What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2024-02-22 compared with 2023-02-23 · 478 added, 497 removed, 1728 unchanged (36% of the section changed)

1 unchanged sentence

Report of Independent Registered Public Accounting Firm

To the Shareholders, Board of Directors, and Audit and Risk Committee

To the Shareholders, Board of Directors, and Audit Committee

Live Oak Bancshares, Inc.

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Critical Audit Matters

The critical audit matters communicated below are matters arising from the current-period audit of the consolidated financial statements that were communicated or required to be communicated to the Audit and Risk Committee and that:

(1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

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The determination of the ACL has been identified by the Company as a critical accounting estimate.

The ACL is based on relevant information from internal and external resources on past events, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of the Company’s portfolio.

As further described in Notes 1 and 3 to the consolidated financial statements, the Company estimates its ACL on a pooled basis for loans and leases that share risk characteristics and on an individual basis for those that do not.

As described in Notes 1 and 3 to the consolidated financial statements, the Company estimates its ACL on a pooled basis for loans and leases that share risk characteristics and on an individual basis for those that do not.

For those evaluated on a pooled basis, the Company’s historical credit loss experience, combined with reasonable and supportable forecasts, supports the underlying assumptions for the estimation of a quantitative component of the ACL.

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We identified the Company’s estimate of the ACL as a critical audit matter.

The principal considerations for that determination were the degree of subjectivity and judgment required to audit management’s identification of individually evaluated loans and leases and quantification of the related ACL, management’s selection of assumptions for both the quantitative and qualitative factor components of the ACL for the pooled loans and leases and our use of an auditor’s specialist.

The principal considerations for that determination were the degree of subjectivity and judgment required to audit management’s selection of assumptions for both the quantitative and qualitative factor components of the ACL for the pooled loans and leases and our use of an auditor’s specialist.

This was particularly true for the areas considered by management in establishing the qualitative factors, as well as the level assigned by management to each qualitative factor.

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◦ Management’s review of the ACL, including the review of the qualitative components of the ACL.

• We tested the completeness of the individually evaluated loan and lease population, including testing the modifications for potential troubled debt restructurings, substandard or worse rated loans and leases, non-accrual loans and leases and past due loans and leases.

• We tested the calculation of losses on a sample of identified individually evaluated loans and leases, including assessing the reasonableness of the significant assumptions including any adjustments made to appraisals for discounts, selling costs, and other unobservable adjustments.

• We involved the firm’s internal valuation specialists to assist in:

• We tested the completeness of the individually evaluated loan and lease population, including substandard or worse rated loans and leases, non-accrual loans and leases, and past due loans and leases.

• We tested the calculation of reserves on a sample of identified individually evaluated loans and leases, including assessing the reasonableness of the significant assumptions including any adjustments made to appraisals for discounts, selling costs, and other unobservable adjustments.

• We involved our internal valuation specialists to assist in:

◦ Evaluating the appropriateness of forecast inputs and assumptions, and;

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Loans Held at Fair Value

As described in Notes 1 and 10 to the consolidated financial statements, the Company had $494.5 million of loans held for investment as of December 31, 2022, representing retained participating interests of government guaranteed loans, for which management elected the fair value option.

The Company had $388.0 million of loans held for investment as of December 31, 2023, representing retained participating interests of government guaranteed loans, for which management elected the fair value option.

The valuation of loans accounted for under the fair value option has been identified by the Company as a critical accounting estimate.

The fair values of loans are determined by discounting estimated cash flows and incorporating measurements of probability of default, loss given default, prepayments, estimated outstanding exposure at default, and the effective interest rate.

If the loan is collateral dependent, the fair value is determined based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date.

Fair value of the loan’s collateral is determined by appraisal, independent valuation, or management’s estimation of fair value, which is then adjusted for the cost related to the liquidation of the collateral.

As described in Notes 1 and 10 to the consolidated financial statements, the fair values of loans are determined by discounting estimated cash flows and incorporating assumptions that market participants would use to estimate fair value of similar assets such as prepayment speeds, default and severity rates, and a discount rate.

The fair value of loans accounted for using the fair value option is sensitive to changes in underlying assumptions.

The discount rate is one of the most significant assumptions.

We identified the Company’s estimate of the fair value of loans for which the fair value option has been elected as a critical audit matter.

The principal considerations for that determination were the high degree of subjectivity and auditor judgment required to assess the reasonableness of the assumptions, calculations in the valuation model related to the credit component of fair value, and our use of an auditor’s specialist.

The principal considerations for that determination were the high degree of subjectivity and auditor judgment required to assess the reasonableness of the assumptions used and our use of an auditor’s specialist.

In particular, discount rates are an unobservable input and the related assumptions are the most subjective and provide the most sensitivity to the fair value measurement.

The primary procedures we performed to address this critical audit matter included the following:

• We obtained an understanding of the Company’s process for establishing the fair value measurement, including the implementation of the model and basis for development and related adjustments of the qualitative factor components for the credit risk.

• We evaluated the design and tested the operating effectiveness of controls relating to the determination of the discount related to credit risk, including management’s assessment of the adjustments applied to determine the qualitative component.

• We involved the firm’s internal valuation specialists to assist in:

◦ Evaluating the appropriateness of forecast inputs and assumptions, and;

• We evaluated the design and tested the operating effectiveness of controls relating to the valuation of loans accounted for using the fair value option, including controls over:

◦ Management’s valuation model, which is designed to ensure the completeness and accuracy of data used in the model, and;

◦ The determination of significant inputs and assumptions, including unobservable inputs such as discount rates, used in the model.

• We involved our internal valuation specialists to assist in:

◦ Evaluating the appropriateness of assumptions used in the model, and;

◦ Testing the design of the model calculation through a re-performance of discounted cash flows on loans accounted for under the fair value option.

• We inspected overall trends for the discount rate and prepayment speeds, and considered how the Company’s assumptions compared to observable market interest rate trends and external prepayment speed data.

Servicing Assets

The Company’s servicing assets were $48.6 million as of December 31, 2023.

As described within Notes 1, 5, and 10 to the consolidated financial statements, the Company recognizes servicing assets, which represent the portion of the servicing spread that exceeds adequate compensation for the servicing function of the sold portion of loans originated by the Company.

The valuation of the servicing asset has been identified by the Company as a critical accounting estimate.

As described in Notes 1, 5, and 10 to the consolidated financial statements, the Company recognizes servicing assets, which represent the portion of the servicing spread that exceeds adequate compensation for the servicing function of the sold portion of loans originated by the Company.

The Company accounts for the servicing assets at fair value with changes in the fair value reported in loan servicing asset revaluation within the consolidated statements of income.

The determination of the servicing assets’ fair value is based on a valuation model that incorporates assumptions such as adequate compensation for servicing, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds, and default rates and losses.

The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as adequate compensation for servicing, the discount rate, the custodial earnings rate, ancillary income, prepayment speeds and default rates and losses, with the prepayment speed and discount rate being the most significant assumptions.

The fair value of servicing rights is sensitive to changes in underlying assumptions.

Prepayment speeds are one of the most significant assumptions.

We identified the Company’s valuation of the servicing asset as a critical audit matter.

The principal considerations for that determination were the high degree of auditor judgment required to assess the reasonableness of certain assumptions used in the valuation model and our use of an auditor’s specialist.

For instance, prepayment speeds and default rates are unobservable inputs developed using proprietary information from management’s internal valuation specialists’ database.

In particular, the assumptions around prepayment speeds are the most subjective and provide the most sensitivity to the servicing rights.

In particular, prepayment speeds and discount rates are unobservable inputs developed by management and the related assumptions are the most subjective and provide the most sensitivity to the servicing assets.

The primary procedures we performed to address this critical audit matter included the following:

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◦ Management’s valuation model, which is designed to ensure the completeness and accuracy of data used in the model, and;

◦ The determination of significant inputs and assumptions, including unobservable inputs such as prepayment speeds, used in the model.

◦ The determination of significant inputs and assumptions, including unobservable inputs such as prepayment speeds and discount rates, used in the model.

• We involved the firm’s internal valuation specialists to assist in:

◦ Evaluating the methodologies and assumptions used by management, including assessing the reasonableness of significant unobservable inputs such as prepayment speeds and assumptions of the valuation model, and;

◦ Evaluating the methodologies and assumptions used by management, including assessing the reasonableness of significant unobservable inputs such as prepayment speeds and discount rates and assumptions of the valuation model, and;

◦ Independently calculating the discounted cash flows at the individual loan level for a sample of loans and comparing the results to management’s estimate.

• We inspected overall trends for the discount rate, prepayment speed, and servicing asset to compare the quarterly change, over a twelve-quarter period, and how the Company’s discount rate assumptions compared to observable market interest rate trends.

/ S / FORVIS, LLP (Formerly, Dixon Hughes Goodman LLP)

• We inspected overall trends for the prepayments speeds and discount rate, and considered how the Company’s prepayment speed and discount rate assumptions compared to external prepayment speed data and observable market interest rate trends.

/ S / FORVIS, LLP

We have served as the Company's auditor since 2010.

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Report of Independent Registered Public Accounting Firm

To the Shareholders, Board of Directors, and Audit and Risk Committee

To the Shareholders, Board of Directors, and Audit Committee

Live Oak Bancshares, Inc.

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Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

/ S / FORVIS, LLP (Formerly, Dixon Hughes Goodman LLP)

/ S / FORVIS, LLP

Greenville, North Carolina

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Investment securities available-for-sale 1,126,160 1,014,719

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

554,610 1,116,519

Loans held for sale 387,037 554,610

Loans and leases held for investment (includes $ 388,036 and $ 494,458 measured at fair value, respectively)

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Foreclosed assets 6,481 —

Servicing assets 26,323 33,574

Servicing assets (includes $ 48,186 and $ 26,323 measured at fair value, respectively)

48,591 26,323

Other assets 354,476 328,308

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344,568 330,854

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

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

Retained earnings 642,817 572,497

Accumulated other comprehensive (loss) income ( 92,318 ) 1,946

Accumulated other comprehensive loss ( 84,719 ) ( 92,318 )

Total shareholders’ equity 902,666 811,033

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Net gains on sales of loans 46,545 43,244 67,280

Net gain (loss) on loans accounted for under the fair value option 1,046 4,257 ( 13,083 )

Equity method investments income (loss) 144,250 ( 1,716 ) ( 14,691 )

Equity security investments gains (losses), net 3,355 44,752 14,909

Gain on sale of investment securities available-for-sale, net — — 1,880

Net (loss) gain on loans accounted for under the fair value option ( 3,539 ) 1,046 4,257

Equity method investments (loss) income ( 5,994 ) 144,250 ( 1,716 )

Equity security investments (losses) gains, net ( 969 ) 3,355 44,752

Lease income 10,007 10,084 10,263

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Income before taxes 82,830 210,324 210,788

Income tax expense (benefit) 34,116 43,793 ( 12,154 )

Income tax expense 8,932 34,116 43,793

Net income $ 73,898 $ 176,208 $ 166,995

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Net income $ 73,898 $ 176,208 $ 166,995

Other comprehensive (loss) income before tax:

Net unrealized (loss) gain on investment securities available-for-sale during the period ( 124,032 ) ( 25,738 ) 14,752

Other comprehensive income (loss) before tax:

Net unrealized gain (loss) on investment securities available-for-sale during the period 9,999 ( 124,032 ) ( 25,738 )

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

Other comprehensive (loss) income before tax ( 124,032 ) ( 25,738 ) 12,872

Income tax benefit (expense) 29,768 6,177 ( 3,089 )

Other comprehensive (loss) income, net of tax ( 94,264 ) ( 19,561 ) 9,783

Other comprehensive income (loss) before tax 9,999 ( 124,032 ) ( 25,738 )

Income tax (expense) benefit ( 2,400 ) 29,768 6,177

Other comprehensive income (loss), net of tax 7,599 ( 94,264 ) ( 19,561 )

Total comprehensive income $ 81,497 $ 81,944 $ 147,434

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Net income — — — 166,995 — 166,995

Other comprehensive income — — — — 9,783 9,783

Other comprehensive loss — — — — ( 19,561 ) ( 19,561 )

Issuance of restricted stock 453,127 — — — — —

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Non-voting common stock converted to voting common stock in private sale 982,733 ( 982,733 ) — — — —

Cumulative effect of accounting change for Accounting Standards Update 2016-13 — — — 822 — 822

Stock option exercises 709,823 — 4,158 — — 4,158

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Restricted stock expense — — 15,572 — — 15,572

Issuance of common stock in connection with acquisition of wholly-owned subsidiary 89,927 — 1,122 — — 1,122

Transfer from retained earnings to other assets for pro rata portion of equity method investee stock compensation expense — — — 3,360 — 3,360

Repurchase and retirement of shares securing a note receivable ( 10,000 ) — ( 953 ) — — ( 953 )

Cash dividends ($ 0.12 per share)

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Transfer from retained earnings to other assets for pro rata portion of equity method investee stock compensation expense — — — 662 — 662

Repurchase and retirement of shares securing a note receivable ( 10,000 ) — ( 953 ) — — ( 953 )

Cash dividends ($ 0.12 per share)

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Net income — — — 73,898 — 73,898

Other comprehensive loss — — — — ( 94,264 ) ( 94,264 )

Other comprehensive income — — — — 7,599 7,599

Issuance of restricted stock 373,616 — — — — —

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Employee stock purchase program 59,074 — 1,396 — — 1,396

Non-voting common stock converted to voting common stock in private sale 125,024 ( 125,024 ) — — — —

Stock option exercises 123,739 — 1,168 — — 1,168

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Restricted stock expense — — 17,603 — — 17,603

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 — — — 1,072 — 1,072

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Amortization of premium on securities, net of accretion 8 3,420 6,461

Deferred tax expense (benefit) 27,129 24,808 ( 17,447 )

Deferred tax (benefit) expense ( 22,161 ) 27,129 24,808

Originations of loans held for sale ( 877,083 ) ( 1,042,061 ) ( 1,364,168 )

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Net gains on sale of loans held for sale ( 46,545 ) ( 43,244 ) ( 67,280 )

Net (gain) loss on sale of foreclosed assets ( 24 ) ( 779 ) 12

Net (gain) loss on loans accounted for under fair value option ( 1,046 ) ( 4,257 ) 13,083

Net decrease in servicing assets 7,251 344 1,447

Gain on sale of investment securities available-for-sale, net — — ( 1,880 )

Net (gain) loss on sale or disposal of long lived asset — ( 114 ) 6

Net loss (gain) on impairment and sale of foreclosed assets 751 ( 24 ) ( 779 )

Net loss (gain) on loans accounted for under fair value option 3,539 ( 1,046 ) ( 4,257 )

Net change in servicing assets ( 22,268 ) 7,251 344

Net gain on sale or disposal of long lived asset ( 4,411 ) — ( 114 )

Net loss (gain) on disposal of premises and equipment 377 31 ( 48 )

Impairment on premises and equipment, net 499 — 904

Equity method investments (income) loss ( 144,250 ) 1,716 14,691

Equity security investments (gains) losses, net ( 3,355 ) ( 44,752 ) ( 14,909 )

Equity method investments loss (income) 5,994 ( 144,250 ) 1,716

Equity security investments losses (gains), net 969 ( 3,355 ) ( 44,752 )

Renewable energy tax credit investment impairment 14,644 16,217 3,187

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Restricted stock compensation expense 17,603 19,405 15,572

Stock based compensation excess tax benefit 531 9,340 22,043

Stock based compensation excess tax (deficiency) benefit ( 1,004 ) 531 9,340

Business combination contingent consideration fair value adjustment 125 ( 86 ) 99

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Proceeds from SBA reimbursement/sale of foreclosed assets, net — 1,837 6,786

Business combination, net of cash acquired — — ( 895 )

Maturities of certificates of deposit with other banks 3,750 750 1,750

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Supplemental disclosures of noncash operating, investing, and financing activities

Unrealized holding (losses) gains on investment securities available-for-sale, net of taxes $ ( 94,264 ) $ ( 19,561 ) $ 9,783

Unrealized holding gains (losses) on investment securities available-for-sale, net of taxes $ 7,599 $ ( 94,264 ) $ ( 19,561 )

Transfers from loans and leases to foreclosed real estate and other repossessions or SBA receivable 39,901 18,496 13,346

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Equity security investment commitments — 394 2,245

Business combination:

Assets acquired (excluding goodwill) — — 2,523

Liabilities assumed — — 2,074

Goodwill recorded — — 1,797

Change related to accounting change for ASU 2022-02 676 — —

See Notes to Consolidated Financial Statements

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The Bank has satellite sales offices across the United States.

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

The Bank identifies and extends lending to credit-worthy borrowers both within specific industries, also called verticals, through expertise within those industries, and more broadly to select borrowers outside of those industries.

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 partially guaranteed by the Small Business Administration (“SBA”) under the 7(a) Loan Program and the U.S.

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

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 material subsidiaries are the Bank, Government Loan Solutions (“GLS”), Live Oak Grove, LLC (“Grove”), Live Oak Ventures, Inc.

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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.

The Grove provides Company employees and business visitors with on-site dining.

Live Oak Ventures’ purpose is investing in businesses that align with the Company's strategic initiative to be a leader in financial technology.

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JAM was previously a wholly owned subsidiary of Live Oak Private Wealth.

See Business Combination discussion below for more information on the acquisition of JAM in 2020.

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

TLH holds land adjacent to the Bank's headquarters consisting of wetlands and other protected property for the use and enjoyment of the Bank's employees and customers.

Basis of Presentation

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The Company is considered to hold a controlling financial interest in a VIE when it is the primary beneficiary.

A primary beneficiary has both (1) the power to direct the activities that most significantly impact the VIE’s economic performance, and (2) the obligation to absorb losses or receive benefits of a VIE that could potentially be significant to a VIE.

A primary beneficiary has both (1) the power to direct the activities that most significantly impact the VIE’s economic performance, and (2) the obligation to absorb losses or right to receive benefits of a VIE that could potentially be significant to a VIE.

The parties that make investment and investment decisions, or parties that can unilaterally remove those decision makers are deemed to have the power to direct the activities of a VIE.

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Any subsequent measurement-period adjustments are recorded within 12 months of the acquisition date.

On April 1, 2020, the Company acquired 100 % of the equity interests of JAM, a registered investment advisor based in Rocky Mount, North Carolina.

Goodwill, intangible assets and contingent consideration of $ 1.8 million, $ 2.3 million and $ 2.1 million, respectively, were recorded by the Company as a result of this transaction.

Intangible assets are almost entirely comprised of customer relationships that are being amortized using the straight-line method over 15 years.

As a result of this acquisition, the Bank's wholly owned subsidiary Live Oak Private Wealth, broadened service offerings to existing high-net-worth individuals and families, attracted new clients from an expanded footprint and benefited from economies of scale.

The acquisition did not materially impact the Company's financial position, results of operations or cash flows.

Given the impact of the above acquisition was immaterial to the Company and its results of operations, additional disclosures have not been included .

Business Segments

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Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for credit losses on loans and leases, valuations of loans at fair value and servicing assets.

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.

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

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

Cash and Cash Equivalents

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The daily average cash reserve requirement was suspended for the years ended December 31, 2023 and 2022.

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Certificates of Deposit with other Banks

Certificates of deposit with other banks have maturities ranging from September 2023 through December 2023 and bear interest at rates ranging from 0.20 % to 3.55 %.

The certificate of deposit with other banks has a maturity of December 2024 and bears interest at a rate of 4.60 %.

All investments in certificates of deposit are with FDIC insured financial institutions and none exceed the maximum insurable amount of $ 250 thousand.

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Purchase premiums and discounts on debt securities are recognized in interest income using the interest method over the terms of the securities.

Gains and losses on the sales of these securities are typically recorded on the trade date and are determined using the specific identification method.

Gains and losses on the sales of these securities are recorded on the trade date and are determined using the specific identification method.

When debt securities are in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis.

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If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security.

If the present value of cash flows expected to be collected from the security is less than the amortized cost basis, a credit loss exists and an allowance for credit losses (“ACL”) is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis.

If the present value of cash flows expected to be collected from the security is less than the amortized cost basis, a credit loss exists and an ACL is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis.

Any impairment that has not been recorded through an ACL is recognized in other comprehensive income.

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Securities are charged-off against the allowance or, in the absence of any allowance, written down through income when deemed uncollectible by management or when either of the aforementioned criteria regarding intent or requirement to sell is met.

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Equity Investments

Equity investments are generally non-marketable investments and are included in the other assets line in the consolidated balance sheets.

Earnings impacts are reflected in the equity method investments income (loss) and equity security investments gains (losses), net line items on the consolidated statements of income .

The Company generally accounts for equity investments either under the equity method or equity security accounting.

Investments through which there is significant influence but not control over the investee are accounted for under the equity method.

The determination of whether the Company has significant influence over an investee requires judgement based on the facts and circumstances of each investment including level of ownership, power to control and legal structure.

Significant influence is generally presumed to exist in privately held companies where the Company owns at least 20 %, or 5 % for limited partnerships or limited liability companies in certain circumstances, or circumstances where there is ability to exercise significant influence over the investee’s operating and financial policies through board involvement or other influence.

Earnings impacts are reflected in the equity method investments (loss) income and equity security investments (losses) gains, net line items on the consolidated statements of income .

Investments in in-substance common stock through which there is significant influence but not control over the investee are accounted for under the equity method.

The determination of whether the Company has significant influence over an investee requires judgement based on the facts and circumstances of each investment including, share type, level of ownership, power to control and legal structure.

Significant influence is generally presumed to exist in privately held companies where the Company owns at least 20 % of voting stock, or 5 % interest in limited partnerships or limited liability companies.

Qualitatively, significant influence can exist through the ability to influence the investee’s operating and financial policies through board involvement or other influence.

Under the equity method, the Company recognizes its proportionate share of the results of operations of the investee based on most current information available.

In instances where cash distributions vary at different points and/or are not directly linked to the Company’s ownership percentage, the investee’s net income or loss is allocated using the hypothetical liquidation at book value (“HLBV”) method.

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Investments through which the Company is not able to exercise significant influence over the investee are accounted for as equity securities whereby investments are measured at fair value with changes in fair value recognized in net income, unless those investments have no readily determinable fair value.

Investments that do not qualify as in-substance common stock, or through which the Company is not able to exercise significant influence over the investee, are accounted for as equity securities, whereby investments are measured at fair value with changes in fair value recognized in net income, unless those investments have no readily determinable fair value.

Investments without a readily determinable fair value are measured at cost minus impairment, if any, plus or minus changes in value resulting from observable price changes arising from orderly transactions .

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For equity securities not accounted for at fair value, any impairment is recognized with the full charge recorded in earnings.

To determine whether such equity security is impaired, the Company considers various indicators of impairment, including (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

To determine whether an equity security may be impaired, the Company considers various indicators of impairment, including, but not limited to (1) the financial condition and near-term prospects of the issuer, (2) adverse market conditions and (3) bona-fide offers to purchase an equity interest in the investee below the carrying amount.

Federal Home Loan Bank Stock

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Fair Value Option

Prior to 2021, management evaluated retained participating interests in government guaranteed loans for the fair value option election.

Prior to 2021, management elected to account for the retained participating interests in government guaranteed loans under the fair value option.

Those loans for which the fair value option were elected are measured at fair value and classified as either held for sale or held for investment, as outlined below.

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

This discount will subsequently be accreted into interest income over the underlying loan’s remaining term using the effective interest method.

This discount is subsequently accreted into interest income over the underlying loan’s remaining term using the effective interest method.

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

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

In accordance with accounting standards, any loans for which fair value was previously elected continue to be measured accordingly.

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.

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Fair value of loans includes adjustments for historical credit losses, market liquidity, and economic conditions.

The credit loss adjustment is estimated using a discounted cash flow (“DCF”) methodology for each loan which incorporates measurements of (i) probability of default (“PD”), which is the likelihood a loan or lease will stop performing, (ii) loss given default (“LGD”), which is the expected loss rate for loans or leases in default, (iii) prepayments, (iv) the estimated outstanding exposure at default (“EAD”), and (v) the effective interest rate (“EIR”).

PD rates are calculated using the number of defaults divided by the number of loans available to default for 1-year observation periods over the lifetime of data available for a certain pool.

LGD rates are calculated by dividing the lifetime net charge-offs for each pool by the pool’s average outstanding balance.

PD and LGD rates are adjusted for forecasted national unemployment rates during a reasonable and supportable forecast period.

Management has determined that four quarters represents a reasonable and supportable forecast period and adjusted loss rates revert back to a historical loss rate over four quarters on a straight-line basis.

Expected losses are calculated as the product of PD, LGD, and EAD.

Expected losses are discounted using the loan or lease EIR, adjusted for prepayments.

Market liquidity and economic condition adjustments are estimated using the sale prices of similar loans based on rate, term, and asset size.

This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Management estimates the fair value of loans accounted for under the fair value option using a discounted cash flow (“DCF”) methodology.

The estimate incorporates assumptions that market participants would use to estimate fair value of similar assets such as prepayment speeds, default and severity rates, and a discount rate.

This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

Held for Sale

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Salability requirements of government guaranteed portions include, but are not limited to, full disbursement of the loan commitment amount.

Loans held for sale are carried at either fair value, if the fair value option is elected, or the lower of cost or estimated fair value determined on a loan-by-loan basis.

Loans held for sale are carried at either fair value, if the fair value option is elected, or the lower of cost or estimated fair value.

Net unrealized losses, if any, on loans without a fair value election, are recognized through a valuation allowance and recorded as a charge to noninterest income.

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If the transfer is accounted for as a sale, the loans are derecognized from the Company’s consolidated balance sheet and a gain or loss is recognized in net gains on sales of loans line item on the consolidated statements of income.

The gain on sale recognized in income is the sum of the premium on the guaranteed loan and the fair value of the servicing assets recognized, less the discount recorded on the unguaranteed portion of the loan retained, and any fair value fluctuations in associated exchange-traded interest rate futures contracts.

If the transfer does not satisfy the aforementioned control criteria, the transaction is recorded as a secured borrowing with the transferred loans remaining on the Company’s consolidated balance sheet and proceeds recognized as a liability.

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Balance at end of period $ 387,037 $ 554,610

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Held for Investment

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Interest income on loans and leases is recognized as earned on a daily accrual basis at the applicable interest rate.

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Loans and leases designated as held for investment include those identified as more beneficial to hold for the long term as well as the required retention amount defined by the SBA and USDA.

Loans and leases held for investment also consist of certain guaranteed and unguaranteed credits including those designated as troubled debt restructurings, nonaccrual, non-marketable, and risk grade 5 or worse as defined by internal risk rating metrics.

Loans and leases held for investment also consist of certain guaranteed and unguaranteed credits including nonaccrual, non-marketable, and risk grade 5 or worse as defined by internal risk rating metrics.

Nonaccrual and Past Due Loans

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Loans and leases, or portions thereof, are charged off when deemed uncollectible.

Troubled Debt Restructurings

A loan or lease is accounted for as a troubled debt restructuring (“TDR”) if the Company, for reasons related to the borrower’s financial difficulties, restructures a loan or lease, and grants a concession to the borrower that it would not otherwise grant.

A TDR typically involves a more than short-term modification of terms such as a reduction of the interest rate below the current market rate for a loan or lease with similar risk characteristics or the waiving of certain financial covenants without corresponding offsetting compensation or additional support.

Al lowance for Credit Losses

The Company adopted ASC 326, Measurement of Credit Losses on Financial Instruments (“ASC 326”) on January 1, 2020.

Upon adoption, the Company recorded a net increase to retained earnings of $ 822 thousand, comprised of a $ 1.3 million decrease in the allowance for credit losses combined with a $ 499 thousand increase in reserve on unfunded commitments.

The ACL is a valuation account that is deducted from the amortized cost basis of loans and leases to present a net amount expected to be collected.

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The Company’s ACL on loans and leases is estimated using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.

As a result, the impact of loss mitigation strategies, such as loan modifications and restructurings, are captured in the estimates of loss given default and probability of default.

As a result, the impact of loss mitigation strategies, such as loan modifications and restructurings, are captured in the estimates of LGD and PD.

The Company’s historical credit loss experience provides the basis for the estimation of expected credit losses.

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Loans and Leases Held for Investment and Credit Quality.

Expected credit losses for pooled loans and leases are estimated using a DCF methodology for each loan which incorporates measurements of PD, LGD, prepayments, the estimated outstanding EAD, and the EIR.

PD rates are calculated using the number of defaults divided by the number of loans available to default for 1-year observation periods over the lifetime of data available for a certain pool.

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Expected losses are discounted using the loan or lease EIR, adjusted for prepayments.

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Management adjusts historical loss information for differences in current risk characteristics that are not considered within the quantitative modeling processes but are relevant in assessing the expected credit losses within the loan and lease pools.

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This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Loans or leases that do not share risk characteristics are evaluated on an individual basis and are excluded from the pooled evaluation.

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• Any loan or lease that is on nonaccrual, or any loan or lease that is delinquent greater than 90 days past due and still accruing interest.

• Any loan or lease that was restructured with an interest rate concession and now meets the definition of a TDR.

• Prior to January 1, 2023, any loan or lease that was restructured with an interest rate concession and met the definition of a troubled debt restructuring (“TDR”).

The Company estimates reserves on individually evaluated loans and leases using a DCF methodology or through the evaluation of collateral values.

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Expected credit losses are estimated over the contractual term of the loan or lease, adjusted for expected prepayments when appropriate.

The contractual term excludes expected extensions, renewals, and modifications unless management has a reasonable expectation at the reporting date that a TDR will be executed with an individual borrower or the extension or renewal options are included in the contract at the reporting date and are not unconditionally cancellable by the Company.

When the ACL, for pooled or individually evaluated loans and leases, is estimated using the DCF method, the effective interest rate used to discount expected cash flows is adjusted for expected prepayments.

The contractual term excludes expected extensions, renewals, and modifications unless management has a reasonable expectation at the reporting date that a modification will be executed with an individual borrower or the extension or renewal options are included in the contract at the reporting date and are not unconditionally cancellable by the Company.

When the ACL, for pooled or individually evaluated loans and leases, is estimated using the DCF method, the EIR used to discount expected cash flows is adjusted for expected prepayments.

When management determines that foreclosure is probable or when the borrower is experiencing financial difficulty at the reporting date and repayment is expected to be provided substantially through the operation or sale of the collateral, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.

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The estimate is influenced by historical loss experience, adjusted for current risk characteristics, and economic forecasts.

The balance of the allowance for off-balance sheet credit exposures was $ 1.5 million and $ 739 thousand at December 31, 2022 and 2021, respectively, and is recorded in other expense in the consolidated statements of income and other liabilities in the consolidated balance sheets.

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

The balance of the allowance for off-balance sheet credit exposures was $ 4.8 million and $ 1.5 million at December 31, 2023 and 2022, respectively, and is recorded in other expense in the consolidated statements of income and other liabilities in the consolidated balance sheets.

Equipment Leasing

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

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

Equipment purchased to fulfill commitments to commercial renewable energy projects is leased out under operating leases while leases of equipment outside of the renewable energy vertical are generally direct financing leases.

Accordingly, leased assets under operating leases are included in premises and equipment while leased assets under direct financing leases are included in loans and leases held for investment in the consolidated balance sheets.

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Direct Financing Leases

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The Company retains ownership of the equipment and associated tax benefits such as investment tax credits and accelerated depreciation.

At the end of the lease term, the lessee has the option to renew the lease for two additional terms or purchase the equipment at current fair market value.

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.

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The Company determines fair value based upon the condition of the rental equipment and the projected net cash flows from its rental and sale considering current market conditions.

During the year ended December 31, 2021, the Company recognized impairment expense of $ 904 thousand related to rental equipment.

No impairment expense was recorded for the years ended December 31, 2022 and 2020.

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

During the years ended December 31, 2023 and December 31, 2021, the Company recognized impairment expense of $ 499 thousand and $ 904 thousand, respectively, related to rental equipment.

No impairment expense was recorded during the year ended December 31, 2022.

Premises and Equipment

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Solar panels 20 - 25

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Foreclosed Assets

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Industry practice recognizes adequate compensation for servicing SBA and USDA loans as 25 basis points.

The fair value of the servicing asset is measured at the discounted present value of the excess servicing spread over the expected life of the related loan using appropriate discount rates and assumptions based on industry statistics for prepayment speeds.

Servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets and are carried at fair value.

Generally, purchased servicing rights are capitalized at the cost to acquire the rights.

For sales of loans, a portion of the cost of originating the loan is allocated to the servicing right based on fair value.

Fair value is based on market prices for comparable servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income.

The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as adequate compensation for servicing, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses, with the prepayment speed being one of the most sensitive assumptions.

Capitalized servicing rights are carried at fair value as of the reporting date.

Servicing assets are recognized as separate assets measured at fair value when a loan is sold.

Servicing rights recognized through the sale of government guaranteed loans are carried at fair value as of the reporting date.

Changes to fair value are reported in loan servicing asset revaluation in the consolidated statements of income.

Servicing rights recognized through the sale of conventional loans are amortized over the period of estimated future net servicing life of the underlying assets and are evaluated quarterly for impairment by comparing the amortized cost to the estimated fair value.

Servicing fee income is recorded for fees earned for servicing loans.

The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned.

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Derivative Financial Instruments

Interest Rate Futures Contracts

The Company may use exchange-traded interest rate futures contracts to manage interest rate risk that may impact expected gains arising from future secondary market loan sales.

All derivative contracts were closed out in December 2020 and there was no further activity in subsequent periods.

The Company had not designated any derivative as a hedging instrument under applicable accounting guidance.

Changes in fair value of the derivative contracts is recorded as a component of net gains on sales of loans on the consolidated statements of income.

The Company recognized a loss of $ 2.6 million on the derivative contracts for the year ended December 31, 2020, respectively.

Equity Warrant Assets

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Similar to other loan fees, the yield adjustment related to grant date fair value of warrants is recognized over the life of that credit facility.

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Any changes in fair value from the grant date fair value of equity warrant assets classified as derivatives are recognized as increases or decreases to other assets on the consolidated balance sheets and as net gains or losses on derivative instruments, in other noninterest income, a component of consolidated net income.

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An impairment loss establishes a new basis in the goodwill and subsequent reversals of goodwill impairment losses are not permitted under applicable accounting guidance.

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For intangible assets subject to amortization, the recoverability test is performed when a triggering event occurs and an impairment loss is recognized if the carrying value of the intangible asset is not recoverable and exceeds fair value.

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An impairment loss is recognized if the carrying value of the intangible asset with an indefinite life exceeds its fair value.

The carrying amounts and accumulated amortization of all intangible assets as of December 31, 2022 was $ 1.9 million and $ 421 thousand, respectively, while at December 31, 2021 the balances were $ 2.0 million and $ 268 thousand, respectively, all as a result of the JAM acquisition discussed earlier under Business Combinations.

As of December 31, 2023 and 2022, the Company had $ 1.8 million of goodwill.

The carrying amounts and accumulated amortization of all intangible assets as of December 31, 2023 was $ 1.7 million and $ 573 thousand, respectively, while at December 31, 2022 the balances were $ 1.9 million and $ 421 thousand, respectively.

Intangible assets are almost entirely comprised of customer relationships that are being amortized using the straight-line method over 15 years.

The Company had no impairment charges related to business combinations in 2023, 2022 or 2021.

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Long-Lived Assets Reclassified to Held for Sale

During 2020, the Company determined that retention of two of its aircraft was ineffective in serving the needs of an expanding nationwide customer base.

As a result of the determination to sell, the Company began marketing the aircraft for sale and accordingly reclassified them from premises and equipment, net to other assets.

The total amount reclassified out of premises and equipment was $ 19.2 million and after assessment of fair value, $ 1.3 million of that balance was recognized as impairment expense included in the other expense line item in the 2020 consolidated statement of income.

Prior to December 31, 2020, one aircraft was sold for a minimal incremental loss with one remaining in other assets with a carrying amount of $ 8.9 million at December 31, 2020.

In 2021, the remaining held for sale aircraft was sold with a gain of $ 114 thousand.

During 2023, the Company determined retention of two of its aircraft, included in the Banking segment, 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 and accordingly reclassified them from premises and equipment, net to other assets.

The total amount reclassified out of premises and equipment, net was $ 30.2 million.

Prior to December 31, 2023, one aircraft was sold for a $ 4.4 million gain and is reflected in the 2023 consolidated statement of income in other noninterest income with one aircraft remaining in other assets with a carrying amount of $ 16.0 million at December 31, 2023.

During 2021, an aircraft previously reclassified to held for sale was sold for a gain of $ 114 thousand.

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

On June 11, 2014, the Company amended its Articles of Incorporation to create two classes of common stock.

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During 2022, 125,024 shares of Class B common stock (non-voting) were converted to Class A common stock (voting) in connection with private sales.

During 2021, 982,733 shares of Class B common stock (non-voting) were converted to Class A common stock (voting) in connection with private sales.

This conversion decreased the value of Class B common stock (non-voting) and increased the value of Class A common stock (voting) by $ 1.3 million and $ 10.4 million during 2022 and 2021, respectively.

This conversion decreased the value of Class B common stock (non-voting) and increased the value of Class A common stock (voting) by $ 1.3 million.

Advertising Expense

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These costs are included in advertising and marketing expense as presented in the consolidated statements of income.

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities (excluding deferred tax assets and liabilities related to business combinations or components of other comprehensive income).

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The only components of other comprehensive income consist of realized and unrealized gains and losses related to investment securities available-for-sale.

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Stock Compensation Plans

The Company recognizes compensation cost based on the fair value of the equity or liability instruments issued.

The Company recognizes compensation cost based on the fair value of the equity instruments issued.

The expense measures the cost of employee services received in exchange for stock options and restricted stock based on the grant-date fair value of the award and recognizes the cost over the vesting period for all awards within an individual grant, including ones with graded vesting features.

The fair value of the restricted stock awards or units with a market price condition and implied service period are calculated using the Monte Carlo Simulation method.

The fair value of restricted stock awards or units with a market price condition and implied service period are calculated using the Monte Carlo Simulation method.

The impact of forfeitures on stock-based compensation expense is recognized as forfeitures occur.

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Fair Value of Financial Instruments for further discussion and detail.

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Earnings Per Share

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Incremental costs of obtaining a contract are expensed when incurred when the amortization period is one year or less.

As of December 31, 2022, 2021 and 2020, remaining performance obligations consisted primarily of serviced based revenues for contracts with an original expected length of two years or less.

Service based revenues are included in other noninterest income and consist of other recurring revenue streams from services provided by the Bank for advisory and successful transactions, GLS to its clients for settlement, accounting and valuation for government guaranteed loan sales and holdings, fund investment advisory services performed by Canapi Advisors, and investment management and financial planning services provided by Live Oak Private Wealth.

As of December 31, 2023, 2022 and 2021, remaining performance obligations consisted primarily of service based revenues for contracts with an original expected length of two years or less.

Service based revenues are included in other noninterest income in the consolidated statements of income and consist of other recurring revenue streams from services provided by the Bank for advisory and successful transactions, GLS to its clients for settlement, accounting and valuation for government guaranteed loan sales and holdings, fund investment advisory services performed by Canapi Advisors, and investment management and financial planning services provided by Live Oak Private Wealth.

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Service Based Revenues

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Fund management fees are calculated as a percentage of committed capital, net of any permitted offsets, and are collected in advance and recognized quarterly.

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Live Oak Private Wealth’s investment management and financial planning performance obligations are generally satisfied over time.

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Reclassifications

Certain reclassifications have been made to the prior period’s consolidated financial statements to place them on a comparable basis with the current year.

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

Loan and Lease Classes

During the fourth quarter of 2022, management made changes to loan and lease classes to align the presentation in the credit quality disclosures in Note 3.

Loans and Leases Held for Investment and Credit Quality with the Company’s method for monitoring and assessing credit risk.

As a result, loans and leases to customers that operate renewable energy projects, lodging facilities, and municipalities were reclassified from the Specialty Lending class into the Energy & Infrastructure class.

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.

Recent Accounting Pronouncements

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

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

In December 2022, ASU 2022-06 “Reference Rate Reform (Topic 848):

Deferral of the Sunset Date of Topic 848” was issued deferring the sunset date of Topic 848.

As subsequently amended, the ASU can be adopted by the Company through December 31, 2024.

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

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Treasury rate.

For currently outstanding LIBOR-based loans, the timing and manner in which each customer’s contract transitions from LIBOR to another rate will vary on a case-by-case basis.

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

As of December 31, 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.

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Additionally, for public business entities, ASU 2022-02 requires that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of ASC 326-20, Financial Instruments – Credit Losses – Measured at Amortized Cost .

The amendments in this standard will be effective for the Company on January 1, 2023.

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

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

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

In June 2022, the FASB issued ASU No.

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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.

In October 2023, the FASB issued ASU No.

2023-06 “Disclosure Improvements - Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative” (“ASU 2023-06”).

ASU 2023-06 amends the ASC to incorporate certain disclosure requirements from SEC Release No.

33-10532 - Disclosure Update and Simplification that was issued in 2018.

The effective date for each amendment will be the date on which the SEC’s removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited.

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

In November 2023, the FASB issued ASU No.

2023-07 “Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures” (“ASU 2023-07”).

ASU 2023-07 improves reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses.

The amendments in this standard will be effective for the Company for the fiscal year ended December 31, 2024 and subsequent interim periods.

The amendments will be applied retrospectively to all prior periods in the consolidated financial statements.

The Company is currently evaluating the impact the amendments will have on the consolidated financial statements and related disclosures.

In December 2023, the FASB issued ASU No.

2023-09 “Income Taxes (Topic 740):

Improvements to Income Tax Disclosures” (“ASU 2023-09”).

ASU 2023-09 requires enhanced income tax disclosures primarily related to the rate reconciliation and income taxes paid information to provide more transparency by requiring (i) consistent categories and greater disaggregation of information in the rate reconciliation table and (ii) income taxes paid, net of refunds, to be disaggregated by jurisdiction based on an established threshold.

The amendments in this standard will be effective for the Company on January 1, 2025.

The Company is currently evaluating the impact the amendments will have the consolidated financial statements and related disclosures.

Live Oak Bancshares, Inc.

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Gains Unrealized

US government agencies $ 16,080 $ — $ 412 $ 15,668

government agencies $ 17,809 $ 2 $ 282 $ 17,529

Mortgage-backed securities 1,216,624 466 111,498 1,105,592

Municipal bonds 3,200 — 161 3,039

Other debt securities 500 — — 500

Total $ 1,237,633 $ 468 $ 111,941 $ 1,126,160

December 31, 2022

US government agencies $ 10,444 $ 193 $ — $ 10,637

government agencies $ 16,080 $ — $ 412 $ 15,668

Mortgage-backed securities 1,116,387 270 121,083 995,574

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

During the year ended December 31, 2022, two securities totaling $ 7.5 million matured and twenty securities totaling $ 36.5 million were paid out.

During the year ended December 31, 2021, one security totaling $ 5.0 million matured and twelve securities totaling $ 33.1 million were paid out.

During the year ended December 31, 2020, four securities totaling $ 12.0 million matured and twenty securities totaling $ 29.6 million were sold resulting in a net gain of $ 1.9 million, which consisted of $ 2.0 million gross realized gains and $ 136 thousand gross realized losses.

During the year ended December 31, 2023, three securities totaling $ 13.0 million were called and four securities totaling $ 7.0 million were settled.

During the year ended December 31, 2022, two securities totaling $ 7.5 million matured and twenty securities totaling $ 36.5 million were settled.

During the year ended December 31, 2021, one security totaling $ 5.0 million matured and twelve securities totaling $ 33.1 million were settled.

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.

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Value Unrealized

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

government agencies $ — $ — $ 15,057 $ 282 $ 15,057 $ 282

Mortgage-backed securities 138,823 3,431 886,699 108,067 1,025,522 111,498

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Value Unrealized

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

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

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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 December 31, 2023, there were 409 mortgage-backed securities, five U.S.

government agencies and two municipal bonds in unrealized loss positions for greater than 12 months.

There were 27 mortgage-backed securities in unrealized loss positions for less than 12 months.

Unrealized losses at December 31, 2022 consisted of 185 mortgage-backed securities and one municipal bond for greater than 12 months.

There were 236 mortgage-backed securities, five U.S.

government agencies, and one municipal bond in unrealized loss positions for less than 12 months.

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

At December 31, 2022, there were 185 mortgage-backed securities and one municipal bond in unrealized loss positions for greater than 12 months.

There were 236 mortgage-backed securities, five US government agencies, and one municipal bond in unrealized loss positions for less than 12 months.

Unrealized losses at December 31, 2021 consisted of 31 mortgage-backed securities and one municipal bond for greater than 12 months and 142 mortgage-backed securities in unrealized loss positions for less than 12 months.

These unrealized losses are primarily the result of non-credit-related volatility in the market and market interest rates.

Since none of the unrealized losses relate to marketability of the securities or the issuer’s ability to honor redemption obligations, and the Company has the intent and ability to hold these securities for a sufficient period of time to recover unrealized losses, none of the losses have been recognized in the Company’s consolidated statement of income.

Since none of the unrealized losses relate to the issuer’s ability to honor redemption obligations, and the Company does not intend to sell the related securities and does not believe it is more likely than not that it will be required to sell the securities before recovery of amortized cost, none of the losses have been recognized in the Company’s consolidated statement of income.

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

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Amortized Cost Fair Value

US government agencies

government agencies

Within one year $ 3,000 $ 2,976

One to five years 12,430 12,218

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Mortgage-backed securities

Within one year 12,358 12,319

One to five years 179,740 170,908

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Municipal bonds

Five to ten years 3,103 2,954

After 10 years 97 85

Total 3,200 3,039

Other debt securities

Within one year 500 500

Total $ 1,237,633 $ 1,126,160

Total $ 1,136,190 $ 1,014,719

The table above reflects contractual maturities.

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

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Equity Investments

1 unchanged sentence

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

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Equity Method Accounting

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Canapi Ventures Fund II, LP (3) (5) (9)

7,412 1.6 % — N/A

7,232 1.6 7,412 1.6

Canapi Ventures SBIC Fund II, LP (4) (5) (8)

7,981 3.7 % — N/A

Other fintech investments in private companies (6)

241 4.3 % 5,330 Various

7,611 2.9 7,981 3.7

Other investments in fintech private companies (6)

Other (7) (8)

22,932 Various 12,476 Various

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(2) Includes unfunded commitments of $ 559 thousand and $ 617 thousand as of December 31, 2023 and 2022, respectively.

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

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

(4) Includes unfunded commitments of $ 7.5 million as of December 31, 2022.

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

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

All Canapi Fund investments are unconsolidated VIEs.

See Variable Interest Entities section below.

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

On August 31, 2022, the Company sold its investment in Payrailz, LLC, resulting in a pre-tax gain of $ 28.4 million, and on April 1, 2022, the Company sold its investment in Finxact, Inc.

resulting in a pre-tax gain of $ 120.8 million.

As of December 31, 2021 Other Fintech investments include Finxact, Inc., Payrailz, LLC and Kwipped, Inc.

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

(7) As of December 31, 2022, Other investments include solar income tax credit investments in Green Sun Tenant LLC (“Green Sun”), SVA 2021-2 TE Holdco LLC (“Sun Vest”), and EG5 CSPI Holding LLC (“HEP”), which the Company holds a 99.0 % limited member interest in all investments.

Also included within Other investments are Cape Fear Collective Impact Opportunity 1 LLC (“Cape Fear Collective 1”) and Cape Fear Collective Impact Opportunity 2 LLC (“Cape Fear Collective 2”), which the Company holds 99.0 % and 32.3 % limited member interests, respectively.

As of December 31, 2022, an unfunded commitment of $ 2.6 million was recorded as a liability for HEP.

As of December 31, 2021, Other investments included Green Sun and Cape Fear Collective 1, each with limited member interests of 99.0 %.

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

All Other investments are unconsolidated VIEs.

See Variable Interest Entities section below.

(3) Includes unfunded commitments of $ 6.3 million and $ 6.9 million as of December 31, 2023 and 2022, respectively.

(4) Includes unfunded commitments of $ 7.1 million and $ 7.5 million as of December 31, 2023 and 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 included Kwipped, Inc.

As of December 31, 2023, the investment has been moved to equity security as the preferred shares do not qualify as in-substance common stock.

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

Also included in Other investments are solar income tax credit investments in Green Sun Tenant, LLC (“Green Sun”), SVA 2021-2 TE Holdco, LLC (“Sun Vest”), EG5 CSP1 Holding, LLC (“HEP”) and HRE MM I, LLC (“Heelstone”), 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 91.0 %, 32.3 %, and 11.5 % of limited member interests, respectively.

As of December 31, 2023, there was an unfunded commitment of $ 7.7 million for Estrella Landing.

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 December 31, 2023, this commitment has been funded.

Managing control of the above investments resides with the managing members.

(8) Investments reported in Banking segment.

(9) Investments reported in Other segment.

Live Oak Bancshares, Inc.

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Downward changes for observable prices ( 1,610 ) ( 1,524 ) — —

Net upward change $ 50,406 $ 2,022 $ 30,197 $ 14,558

(1) Includes $ 3.0 million, $ 2.8 million and $ 522 thousand in unfunded commitments for the years ended December 31, 2022, 2021 and 2020, respectively.

Net upward (downward) change $ 48,882 $ ( 1,524 ) $ 2,022 $ 30,197

(1) Includes $ 2.3 million, $ 3.0 million and $ 2.8 million in unfunded commitments for the years ended December 31, 2023, 2022 and 2021, respectively.

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

For the twelve months ended December 31, 2022, 2021 and 2020, the Company recognized unrealized gains on all equity securities still held at the reporting date of $ 1.9 million, $ 44.0 million, and $ 14.6 million, respectively.

For the twelve months ended December 31, 2023, 2022 and 2021, the Company recognized unrealized (losses) gains on all equity securities still held at the reporting date of $( 1.5 ) million, $ 1.9 million, and $ 44.0 million, respectively.

Variable Interest Entities

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Solar Renewable Energy Tax Credit Investments

The Company has limited interest in several limited liability companies that own and operate solar renewable energy projects which are accounted for as equity method investments.

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 .

The Company’s limited partnership investments in the Canapi Funds focus on providing venture capital to new and emerging financial technology companies.

After initial commitment and over the course of the investment period, the Company will make capital contributions and receive profit and return of capital distributions as a result of fund performance until the funds wind down.

These fund investments are accounted for under the equity method due to the Company’s participation as an investment advisor.

Live Oak Bancshares, Inc.

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Non-marketable and Other Equity Investments

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

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.

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Investments may only be sold or transferred subject to the notice and approval provisions of the underlying investment agreement.

Additionally, the Company has a limited interest in two limited liability companies that invest in the acquisition, rehabilitation, or new construction of local qualified housing projects which are accounted for as equity method investments.

The above investments meet the criteria of a VIE, however, the Company is not the primary beneficiary of the entities, as it does not have the power to direct the activities that most significantly impact the economic performance of the entities.

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

The Company’s maximum exposure to loss from unconsolidated VIEs includes the investment recorded on the Company’s consolidated balance sheets, net of any impairment recognized, and previously recorded tax credits which remain subject to recapture by taxing authorities based on compliance features required to be met at the project level.

While the Company believes the potential for losses from this investment is remote, the maximum exposure was determined by assuming a scenario where related tax credits were recaptured.

The 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 consolidated balance sheets.

The Company’s maximum exposure to loss from unconsolidated VIEs includes the investment recorded on the Company’s consolidated balance sheets.

For solar tax credit 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.

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

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

Solar tax credit investments $ 5,221 $ 24,295 $ 2,641 Other assets & other liabilities (1)

Solar tax credit investments $ 6,714 $ 38,228 $ — Other assets (1)

Affordable housing 15,611 15,611 7,715 Other assets & other liabilities (2)

Canapi Funds 35,300 35,300 18,930 Other assets & other liabilities

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

Solar tax credit investments $ 708 $ 4,100 $ — Other assets (2)

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

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(1) Maximum exposure to loss represents $ 6.7 million of current investments and a scenario in which $ 31.5 million in related tax credits are recaptured.

(2) Maximum exposure to loss represents $ 708 thousand of current investments and a scenario in which $ 4.1 million in related tax credits are recaptured.

(2) Maximum exposure to loss represents $ 15.6 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.

Live Oak Bancshares, Inc.

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These typically include small businesses and professional practices.

Commercial real estate loans may also include government guaranteed loans secured by collateral in the form of residential real estate.

Repayment of such loans generally comes from the generation of cash flow as the result of the borrower’s business operations.

Commercial Land

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Underwriting generally involves intensive analysis of the financial strength of the borrower and guarantor, liquidation value of the subject collateral, and any available secondary sources of repayment, with the greatest emphasis given to a borrower’s capacity to meet cash flow coverage requirements as set forth by Bank policies.

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

The loan and lease portfolio is further grouped into one of the following classes (also referred to as divisions):

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These loans and lease classes were determined based on industry risk characteristics and management’s method for monitoring credit risk and managing those lending divisions.

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Past Due Loans and Leases

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The following tables show an age analysis of past due loans and leases as of the dates presented.

December 31, 2022 Current 30-89 Days

December 31, 2023 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

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Total $ 8,139,864 $ 41,231 $ 86,734 $ 127,965 $ 8,267,829 $ 388,036 $ 8,655,865

Net deferred fees $ ( 4,434 )

Retained Loan Discount and Net Deferred Costs $ ( 22,018 )

Loan and Leases, Net $ 8,633,847

3 unchanged sentences

Notes to Consolidated Financial Statements

December 31, 2021 Current 30-89 Days

December 31, 2022 Current or Less than 30 Days Past Due 30-89 Days

90 Days or More Past Due Total Past Due Total Carried at Amortized

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Total $ 6,786,593 $ 37,232 $ 30,329 $ 67,561 $ 6,854,154 $ 494,458 $ 7,348,612

Net deferred fees $ ( 5,604 )

Retained Loan Discount and Net Deferred Costs $ ( 4,434 )

Loan and Leases, Net $ 7,344,178

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Total $ 2,036,254 $ 2,193,204 $ 1,853,492 $ 860,080 $ 500,089 $ 417,584 $ 326,786 $ 80,340 $ 8,267,829

Gross Charge-offs

Small Business Banking $ — $ 5,621 $ 6,435 $ 1,058 $ 1,225 $ 525 $ 1,097 $ — $ 15,961

Specialty Lending — — — — — — 7,966 — 7,966

Total $ — $ 5,621 $ 6,435 $ 1,058 $ 1,225 $ 525 $ 9,063 $ — $ 23,927

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Term Loans and Leases Amortized Cost Basis by Origination Year

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Nonaccrual loans and leases as of December 31, 2023 and December 31, 2022 are as follows:

December 31, 2022 Loan and Lease Balance (1)

December 31, 2023 Loan and Lease

Guaranteed Balance Unguaranteed Balance Unguaranteed Exposure with No ACL

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Small Business Banking $ 47,558 $ 39,018 $ 8,540 $ 407

Specialty Lending 3,647 384 3,263 —

Energy & Infrastructure 6,850 2,794 4,056 2,546

Total 54,408 41,812 12,596 2,953

Construction & Development

Small Business Banking 1,745 1,309 436 —

Total 1,745 1,309 436 —

Commercial Real Estate

Small Business Banking 57,140 44,426 12,714 8,199

Specialty Lending 12,032 — 12,032 12,032

Energy & Infrastructure 3,072 2,799 273 —

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Notes to Consolidated Financial Statements

December 31, 2021 Loan and Lease Balance (1)

December 31, 2022 Loan and Lease

Guaranteed Balance Unguaranteed Balance Unguaranteed Exposure with No ACL

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Small Business Banking $ 25,968 $ 19,686 $ 6,282 $ 407

Payroll Protection Program 1,482 1,482 — —

Total 18,393 15,463 2,930 —

Construction & Development

Small Business Banking 3,884 1,201 2,683 —

Energy & Infrastructure 3,082 2,794 288 288

Total 29,050 22,480 6,570 695

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Total $ 73,392 $ 54,608 $ 18,784 $ 4,502

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

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

Fair Value of Financial Instruments for additional information.

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:

Twelve Months Ended December 31,

Commercial & Industrial $ 2,212 $ 619

Commercial Real Estate 1,041 833

Commercial Land — 127

Construction & Development 56 —

Total $ 3,309 $ 1,579

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

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Small Business Banking $ 2,730 $ 371 $ — $ 414 $ 371 $ — $ 291

Total 698 7,475 — 152 449 — 235

Construction & Development

Specialty Lending 3,858 — — 2,657 — — 57

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

Total 19,108 371 — 13,997 371 — 291

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

Energy & Infrastructure 512 — — 6 — — —

Total 15,286 — — 6,440 — — 152

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Allowance for Credit Losses – Loans and Leases

On January 1, 2020, the Company adopted ASC 326.

The Company maintains the ACL at levels management believes represents the future expected credit losses in the loan and lease portfolios as of the balance sheet date.

Organization and Summary of Significant Accounting Policies for a description of the methodologies used to estimate credit losses under ASC 326.

Organization and Summary of Significant Accounting Policies for a description of the methodologies used to estimate credit losses.

The following tables detail activity in the allowance for credit losses for the periods presented:

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

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

Charge offs ( 22,510 ) — ( 1,417 ) — ( 23,927 )

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December 31, 2021

Beginning Balance, prior to adoption of ASC 326 $ 15,757 $ 2,732 $ 8,427 $ 1,318 $ 28,234

Impact of adopting ASC 326 ( 4,561 ) 1,131 1,916 193 ( 1,321 )

Beginning Balance $ 26,941 $ 5,663 $ 18,148 $ 1,554 $ 52,306

Charge offs ( 2,912 ) ( 262 ) ( 2,731 ) ( 12 ) ( 5,917 )

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

During the year ended December 31, 2023, the ACL increased primarily as a result of loan growth 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.

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

Live Oak Bancshares, Inc.

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

During the year ended December 31, 2020, increases to the ACL were primarily related to the severity of forecasted unemployment rates and ongoing developments as a result of the COVID-19 pandemic.

Unemployment rates were forecasted for twelve months followed by a twelve-month straight-line reversion period.

Additionally, the provision expense was impacted by loan and lease growth and net charge-offs during the period.

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.

Twelve Months Ended December 31, 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 $ 10,090 $ 5,127 $ 3,330 $ 361 0.3 %

Specialty Lending — 708 — 4,133 0.3

Energy & Infrastructure — 13,485 — — 1.4

Total $ 10,090 $ 19,320 $ 3,330 $ 4,494 2.0 %

As of December 31, 2023, the Company had commitments to lend additional funds to these borrowers totaling $ 1.2 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 December 31, 2023.

Current 30-89 Days

Past Due 90 Days or More Past Due Total Past Due

Small Business Banking $ 18,908 $ — $ — $ —

Specialty Lending 4,841 — — —

Energy & Infrastructure 13,485 — — —

Total $ 37,234 $ — $ — $ —

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

Twelve Months Ended December 31, 2023

Weighted Average

Interest Rate Reduction Weighted Average

Term Extension (in Months)

Small Business Banking 1.41 % 67

Specialty Lending — 67

Energy & Infrastructure — 15

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

Live Oak Bancshares, Inc.

Notes to 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.

Prior to January 1, 2023, a loan or lease was accounted for as a TDR if the Company, for reasons related to the borrower’s financial difficulties, restructured a loan or lease, and granted a concession to the borrower that it would not otherwise grant.

A TDR typically involved a more than short-term modification of terms such as a reduction of the interest rate below the current market rate for a loan or lease with similar risk characteristics or the waiving of certain financial covenants without corresponding offsetting compensation or additional support.

The following table represents the types of TDRs that were made during the periods presented:

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Fair Value of Financial Instruments for additional information.

Twelve months ended December 31, 2020

Interest Only Payment Deferral Extend Amortization Other (1)

Total TDRs (2)

Recorded investment at period end Number of

Loans Recorded investment at period end Number of

Recorded investment at period end Number of

investment at period end

Commercial & Industrial

Small Business Banking — $ — 6 $ 1,895 — $ — 1 $ 170 7 $ 2,065

Specialty Lending — — — — 2 423 — — 2 423

Total — — 6 1,895 2 423 1 170 9 2,488

Construction & Development

Small Business Banking — — — — 1 1,787 — — 1 1,787

Total — — — — 1 1,787 — — 1 1,787

Commercial Real Estate

Small Business Banking — — 2 3,738 — — — — 2 3,738

Energy & Infrastructure — — 1 3,627 — — 2 12,219 3 15,846

Total — — 3 7,365 — — 2 12,219 5 19,584

Commercial Land

Small Business Banking — — — — 1 4,865 — — 1 4,865

Total — — — — 1 4,865 — — 1 4,865

Total — $ — 9 $ 9,260 4 $ 7,075 3 $ 12,389 16 $ 28,724

(1) Includes one small business banking interest only and rate concession TDR ($ 170 thousand), and two energy & infrastructure interest only and rate concession TDRs ($ 12.2 million).

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

Fair Value of Financial Instruments for additional information.

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

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

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The TDR that defaulted was a commercial real estate small business banking loan that had previously been modified for a payment deferral and had a recorded investment of $ 50 thousand at December 31, 2021.

No TDRs were modified within the twelve months ended December 31, 2020 subsequently defaulted during the twelve months ended December 31, 2020.

Lessor Equipment Leasing

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

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

Equipment purchased to fulfill commitments to commercial renewable energy projects is rented out under operating leases while leases of equipment outside of the renewable energy vertical are generally direct financing leases.

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.

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Direct Financing Leases

The gross lease payments receivable and the net investment included in accounts receivable for such leases are as follows:

The gross lease payments receivable and the net investment included in loans and leases held for investment are as follows:

As of December 31,

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Interest income of $ 253 thousand, $ 393 thousand and $ 669 thousand was recognized in the twelve months ended December 31, 2023 , 2022 and 2021 , respectively.

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Operating Leases

As of December 31, 2022 and 2021 , the Company had a net investment of $ 114.2 million and $ 123.9 million, respectively, in assets included in premises and equipment that are subject to operating leases.

Of the net investment, the gross balance of the assets was $ 163.4 million as of December 31, 2022 and 2021 and accumulated depreciation was $ 49.2 million and $ 39.5 million as of December 31, 2022 and 2021 , respectively.

As of December 31, 2023 and 2022 , the Company had a net investment of $ 104.0 million and $ 114.2 million, respectively, in assets included in premises and equipment, net in the consolidated balance sheets that are subject to operating leases.

Of the net investment, the gross balance of the assets was $ 162.3 million and $ 163.4 million as of December 31, 2023 and 2022, respectively, and accumulated depreciation was $ 58.3 million and $ 49.2 million as of December 31, 2023 and 2022 , respectively.

Depreciation expense recognized on these assets for the twelve months ended December 31, 2023 , 2022 and 2021 was $ 9.6 million, $ 9.7 million and $ 9.7 million, respectively.

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If it is determined to be or contain a lease, then the lease is classified as an operating or finance lease.

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Right-of-use assets represent the Company's right to use an underlying asset for the lease term.

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Lease expense for operating leases and finance leases is included in occupancy expense in the consolidated statements of income and interest expense for finance leases is included in borrowings interest expense in the consolidated statements of income.

The Company has operating leases for real property, land, copiers and other equipment.

The Company has operating leases for real property and land.

These leases have remaining lease terms of less than 1 year to 23 years, some of which include options to extend the leases for up to 20 years, and some of which include options to terminate the leases.

1 unchanged sentence

The Company had a finance lease for fitness equipment, which matured during the year ended December 31, 2022.

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

The components of lease expense are as follows:

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Total net lease cost $ 943 $ 1,327

Supplemental disclosure for the consolidated balance sheets related to operating and finance leases is as follows:

Supplemental disclosure for the consolidated balance sheets related to operating leases is as follows:

December 31, 2023 December 31, 2022

1 unchanged sentence

Operating lease liability 3,180 2,558

Finance lease right-of-use asset — 4

Finance lease liability — 4

The weighted average remaining lease term and weighted average discount rate for leases are as follows:

2 unchanged sentences

Operating leases 10.58 10.62

Finance lease 0 0.92

Weighted average discount rate

Operating leases 3.64 % 3.14 %

Finance lease — % 3.10 %

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

A maturity analysis of operating lease liabilities is as follows:

4 unchanged sentences

Total lease liabilities $ 3,180

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Servicing Assets

Loans serviced for others are not included in the accompanying consolidated balance sheets.

Loans serviced for others are not included in the consolidated balance sheets.

The unpaid principal balances of loans serviced for others requiring recognition of a servicing asset were $ 3.09 billion, $ 2.67 billion and $ 2.29 billion at December 31, 2023, 2022 and 2021 , respectively.

The unpaid principal balance for all loans serviced for others was $ 4.24 billion, $ 3.48 billion and $ 3.30 billion at December 31, 2023, 2022 and 2021 , respectively.

The following summarizes the activity pertaining to servicing rights:

The following summarizes the activity pertaining to servicing rights measured at fair value:

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

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Due to changes in valuation inputs or assumptions (1)

14,297 ( 5,934 )

Decay due to increases in principal paydowns or runoff ( 9,411 ) ( 10,643 )

Balance at end of period $ 48,186 $ 26,323

The fair value of servicing rights was determined using a weighted average discount rate of 20.8 % on December 31, 2022 and 13.2 % on December 31, 2021.

The fair value of servicing rights was determined using a weighted average prepayment speed of 15.7 % on December 31, 2022 and 16.2 % on December 31, 2021, with the actual rate depending on the stratification of the specific right.

Changes to fair value are reported in loan servicing asset revaluation within the consolidated statements of income.

The fair value of servicing rights is highly sensitive to changes in underlying assumptions.

Changes in prepayment speed assumptions have the most significant impact on the fair value of servicing rights.

Generally, as interest rates rise on variable rate loans, loan prepayments increase due to an increase in refinance activity, which results in a decrease in the fair value of servicing assets.

However, weakening economic conditions or significant declines in interest rates can also increase loan prepayment activity.

Measurement of fair value is limited to the conditions existing and the assumptions used as of a particular point in time, and those assumptions may not be appropriate if they are applied at a different time.

(1) The twelve month period ended December 31, 2023, includes a $ 13.7 million increase related to change in estimate implemented on July 1, 2023.

Fair Value of Financial Instruments for further details about servicing assets measured at fair value.

As of December 31, 2023, the Company had servicing assets related to conventional commercial loans carried at amortized cost of $ 405 thousand.

Live Oak Bancshares, Inc.

15 unchanged sentences

Premises and equipment, net of depreciation $ 257,881 $ 263,290

Deposits on fixed assets at December 31, 2022 consist primarily of software development costs, plane deposits and campus improvement costs.

Deposits on fixed assets at December 31, 2023 consist primarily of construction costs related to the Company’s planned fourth building, software development costs, plane deposits and campus improvement costs.

Depreciation expense for the years ended December 31, 2023, 2022 and 2021 amounted to $ 21.1 million, $ 20.6 million and $ 21.2 million, respectively.

In 2022, the Company purchased a building and land adjacent to its main campus for $ 18.3 million.

The building with a value of $ 11.3 million is temporarily idle and therefore included in deposits on fixed assets at December 31, 2022 as the Company formalizes plans for its campus expansion.

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

The building, with a value of $ 11.5 million and $ 11.3 million at December 31, 2023 and 2022, respectively, is temporarily idle and therefore included in deposits on fixed assets as the Company formalizes plans for its campus expansion.

The types of deposits at December 31, 2023 and 2022 are:

1 unchanged sentence

Interest-bearing deposits:

Interest-bearing checking 301,006 —

Money market 135,551 128,443

3 unchanged sentences

Total deposits $ 10,275,019 $ 8,884,928

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

The aggregate amount of time deposits in denominations of $250 thousand or more at December 31, 2023 and 2022 was approximately $ 695.6 million and $ 629.1 million, respectively.

3 unchanged sentences

Total $ 5,081,816

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Total outstanding borrowings consisted of the following:

4 unchanged sentences

$ 23,354 $ 33,203

In April 2020, the Company entered into the Federal Reserve Bank's Paycheck Protection Program Liquidity Facility (“PPPLF”).

Under the PPPLF, advances must be secured by pledges of loans to small businesses originated by the Company under the U.S.

Small Business Administration's 7(a) loan program titled the Paycheck Protection Program.

The PPPLF accrues interest at thirty-five basis points and matures at various dates equal to the maturity date of the PPPLF collateral pledged to secure the advance, and will be accelerated on and to the extent of any 7(a) loan forgiveness reimbursement by the SBA for any PPPLF collateral or the date of purchase by the SBA from the borrower of any PPPLF collateral.

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

The borrowing was paid in full at September 30, 2022.

In September 2020, the Company renewed a $ 50.0 million revolving line of credit originally issued in 2017 with a third party correspondent bank.

Subsequently on October 20, 2021, the Company renewed and increased the revolving line of credit from $ 50.0 million to $ 100.0 million and increased the term from 12 months to 36 months.

The line of credit is unsecured and accrues interest at 30-day SOFR plus 1.25 %, with an interest rate cap of 4.25 % and an interest rate floor of 2.75 %.

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

The terms of this loan require the Company to maintain minimum capital and debt service coverage ratios.

The Company paid the Lender a non-refundable $ 750 thousand loan origination fee upon signing of the Note that will be amortized into interest expense over the life of the loan.

The Company made an advance of $ 8.0 million on December 20, 2021 and $ 12.0 million on March 16, 2022.

The Company paid down this balance in full on May 20, 2022 and there is $ 100.0 million of available credit remaining at December 31, 2022.

On December 30, 2022, the Company made an advance of $ 50.0 million on an overnight Fed Funds line of credit that is unsecured with an interest rate of 4.65 % with $ 50.0 million of available credit remaining at December 31, 2022.

Other long term debt (1)

On December 30, 2022, the Company made an advance of $ 50.0 million on an overnight Fed Funds line of credit that is unsecured with an 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 December 31, 2023.

Total borrowings $ 23,354 $ 83,203

(1) Includes finance leases paid in full November 1, 2022.

As of December 31, 2023 and 2022, the Company’s total unused borrowing capacity was $ 3.68 billion and $ 3.55 billion, respectively, based upon securities and loans identified as available for collateral.

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, the Federal Reserve Bank’s Bank Term Funding Program, as well as access to a repurchase agreement.

If additional collateral is available, the Company’s aggregate approved borrowing capacity with all of the above sources is $ 6.28 billion and $ 4.88 billion as of December 31, 2023 and 2022, respectively.

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

These borrowings are secured by a blanket floating lien on qualifying loans with a balance of $ 2.74 billion and $ 2.81 billion as of December 31, 2023 and 2022, respectively.

At December 31, 2023 and 2022, the Company had approximately $ 2.21 billion and $ 2.35 billion, respectively, in borrowing capacity available under these arrangements with no outstanding balance as of December 31, 2023 or 2022.

On June 18, 2018, the Company entered into a borrowing agreement with the Federal Home Loan Bank of Atlanta.

These borrowings must be secured with eligible collateral approved by the Federal Home Loan Bank of Atlanta.

As of December 31, 2023 and 2022, there was $ 2.72 billion and $ 2.31 billion, respectively, of stated potential borrowing capacity available under this agreement, of which approximately $ 111.7 million and $ 983.8 million of securities are available for collateral, respectively.

There is no collateral pledged and no advances outstanding as of December 31, 2023 or 2022.

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

The Company may purchase federal funds through unsecured federal funds lines of credit with various correspondent banks, which totaled $ 130.0 million and $ 164.5 million as of December 31, 2023 and 2022, respectively.

1 unchanged sentence

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

The Company had $ 50.0 million in outstanding balances on the lines of credit as of December 31, 2022, and no outstanding balance on the lines of credit as of December 31, 2021.

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

The Company had no outstanding balance on the lines of credit as of December 31, 2023, and $ 50.0 million in outstanding balances on the lines of credit as of December 31, 2022.

In September 2023, the Company modified a $ 100.0 million revolving line of credit with a third party correspondent bank.

The line of credit is unsecured and accrues interest at 30-day SOFR plus 1.25 % with an interest rate floor of 2.75 %.

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 %.

Payments are interest only with all principal and accrued interest due at maturity.

The terms of this loan require the Company to maintain minimum capital and debt service coverage ratios.

The Company paid the Lender a non-refundable $ 250 thousand renewal fee upon modifying the Note that will be amortized into interest expense over the life of the loan.

As of December 31, 2023 and 2022, there was $ 100.0 million of available credit.

The Company may borrow funds 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.

As of December 31, 2023, there was $ 1.12 billion of potential borrowing capacity available and no outstanding balance.

The Company has entered into a repurchase agreement with a third party for up to $ 5.0 million as of December 31, 2023 and 2022.

2 unchanged sentences

The Company had no outstanding balance on the repurchase agreement as of December 31, 2023 and 2022.

On June 18, 2018, the Company entered into a borrowing agreement with the Federal Home Loan Bank of Atlanta.

These borrowings must be secured with eligible collateral approved by the Federal Home Loan Bank of Atlanta.

As of December 31, 2022 and 2021, there was $ 2.31 billion and $ 2.02 billion, respectively, of potential borrowing capacity available under this agreement.

There is no collateral pledged and no advances outstanding as of December 31, 2022 or 2021.

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

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

At December 31, 2022 and 2021, the Company had approximately $ 2.35 billion and $ 2.04 billion, respectively, in borrowing capacity available under these arrangements with no outstanding balance as of December 31, 2022 or 2021.

The components of income tax expense for the years ended December 31 are as follows:

4 unchanged sentences

Total current tax expense 31,093 6,987 18,985

Deferred income tax expense (benefit):

Deferred income tax (benefit) expense:

Federal ( 20,914 ) 23,838 22,886

State ( 1,247 ) 3,291 1,922

Total deferred tax expense (benefit) 27,129 24,808 ( 17,447 )

Income tax expense (benefit), as reported $ 34,116 $ 43,793 $ ( 12,154 )

Reported income tax expense (benefit) differed from the amounts computed by applying the U.S.

Total deferred tax (benefit) expense ( 22,161 ) 27,129 24,808

Income tax expense, as reported $ 8,932 $ 34,116 $ 43,793

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Reported income tax expense differed from the amounts computed by applying the U.S.

federal statutory income tax rate of 21 % in 2023, 2022 and 2021 to income before income taxes as follows:

1 unchanged sentence

Income tax expense computed at the statutory rate $ 17,394 $ 44,168 $ 44,266

State income tax expense (benefit), net of federal 5,899 6,426 ( 1,009 )

State income tax expense, net of federal 4,316 5,899 6,426

Stock-based compensation expense 2,084 73 ( 4,689 )

1 unchanged sentence

Amended return net benefits — ( 3,261 ) —

Net operating loss carryback arising from CARES Act — — ( 3,732 )

Other 1,528 3,598 1,182

Total income tax expense (benefit) $ 34,116 $ 43,793 $ ( 12,154 )

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Total income tax expense $ 8,932 $ 34,116 $ 43,793

Components of deferred tax assets and liabilities are as follows:

7 unchanged sentences

Goodwill and intangibles — 14

Mark to market on loans held for sale — 24,213

Unguaranteed loan discount 319 —

Deferred loan fees and costs, net 101 —

8 unchanged sentences

Operating lease right-of-use assets 680 511

Net unrealized gains on securities available for sale — 614

Goodwill and intangibles 19 —

Total deferred tax liabilities 62,550 81,564

Net deferred tax (liability) asset $ ( 13,375 ) $ ( 16,015 )

Net deferred tax asset (liability) $ 6,386 $ ( 13,375 )

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

The Company assesses the realizability of deferred tax assets at each reporting period and considers whether it is more likely than not that a deferred tax asset will not be realized.

4 unchanged sentences

The Company does not have material uncertain tax positions, interest or penalties recorded in the consolidated balance sheets or statements of income as of or for the years ended December 31, 2023, 2022 and 2021.

As of December 31, 2023, the Company was under audit by the Internal Revenue Service principally as it relates to prior energy credits.

Due to the complexities of uncertainties, the ultimate resolution may result in a liability that is materially different from the current estimate.

The Company files a consolidated income tax return in the U.S.

1 unchanged sentence

Generally, the Company’s federal and state tax returns are no longer subject to examination by the taxing authorities for years prior to 2015.

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Fair Value of Financial Instruments

8 unchanged sentences

The following sections provide a description of the valuation methodologies used for instruments measured at fair value on a recurring basis, as well as the general classification of such instruments pursuant to the fair value hierarchy:

Investment securities :

Investment securities available-for-sale :

Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy.

4 unchanged sentences

In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy.

Loans held for sale:

The fair values of loans held for sale accounted for under the fair value option are determined by discounting estimated cash flows using interest rates approximating prevailing market rates for similar loans adjusted to reflect the inherent credit risk.

Due to the nature of the valuation inputs, loans held for sale are classified within Level 3 of the valuation hierarchy.

Loans held for investment:

The fair values of loans held for investment accounted for under the fair value option are typically determined based on discounted cash flow analyses using market-based interest rate spreads.

Discounted cash flow analyses are adjusted, as appropriate, to reflect current market conditions and borrower-specific credit risk.

If the loan is collateral dependent, the fair value is determined based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date.

Fair value of the loan’s collateral is determined by appraisals, independent valuation, or management’s estimation of fair value which is then adjusted for the cost related to liquidation of the collateral.

The fair values of loans accounted for under the fair value option are determined using a DCF methodology.

The estimate incorporates assumptions that market participants would use to estimate fair value of similar assets such as prepayment speeds, default and severity rates, and a discount rate.

Due to the nature of the valuation inputs, loans held for investment are classified within Level 3 of the valuation hierarchy.

2 unchanged sentences

While sales of servicing rights do occur, the precise terms and conditions typically are not readily available.

Accordingly, the Company estimates the fair value of servicing rights using discounted cash flow models incorporating numerous assumptions from the perspective of a market participant including servicing income, servicing costs, market discount rates and prepayment speeds.

Accordingly, the Company estimates the fair value of servicing rights using discounted cash flow models incorporating numerous assumptions from the perspective of a market participant including servicing income, ancillary income, servicing costs, discount rates and prepayment speeds.

Due to the nature of the valuation inputs, servicing rights are classified within Level 3 of the valuation hierarchy.

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

The mutual fund is registered with the Securities and Exchange Commission as a closed-end, non-diversified management investment company and operates as an interval fund.

1 unchanged sentence

This investment is valued using quoted prices in markets that are not active and is classified as Level 2 within the valuation hierarchy.

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Equity warrant assets:

1 unchanged sentence

Option volatility assumptions used in the Black-Scholes model are based on public companies that operate in similar industries as the companies in the Company’s private company portfolio.

Option expiration dates are modified to account for estimates of actual life relative to stated expiration.

Values are further adjusted for a general lack of liquidity due to the private nature of the associated underlying company.

11 unchanged sentences

Investment securities available-for-sale

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

government agencies $ 17,529 $ — $ 17,529 $ —

Mortgage-backed securities 1,105,592 — 1,105,592 —

1 unchanged sentence

3,039 — 2,954 85

Other debt securities 500 — 500 —

Loans held for investment 388,036 — — 388,036

8 unchanged sentences

Investment securities available-for-sale

US government agencies $ 10,637 $ — $ 10,637 $ —

government agencies $ 15,668 $ — $ 15,668 $ —

Mortgage-backed securities 995,574 — 995,574 —

2 unchanged sentences

Other debt securities 500 — 500 —

Loans held for sale 25,310 — — 25,310

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

5 unchanged sentences

(1) During the year ended December 31, 2023, the Company recorded a principal paydown of $ 1 thousand and a fair value adjustment loss of $ 7 thousand.

During the year ended December 31, 2021, the Company recorded a principal paydown of $ 1 thousand and a fair value adjustment gain of $ 1 thousand.

During the year ended December 31, 2022, the Company recorded a principal paydown of $ 1 thousand and a fair value adjustment loss of $ 2 thousand.

(2) See Note 5 for a rollforward of recurring Level 3 fair values for servicing assets.

Fair Value Option

The Company has historically elected to account for retained participating interests of all government guaranteed loans under the fair value option in order to align the accounting presentation with the Company’s viewpoint of the economics of the loans.

Interest income on loans accounted for under the fair value option is recognized in loans and fees on loans on the Company’s consolidated statements of income.

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

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.

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

1 unchanged sentence

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

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

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

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

The unpaid principal balance of unguaranteed exposure for nonaccruals was $ 9.1 million and $ 7.2 million at December 31, 2023 and 2022, respectively.

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

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

5 unchanged sentences

$ 388,036 $ 407,544 $ ( 19,508 ) $ 48,474 $ 50,749 $ ( 2,275 ) $ 36,490 $ 37,939 $ ( 1,449 )

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

December 31, 2022

2 unchanged sentences

Fair Value Option Elections

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

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

$ 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.

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

Twelve Months Ended

Gains (Losses) on Loans Accounted for under the Fair Value Option 2022 2021

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

Loans held for sale $ — $ 1,521

2 unchanged sentences

Losses related to borrower-specific credit risk were $ 3.5 million and $ 1.9 million for the twelve months ended December 31, 2023 and 2022, respectively.

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

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

Twelve Months Ended

Twelve Months Ended December 31,

Loans held for sale 2023 2022

Balance at beginning of period $ — $ 25,310

Repurchases & Issuances 65 —

Repurchases and issuances — 65

Fair value changes — 1,521

2 unchanged sentences

Balance at end of period $ — $ —

Twelve Months Ended

Twelve Months Ended December 31,

Loans held for investment 2023 2022

Balance at beginning of period $ 494,458 $ 645,201

Repurchases & Issuances 18,629 37,159

Repurchases and issuances 22,955 18,629

Fair value changes ( 3,539 ) ( 475 )

2 unchanged sentences

Balance at end of period $ 388,036 $ 494,458

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Non-recurring Fair Value

10 unchanged sentences

Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral.

Given the lack of observable market prices for identical properties and market discounts applied to appraised values, the Company generally classifies foreclosed assets as nonrecurring Level 3.

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

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

Given the lack of observable market prices for identical properties and market discounts applied to appraised values, the Company generally classifies foreclosed assets as non-recurring Level 3.

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

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

December 31, 2023 Total Level 1 Level 2 Level 3

Collateral-dependent loans $ 4,503 $ — $ — $ 4,503

Foreclosed assets 6,481 — — 6,481

Total assets at fair value $ 10,984 $ — $ — $ 10,984

1 unchanged sentence

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

Foreclosed assets 620 — — 620

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

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Level 3 Analysis

For Level 3 assets and liabilities measured at fair value as of December 31, 2022 and December 31, 2021, the significant unobservable inputs used in the fair value measurements were as follows:

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

December 31, 2023

1 unchanged sentence

Recurring fair value

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

Prepayment speed 5.0 % N/A

Municipal bond $ 85 Discounted expected cash flows Discount rate 7.0 %

Prepayment speed 5.0 %

Loans held for investment $ 388,036 Discounted expected cash flows Loss rate 0.0 % - 7.4 %

1 unchanged sentence

Prepayment speed 14.0 % - 30.3 %

Discounted appraisals Appraisal adjustments (2)

0.0 % - 77.3 %

Servicing assets $ 48,186 Discounted expected cash flows Discount rate 14.5 %

Prepayment speed 11.8 % - 17.8 %

Equity warrant assets $ 2,874 Black-Scholes option pricing model Volatility 26.9 % - 90.0 %

5 unchanged sentences

10.0 % - 70.0 %

Foreclosed assets $ 6,481 Discounted appraisals Appraisal adjustments (2)

10.0 % - 17.4 %

Live Oak Bancshares, Inc.

3 unchanged sentences

Recurring fair value

Municipal bond $ 96 Discounted expected cash flows Discount rate 4.8 % N/A

Prepayment speed 5.0 % N/A

Loans held for sale $ 25,310 Discounted expected cash flows Discount rate 6.2 % - 21.9 %

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

Prepayment speed 5.0 %

3 unchanged sentences

Discounted appraisals Appraisal adjustments 0.0 % - 77.3 %

10.0 % - 85.0 %

Servicing assets $ 26,323 Discounted expected cash flows Discount rate 0.0 % - 32.0 %

Prepayment speed 0.0 % - 37.4 %

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

5 unchanged sentences

10.0 % - 66.5 %

Foreclosed assets $ 620 Discounted appraisals Appraisal adjustments (2)

9.0 % - 10.0 %

(1) Weighted averages are determined by the relative fair value of the instruments or the relative contribution to the instruments fair value.

5 unchanged sentences

In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments.

Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

Accordingly, the aggregate fair value amounts presented do not necessarily represent the underlying value to the Company.

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

The carrying amounts and estimated fair values of the Company’s financial instruments are as follows:

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:

December 31, 2023 Carrying Amount Quoted Price In Active Markets for Identical Assets/Liabilities (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Fair Value

1 unchanged sentence

Cash and due from banks $ 582,540 $ 582,540 $ — $ — $ 582,540

Federal funds sold 136,397 136,397 — — 136,397

Certificates of deposit with other banks 250 250 — — 250

14 unchanged sentences

Borrowings 83,203 — — 82,258 82,258

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Commitments and Contingencies

1 unchanged sentence

In the opinion of management, as of December 31, 2023, there are no material pending legal proceedings to which the Company or any of its subsidiaries is a party or of which any of their property is the subject.

On March 12, 2021, a purported class action was filed against the Company in the United States District Court for the Eastern District of North Carolina, Joseph McAlear, individually and on behalf of all others similarly situated v.

Live Oak Bancshares, Inc.

The complaint alleged the existence of an agreement between the Company, nCino, Inc.

and Apiture, LLC in which those companies purportedly sought to restrain the mobility of employees in violation of antitrust laws by agreeing not to solicit or hire each other’s employees.

The complaint alleged violations of Section 1 of the federal Sherman Act (15 U.S.C.

§ 1) and violations of Sections 75-1 and 75-2 of the North Carolina General Statutes.

The plaintiff sought monetary damages, including treble damages, entitlement to restitution, disgorgement, attorneys’ fees, and pre- and post-judgment interest.

On October 12, 2021, the Company reached an agreement to settle the case with a proposed class of all persons (with certain exclusions) employed by the Company or its wholly owned subsidiary, Live Oak Banking Company, Apiture, Inc.

or nCino, Inc.

in North Carolina at any time from January 27, 2017, through March 31, 2021.

In the agreement, the Company agreed to pay $ 3.9 million.

On October 13, 2021, the plaintiff filed a motion for preliminary approval of the settlement, which the court granted by order entered on November 23, 2021.

After class-wide noticing, the plaintiff filed a motion for final approval on March 28, 2022, which the court granted by order entered on April 28, 2022.

Pursuant to the terms of the settlement, the settlement became effective on June 11, 2022.

Financial Instruments with Off-balance-sheet Risk

2 unchanged sentences

These instruments involve, to varying degrees, credit risk in excess of the amount recognized in the balance sheet.

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

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.

3 unchanged sentences

Commitments to extend credit (1)

$ 2,921,978 $ 2,731,866

Standby letters of credit 20,487 26,454

1 unchanged sentence

Total unfunded off-balance sheet credit risk $ 2,951,465 $ 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.

9 unchanged sentences

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

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

As of December 31, 2022 and 2021, the Company had unfunded commitments to provide capital contributions for on-balance sheet instruments in the amount of $ 26.1 million and $ 10.4 million, respectively.

Other Commitments

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

The total estimated cost to complete the construction program is approximately $ 37.0 million.

At December 31, 2023 , the Company has paid and was committed to approximately $ 21.5 million of the total estimated amount.

As of December 31, 2023 and December 31, 2022, the Company recorded unfunded commitments to provide capital contributions for on-balance-sheet investments in the amount of $ 29.0 million and $ 26.1 million, respectively.

Concentrations of Credit Risk

The distribution of commitments to extend credit approximates the distribution of loans outstanding.

The Company does not have a significant number of credits to any single borrower or group of related borrowers whereby their retained exposure exceeds $ 20.0 million, except for 23 relationships that have a retained unguaranteed exposure of $ 701.9 million of which $ 440.9 million of the unguaranteed exposure has been disbursed.

The Company does not have a significant number of credits to any single borrower or group of related borrowers whereby their retained exposure exceeds $ 20.0 million, except for twenty-seven relationships that have a retained unguaranteed exposure of $ 1.10 billion of which $ 684.9 million of the unguaranteed exposure has been disbursed.

Additionally, the Company has future minimum lease payments receivable under non-cancelable operating leases totaling $ 48.5 million, of which no relationships exceed $ 20.0 million.

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

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Geographic Concentration s

The following table presents the geographic concentration of the Company’s loan and lease portfolio at December 31, 2023:

Geographic Regions (1)

Midwest 12.4 %

Northeast 18.7

Southeast 30.8

Southwest 12.2

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.

Benefit Plans

15 unchanged sentences

Expense recognized in relation to the ESPP was $ 246 thousand, $ 188 thousand and $ 118 thousand for fiscal years 2023, 2022 and 2021, respectively.

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Stock Option Plans

On March 20, 2015, the Company adopted the 2015 Omnibus Stock Incentive Plan which replaced the previously existing Amended Incentive Stock Option Plan and Nonstatutory Stock Option Plan.

On March 20, 2015, the Company adopted the 2015 Omnibus Stock Incentive Plan (as amended and currently in effect, the “2015 Omnibus Stock Incentive Plan”) which replaced the previously existing Amended Incentive Stock Option Plan and Nonstatutory Stock Option Plan.

Subsequently on May 24, 2016, the 2015 Omnibus Stock Incentive Plan was amended and restated, and on May 15, 2018, the 2015 Omnibus Stock Incentive Plan was amended, to authorize awards covering a maximum of 7,000,000 and 8,750,000 common voting shares, respectively.

On May 11, 2021, the Amended and Restated 2015 Omnibus Stock Incentive Plan was amended to authorize awards covering a maximum of 10,750,000 common voting shares.

Options or restricted shares granted under the Amended and Restated 2015 Omnibus Stock Incentive Plan (the “Plan”) expire no more than 10 years from date of grant.

Exercise prices under the Plan are set by the Board of Directors at the date of grant but shall not be less than 100 % of fair market value of the related stock at the date of the grant.

Subsequently on May 16, 2023, 2015 Omnibus Stock Incentive Plan was amended to authorize awards covering a maximum of 13,750,000 common voting shares.

Options or restricted shares granted under 2015 Omnibus Stock Incentive Plan expire no more than 10 years from date of grant.

Exercise prices under the 2015 Omnibus Stock Incentive Plan are set by the Board of Directors at the date of grant but shall not be less than 100 % of fair market value of the related stock at the date of the grant.

Forfeitures are recognized as they occur.

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Compensation cost relating to share-based payment transactions are recognized in the financial statements with measurement based upon the fair value of the equity or liability instruments issued.

For the years ended December 31, 2022, 2021 and 2020 the Company recognized $ 753 thousand, $ 1.3 million and $ 1.5 million in compensation expense for stock options, respectively.

Stock option activity under the Plan during the year ended December 31, 2022 is summarized below.

For the years ended December 31, 2023, 2022 and 2021 the Company recognized $ 25 thousand, $ 753 thousand and $ 1.3 million in compensation expense for stock options, respectively.

Stock option activity under the 2015 Omnibus Stock Incentive Plan during the year ended December 31, 2023 is summarized below.

Shares Weighted Average

4 unchanged sentences

Exercised ( 148,551 ) 12.71

Forfeited ( 8,626 ) 15.75

Outstanding at December 31, 2022 825,114 $ 12.73 2.28 $ 14,412,142

Exercisable at December 31, 2022 787,354 $ 12.67 2.24 $ 13,803,102

Outstanding at December 31, 2023 676,563 $ 12.74 1.31 years $ 22,165,930

Exercisable at December 31, 2023 676,563 $ 12.74 1.31 years $ 22,165,930

The following is a summary of non-vested stock option activity for the Company for the years ended December 31, 2023, 2022 and 2021.

8 unchanged sentences

Vested ( 37,760 ) 6.60

Forfeited ( 8,626 ) 6.95

Non-vested at December 31, 2023 — $ —

The total intrinsic value of options exercised during the years ended December 31, 2023, 2022 and 2021 was $ 2.8 million, $ 7.0 million and $ 46.3 million, respectively.

At December 31, 2022, unrecognized compensation costs relating to stock options amounted to $ 25 thousand which will be recognized over a weighted average period of 0.27 years.

At December 31, 2023, there was no unrecognized compensation costs relating to stock options.

There were no options granted in 2023, 2022 or 2021.

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Restricted Stock Plan

2 unchanged sentences

Restricted stock grants vested in equal installments ranging from immediate vesting to over a seven year period from the date of the grant.

Under the 2015 Omnibus Stock Incentive Plan, which replaced the previously existing Restricted Stock Plan, during 2020, 586,132 restricted stock units were granted to eligible employees and outside directors at a weighted average grant date fair value of $ 17.78 .

Under the 2015 Omnibus Stock Incentive Plan, which replaced the previously existing Restricted Stock Plan, 1,329,508 restricted stock units were granted during 2021 to eligible employees and outside directors at a weighted average grant date fair value of $ 58.19 .

During 2022, 885,939 restricted stock units were granted to eligible employees and outside directors at a weighted average grant date fair value of $ 37.75 .

1 unchanged sentence

During 2023, 927,838 restricted stock units were granted to eligible employees and outside directors at a weighted average grant date fair value of $ 34.83 , of which the vesting of all grants was time based.

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

The fair value of each restricted stock unit is based on the market value of the Company’s stock on the date of the grant.

3 unchanged sentences

Market RSUs may have a restriction based on the passage of time and may have non-market-related performance criteria, but also have a restriction based on market price criteria related to the Company’s share price closing at or above a specified price for at least twenty ( 20 ) consecutive trading days at any time prior to the expiration date of the grants.

For the outstanding Market RSUs as of December 31, 2020, the market price conditions ranged from $ 45.00 to $ 55.00 per share.

The non-market-related performance criteria had all been satisfied as of December 31, 2020.

The amount of Market RSUs earned will not exceed 100 % of the Market RSUs awarded.

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During 2022 and 2021, the Company granted 885,939 and 1,329,508 RSUs, respectively.

The weighted average grant date fair value for RSUs granted in 2021 and 2020 were $ 58.19 and $ 17.78 respectively.

The weighted average grant date fair value for RSUs granted in 2022 and 2021 was $ 37.75 and $ 58.19 , respectively.

For the years ended December 31, 2023, 2022 and 2021, the Company recognized $ 17.6 million, $ 19.4 million and $ 11.4 million in compensation expense for RSUs, respectively.

At December 31, 2023, unrecognized compensation costs relating to RSUs amounted to $ 77.1 million which will be recognized over a weighted average period of 3.83 years.

Subsequently in February 2024, the Company granted 457,167 RSUs with a weighted average grant date fair value of $ 39.40 with unrecognized compensation expense of $ 18.0 million which will be recognized over a weighted average period of 5.01 years.

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

The compensation expense for Market RSUs is measured based on their grant date fair value as calculated using the Monte Carlo Simulation and is recognized on a straight-line basis over the average vesting period.

The Monte Carlo Simulation used 100,000 simulation paths to assess the expected date of achieving the market price criteria.

For the years ended December 31, 2021 and 2020, the Company recognized $ 4.2 million and $ 9.7 million, respectively, in compensation expense for Market RSUs.

For the year ended December 31, 2021, 575,500 Market RSUs met the performance stock price conditions for the $ 45.00 , $ 48.00 $ 50.00 and $ 55.00 stock price for twenty consecutive days.

The remaining expense of $ 3.7 million was fully recognized due to the accelerated vesting.

For the year ended December 31, 2021, the Company recognized $ 4.2 million in compensation expense for Market RSUs.

For the year ended December 31, 2021, 575,500 Market RSUs met the performance stock price conditions for the $ 45.00 , $ 48.00 $ 50.00 and $ 55.00 stock price for twenty consecutive days.

1 unchanged sentence

There were no remaining Market RSUs at year end December 31, 2023 and 2022.

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Employee Incentive Compensation

1 unchanged sentence

Both cash bonus and LTI equity grants are based on each individual’s base pay and overall Company performance.

LTI grants are also influenced by each individual’s tiered target as a percent of base pay.

LTI grants are generally influenced by each individual’s tiered target as a percent of base pay.

Total expenses related to the cash bonus for employees were $ 1.0 million, $ 9.4 million and $ 7.7 million for the years ended December 31, 2023, 2022 and 2021, respectively.

In addition, for the years ended December 31, 2022, 2021 and 2020 the Company had discretionary special bonuses related to fintech investment gains and PPP loan efforts of $ 10.5 million, $ 4.0 million and $ 7.2 million, respectively, to most full-time employees.

In addition, for the years ended December 31, 2023, 2022 and 2021 the Company had discretionary special bonuses of $ 4.5 million, $ 10.5 million and $ 4.0 million, respectively, to most full-time employees.

Regulatory Matters

8 unchanged sentences

Failure to meet minimum capital requirements may result in certain actions by regulators that could have a direct material effect on the consolidated financial statements.

As discussed in Note 1.

Organization and Summary of Significant Accounting Policies, the Company recorded a cumulative effect increase to retained earnings totaling $ 822 thousand on January 1, 2020 as a result of the adoption of ASC 326.

The Company did not elect the federal banking agencies’ transition option that allowed banking organizations to phase in the day one effects of ASC 326 on their regulatory capital ratios over multiple years.

Federal bank regulatory agencies have issued an interim final rule that permits banks to neutralize the regulatory capital effects of participating in the PPPLF and clarify that PPP loans have a zero percent risk weight under applicable risk-based capital rules.

Specifically, a bank may exclude all PPP loans pledged as collateral to the PPPLF from its average total consolidated assets for the purposes of calculating its leverage ratio, while PPP loans that are not pledged as collateral to the PPPLF will be included.

Accordingly, the Company’s PPP loans are excluded from the calculation of the leverage ratio as of December 31, 2022 and 2021.

Based on the most recent notification from the Federal Deposit Insurance Corporation, the Bank is well capitalized under the regulatory framework for prompt corrective action.

55 unchanged sentences

Apiture, Inc.

(“Apiture”), Canapi Funds, Cape Fear Collective 1 & 2, Green Sun, Sunvest, and HEP.

(“Apiture”), Canapi Funds, Cape Fear Collective 1 & 2, OTR, Estrella Landing, Green Sun, Sunvest, HEP and Heelstone.

Apiture is a digital banking solution for financial institutions.

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Each of Cape Fear Collective 1 & 2 is a “qualified housing project” within the meaning of 12 CFR 362.3 and serves as a special purpose vehicle to purchase residential homes available for sale in the community.

Green Sun, Sunvest, and HEP are solar income tax credit projects.

OTR is a Community Development Financial Institution (CDFI) certified by the U.S.

Department of the Treasury.

CDFIs provide credit and financial services to underserved markets and populations to help low-income and other disadvantaged people join the economic mainstream.

Estrella Landing is a LIHTC investment that qualifies as an affordable housing project located in Wilmington, NC.

Green Sun, Sunvest, HEP, and Heelstone are solar income tax credit projects.

Securities, section captioned “Equity Method Accounting,” for further detail on equity method investments.

During the years ended December 31, 2022, 2021 and 2020, the Company paid Apiture $ 2.0 million, $ 1.2 million and $ 377 thousand, respectively, for professional services.

During the years ended December 31, 2023, 2022 and 2021, the Company paid Apiture $ 2.5 million, $ 2.0 million and $ 1.2 million, respectively, for professional services.

During 2023, 2022 and 2021, the Company recognized income from Apiture of $ 385 thousand, $ 438 thousand and $ 601 thousand, respectively, for shared services and rent.

During the years ended December 31, 2022, 2021 and 2020, the Company made charitable contributions in the amounts of $ 310 thousand, $ 352 thousand and $ 282 thousand, respectively, to Collective Impact in New Hanover County, a 501(c)(3) charitable organization (“Collective Impact”).

During the years ended December 31, 2022 and 2021, the Company made charitable contributions in the amounts of $ 310 thousand and $ 352 thousand, respectively, to Collective Impact in New Hanover County, a 501(c)(3) charitable organization (“Collective Impact”).

There were no charitable contributions made during the year ended December 31, 2023.

Cape Fear Collective Ventures, LLC, a wholly owned subsidiary of Collective Impact, manages each of Cape Fear Collective 1 & 2.

Significant Equity Method Investments

In accordance with Rules 3-09 and 4-08(g) of Regulation S-X, the Company must assess whether any of its equity method investments are significant equity method investments.

In evaluating the significance of these investments, the Company performed the income test, the investment test and the asset test described in S-X 3-05 and S-X 1-02(w).

Rule 3-09 of Regulation S-X requires separate audited financial statements of an equity method investee in an annual report if either the income or investment test exceeds 20%.

As of December 31, 2022, 2021 and 2020, none of our investments were considered a significant subsidiary under Rule 3-09.

Rule 4-08(g) of Regulation S-X requires summarized financial information in an annual report if any of the three tests exceeds 10%.

Under the income test, the Company’s proportionate share of its equity method investees' aggregated net losses exceeded the applicable threshold of 10% for the year ended December 31, 2020, and are accordingly required to provide summarized financial information for these investees for all periods presented in this Form 10-K.

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

The following table provides summarized balance sheet information for the Company’s combined equity method investments as of December 31, 2022 and 2021.

The Company’s equity method investments are included in the other assets line on the consolidated balance sheet and are largely concentrated in new or emerging financial service technology companies and solar investment tax credits.

As of December 31,

Balance sheet data 2022 2021

Current assets $ 58,683 $ 90,629

Noncurrent assets 889,677 776,171

Total assets $ 948,360 $ 866,800

Current liabilities $ 16,947 $ 37,730

Noncurrent liabilities 16,799 14,052

Total liabilities 33,746 51,782

Equity interests 914,614 815,018

Total liabilities and equity $ 948,360 $ 866,800

The following table provides summarized income statement information for the Company’s combined equity method investments for the years ended December 31, 2022, 2021 and 2020.

Years ended December 31,

Summary of operations 2022 2021 2020

Total revenues $ 74,908 $ 79,016 $ 68,038

Net (loss) income ( 65,208 ) 215,792 ( 68,406 )

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.

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Noninterest expense 296,891 9,413 7,922 314,226

Income tax expense (benefit) 35,539 10,280 ( 2,026 ) 43,793

Income tax (benefit) expense ( 226 ) 36,016 ( 1,674 ) 34,116

Net income (loss) $ 71,937 $ 109,692 $ ( 5,421 ) $ 176,208

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Retained earnings 642,817 572,497

Accumulated other comprehensive (loss) income ( 92,318 ) 1,946

Accumulated other comprehensive loss ( 84,719 ) ( 92,318 )

Total shareholders' equity 902,666 811,033

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Net income $ 73,898 $ 176,208 $ 166,995

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

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

Equity in undistributed net income of subsidiaries in excess of dividends of subsidiaries

2 unchanged sentences

( 10,474 ) ( 14,862 ) 2,679

Deferred income tax 434 30,070 1,163

Deferred tax (benefit) expense ( 15 ) 434 30,070

Stock option compensation expense 272 942 1,379

4 unchanged sentences

Net change in other liabilities 299 ( 1,626 ) ( 11,243 )

Net cash (used in) provided by operating activities ( 3,477 ) 10,370 41,455

Net cash provided by (used in) operating activities 38,739 ( 3,477 ) 10,370

Cash flows from investing activities

Capital return on (investment in) subsidiaries 121,750 ( 26,407 ) ( 6,354 )

Capital (investment in) return on subsidiaries ( 40,000 ) 121,750 ( 26,407 )

Purchases of equity security investments ( 132 ) ( 182 ) ( 84 )

Purchases of equity method investments ( 612 ) ( 904 ) ( 237 )

Business combination, net of cash acquired — — ( 895 )

Net cash provided by (used in) investing activities 120,664 ( 26,728 ) ( 7,773 )

Net cash (used in) provided by investing activities ( 40,744 ) 120,664 ( 26,728 )

Cash flows from financing activities

12 unchanged sentences

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data