6,282 $ 407 Specialty Lending — — — — 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. 22 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements 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 September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Commercial & Industrial $ 263 $ 88 $ 1,605 $ 397 Commercial Real Estate 32 288 499 470 Commercial Land — — — 105 Total $ 295 $ 376 $ 2,104 $ 972 The following table presents the amortized cost basis of collateral-dependent loans and leases, which are individually evaluated to determine expected credit losses, as of September 30, 2023 and December 31, 2022: Total Collateral-Dependent Loans Unguaranteed Portion September 30, 2023 Real Estate Business Assets Other Real Estate Business Assets Other Allowance for Credit Losses Commercial & Industrial Small Business Banking $ 2,737 $ — $ — $ 421 $ — $ — $ — Specialty Lending — 4,711 — — 4,711 — — Energy & Infrastructure 3,022 — — 227 — — — Total 5,759 4,711 — 648 4,711 — — Commercial Real Estate Small Business Banking 18,348 — — 5,908 — — 420 Total 18,348 — — 5,908 — — 420 Commercial Land Small Business Banking 1,743 — — 202 — — — Total 1,743 — — 202 — — — Total $ 25,850 $ 4,711 $ — $ 6,758 $ 4,711 $ — $ 420 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 $ 371 $ — $ 414 $ 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 23 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 September 30, 2023 Beginning Balance $ 79,407 $ 6,428 $ 29,908 $ 4,373 $ 120,116 Charge offs ( 9,088 ) — ( 287 ) — ( 9,375 ) Recoveries 104 — 149 — 253 Provision (Recovery) 10,395 ( 448 ) 134 198 10,279 Ending Balance $ 80,818 $ 5,980 $ 29,904 $ 4,571 $ 121,273 September 30, 2022 Beginning Balance $ 41,178 $ 3,504 $ 17,840 $ 3,341 $ 65,863 Charge offs ( 1,528 ) — ( 945 ) — ( 2,473 ) Recoveries 240 — 481 11 732 Provision 9,023 1,982 3,155 9 14,169 Ending Balance $ 48,913 $ 5,486 $ 20,531 $ 3,361 $ 78,291 Nine Months Ended Commercial & Industrial Construction & Development Commercial Real Estate Commercial Land Total September 30, 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 ( 17,564 ) — ( 979 ) — ( 18,543 ) Recoveries 685 — 913 — 1,598 Provision 32,727 1,045 7,152 1,404 42,328 Ending Balance $ 80,818 $ 5,980 $ 29,904 $ 4,571 $ 121,273 September 30, 2022 Beginning Balance $ 37,770 $ 3,435 $ 19,068 $ 3,311 $ 63,584 Charge offs ( 6,163 ) — ( 1,378 ) ( 652 ) ( 8,193 ) Recoveries 420 — 1,197 11 1,628 Provision 16,886 2,051 1,644 691 21,272 Ending Balance $ 48,913 $ 5,486 $ 20,531 $ 3,361 $ 78,291 During the three and nine months ended September 30, 2023, the ACL increased as a result of loan growth, combined with specific reserve changes on individually evaluated loans and charge-off related impacts. 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 nine months ended September 30, 2023. Loss rates are adjusted for twelve month forecasted unemployment followed by a twelve-month straight-line reversion period. During the three and nine month periods ended September 30, 2022, the ACL increased primarily as a result of loan growth, charge-off experience impacts, a transfer of $ 729.5 million in loans carried at amortized cost, including $ 694.0 million in guaranteed loans, from held for sale to held for investment and changes in the macroeconomic outlook. Loss rates are adjusted for twelve month forecasted unemployment followed by a twelve-month straight-line reversion period. 24 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements 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 periods presented. Three Months Ended September 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 $ 10,117 $ 5,184 $ — $ — 0.3 % Total $ 10,117 $ 5,184 $ — $ — 0.3 % Nine Months Ended September 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 $ 10,117 $ 5,184 $ 3,356 $ 361 0.4 % Specialty Lending — 399 — 4,164 0.3 Energy & Infrastructure — 13,485 — — 1.7 Total $ 10,117 $ 19,068 $ 3,356 $ 4,525 2.3 % As of September 30, 2023, the Company had commitments to lend additional funds to these borrowers totaling $ 1.7 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 September 30, 2023. Current 30-89 Days Past Due 90 Days or More Past Due Total Past Due Small Business Banking $ 19,018 $ — $ — $ — Specialty Lending 4,563 — — — Energy & Infrastructure 13,485 — — — Total $ 37,066 $ — $ — $ — The following tables summarize the financial impacts of loan modifications made to borrowers experiencing financial difficulty during the periods presented. Three Months Ended September 30, 2023 Weighted Average Interest Rate Reduction Weighted Average Term Extension (in Months) Small Business Banking — % 60 Nine Months Ended September 30, 2023 Weighted Average Interest Rate Reduction Weighted Average Term Extension (in Months) Small Business Banking 1.41 % 67 Specialty Lending — 70 Energy & Infrastructure — 12 There were no loans that were modified on or after January 1, 2023, the date the Company adopted ASU 2022-02, through September 30, 2023 that subsequently defaulted during the periods presented. 25 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements 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 September 30, 2022 Interest Only Payment Deferral Extend Amortization Other (1) Total TDRs (2) Number of Loans Recorded investment at period end Number of Loans Recorded investment at period end Number of Loans Recorded investment at period end Number of Loans Recorded investment at period end Number of Loans Recorded investment at period end Commercial & Industrial Small Business Banking — $ — 3 $ 7,074 1 $ 146 — $ — 4 $ 7,220 Total — — 3 7,074 1 146 — — 4 7,220 Construction & Development Small Business Banking — — — — — — 2 2,518 2 2,518 Total — — — — — — 2 2,518 2 2,518 Total — $ — 3 $ 7,074 1 $ 146 2 $ 2,518 6 $ 9,738 (1) Includes two small business banking loans with extended amortization and interest only. (2) Excludes loans accounted for under the fair value option. See Note 9. Fair Value of Financial Instruments for additional information. 26 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Nine Months Ended September 30, 2022 Interest Only Payment Deferral Extend Amortization Other (1) Total TDRs (2) Number of Loans Recorded investment at period end Number of Loans Recorded investment at period end Number of Loans Recorded investment at period end Number of Loans Recorded investment at period end Number of Loans Recorded investment at period end Commercial & Industrial Small Business Banking — $ — 6 $ 10,192 3 $ 1,674 1 $ 527 10 $ 12,393 Specialty Lending — — 1 734 — — — — 1 734 Total — — 7 10,926 3 1,674 1 527 11 13,127 Commercial Real Estate Small Business Banking — — — — 1 4,847 — — 1 4,847 Total — — — — 1 4,847 — — 1 4,847 Construction & Development Small Business Banking — — — — — — 2 2,518 2 2,518 Total — — — — — — 2 2,518 2 2,518 Total — $ — 7 $ 10,926 4 $ 6,521 3 $ 3,045 14 $ 20,492 (1) Includes one small business banking loan with extend amortization and a rate concession, two small business banking loans with extended amortization and interest only. (2) Excludes loans accounted for under the fair value option. See Note 9. Fair Value of Financial Instruments for additional information. Restructurings made to improve a loan’s performance have varying degrees of success. The following tables present TDRs that were modified within the twelve months ended September 30, 2022 subsequently defaulted during the period: Three Months Ended September 30, 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 — $ — — $ — 1 $ 146 — $ — 1 $ 146 Total — $ — — $ — 1 $ 146 — $ — 1 $ 146 (1) Excludes loans accounted for under the fair value option. See Note 9. Fair Value of Financial Instruments for additional information. 27 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Nine Months Ended September 30, 2022 Interest Only Payment Deferral Extend Amortization Other Total TDRs (1) 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 $ 2,737 2 $ 496 — $ — 4 $ 3,233 Total — $ — 2 $ 2,737 2 $ 496 — $ — 4 $ 3,233 (1) Excludes loans accounted for under the fair value option. See Note 9. Fair Value of Financial Instruments for additional information. Note 6. Leases Lessor Equipment Leasing 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. 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: September 30, 2023 December 31, 2022 Gross direct finance lease payments receivable $ 2,716 $ 4,284 Less – unearned interest ( 265 ) ( 479 ) Net investment in direct financing leases $ 2,451 $ 3,805 Future minimum lease payments under finance leases are as follows: As of September 30, 2023 Amount 2023 $ 388 2024 1,243 2025 968 2026 117 Total $ 2,716 Interest income of $ 72 thousand and $ 101 thousand was recognized in the three months ended September 30, 2023 and 2022, respectively. Interest income of $ 211 thousand and $ 309 thousand was recognized in the nine months ended September 30, 2023 and 2022, respectively. 28 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements 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. As of September 30, 2023 and December 31, 2022, the Company had a net investment of $ 106.9 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 $ 162.8 million and $ 163.4 million as of September 30, 2023 and December 31, 2022, respectively. Accumulated depreciation was $ 55.9 million and $ 49.2 million as of September 30, 2023 and December 31, 2022, respectively. Depreciation expense recognized on these assets was $ 2.4 million for the three months ended September 30, 2023 and 2022. Depreciation expense recognized on these assets was $ 7.2 million and $ 7.3 million for the nine months ended September 30, 2023 and 2022. Lease income of $ 2.4 million was recognized in the three months ended September 30, 2023 and 2022. Lease income of $ 7.1 million was recognized in the nine months ended September 30, 2023 and 2022. A maturity analysis of future minimum lease payments to be received under non-cancelable operating leases is as follows: As of September 30, 2023 Amount 2023 $ 1,937 2024 8,808 2025 8,935 2026 8,923 2027 8,690 Thereafter 13,562 Total $ 50,855 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 $ 3.00 billion and $ 2.67 billion at September 30, 2023 and December 31, 2022, respectively. The unpaid principal balance for all loans serviced for others was $ 4.03 billion and $ 3.48 billion at September 30, 2023 and December 31, 2022, respectively. 29 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements The following table summarizes the activity pertaining to servicing rights: Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Balance at beginning of period $ 31,042 $ 28,661 $ 26,323 $ 33,574 Additions, net 4,750 1,744 11,944 7,068 Fair value changes: Due to changes in valuation inputs or assumptions (1) 13,334 992 15,457 ( 3,056 ) Decay due to increases in principal paydowns or runoff ( 1,999 ) ( 2,316 ) ( 6,597 ) ( 8,505 ) Balance at end of period $ 47,127 $ 29,081 $ 47,127 $ 29,081 (1) Three and nine month periods ended September 30, 2023 include a $ 13.7 million increase related to change in estimate implemented on July 1, 2023. See Note 1. Basis of Presentation for additional information. The fair value of servicing rights was determined using a weighted average discount rate of 15.0 % on September 30, 2023 and 15.1 % on September 30, 2022. The fair value of servicing rights was determined using a weighted average prepayment speed of 15.3 % on September 30, 2023 and 16.1 % on September 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. 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. 30 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Note 8. Borrowings Total outstanding borrowings consisted of the following: September 30, 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. $ 25,847 $ 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 September 30, 2023. — 50,000 Total borrowings $ 25,847 $ 83,203 As of September 30, 2023 the Company’s unused borrowing capacity was $ 3.80 billion. 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”). 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. In September 2023, the Company modified a $ 100.0 million revolving line of credit with a third party correspondent bank. The line of credit was extended 12 months to a maturity date of October 10, 2026 and the interest rate cap was increased from 4.25 % to 6.75 %. The Company paid the Lender a non-refundable $ 250 thousand renewal fee upon signing the Note that will be amortized into interest expense over the life of the loan. 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. 31 Table of Contents 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 September 30, Nine Months Ended September 30, Equity Warrant Assets 2023 2022 2023 2022 Balance at beginning of period $ 2,251 $ 2,422 $ 2,210 $ 1,672 New equity warrant assets 708 14 952 718 Changes in fair value, net 19 121 37 167 Settlements — — ( 221 ) — Balance at end of period $ 2,978 $ 2,557 $ 2,978 $ 2,557 The tables below present the recorded amount of assets measured at fair value on a recurring basis. September 30, 2023 Total Level 1 Level 2 Level 3 Investment securities available-for-sale US government agencies $ 30,184 $ — $ 30,184 $ — Mortgage-backed securities 1,066,811 — 1,066,811 — Municipal bonds (1) 2,883 — 2,799 84 Loans held for investment 410,128 — — 410,128 Servicing assets (2) 47,127 — — 47,127 Mutual fund 1,647 — 1,647 — Equity warrant assets 2,978 — — 2,978 Total assets at fair value $ 1,561,758 $ — $ 1,101,441 $ 460,317 December 31, 2022 Total Level 1 Level 2 Level 3 Investment securities available-for-sale US government agencies $ 15,668 $ — $ 15,668 $ — Mortgage-backed securities 995,574 — 995,574 — Municipal bonds (1) 2,977 — 2,884 93 Other debt securities 500 — 500 — Loans held for investment 494,458 — — 494,458 Servicing assets (2) 26,323 — — 26,323 Mutual fund 1,656 — 1,656 — Equity warrant assets 2,210 — — 2,210 Total assets at fair value $ 1,539,366 $ — $ 1,016,282 $ 523,084 (1) During the three months ended September 30, 2023 there was no level 3 fair value adjustment gain or loss. During the nine months ended September 30, 2023, the Company recorded a level 3 fair value adjustment loss of $ 9 thousand. During the three and nine months ended September 30, 2022, the Company recorded a level 3 fair value adjustment gain of $ 1 thousand and a loss of $ 2 thousand, respectively. (2) 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. Additionally, see Note 1. Basis of Presentation of the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements for information related to changes in valuation techniques for the Company's loan servicing assets and loans accounted for under the fair value option. 32 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements 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. There were no loans accounted for under the fair value option that were 90 days or more past due and still accruing interest at September 30, 2023 or December 31, 2022. The unpaid principal balance of unguaranteed exposure for nonaccruals was $ 8.4 million and $ 7.2 million at September 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 September 30, 2023 and December 31, 2022. September 30, 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 $ 410,128 $ 429,643 $ ( 19,515 ) $ 45,896 $ 48,202 $ ( 2,306 ) $ 30,388 $ 31,581 $ ( 1,193 ) $ 410,128 $ 429,643 $ ( 19,515 ) $ 45,896 $ 48,202 $ ( 2,306 ) $ 30,388 $ 31,581 $ ( 1,193 ) 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 September 30, Nine Months Ended September 30, Gains (Losses) on Loans Accounted for under the Fair Value Option 2023 2022 2023 2022 Loans held for sale $ — $ 1,748 $ — $ 1,521 Loans held for investment ( 568 ) 2,672 ( 3,369 ) ( 1,046 ) $ ( 568 ) $ 4,420 $ ( 3,369 ) $ 475 Gains and (losses) related to borrower-specific credit risk were $ 0 and $ 3.5 million for the three and nine months ended September 30, 2023, respectively, and $ 451 thousand and $( 2.4 ) million for the three and nine months ended September 30, 2022, respectively. 33 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements The following tables summarize the activity pertaining to loans accounted for under the fair value option: Three Months Ended September 30, Nine Months Ended September 30, Loans held for sale 2023 2022 2023 2022 Balance at beginning of period $ — $ 23,452 $ — $ 25,310 Repurchases — — — 65 Fair value changes — 1,748 — 1,521 Transfers to held for investment, net — ( 24,768 ) — ( 26,219 ) Settlements — ( 432 ) — ( 677 ) Balance at end of period $ — $ — $ — $ — Three Months Ended September 30, Nine Months Ended September 30, Loans held for investment 2023 2022 2023 2022 Balance at beginning of period $ 441,781 $ 530,644 $ 494,458 $ 645,201 Repurchases 3,390 1,946 19,287 4,851 Fair value changes (1) ( 568 ) 2,672 ( 3,369 ) ( 1,046 ) Transfers from held for sale, net — 24,768 — 26,219 Settlements ( 34,475 ) ( 47,847 ) ( 100,248 ) ( 163,042 ) Balance at end of period $ 410,128 $ 512,183 $ 410,128 $ 512,183 (1) Three and nine month periods ended September 30, 2023 include a $ 1.3 million increase related to change in estimate implemented on July 1, 2023. See Note 1. Basis of Presentation for additional information. 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. September 30, 2023 Total Level 1 Level 2 Level 3 Collateral-dependent loans $ 4,220 $ — $ — $ 4,220 Foreclosed assets 6,701 — — 6,701 Total assets at fair value $ 10,921 $ — $ — $ 10,921 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. 34 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Level 3 Analysis For Level 3 assets measured at fair value on a recurring or non-recurring basis as of September 30, 2023 and December 31, 2022, the significant unobservable inputs used in the fair value measurements were as follows: September 30, 2023 Level 3 Assets with Significant Unobservable Inputs Fair Value Valuation Technique Significant Unobservable Inputs Range Weighted Average (1) Recurring fair value Municipal bond $ 84 Discounted expected cash flows Discount rate 7.2 % N/A Prepayment speed 5.0 % N/A Loans held for investment $ 410,128 Discounted expected cash flows Loss rate 0.0 % - 7.5 % 1.8 % Discount rate 6.7 % - 18.0 % 9.6 % Prepayment speed 14.0 % - 30.4 % 16.1 % Equity warrant assets $ 2,978 Black-Scholes option pricing model Volatility 26.7 % - 90.0 % 35.1 % Risk-free interest rate 4.5 % - 4.6 % 4.5 % Marketability discount 20.0 % - 25.0 % 22.8 % Remaining life 4 - 10 years 7.8 years Non-recurring fair value Collateral-dependent loans $ 4,220 Discounted appraisals Appraisal adjustments (2) 10.0 % - 37.5 % 11.1 % Foreclosed assets $ 6,701 Discounted appraisals Appraisal adjustments (2) 10.0 % 10.0 % 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. 35 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements 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: September 30, 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 $ 534,774 $ 534,774 $ — $ — $ 534,774 Certificates of deposit with other banks 3,750 3,750 — — 3,750 Loans held for sale 572,604 — — 586,231 586,231 Loans and leases held for investment, net of allowance for credit losses on loans and leases 7,671,230 — — 7,960,602 7,960,602 Financial liabilities Deposits 10,003,642 — 9,659,636 — 9,659,636 Borrowings 25,847 — — 25,140 25,140 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. 36 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements 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: September 30, 2023 December 31, 2022 Commitments to extend credit (1) $ 2,831,592 $ 2,731,866 Standby letters of credit 21,983 26,454 Airplane purchase agreement commitments 18,000 24,000 Total unfunded off-balance-sheet credit risk $ 2,871,575 $ 2,782,320 (1) Includes unfunded overdraft protection. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the party. Collateral held varies, but may include accounts receivable, inventory, property and equipment, residential real estate and income-producing commercial properties. Commitment letters are issued after approval of the loan by the Credit Department and generally expire ninety days after issuance. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held varies as specified above and is required in instances which the Company deems necessary. The allowance for off-balance-sheet credit exposures was $ 4.6 million and $ 1.5 million at September 30, 2023 and December 31, 2022, respectively. Other Commitments 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 $ 36.7 million. At September 30, 2023, the Company has paid and was committed to approximately $ 12.0 million of the total estimated amount. As of September 30, 2023 and December 31, 2022, the Company recorded unfunded commitments to provide capital contributions for on-balance-sheet investments in the amount of $ 30.1 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-nine relationships that have a retained unguaranteed exposure of $ 1.05 billion of which $ 673.1 million of the unguaranteed exposure has been disbursed. Additionally, the Company has future minimum lease payments receivable under non-cancelable operating leases totaling $ 50.9 million, of which no relationships exceed $ 20.0 million. 37 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements The Company from time-to-time may have cash and cash equivalents on deposit with other financial institutions that exceed federally-insured limits. Geographic Concentration s The following table presents the geographic concentration of our loan and lease portfolio at September 30, 2023: % of Total Geographic Regions (1) Midwest 12.6 % Northeast 18.7 Southeast 31.0 Southwest 11.2 West 26.5 Total 100.0 % (1) Concentrations are stated as a percentage of total unguaranteed loans held for investment. Midwest consists of ND, SD, NE, KS, MN, IA,WI, MO, IL, IN, MI and OH. Northeast consists of MD, DE, PA, NJ, NY, CT, RI, MA, VT, ME and NH. Southeast consists of AR, LA, MS, TN, AL, GA, FL, SC, KY, NC, VA, WV, DC, PR and VI. Southwest consists of AZ, NM, TX and OK. West consists of WA, OR, CA, NV, ID, MT, WY, CO, UT, AK and HI. 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. 38 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 September 30, 2023 Interest income $ 180,416 $ ( 6 ) $ 201 $ 180,611 Interest expense 90,914 — 287 91,201 Net interest income (loss) 89,502 ( 6 ) ( 86 ) 89,410 Provision for loan and lease credit losses 10,279 — — 10,279 Noninterest income 35,730 1,652 509 37,891 Noninterest expense 69,480 3,069 1,713 74,262 Income tax expense (benefit) 3,084 ( 5 ) ( 112 ) 2,967 Net income (loss) $ 42,389 $ ( 1,418 ) $ ( 1,178 ) $ 39,793 Total assets $ 10,800,881 $ 110,914 $ 38,665 $ 10,950,460 As of and for the three months ended September 30, 2022 Interest income $ 115,819 $ 8 $ 7 $ 115,834 Interest expense 31,581 — 367 31,948 Net interest income (loss) 84,238 8 ( 360 ) 83,886 Provision for loan and lease credit losses 14,169 — — 14,169 Noninterest income 27,268 29,980 476 57,724 Noninterest expense 78,474 2,495 2,079 83,048 Income tax expense (benefit) 1,344 416 ( 235 ) 1,525 Net income (loss) $ 17,519 $ 27,077 $ ( 1,728 ) $ 42,868 Total assets $ 9,140,943 $ 163,304 $ 10,403 $ 9,314,650 39 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Banking Fintech Other Consolidated As of and for the nine months ended September 30, 2023 Interest income $ 501,271 $ 14 $ 454 $ 501,739 Interest expense 245,094 — 916 246,010 Net interest income (loss) 256,177 14 ( 462 ) 255,729 Provision for loan and lease credit losses 42,328 — — 42,328 Noninterest income 74,215 5,689 1,722 81,626 Noninterest expense 215,879 8,032 5,770 229,681 Income tax expense (benefit) 7,785 177 ( 351 ) 7,611 Net income (loss) $ 64,400 $ ( 2,506 ) $ ( 4,159 ) $ 57,735 Total assets $ 10,800,881 $ 110,914 $ 38,665 $ 10,950,460 As of and for the nine months ended September 30, 2022 Interest income $ 307,780 $ 80 $ 3 $ 307,863 Interest expense 64,961 — 1,303 66,264 Net interest income (loss) 242,819 80 ( 1,300 ) 241,599 Provision for loan and lease credit losses 21,272 — — 21,272 Noninterest income 64,371 152,878 1,672 218,921 Noninterest expense 216,652 6,809 6,180 229,641 Income tax expense (benefit) 10,152 26,138 ( 1,099 ) 35,191 Net income (loss) $ 59,114 $ 120,011 $ ( 4,709 ) $ 174,416 Total assets $ 9,140,943 $ 163,304 $ 10,403 $ 9,314,650 40 Table of Contents