Live Oak Bancshares, Inc. 10-Q

Item 1. Financial Statements Live Oak Bancshares, Inc. Condensed Consolidated Balance Sheets As of September 30, 2024 (unaudited) and December 31, 2023 (Dollars in thousands) September 30, 2024 December 31, 2023 Assets Cash and due from banks $ 666,585 $ 582,540 Certificates of deposit with other banks 250 250 Investment securities available-for-sale 1,233,466 1,126,160 Loans held for sale 359,977 387,037 Loans and leases held for investment (includes $ 343,371 and $ 388,036 measured at fair value, respectively) 9,831,891 8,633,847 Allowance for credit losses on loans and leases ( 168,737 ) ( 125,840 ) Net loans and leases 9,663,154 8,508,007 Premises and equipment, net 267,032 257,881 Foreclosed assets 8,015 6,481 Servicing assets (includes $ 52,295 and $ 48,186 measured at fair value, respectively) 52,553 48,591 Other assets 356,314 354,476 Total assets $ 12,607,346 $ 11,271,423 Liabilities and shareholders’ equity Liabilities Deposits: Noninterest-bearing $ 258,844 $ 259,270 Interest-bearing 11,141,703 10,015,749 Total deposits 11,400,547 10,275,019 Borrowings 115,371 23,354 Other liabilities 83,672 70,384 Total liabilities 11,599,590 10,368,757 Shareholders’ equity Preferred stock, no par value, 1,000,000 shares authorized, none issued or outstanding at September 30, 2024 and December 31, 2023 — — Class A common stock, no par value, 100,000,000 shares authorized, 45,151,691 and 44,617,673 shares issued and outstanding at September 30, 2024 and December 31, 2023, respectively 361,925 344,568 Class B common stock, no par value, 10,000,000 shares authorized, none issued or outstanding at September 30, 2024 and December 31, 2023 — — Retained earnings 707,026 642,817 Accumulated other comprehensive loss ( 61,195 ) ( 84,719 ) Total shareholders’ equity 1,007,756 902,666 Total liabilities and shareholders’ equity $ 12,607,346 $ 11,271,423 See Notes to Unaudited Condensed Consolidated Financial Statements 1 Table of Contents Live Oak Bancshares, Inc. Condensed Consolidated Statements of Income For the three and nine months ended September 30, 2024 and 2023 (unaudited) (Dollars in thousands, except per share data) Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Interest income Loans and fees on loans $ 192,170 $ 162,722 $ 550,020 $ 454,136 Investment securities, taxable 9,750 8,701 27,923 24,751 Other interest earning assets 7,016 9,188 21,861 22,852 Total interest income 208,936 180,611 599,804 501,739 Interest expense Deposits 110,174 90,914 317,530 243,512 Borrowings 1,762 287 3,843 2,498 Total interest expense 111,936 91,201 321,373 246,010 Net interest income 97,000 89,410 278,431 255,729 Provision for credit losses 34,502 10,279 62,631 42,328 Net interest income after provision for credit losses 62,498 79,131 215,800 213,401 Noninterest income Loan servicing revenue 8,040 6,990 23,011 20,057 Loan servicing asset revaluation ( 4,207 ) 11,335 ( 9,829 ) 8,860 Net gains on sales of loans 16,646 12,675 42,543 33,654 Net gain (loss) on loans accounted for under the fair value option 2,255 ( 568 ) 2,208 ( 3,369 ) Equity method investments (loss) income ( 1,393 ) ( 1,034 ) ( 8,182 ) ( 6,041 ) Equity security investments gains (losses), net 909 ( 783 ) 541 ( 585 ) Lease income 2,424 2,498 7,300 7,568 Management fee income 1,116 3,277 7,658 10,015 Other noninterest income 7,142 3,501 27,938 11,467 Total noninterest income 32,932 37,891 93,188 81,626 Noninterest expense Salaries and employee benefits 44,524 42,947 138,054 130,778 Travel expense 2,344 2,197 7,110 7,378 Professional services expense 3,287 1,762 8,226 4,685 Advertising and marketing expense 2,473 3,446 9,169 10,058 Occupancy expense 2,807 2,129 7,442 6,259 Technology expense 9,081 7,722 24,800 23,456 Equipment expense 3,472 3,676 10,057 11,517 Other loan origination and maintenance expense 4,872 3,498 12,442 10,867 Renewable energy tax credit investment impairment (recovery) 115 — ( 642 ) 69 FDIC insurance 1,933 4,115 7,782 12,579 Other expense 2,681 2,770 8,542 12,035 Total noninterest expense 77,589 74,262 232,982 229,681 Income before taxes 17,841 42,760 76,006 65,346 Income tax expense 4,816 2,967 8,432 7,611 Net income $ 13,025 $ 39,793 $ 67,574 $ 57,735 Basic earnings per share $ 0.28 $ 0.89 $ 1.50 $ 1.30 Diluted earnings per share $ 0.28 $ 0.88 $ 1.48 $ 1.28 See Notes to Unaudited Condensed Consolidated Financial Statements 2 Table of Contents Live Oak Bancshares, Inc. Condensed Consolidated Statements of Comprehensive Income For the three and nine months ended September 30, 2024 and 2023 (unaudited) (Dollars in thousands) Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Net income $ 13,025 $ 39,793 $ 67,574 $ 57,735 Other comprehensive income (loss) before tax: Net unrealized gain (loss) on investment securities available-for-sale during the period 38,565 ( 27,297 ) 30,953 ( 34,213 ) Reclassification adjustment for gain on sale of securities available-for-sale included in net income — — — — Other comprehensive income (loss) before tax 38,565 ( 27,297 ) 30,953 ( 34,213 ) Income tax (expense) benefit ( 9,256 ) 6,557 ( 7,429 ) 8,211 Other comprehensive income (loss), net of tax 29,309 ( 20,740 ) 23,524 ( 26,002 ) Total comprehensive income $ 42,334 $ 19,053 $ 91,098 $ 31,733 See Notes to Unaudited Condensed Consolidated Financial Statements 3 Table of Contents Live Oak Bancshares, Inc. Condensed Consolidated Statements of Changes in Shareholders’ Equity For the three and nine months ended September 30, 2024 and 2023 (unaudited) (Dollars in thousands) Three Months Ended Common stock Retained earnings Accumulated other comprehensive (loss) income Total equity Shares Amount Class A Class B Balance at June 30, 2024 45,003,856 — $ 356,381 $ 695,172 $ ( 90,504 ) $ 961,049 Net income — — — 13,025 — 13,025 Other comprehensive income — — — — 29,309 29,309 Issuance of restricted stock 78,402 — — — — — Tax withholding related to vesting of restricted stock and other — — ( 2,356 ) — — ( 2,356 ) Employee stock purchase program 16,445 — 747 — — 747 Stock option exercises 52,988 — 539 — — 539 Restricted stock compensation expense — — 6,614 — — 6,614 Transfer from retained earnings to other assets for pro rata portion of equity method investee stock compensation expense — — — 183 — 183 Cash dividends ($ 0.03 per share) — — — ( 1,354 ) — ( 1,354 ) Balance at September 30, 2024 45,151,691 — $ 361,925 $ 707,026 $ ( 61,195 ) $ 1,007,756 Balance at June 30, 2023 44,351,715 — $ 341,032 $ 589,036 $ ( 97,580 ) $ 832,488 Net income — — — 39,793 — 39,793 Other comprehensive loss — — — — ( 20,740 ) ( 20,740 ) Issuance of restricted stock 63,694 — — — — — Tax withholding related to vesting of restricted stock and other — — ( 1,348 ) — — ( 1,348 ) Employee stock purchase program 28,015 — 765 — — 765 Stock option exercises 36,791 — 263 — — 263 Stock option compensation expense — — 135 — — 135 Restricted stock compensation expense — — 82 — — 82 Transfer from retained earnings to other assets for pro rata portion of equity method investee stock compensation expense — — — 263 — 263 Cash dividends ($ 0.03 per share) — — — ( 1,333 ) — ( 1,333 ) Balance at September 30, 2023 44,480,215 — $ 340,929 $ 627,759 $ ( 118,320 ) $ 850,368 4 Table of Contents Live Oak Bancshares, Inc. Condensed Consolidated Statements of Changes in Shareholders’ Equity (Continued) For the three and nine months ended September 30, 2024 and 2023 (unaudited) (Dollars in thousands) Nine Months Ended Common stock Retained earnings Accumulated other comprehensive income (loss) Total equity Shares Amount Class A Class B Balance at December 31, 2023 44,617,673 — $ 344,568 $ 642,817 $ ( 84,719 ) $ 902,666 Net income — — — 67,574 — 67,574 Other comprehensive income — — — — 23,524 23,524 Issuance of restricted stock 247,685 — — — — — Tax withholding related to vesting of restricted stock and other — — ( 5,750 ) — — ( 5,750 ) Employee stock purchase program 34,930 — 1,449 — — 1,449 Stock option exercises 251,403 — 1,945 — — 1,945 Stock option based compensation expense — — — — — — Restricted stock compensation expense — — 19,713 — — 19,713 Transfer from retained earnings to other assets for pro rata portion of equity method investee stock compensation expense — — — 684 — 684 Cash dividends ($ 0.09 per share) — — — ( 4,049 ) — ( 4,049 ) Balance at September 30, 2024 45,151,691 — $ 361,925 $ 707,026 $ ( 61,195 ) $ 1,007,756 Balance at December 31, 2022 44,061,244 — $ 330,854 $ 572,497 $ ( 92,318 ) $ 811,033 Net income — — — 57,735 — 57,735 Other comprehensive loss — — — — ( 26,002 ) ( 26,002 ) Issuance of restricted stock 264,713 — — — — — Tax withholding related to vesting of restricted stock and other — — ( 4,950 ) — — ( 4,950 ) Employee stock purchase program 59,074 — 1,396 — — 1,396 Stock option exercises 95,184 — 926 — — 926 Stock option based compensation expense — — 272 — — 272 Restricted stock compensation expense — — 12,431 — — 12,431 Adoption of ASU 2022-02 — — — 676 — 676 Transfer from retained earnings to other assets for pro rata portion of equity method investee stock compensation expense — — — 841 — 841 Cash dividends ($ 0.09 per share) — — — ( 3,990 ) — ( 3,990 ) Balance at September 30, 2023 44,480,215 — $ 340,929 $ 627,759 $ ( 118,320 ) $ 850,368 See Notes to Unaudited Condensed Consolidated Financial Statements 5 Table of Contents Live Oak Bancshares, Inc. Condensed Consolidated Statements of Cash Flows For the nine months ended September 30, 2024 and 2023 (unaudited) (Dollars in thousands) Nine Months Ended September 30, 2024 2023 Cash flows from operating activities Net income $ 67,574 $ 57,735 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 16,631 15,941 Provision for credit losses 62,631 42,328 (Accretion) amortization of (discount) premium on securities, net ( 631 ) 63 Deferred tax benefit ( 8,989 ) ( 13,164 ) Originations of loans held for sale ( 744,286 ) ( 642,722 ) Proceeds from sales of loans held for sale 1,003,740 985,287 Net gains on sale of loans held for sale ( 42,543 ) ( 33,654 ) Net loss on sale of foreclosed assets 9 — Net (gain) loss on loans accounted for under fair value option ( 2,208 ) 3,369 Net change in servicing assets ( 3,962 ) ( 20,804 ) Net gain on disposal of long-lived assets ( 9,079 ) — Net loss on disposal of property and equipment 177 377 Equity method investments loss (income) 8,182 6,041 Equity security investments (gains) losses, net ( 541 ) 585 Gain on equity warrant assets ( 6,119 ) — Renewable energy tax credit investment (recovery) impairment ( 642 ) 69 Stock option compensation expense — 272 Restricted stock compensation expense 19,713 12,431 Stock based compensation excess tax benefit (deficiency) 729 ( 915 ) Lease right-of-use assets and liabilities, net 166 ( 52 ) Changes in assets and liabilities: Other assets ( 4,915 ) 37,571 Other liabilities 10,146 ( 933 ) Net cash provided by operating activities 365,783 449,825 Cash flows from investing activities Purchases of investment securities available-for-sale ( 189,116 ) ( 198,676 ) Proceeds from maturities, calls, and principal paydown of investment securities available-for-sale 113,394 79,241 Proceeds from SBA reimbursement/sale of foreclosed assets, net 583 — Maturities of certificates of deposits with other banks — 250 Purchases of loans previously sold ( 67,424 ) ( 36,227 ) Loan and lease originations and principal collections, net ( 1,341,740 ) ( 1,204,309 ) Proceeds from sale of long-lived asset 43,598 — Purchases of equity security investments ( 3,951 ) ( 3,359 ) Purchases of equity method investments ( 6,426 ) ( 5,094 ) Proceeds from equity security investment 1,177 — Proceeds from equity method investments 1,338 6,878 Proceeds from sale of premises and equipment 978 100 Purchases of premises and equipment, net ( 45,289 ) ( 25,231 ) Net cash used by investing activities ( 1,492,878 ) ( 1,386,427 ) 6 Table of Contents Live Oak Bancshares, Inc. Condensed Consolidated Statements of Cash Flows (Continued) For the nine months ended September 30, 2024 and 2023 (unaudited) (Dollars in thousands) Nine Months Ended September 30, 2024 2023 Cash flows from financing activities Net increase in deposits $ 1,125,528 $ 1,118,714 Proceeds from borrowings 99,659 2,906,056 Repayment of borrowings ( 7,642 ) ( 2,963,412 ) Stock option exercises 1,945 926 Employee stock purchase program 1,449 1,396 Withholding cash issued in lieu of restricted stock and other ( 5,750 ) ( 4,950 ) Shareholder dividend distributions ( 4,049 ) ( 3,990 ) Net cash provided by financing activities 1,211,140 1,054,740 Net increase in cash and cash equivalents 84,045 118,138 Cash and cash equivalents, beginning 582,540 416,636 Cash and cash equivalents, ending $ 666,585 $ 534,774 Supplemental disclosures of cash flow information Interest paid $ 321,470 $ 245,091 Income tax paid, net 26,476 1,689 Supplemental disclosures of noncash investing and financing activities Unrealized holding gains (losses) on investment securities available-for-sale, net of taxes $ 23,524 $ ( 26,002 ) Transfers from loans and leases to foreclosed real estate and other repossessions or SBA receivable 10,351 34,864 Transfer from premises and equipment, net to other assets 18,540 14,177 Transfer of loans held for sale to loans and leases held for investment 139,714 65,734 Transfer of loans and leases held for investment to loans held for sale 340,121 458,868 Transfer from retained earnings to other assets for pro rata portion of equity method investee stock compensation expense 684 841 Accrued premises and equipment additions 297 — Equity method investment commitments 1,008 7,721 Equity security investment commitments 2,500 — See Notes to Unaudited Condensed Consolidated Financial Statements 7 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Note 1. Basis of Presentation Nature of Operations Live Oak Bancshares, Inc. (collectively with its subsidiaries including Live Oak Banking Company, the “Company”) is a bank holding company headquartered in Wilmington, North Carolina incorporated under the laws of the State of North Carolina in December 2008. The Company conducts business operations primarily through its commercial bank subsidiary, Live Oak Banking Company (the “Bank”). The Bank was organized and incorporated under the laws of the State of North Carolina on February 25, 2008 and commenced operations on May 12, 2008. The Bank specializes in providing lending and deposit related services to small businesses nationwide. A significant portion of the loans originated by the Bank are guaranteed by the Small Business Administration (“SBA”) under the 7(a) Loan Program and the U.S. Department of Agriculture’s ( “ USDA”) Rural Energy for America Program (“REAP”), Water and Environmental Program (“WEP”), Business & Industry ( “ B&I”) and Community Facilities loan programs. These loans are to small businesses and professionals with what the Bank believes are lower risk characteristics. Industries, or “verticals,” on which the Bank focuses its lending efforts are carefully selected. The Bank also lends more broadly to select borrowers outside of those verticals. The Company’s wholly owned material subsidiaries are the Bank, Government Loan Solutions, Inc. (“GLS”), Live Oak Grove, LLC (“Grove”), Live Oak Ventures, Inc. (“Live Oak Ventures”), and Canapi Advisors, LLC (“Canapi Advisors”). GLS is a management and technology consulting firm that advises and offers solutions and services to participants in the government guaranteed lending sector. GLS primarily provides services in connection with the settlement, accounting, and securitization processes for government guaranteed loans, including loans originated under the SBA 7(a) loan programs and USDA guaranteed loans. The Grove provides Company employees and business visitors 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. Canapi Advisors provided investment advisory services to a series of funds (the“Canapi Funds”) focused on providing venture capital to new and emerging financial technology companies. During the third quarter of 2024, the Canapi Funds were restructured and Canapi Advisors voluntarily withdrew as an investment advisor to the funds. As of September 30, 2024, Live Oak Bancshares, Inc. and two Company Directors held carried interest in Canapi Ventures Fund, LP. The Bank’s wholly owned subsidiaries are Live Oak Number One, Inc., Live Oak Clean Energy Financing LLC (“LOCEF”), Live Oak Private Wealth, LLC (“Live Oak Private Wealth”) and Tiburon Land Holdings, LLC (“TLH”). Live Oak Number One, Inc. holds properties foreclosed on by the Bank. LOCEF provides financing to entities for renewable energy applications. Live Oak Private Wealth provides high-net-worth individuals and families with strategic wealth and investment management services. 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. The Company generates revenue primarily from net interest income and secondarily through the origination and sale of government guaranteed loans. Income from the retention of loans is comprised principally of interest income. Income from the sale of loans is comprised of loan servicing revenue and revaluation of related servicing rights along with net gains on sales of loans. Offsetting these revenues are the cost of funding sources, provision for credit losses, any costs related to foreclosed assets and other operating costs such as salaries and employee benefits, travel, professional services, advertising and marketing and tax expense. The Company also has less routinely generated gains and losses arising from its financial technology investments predominantly in its Fintech segment. 8 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements General In the opinion of management, all adjustments necessary for a fair presentation of the financial position and results of operations for the periods presented have been included, and all intercompany transactions have been eliminated in consolidation. Results of operations for the three and nine months ended September 30, 2024 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2024. The Condensed Consolidated Balance Sheet as of December 31, 2023 has been derived from the audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed with the Securities Exchange Commission ( “ SEC ” ) on February 22, 2024 (SEC File No. 001-37497) (the “ 2023 Form 10-K ” ). A summary description of the significant accounting policies followed by the Company is set forth in Note 1 of the Notes to Consolidated Financial Statements in the Company’s 2023 Form 10-K. These Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited consolidated financial statements and footnotes in the Company's 2023 Form 10-K. The preparation of financial statements in conformity with United States ( “ U.S. ” ) generally accepted accounting principles ( “ GAAP ” ) requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates. Amounts in all tables in the Notes to Unaudited Condensed Consolidated Financial Statements have been presented in thousands, except percentage, time period, share and per share data or where otherwise indicated. Business Segments Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Management has determined that the Company has two reportable operating segments: Banking and Fintech, as discussed more fully in Note 11. Segments. Changes in Accounting Estimates During the second quarter of 2024, the Company made enhancements to the qualitative framework of the allowance for credit losses. The enhanced framework leverages quantifiable credit risk metrics as well as current and forecasted economic conditions to determine possible portfolio outcomes that are not captured in quantitatively modeled results. The framework continues to consider risk factors which include, but are not limited to, changes in lending policies, economic and business conditions, nature and volume of portfolio, volume and severity of past due loans, value of underlying collateral, concentrations, and prepayment speeds. The result of these changes was not material. 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 included 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 nonrecurring adjustments to increase the estimated value of the servicing asset by $ 13.7 million and loans measured at fair value by $ 1.3 million. This adjustment also increased noninterest income by a corresponding $ 15.0 million. These refinements have been accounted for as changes in accounting estimates under Financial Accounting Standards Board ( “ FASB ” ) Accounting Standards Codification ( “ ASC ” ) 250, Accounting Changes and Error Corrections , with prospective application beginning in the period of change. Long-Lived Asset Reclassified to Held for Sale During the second quarter of 2024, the Company sold an aircraft that was previously reclassified as held for sale. The $ 6.7 million gain on the sale of the aircraft is reflected in other income on the Condensed Consolidated Statements of Income. 9 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements During the first quarter of 2024, the Company determined that retention of an idle building and accompanying land adjacent to its main campus was not best suited to serve future expansion plans. As a result of this determination, the Company entered into a purchase and sale agreement with a third party with expected total proceeds, net of estimated expenses, of $ 20.9 million. Accordingly, the $ 18.5 million carrying amount of the building and land, was considered held for sale, and reclassified from premises and equipment, net to other assets in the Unaudited Condensed Consolidated Balance Sheet. During the third quarter of 2024, the building and land were sold for a gain of $ 2.4 million. Reclassifications Certain reclassifications have been made to the prior period's condensed consolidated financial statements to place them on a comparable basis with the current year. Net income and shareholders' equity previously reported were not affected by these reclassifications. Note 2. Recent Accounting Pronouncements In March 2020, the FASB issued Accounting Standards Update (“ASU”) No. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”). ASU 2020-04 provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. In December 2022, ASU 2022-06 “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848” was issued deferring the sunset date of Topic 848. As subsequently amended, the guidance in the ASU can be applied by the Company through December 31, 2024. To address the discontinuance of LIBOR, the Company stopped originating variable LIBOR-based loans effective December 31, 2021 and started to negotiate loans using the preferred replacement index, the Secured Overnight Financing Rate (“SOFR”) or a relevant duration U.S. Treasury rate. As of March 31, 2024, the Company had transitioned all its LIBOR-based loan exposure to an alternative index. The application of the standard did not have a material effect on the Consolidated Financial Statements. In June 2022, the FASB issued ASU No. 2022-03 “Fair Value Measurement (Topic 820) Fair Value Measurement of Equity Securities Subject to Contractual Restrictions” (“ASU 2022-03”). ASU 2022-03 indicates a contractual sale restriction on equity securities should not be considered in measuring fair value, however, disclosure should be made about such restrictions. The Company adopted the standard on January 1, 2024 with no material effect 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 Company adopted the standard on January 1, 2024 with no material effect 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. 10 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements 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. In March 2024, the FASB issued ASU 2024-01 “Compensation - Stock Compensation (Topic 718): Scope Application of Profits Interest and Similar Awards” (“ASU 2024-01”). ASU 2024-01 adds an illustrative example to clarify how an entity should determine whether a profits interest or similar award is within the scope of ASC 718. The amendments in this standard will be effective for the Company on January 1, 2025. The Company does not believe this standard will have a material impact on its Consolidated Financial Statements. In March 2024, the FASB issued ASU 2024-02 “Codification Improvements - Amendments to Remove References to the Concepts Statements” (“ASU 2024-02”). ASU 2024-02 removes references to various Concepts Statements in the Codification. The amendments in this standard will be effective for the Company on January 1, 2025. The Company does not believe this standard will have a material impact on its Consolidated Financial Statements. Note 3. Earnings Per Share Basic and diluted earnings per share are computed based on the weighted-average number of shares outstanding during each period. Diluted earnings per share reflects the potential dilution that could occur upon the exercise of stock options or upon the vesting of restricted stock grants, any of which would result in the issuance of common stock that would then share in the net income of the Company. Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Basic earnings per share: Net income $ 13,025 $ 39,793 $ 67,574 $ 57,735 Weighted-average basic shares outstanding 45,073,482 44,408,997 44,937,409 44,298,798 Basic earnings per share $ 0.28 $ 0.89 $ 1.50 $ 1.30 Diluted earnings per share: Net income, for diluted earnings per share $ 13,025 $ 39,793 $ 67,574 $ 57,735 Total weighted-average basic shares outstanding 45,073,482 44,408,997 44,937,409 44,298,798 Add effect of dilutive stock options and restricted stock grants 880,465 859,748 769,836 724,941 Total weighted-average diluted shares outstanding 45,953,947 45,268,745 45,707,245 45,023,739 Diluted earnings per share $ 0.28 $ 0.88 $ 1.48 $ 1.28 Anti-dilutive stock options and restricted stock grants 297,730 700,768 567,464 700,768 11 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Note 4. Securities Available-for-Sale The carrying amount of securities and their approximate fair values are reflected in the following table: September 30, 2024 Amortized Cost Unrealized Gains Unrealized Losses Fair Value U.S. government agencies $ 11,267 $ 10 $ 83 $ 11,194 Mortgage-backed securities 1,299,535 2,831 83,203 1,219,163 Municipal bonds 3,183 — 74 3,109 Total $ 1,313,985 $ 2,841 $ 83,360 $ 1,233,466 December 31, 2023 Amortized Cost Unrealized Gains Unrealized Losses Fair Value U.S. 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 Total $ 1,237,633 $ 468 $ 111,941 $ 1,126,160 During the three months ended September 30, 2024, four securities totaling $ 3.7 million were settled. During the nine months ended September 30, 2024, six securities totaling $ 18.5 million were settled, one security totaling $ 2.5 million was called and one security totaling $ 3.0 million matured. During the three months ended September 30, 2023, two mortgage-backed securities totaling $ 4.3 million were settled. During the nine months ended September 30, 2023, four mortgage-backed securities totaling $ 7.0 million were settled. Accrued interest receivable on available-for-sale securities totaled $ 4.0 million and $ 3.3 million at September 30, 2024 and December 31, 2023, respectively, and is included in other assets in the accompanying Unaudited Condensed Consolidated Balance Sheets. The following tables show debt securities available-for-sale in an unrealized loss position for which an allowance for credit losses has not been recorded, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position. Less Than 12 Months 12 Months or More Total September 30, 2024 Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses U.S. government agencies $ — $ — $ 9,886 $ 83 $ 9,886 $ 83 Mortgage-backed securities 67,397 416 904,177 82,787 971,574 83,203 Municipal bonds — — 3,109 74 3,109 74 Total $ 67,397 $ 416 $ 917,172 $ 82,944 $ 984,569 $ 83,360 Less Than 12 Months 12 Months or More Total December 31, 2023 Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses U.S. government agencies $ — $ — $ 15,057 $ 282 $ 15,057 $ 282 Mortgage-backed securities 138,823 3,431 886,699 108,067 1,025,522 111,498 Municipal bonds — — 3,039 161 3,039 161 Total $ 138,823 $ 3,431 $ 904,795 $ 108,510 $ 1,043,618 $ 111,941 12 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements At September 30, 2024, there were 406 mortgage-backed securities, three U.S. government agencies and two municipal bonds in unrealized loss positions for greater than 12 months. There were 15 mortgage-backed securities in unrealized loss positions for less than 12 months. Unrealized losses at December 31, 2023 were comprised of 409 mortgage-backed securities, five U.S. government agencies and two municipal bonds in unrealized loss positions for greater than 12 months and 27 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 the issuers' 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 Unaudited Condensed Consolidated Statements of Income. All mortgage-backed securities in the Company’s portfolio at September 30, 2024 and December 31, 2023 were backed by U.S. government sponsored enterprises (“GSEs”). The following is a summary of investment securities by maturity: September 30, 2024 Available-for-Sale Amortized Cost Fair Value U.S. government agencies Within one year $ 7,000 $ 6,960 One to five years 4,267 4,234 Total 11,267 11,194 Mortgage-backed securities Within one year 24,709 24,544 One to five years 188,706 182,587 Five to 10 years 217,264 200,263 After 10 years 868,856 811,769 Total 1,299,535 1,219,163 Municipal bonds Five to 10 years 3,086 3,024 After 10 years 97 85 Total 3,183 3,109 Total $ 1,313,985 $ 1,233,466 The table above reflects contractual maturities. Actual results will differ as the loans underlying the mortgage-backed securities may prepay sooner than scheduled. There were no investment securities pledged at September 30, 2024 or December 31, 2023. Equity Investments Equity investments, largely comprised of non-marketable equity investments, are generally accounted for under either the equity method or equity security accounting and are included in other assets in the accompanying Unaudited Condensed Consolidated Balance Sheets. The below tables provide additional information related to investments accounted for under these two methods. 13 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Equity Method Accounting The carrying amount and ownership percentage of each equity method investment at September 30, 2024 and December 31, 2023 is reflected in the following table: September 30, 2024 December 31, 2023 Amount Ownership % Amount Ownership % Apiture, Inc. $ 55,430 40.4 % $ 60,682 40.4 % Canapi Ventures SBIC Fund, LP (1) (5) 16,340 2.9 18,190 2.9 Canapi Ventures Fund, LP (2) (5) 1,918 1.5 2,267 1.5 Canapi Ventures Fund II, LP (3) (5) 7,455 1.6 7,232 1.6 Canapi Ventures SBIC Fund II, LP (4) (5) 7,778 2.9 7,611 2.9 Affordable housing (6) 15,105 Various 15,611 Various Solar tax credit investments (7) 6,784 99.0 6,714 99.0 Other (8) 1,390 Various 607 Various Total $ 112,200 $ 118,914 (1) Includes unfunded commitments of $ 5.5 million and $ 5.0 million as of September 30, 2024 and December 31, 2023, respectively. (2) Includes unfunded commitments of $ 555 thousand and $ 559 thousand as of September 30, 2024 and December 31, 2023, respectively. (3) Includes unfunded commitments of $ 6.1 million and $ 6.3 million as of September 30, 2024 and December 31, 2023, respectively. (4) Includes unfunded commitments of $ 7.0 million and $ 7.1 million as of September 30, 2024 and December 31, 2023, respectively. (5) Investee is accounted for under equity method due to the Company's potential influence with investment advisor. (6) Affordable Housing includes 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 are Cape Fear Collective Impact Opportunity 1 LLC (“Cape Fear Collective”) and Cape Fear Collective Impact Opportunity 2 LLC (“Cape Fear Collective 2”) which the Company holds 91.0 % and 32.3 % of limited member interests, respectively. As of September 30, 2024, and December 31, 2023, there was an unfunded commitment of $ 1.8 million and $ 7.7 million, respectively for Estrella Landing. (7) Solar tax credit investments includes Green Sun Tenant LLC (“Green Sun”), SVA 2021-2 TE Holdco LLC (“Sun Vest”), EG5 CSP1 Holding LLC (“HEP”) and HRE Lessee I, LLC (“Heelstone”), which the Company holds a 99.0 % limited member interest in all investments. As of September 30, 2024, and December 31, 2023, there was an unfunded commitment of $ 1.0 million and $ 0.0 million for Heelstone, respectively. (8) Other investments includes OTR Fund I, LLC (“OTR”) which the company holds 5.9 % of limited member interests. As of September 30, 2024, this investment category also includes the carried interest security related to Canapi Ventures Fund I, LP. 14 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Equity Security Accounting The carrying amount of the Company’s investments in non-marketable equity securities with no readily determinable fair value and amounts recognized in earnings on a cumulative basis as of September 30, 2024 and as of and for the nine months ended September 30, 2024 and 2023 is reflected in the following table: As of and for the nine month period ended Cumulative Adjustments September 30, 2024 September 30, 2023 Carrying value (1) $ 82,778 $ 78,508 Carrying value adjustments: Impairment $ — — Upward changes for observable prices (2) 50,901 409 — Downward changes for observable prices ( 1,980 ) ( 369 ) ( 999 ) Net upward (downward) change $ 48,921 $ 40 $ ( 999 ) (1) Includes $ 4.4 million and $ 2.6 million in unfunded commitments as of September 30, 2024, and September 30, 2023, respectively. (2) Cumulative adjustments excludes $ 13.9 million in realized gains for sale of an investment in the second quarter of 2021. For the three and nine months ended September 30, 2024, the Company recognized unrealized gains (losses) on all equity securities held at the reporting date of $ 383 thousand and $ 114 thousand, respectively. For the three and nine months ended September 30, 2023, the Company recognized unrealized losses on all equity securities held at the reporting date of $ 1.0 million. Variable Interest Entities Variable interests are defined as contractual ownership or other interests in an entity that change with fluctuations in the fair value of an entity's net asset value (a “VIE”). The primary beneficiary consolidates the VIE. The primary beneficiary is defined as the enterprise that has both the power to direct the activities of the VIE that most significantly impact the entity's economic performance and the obligation to absorb losses or the right to receive benefits that could be significant to the VIE. Solar Renewable Energy Tax Credit Investments The Company has equity interests in several limited liability companies that own and operate solar renewable energy projects which are accounted for as equity method investments. Over the course of the investments, the Company will receive federal and state tax credits, tax-related benefits, and excess cash available for distribution, if any. The Company may be called to sell its interest in the limited partnerships through a call option once all investment tax credits have been recognized. Affordable Housing The Company has an equity investment in a limited liability company LIHTC that qualifies as an affordable housing project, managed by an unrelated general partner. The Company accounts for the investment under the proportional amortization method. Under this method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance as a component of income tax expense. The Company also has equity interests in two limited liability companies that invest in the acquisition, rehabilitation, or new construction of local qualified housing projects which are accounted for as equity method investments. 15 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Canapi Funds The Company’s limited partnership investments in the Canapi Funds focus on providing venture capital to new and emerging financial technology companies. After 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. Non-marketable and Other Equity Investments The Company also has limited interests in several non-marketable funds, including Small Business Investment Company (“SBIC”) and venture capital funds, which are generally 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. All investments are generally non-redeemable and distributions are expected to be received through the liquidation of the underlying investments throughout the life of the investment fund. All above investments meet the criteria of a VIE, however, the Company is not the primary beneficiary of the entities, as it does not have the power to direct the activities that most significantly impact the economic performance of the entities. The Company’s investment in the unconsolidated VIEs are carried in other assets and the Company’s unfunded capital and other commitments related to the unconsolidated VIEs are carried in other liabilities on the Unaudited Condensed Consolidated Balance Sheets. The Company’s maximum exposure to loss from unconsolidated VIEs includes the investment recorded on the Company’s Unaudited Condensed Consolidated Balance Sheets. For solar 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 LIHTC and solar tax credit investments was determined by assuming a scenario where related tax credits were recaptured. 16 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements The following table provides a summary of the VIEs that the Company has not consolidated as of September 30, 2024 and December 31, 2023: September 30, 2024 Investment Carrying Amount Maximum Exposure to Loss Liability Recognized Classification Solar tax credit investments $ 6,784 $ 39,583 $ 1,008 Other assets (1) Affordable housing 15,105 15,929 1,784 Other assets & other liabilities (2) Canapi Funds 34,116 34,116 19,192 Other assets & other liabilities Non-marketable and other equity investments 10,194 10,194 4,370 Other assets & other liabilities December 31, 2023 Investment Carrying Amount Maximum Exposure to Loss Liability Recognized Classification Solar tax credit investments $ 6,714 $ 48,869 $ — Other assets (3) Affordable housing 15,611 15,611 7,715 Other assets & other liabilities (4) Canapi Funds 35,300 35,300 18,930 Other assets & other liabilities Non-marketable and other equity investments 8,840 8,840 2,321 Other assets & other liabilities (1) Maximum exposure to loss represents $ 6.8 million of current investments and a scenario in which related tax credits are recaptured, collectively totaling $ 32.8 million. (2) Maximum exposure to loss represents $ 15.1 million of investments and a scenario in which related tax credits are recaptured, collectively totaling $ 824 thousand. (3) Maximum exposure to loss represents $ 6.7 million of current investments and a scenario in which related tax credits are recaptured, collectively totaling $ 42.2 million. (4) Maximum exposure to loss represents $ 15.6 million of investments. As there are no tax credits allocated in 2023, there is no increase to the maximum exposure to loss related to recaptured tax credits on the $ 8.8 million LIHTC investment as of December 31, 2023. 17 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Note 5. Loans and Leases Held for Investment and Credit Quality The following tables present total loans and leases held for investment and an aging analysis for the Company’s portfolio segments. Loans and leases are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Current or Less than 30 Days Past Due 30-89 Days Past Due 90 Days or More Past Due Total Past Due Total Carried at Amortized Cost Loans Accounted for Under the Fair Value Option (1) Total Loans and Leases September 30, 2024 Commercial & Industrial Small Business Banking $ 2,168,865 $ 45,392 $ 70,197 $ 115,589 $ 2,284,454 $ 132,722 $ 2,417,176 Specialty Lending 1,332,391 13,417 — 13,417 1,345,808 4,565 1,350,373 Energy & Infrastructure 917,696 261 19,605 19,866 937,562 45,491 983,053 Paycheck Protection Program 3,263 — — — 3,263 — 3,263 Total 4,422,215 59,070 89,802 148,872 4,571,087 182,778 4,753,865 Construction & Development Small Business Banking 423,631 11,033 2,468 13,501 437,132 — 437,132 Specialty Lending 51,388 — — — 51,388 — 51,388 Energy & Infrastructure 15,442 — — — 15,442 — 15,442 Total 490,461 11,033 2,468 13,501 503,962 — 503,962 Commercial Real Estate Small Business Banking 2,682,139 40,981 40,528 81,509 2,763,648 107,511 2,871,159 Specialty Lending 819,434 12,852 — 12,852 832,286 — 832,286 Energy & Infrastructure 223,372 9,146 2,799 11,945 235,317 18,982 254,299 Total 3,724,945 62,979 43,327 106,306 3,831,251 126,493 3,957,744 Commercial Land Small Business Banking 593,114 13,101 4,080 17,181 610,295 34,100 644,395 Total 593,114 13,101 4,080 17,181 610,295 34,100 644,395 Total $ 9,230,735 $ 146,183 $ 139,677 $ 285,860 $ 9,516,595 $ 343,371 $ 9,859,966 Retained Loan Discount and Net Deferred Costs $ ( 28,075 ) Loans and Leases, Net $ 9,831,891 Guaranteed Balance $ 2,907,430 $ 63,704 $ 117,361 $ 181,065 $ 3,088,495 $ 73,984 $ 3,162,479 % Guaranteed 31.5 % 43.6 % 84.0 % 63.3 % 32.5 % 21.5 % 32.1 % 18 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Current or Less than 30 Days Past Due 30-89 Days Past Due 90 Days or More Past Due Total Past Due Total Carried at Amortized Cost Loans Accounted for Under the Fair Value Option (1) Total Loans and Leases December 31, 2023 Commercial & Industrial Small Business Banking $ 2,075,227 $ 16,570 $ 33,366 $ 49,936 $ 2,125,163 $ 151,887 $ 2,277,050 Specialty Lending 1,131,493 — — — 1,131,493 7,829 1,139,322 Energy & Infrastructure 842,907 2,806 4,044 6,850 849,757 46,185 895,942 Paycheck Protection Program 5,595 — — — 5,595 — 5,595 Total 4,055,222 19,376 37,410 56,786 4,112,008 205,901 4,317,909 Construction & Development Small Business Banking 413,349 1,745 — 1,745 415,094 — 415,094 Specialty Lending 47,419 — — — 47,419 — 47,419 Energy & Infrastructure 7,541 — — — 7,541 — 7,541 Total 468,309 1,745 — 1,745 470,054 — 470,054 Commercial Real Estate Small Business Banking 2,414,677 18,589 32,310 50,899 2,465,576 127,358 2,592,934 Specialty Lending 511,712 — 12,032 12,032 523,744 — 523,744 Energy & Infrastructure 158,613 — 3,072 3,072 161,685 17,751 179,436 Total 3,085,002 18,589 47,414 66,003 3,151,005 145,109 3,296,114 Commercial Land Small Business Banking 531,331 1,521 1,910 3,431 534,762 37,026 571,788 Total 531,331 1,521 1,910 3,431 534,762 37,026 571,788 Total $ 8,139,864 $ 41,231 $ 86,734 $ 127,965 $ 8,267,829 $ 388,036 $ 8,655,865 Retained Loan Discount and Net Deferred Costs $ ( 22,018 ) Loans and Leases, Net $ 8,633,847 Guaranteed Balance $ 2,877,105 $ 29,183 $ 61,107 $ 90,290 $ 2,967,395 $ 66,299 $ 3,033,694 % Guaranteed 35.3 % 70.8 % 70.5 % 70.6 % 35.9 % 17.1 % 35.0 % (1) Retained portions of government guaranteed loans sold prior to January 1, 2021 are carried at fair value under FASB ASC Subtopic 825-10, Financial Instruments: Overall . See Note 9. Fair Value of Financial Instruments for additional information. 19 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Credit Quality Indicators The Bank uses internal loan and lease reviews to assess the performance of individual loans and leases. Each loan and lease is assigned a risk grade during the origination and closing process. Subsequent to origination, loans and lease risk grades are continually evaluated as information becomes available. The Bank performs an annual review of each borrower's financial performance to validate the accuracy of the assigned risk grade. Additionally, the loan and lease portfolio is subject to annual independent review by an external firm. Pass: These loans and leases are not impaired and have no known issues that could significantly impact their quality. There are seven categories within the Pass classification depending on the strength of the borrower, including credits that warrant additional management attention but are not currently Special Mention. Special Mention: These loans and leases show signs of weaknesses in either adequate sources of repayment or collateral. These loans and leases may contain underwriting guideline tolerances and/or exceptions with no mitigating factors; and/or instances where adverse economic conditions develop subsequent to origination that do not jeopardize liquidation of the debt but substantially increase the level of risk. Substandard: Loans and leases graded Substandard are inadequately protected by current sound net worth, paying capacity of the obligor, or pledged collateral. Loans and leases classified as Substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt; are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. These loans and leases are consistently not meeting the repayment schedule. 20 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements The following tables present asset quality indicators by portfolio class and origination year. Term Loans and Leases Amortized Cost Basis by Origination Year 2024 2023 2022 2021 2020 Prior Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Total (1) September 30, 2024 Small Business Banking Pass $ 785,067 $ 1,086,723 $ 1,388,276 $ 1,071,627 $ 554,927 $ 509,785 $ 115,206 $ 19,040 $ 5,530,651 Special Mention 7,036 32,023 76,061 72,176 31,983 95,949 8,144 1,108 324,480 Substandard 6,811 13,038 75,005 44,541 36,155 57,064 7,439 345 240,398 Total 798,914 1,131,784 1,539,342 1,188,344 623,065 662,798 130,789 20,493 6,095,529 Specialty Lending Pass 641,027 430,420 262,384 160,179 25,222 2,429 367,088 134,325 2,023,074 Special Mention — 11,350 58,310 35,023 36,148 — 22,396 3,907 167,134 Substandard — 1,042 17,876 12,046 — — 4,436 3,874 39,274 Total 641,027 442,812 338,570 207,248 61,370 2,429 393,920 142,106 2,229,482 Energy & Infrastructure Pass 222,067 354,989 212,845 94,771 34,881 71,171 17,530 — 1,008,254 Special Mention — — 6,494 1,925 — 25,939 — — 34,358 Substandard — — 10,595 119,342 15,772 — — — 145,709 Total 222,067 354,989 229,934 216,038 50,653 97,110 17,530 — 1,188,321 Paycheck Protection Program Pass — — — 1,888 1,375 — — — 3,263 Total — — — 1,888 1,375 — — — 3,263 Total $ 1,662,008 $ 1,929,585 $ 2,107,846 $ 1,613,518 $ 736,463 $ 762,337 $ 542,239 $ 162,599 $ 9,516,595 Year-To-Date Gross Charge-offs Small Business Banking $ — $ 1,542 $ 5,597 $ 3,533 $ 176 $ 1,681 $ 1,098 $ 170 $ 13,797 Energy & Infrastructure $ — $ — $ — $ 153 $ 273 $ — $ — $ — $ 426 Total $ — $ 1,542 $ 5,597 $ 3,686 $ 449 $ 1,681 $ 1,098 $ 170 $ 14,223 21 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Term Loans and Leases Amortized Cost Basis by Origination Year 2023 2022 2021 2019 2018 Prior Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Total (1) December 31, 2023 Small Business Banking Pass $ 990,349 $ 1,470,824 $ 1,255,664 $ 660,926 $ 363,377 $ 296,132 $ 63,963 $ 11,047 $ 5,112,282 Special Mention 7,744 72,913 60,115 37,390 42,095 50,705 7,174 1,407 279,543 Substandard 2,286 31,487 29,636 35,611 18,429 28,700 2,621 — 148,770 Total 1,000,379 1,575,224 1,345,415 733,927 423,901 375,537 73,758 12,454 5,540,595 Specialty Lending Pass 640,596 337,880 226,170 21,286 9,103 112 210,460 58,441 1,504,048 Special Mention 8,858 52,767 35,453 43,080 9,223 — 20,547 5,417 175,345 Substandard — — 12,032 — — — 7,203 4,028 23,263 Total 649,454 390,647 273,655 64,366 18,326 112 238,210 67,886 1,702,656 Energy & Infrastructure Pass 386,421 223,309 120,917 41,919 50,035 23,308 14,818 — 860,727 Special Mention — — 104,371 13,485 7,827 18,627 — — 144,310 Substandard — 4,024 6,303 3,619 — — — — 13,946 Total 386,421 227,333 231,591 59,023 57,862 41,935 14,818 — 1,018,983 Paycheck Protection Program Pass — — 2,831 2,764 — — — — 5,595 Total — — 2,831 2,764 — — — — 5,595 Total $ 2,036,254 $ 2,193,204 $ 1,853,492 $ 860,080 $ 500,089 $ 417,584 $ 326,786 $ 80,340 $ 8,267,829 Current Period 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 (1) Excludes $ 343.4 million and $ 388.0 million of loans accounted for under the fair value option as of September 30, 2024 and December 31, 2023, respectively. The following tables present guaranteed and unguaranteed loan and lease balances by asset quality indicator: September 30, 2024 Loan and Lease Balance (1) Guaranteed Balance Unguaranteed Balance % Guaranteed Pass $ 8,565,242 $ 2,639,737 $ 5,925,505 30.8 % Special Mention 525,972 169,371 356,601 32.2 Substandard 425,381 279,387 145,994 65.7 Total $ 9,516,595 $ 3,088,495 $ 6,428,100 32.5 % 22 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements December 31, 2023 Loan and Lease Balance (1) Guaranteed Balance Unguaranteed Balance % Guaranteed Pass $ 7,482,652 $ 2,622,558 $ 4,860,094 35.0 % Special Mention 599,198 234,845 364,353 39.2 Substandard 185,979 109,992 75,987 59.1 Total $ 8,267,829 $ 2,967,395 $ 5,300,434 35.9 % (1) Excludes $ 343.4 million and $ 388.0 million of loans accounted for under the fair value option as of September 30, 2024 and December 31, 2023, respectively. Nonaccrual Loans and Leases As of September 30, 2024 and December 31, 2023 there were no loans greater than 90 days past due and still accruing. There was no interest income recognized on nonaccrual loans and leases during the three and nine months ended September 30, 2024 and 2023. Accrued interest receivable on loans totaled $ 74.7 million and $ 63.5 million at September 30, 2024 and December 31, 2023 , respectively, and is included in other assets in the accompanying Unaudited Condensed Consolidated Balance Sheets. Nonaccrual loans and leases held for investment as of September 30, 2024 and December 31, 2023 are as follows: September 30, 2024 Loan and Lease Balance (1) Guaranteed Balance Unguaranteed Balance Unguaranteed Exposure with No ACL Commercial & Industrial Small Business Banking $ 96,787 $ 80,194 $ 16,593 $ 1,204 Energy & Infrastructure 19,606 15,866 3,740 135 Total 116,393 96,060 20,333 1,339 Construction & Development Small Business Banking 3,970 3,390 580 375 Total 3,970 3,390 580 375 Commercial Real Estate Small Business Banking 64,226 48,810 15,416 6,867 Specialty Lending 11,304 — 11,304 11,304 Energy & Infrastructure 10,942 10,128 814 814 Total 86,472 58,938 27,534 18,985 Commercial Land Small Business Banking 8,740 7,789 951 269 Total 8,740 7,789 951 269 Total $ 215,575 $ 166,177 $ 49,398 $ 20,968 23 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements December 31, 2023 Loan and Lease Balance (1) Guaranteed Balance Unguaranteed Balance Unguaranteed Exposure with No ACL Commercial & Industrial Small Business Banking $ 47,558 $ 39,018 $ 8,540 $ 407 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 — Total 72,244 47,225 25,019 20,231 Commercial Land Small Business Banking 6,566 5,332 1,234 194 Total 6,566 5,332 1,234 194 Total $ 134,963 $ 95,678 $ 39,285 $ 23,378 (1) Excludes loans accounted for under the fair value option. See Note 9. Fair Value of Financial Instruments for additional information. 24 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements When a loan or lease is placed on nonaccrual status, any accrued interest is reversed from loan interest income. The following table summarizes the amount of accrued interest reversed during the periods presented: Three Months Ended September 30, Nine Months Ended September 30, 2024 (1) 2023 (1) 2024 (1) 2023 (1) Commercial & Industrial $ 950 $ 165 $ 1,924 $ 1,208 Commercial Real Estate 442 32 780 376 Commercial Land 28 — 80 — Construction & Development 44 — 74 — Total $ 1,464 $ 197 $ 2,858 $ 1,584 (1) Excludes loans accounted for under the fair value option. See Note 9. Fair Value of Financial Instruments for additional information. The following table presents the amortized cost basis of collateral-dependent loans and leases, which are individually evaluated to determine expected credit losses, as of September 30, 2024 and December 31, 2023: Total Collateral-Dependent Loans Unguaranteed Portion September 30, 2024 Real Estate Business Assets Other Real Estate Business Assets Other Allowance for Credit Losses Commercial & Industrial Small Business Banking $ 6,324 $ 27,759 $ — $ 1,255 $ 6,747 $ — $ 5,107 Specialty Lending — 14,976 — — 14,976 — 7,181 Energy & Infrastructure 94,131 2,869 — 13,350 74 — — Total 100,455 45,604 — 14,605 21,797 — 12,288 Commercial Real Estate Small Business Banking 35,887 715 — 7,608 715 — 769 Total 35,887 715 — 7,608 715 — 769 Commercial Land Small Business Banking 4,794 — — 2,481 — — 978 Total 4,794 — — 2,481 — — 978 Total $ 141,136 $ 46,319 $ — $ 24,694 $ 22,512 $ — $ 14,035 Total Collateral-Dependent Loans Unguaranteed Portion December 31, 2023 Real Estate Business Assets Other Real Estate Business Assets Other Allowance for Credit Losses Commercial & Industrial Small Business Banking $ 2,737 $ 2,426 $ — $ 421 $ 547 $ — $ 277 Specialty Lending — 4,711 — — 4,711 — — Energy & Infrastructure — 3,022 — — 227 — — Total 2,737 10,159 — 421 5,485 — 277 Commercial Real Estate Small Business Banking 21,211 — — 6,298 — — — Total 21,211 — — 6,298 — — — Commercial Land Small Business Banking 1,735 — — 200 — — — Total 1,735 — — 200 — — — Total $ 25,683 $ 10,159 $ — $ 6,919 $ 5,485 $ — $ 277 25 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Allowance for Credit Losses - Loans and Leases See Note 1. Organization and Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements in the Company’s 2023 Form 10-K for a description of the methodologies used to estimate the ACL. The following table details activity in the ACL by portfolio segment allowance for the periods presented: Three Months Ended Commercial & Industrial Construction & Development Commercial Real Estate Commercial Land Total September 30, 2024 Beginning Balance $ 108,166 $ 3,694 $ 23,540 $ 2,467 $ 137,867 Charge offs ( 1,739 ) — ( 273 ) ( 16 ) ( 2,028 ) Recoveries 41 — 269 8 318 Provision (Recovery) 26,580 291 4,437 1,272 32,580 Ending Balance $ 133,048 $ 3,985 $ 27,973 $ 3,731 $ 168,737 September 30, 2023 Beginning Balance $ 79,407 $ 6,428 $ 29,908 $ 4,373 $ 120,116 Charge offs ( 9,088 ) — ( 287 ) — ( 9,375 ) Recoveries 104 — 149 — 253 Provision (Recovery) 10,395 ( 448 ) 134 198 10,279 Ending Balance $ 80,818 $ 5,980 $ 29,904 $ 4,571 $ 121,273 Nine Months Ended Commercial & Industrial Construction & Development Commercial Real Estate Commercial Land Total September 30, 2024 Beginning Balance $ 87,581 $ 4,717 $ 28,864 $ 4,678 $ 125,840 Charge offs ( 13,483 ) ( 338 ) ( 378 ) ( 24 ) ( 14,223 ) Recoveries 553 — 536 8 1,097 Provision (Recoveries) 58,397 ( 394 ) ( 1,049 ) ( 931 ) 56,023 Ending Balance $ 133,048 $ 3,985 $ 27,973 $ 3,731 $ 168,737 September 30, 2023 Beginning Balance $ 64,995 $ 5,101 $ 22,901 $ 3,569 $ 96,566 Adoption of ASU 2022-02 ( 25 ) ( 166 ) ( 83 ) ( 402 ) ( 676 ) Charge offs ( 17,564 ) — ( 979 ) — ( 18,543 ) Recoveries 685 — 913 — 1,598 Provision 32,727 1,045 7,152 1,404 42,328 Ending Balance $ 80,818 $ 5,980 $ 29,904 $ 4,571 $ 121,273 During the three months ended September 30, 2024, the ACL increased primarily as a result of an increase in specific reserves on loans individually evaluated for impairment. During the nine months ended September 30, 2024, the ACL increased as a result of specific reserve changes on individually evaluated loans and continued growth of the loan and lease portfolio. Loss rates are adjusted for twelve month forecasted unemployment followed by a twelve-month straight-line reversion period. During the three and nine months ended September 30, 2023, the ACL increased as a result of continued loan growth, combined with specific reserve changes on individually evaluated loans and charge-off related impacts. Additionally, during the first quarter of 2023, certain assumptions were refined, drawing more heavily on internal data, in the calculations of PD, LGD, and prepayment rates. These refinements increased the ACL by $ 1.5 million during the nine months ended September 30, 2023. Loss rates are adjusted for twelve month forecasted unemployment followed by a twelve-month straight-line reversion period. 26 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Loan Modifications for Borrowers Experiencing Financial Difficulty The Company may agree to modify the contractual terms of a loan to a borrower experiencing financial difficulty as a part of ongoing loss mitigation strategies. These modifications may result in an interest rate reduction, term extension, an other-than-insignificant payment delay, or a combination thereof. The Company typically does not offer principal forgiveness. The following tables summarize the amortized cost basis of loans that were modified during the three and nine months ended September 30, 2024 and September 30, 2023, respectively: Three Months Ended September 30, 2024 Other-Than-Insignificant Payment Delay Term Extension Interest Rate Reduction Combination - Term Extension & Interest Rate Reduction % of Total Class of Financing Receivable Small Business Banking $ 2,014 $ — $ — $ — 0.03 % Specialty Lending — — 3,478 2,500 0.16 Total $ 2,014 $ — $ 3,478 $ 2,500 0.19 % Nine Months Ended September 30, 2024 Other-Than-Insignificant Payment Delay Term Extension Interest Rate Reduction Combination - Term Extension & Interest Rate Reduction % of Total Class of Financing Receivable Small Business Banking $ 8,278 $ — $ — $ — 0.14 % Specialty Lending — — 3,478 2,500 0.16 Total $ 8,278 $ — $ 3,478 $ 2,500 0.30 % Three Months Ended September 30, 2023 Other-Than-Insignificant Payment Delay Term Extension Interest Rate Reduction Combination - Term Extension & Payment Delay % of Total Class of Financing Receivable Small Business Banking $ 10,117 $ 5,184 $ — $ — 0.28 % Total $ 10,117 $ 5,184 $ — $ — 0.28 % Nine Months Ended September 30, 2023 Other-Than-Insignificant Payment Delay Term Extension Interest Rate Reduction Combination - Term Extension & Payment Delay % of Total Class of Financing Receivable Small Business Banking $ 10,117 $ 5,184 $ 3,356 $ 361 0.35 % Specialty Lending — 399 — 4,164 0.30 Energy & Infrastructure — 13,485 — — 1.66 Total $ 10,117 $ 19,068 $ 3,356 $ 4,525 2.31 % As of September 30, 2024, the Company had $ 6.3 million in commitments to lend additional funds to these borrowers. The following table presents an aging analysis of loans that were modified within the twelve months ended September 30, 2024 and September 30, 2023, respectively: September 30, 2024 Current 30-89 Days Past Due 90 Days or More Past Due Total Past Due Small Business Banking $ 8,278 $ — $ — $ — Specialty Lending 5,978 — — — Total $ 14,256 $ — $ — $ — 27 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements September 30, 2023 Current 30-89 Days Past Due 90 Days or More Past Due Total Past Due Small Business Banking $ 19,018 $ — $ — $ — Specialty Lending 4,563 — — — Energy & Infrastructure 13,485 — — — Total $ 37,066 $ — $ — $ — The following tables summarize the financial impacts of loan modifications made to borrowers experiencing financial difficulty during the periods presented: Three Months Ended September 30, 2024 Weighted Average Interest Rate Reduction Weighted Average Term Extension (in Months) Specialty Lending 5.00 % 7 Nine Months Ended September 30, 2024 Weighted Average Interest Rate Reduction Weighted Average Term Extension (in Months) Specialty Lending 5.00 % 7 Three Months Ended September 30, 2023 Weighted Average Interest Rate Reduction Weighted Average Term Extension (in Months) Small Business Banking — % 60 Nine Months Ended September 30, 2023 Weighted Average Interest Rate Reduction Weighted Average Term Extension (in Months) Small Business Banking 1.41 % 67 Specialty Lending — 70 Energy & Infrastructure — 12 Additionally, there were no loans that were modified within the twelve months ended September 30, 2024 that subsequently defaulted during the periods presented. The Company’s ACL is estimated using lifetime historical loan performance adjusted to reflect current conditions and reasonable and supportable forecasts. 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. Note 6. Leases Lessor Equipment Leasing The Company may purchase new equipment for the purpose of leasing such equipment to customers within its verticals. Equipment purchased to fulfill commitments to commercial renewable energy projects is rented out under operating leases while leases of equipment outside of the renewable energy vertical are generally direct financing leases. Accordingly, leased assets under operating leases are included in premises and equipment, net while leased assets under direct financing leases are included in loans and leases held for investment in the accompanying Unaudited Condensed Consolidated Balance Sheets. 28 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Direct Financing Leases Interest income on direct financing leases is recognized when earned. Unearned interest is recognized over the lease term on a basis which results in a constant rate of return on the unrecovered lease investment. The term of each lease is generally 3 to 7 years which is consistent with the useful life of the equipment with no residual value. The net investment in direct finance leases included in loans and leases held for investment are as follows: September 30, 2024 December 31, 2023 Gross direct finance lease payments receivable $ 1,357 $ 2,335 Less – unearned interest ( 116 ) ( 218 ) Net investment in direct financing leases $ 1,241 $ 2,117 Future minimum lease payments to be received under finance leases are as follows: As of September 30, 2024 Amount 2024 $ 322 2025 929 2026 106 Total $ 1,357 Interest income of $ 29 thousand and $ 72 thousand was recognized in the three months ended September 30, 2024 and 2023, respectively. Interest income of $ 95 thousand and $ 211 thousand was recognized in the nine months ended September 30, 2024 and 2023, respectively. Operating Leases The term of each operating lease is generally 10 to 15 years. The Company retains ownership of the equipment and associated tax benefits such as investment tax credits and accelerated depreciation. At the end of the lease term, the lessee has the option to renew the lease for two additional terms or purchase the equipment at the then-current fair market value. Rental revenue from operating leases is recognized on a straight-line basis over the term of the lease. Rental equipment is recorded at cost and depreciated to an estimated residual value on a straight-line basis over the estimated useful life. The useful lives generally range from 20 to 25 years and residual values generally range from 20 % to 50 %, however, they are subject to periodic evaluation. Changes in useful lives or residual values will impact depreciation expense and any gain or loss from the sale of used equipment. The estimated useful lives and residual values of the Company's leasing equipment are based on industry disposal experience and the Company's expectations for future sale prices. If the Company decides to sell or otherwise dispose of rental equipment, it is carried at the lower of cost or fair value less costs to sell or dispose. Repair and maintenance costs that do not extend the lives of the rental equipment are charged to equipment expense at the time the costs are incurred. As of September 30, 2024 and December 31, 2023, the Company had a net investment of $ 96.0 million and $ 104.0 million, respectively, in assets included in premises and equipment, net that are subject to operating leases. Of the net investment, the gross balance of the assets was $ 160.7 million and $ 162.3 million as of September 30, 2024 and December 31, 2023, respectively. Accumulated depreciation was $ 64.7 million and $ 58.3 million as of September 30, 2024 and December 31, 2023, respectively. Depreciation expense recognized on these assets was $ 2.4 million for the three months ended September 30, 2024 and 2023. Depreciation expense recognized on these assets was $ 7.1 million and $ 7.2 million for the nine months ended September 30, 2024 and 2023, respectively. Lease income of $ 2.3 million and $ 2.4 million was recognized in the three months ended September 30, 2024 and 2023, respectively. Lease income of $ 7.1 million was recognized in the nine months ended September 30, 2024 and 2023. 29 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements A maturity analysis of future minimum lease payments to be received under non-cancelable operating leases is as follows: As of September 30, 2024 Amount 2024 $ 2,988 2025 8,741 2026 8,721 2027 8,483 2028 3,837 Thereafter 9,708 Total $ 42,478 Note 7. Servicing Assets Loans serviced for others are not included in the accompanying Unaudited Condensed Consolidated Balance Sheets. The unpaid principal balance of loans serviced for others requiring recognition of a servicing asset was $ 3.38 billion and $ 3.09 billion at September 30, 2024 and December 31, 2023, respectively. The unpaid principal balance for all loans serviced for others was $ 4.45 billion and $ 4.24 billion at September 30, 2024 and December 31, 2023, respectively. The following table summarizes the activity pertaining to servicing rights measured at fair value: Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Balance at beginning of period $ 51,303 $ 31,042 $ 48,186 $ 26,323 Additions, net 5,200 4,750 13,938 11,944 Fair value changes: Due to changes in valuation inputs or assumptions ( 1,824 ) 13,334 ( 902 ) 15,457 Decay due to increases in principal paydowns or runoff ( 2,384 ) ( 1,999 ) ( 8,927 ) ( 6,597 ) Balance at end of period $ 52,295 $ 47,127 $ 52,295 $ 47,127 See Note 9. Fair Value of Financial Instruments for further details about servicing assets measured at fair value. The fair value of servicing rights was determined using a weighted average discount rate of 14.5 % on September 30, 2024 and 15.0 % on September 30, 2023. The fair value of servicing rights was determined using a weighted average prepayment speed of 15.7 % on September 30, 2024 and 15.3 % on September 30, 2023, with the actual rate depending on the stratification of the specific right. Changes to fair value are reported in loan servicing asset revaluation within the Unaudited Condensed Consolidated Statements of Income. As of September 30, 2024, the Company had servicing assets related to conventional commercial loans carried at amortized cost of $ 258 thousand. 30 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Note 8. Borrowings Total outstanding borrowings consisted of the following: September 30, 2024 December 31, 2023 Borrowings In March 2021, the Company entered into a 60 -month term loan agreement of $ 50.0 million with a third party correspondent bank. The loan accrues interest at a fixed rate of 2.95 % with a monthly payment sufficient to fully amortize the loan, with all remaining unpaid principal and interest due at maturity on March 30, 2026 . The Company paid the Lender a non-refundable $ 325 thousand loan origination fee upon signing of the Note that is presented as a direct deduction from the carrying amount of the loan and will be amortized into interest expense over the life of the loan. $ 15,758 $ 23,354 In March 2024, the Company entered into a 60 -month term loan agreement of $ 100.0 million with a third party correspondent bank. The loan accrues interest at a fixed rate of 5.95 % with monthly interest payments until maturity on March 28, 2029 , and $ 33.0 million of principal to be paid in year 4, and $ 67.0 million of principal to be paid in year 5. The Company paid the Lender a non-refundable $ 600 thousand loan origination fee upon signing of the Note that is represented as a direct deduction from the carrying amount of the loan and will be amortized into interest expense over the life of the loan. 99,470 — Other long term debt (1) 143 — Total borrowings $ 115,371 $ 23,354 (1) Includes finance leases. As of September 30, 2024 and December 31, 2023, the Company’s unused borrowing capacity was $ 3.69 billion and $ 3.68 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, access to a repurchase agreement, and the Federal Reserve Bank's Bank Term Funding Program which ended March 11, 2024. If additional collateral is available, the Company's aggregate borrowing capacity with all of the above sources is $ 6.37 billion and $ 6.28 billion as of September 30, 2024 and December 31, 2023, respectively. Note 9. Fair Value of Financial Instruments Fair Value Hierarchy There are three levels of inputs in the fair value hierarchy that may be used to measure fair value. Financial instruments are considered Level 1 when valuation can be based on quoted prices in active markets for identical assets or liabilities. Level 2 financial instruments are valued using quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or models using inputs that are observable or can be corroborated by observable market data of substantially the full term of the assets or liabilities. Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable and when determination of the fair value requires significant management judgment or estimation. 31 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Recurring Fair Value The table below provides a rollforward of the Level 3 equity warrant asset fair values: Three Months Ended September 30, Nine Months Ended September 30, Equity Warrant Assets 2024 2023 2024 2023 Balance at beginning of period $ 7,407 $ 2,251 $ 2,874 $ 2,210 New equity warrant assets 298 708 791 952 Changes in fair value, net ( 127 ) 19 6,119 37 Settlements ( 264 ) — ( 2,470 ) ( 221 ) Balance at end of period $ 7,314 $ 2,978 $ 7,314 $ 2,978 The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis. September 30, 2024 Total Level 1 Level 2 Level 3 Investment securities available-for-sale US government agencies $ 11,194 $ — $ 11,194 $ — Mortgage-backed securities 1,219,163 — 1,219,163 — Municipal bonds (1) 3,109 — 3,024 85 Loans held for investment 343,371 — — 343,371 Servicing assets (2) 52,295 — — 52,295 Mutual fund 740 — 740 — Equity warrant assets 7,314 — — 7,314 Total assets at fair value $ 1,637,186 $ — $ 1,234,121 $ 403,065 December 31, 2023 Total Level 1 Level 2 Level 3 Investment securities available-for-sale US government agencies $ 17,529 $ — $ 17,529 $ — Mortgage-backed securities 1,105,592 — 1,105,592 — Municipal bonds (1) 3,039 — 2,954 85 Loans held for investment 388,036 — — 388,036 Servicing assets (2) 48,186 — — 48,186 Mutual fund 1,645 — 1,645 — Equity warrant assets 2,874 — — 2,874 Total assets at fair value $ 1,566,901 $ — $ 1,127,720 $ 439,181 (1) During the three and nine months ended September 30, 2024 there was no level 3 fair value adjustment gain or loss. During the three months ended September 30, 2023, there was no level 3 fair value adjustment gain or loss. During the nine months ended September 30, 2023, the Company recorded a level 3 fair value adjustment loss of $ 9 thousand. (2) See Note 7 for a rollforward of recurring Level 3 fair values for servicing assets. For additional information on the valuation techniques and significant inputs for Level 2 and Level 3 assets and liabilities that are measured at fair value on a recurring basis, see Note 10. Fair Value of Financial Instruments in the Company’s 2023 Form 10-K. Additionally, see Note 1. Basis of Presentation of the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements for information related to changes in valuation techniques for the Company's loan servicing assets and loans accounted for under the fair value option. 32 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Fair Value Option Until the first quarter of 2021, the Company had historically elected to account for retained participating interests of all government guaranteed loans under the fair value option in order to align the accounting presentation with the Company’s viewpoint of the economics of the loans. Interest income is recognized in the same manner on loans reported at fair value as on non-fair value loans, except in regard to origination fees and costs which are recognized immediately upon fair value election. Not electing fair value generally results in a larger discount being recorded on the date of the sale. This discount is subsequently accreted into interest income over the underlying loan’s remaining term using the effective interest method. Management made this change of election in alignment with its ongoing effort to reduce volatility and drive more predictable revenue. In accordance with GAAP, any loans for which fair value was previously elected continue to be measured as such. There were no loans accounted for under the fair value option that were 90 days or more past due and still accruing interest at September 30, 2024 or December 31, 2023. The unpaid principal balance of unguaranteed exposure for nonaccruals was $ 9.5 million and $ 9.1 million at September 30, 2024 and December 31, 2023, respectively. The following tables provide more information about the fair value carrying amount and the unpaid principal outstanding of loans accounted for under the fair value option at September 30, 2024 and December 31, 2023. September 30, 2024 Total Loans Nonaccruals 90 Days or More Past Due Fair Value Carrying Amount Unpaid Principal Balance Difference Fair Value Carrying Amount Unpaid Principal Balance Difference Fair Value Carrying Amount Unpaid Principal Balance Difference Fair Value Option Elections Loans held for investment $ 343,371 $ 359,023 $ ( 15,653 ) $ 58,494 $ 60,046 $ ( 1,551 ) $ 54,094 $ 55,583 $ ( 1,489 ) December 31, 2023 Total Loans Nonaccruals 90 Days or More Past Due Fair Value Carrying Amount Unpaid Principal Balance Difference Fair Value Carrying Amount Unpaid Principal Balance Difference Fair Value Carrying Amount Unpaid Principal Balance Difference Fair Value Option Elections Loans held for investment $ 388,036 $ 407,544 $ ( 19,508 ) $ 48,474 $ 50,749 $ ( 2,275 ) $ 36,490 $ 37,939 $ ( 1,449 ) The following table presents the net gains (losses) from changes in fair value. Three Months Ended September 30, Nine Months Ended September 30, Gains (Losses) on Loans Accounted for under the Fair Value Option 2024 2023 2024 2023 Loans held for investment $ 2,255 $ ( 568 ) $ 2,208 $ ( 3,369 ) Gains and (losses) related to borrower-specific credit risk were $ 0 for the three and nine months ended September 30, 2024, and $ 0 and $ 3.5 million for the three and nine months ended September 30, 2023, respectively. 33 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements The following tables summarize the activity pertaining to loans accounted for under the fair value option: Three Months Ended September 30, Nine Months Ended September 30, Loans held for investment 2024 2023 2024 2023 Balance at beginning of period $ 363,017 $ 441,781 $ 388,036 $ 494,458 Repurchases 3,312 3,390 16,125 19,287 Fair value changes (1) 2,255 ( 568 ) 2,208 ( 3,369 ) Settlements ( 25,213 ) ( 34,475 ) ( 62,998 ) ( 100,248 ) Balance at end of period $ 343,371 $ 410,128 $ 343,371 $ 410,128 (1) Three and nine month periods ended September 30, 2023 include a $ 1.3 million increase related to change in estimate implemented on July 1, 2023. See Note 1. Basis of Presentation for additional information. Non-Recurring Fair Value The tables below present the recorded amount of assets measured at fair value on a non-recurring basis. The Company has no liabilities recorded at fair value on a non-recurring basis. September 30, 2024 Total Level 1 Level 2 Level 3 Collateral-dependent loans $ 13,400 $ — $ — $ 13,400 Total assets at fair value $ 13,400 $ — $ — $ 13,400 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 For additional information on the valuation techniques and significant inputs for Level 2 and Level 3 assets that are measured at fair value on a non-recurring basis, see Note 10. Fair Value of Financial Instruments in the Company’s 2023 Form 10-K. 34 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Level 3 Analysis For Level 3 assets measured at fair value on a recurring or non-recurring basis as of September 30, 2024 and December 31, 2023, the significant unobservable inputs used in the fair value measurements were as follows: September 30, 2024 Level 3 Assets with Significant Unobservable Inputs Fair Value Valuation Technique Significant Unobservable Inputs Range Weighted Average (1) Recurring fair value Municipal bond $ 85 Discounted expected cash flows Discount rate 7.0 % N/A Prepayment speed 5.0 % N/A Loans held for investment $ 343,371 Discounted expected cash flows Loss rate 0.0 % - 6.3 % 1.1 % Discount rate 7.5 % - 18.0 % 9.1 % Prepayment speed 14.4 % - 30.3 % 16.3 % Servicing assets $ 52,295 Discounted expected cash flows Discount rate 14.5 % 14.5 % Prepayment speed 12.1 % - 18.2 % 15.7 % Equity warrant assets $ 7,314 Black-Scholes option pricing model Volatility 13.1 % - 90.0 % 31.8 % Risk-free interest rate 3.6 % - 3.8 % 3.6 % Marketability discount 5.0 % - 25.0 % 10.3 % Remaining life 3.2 - 12.0 years 4.6 years Non-recurring fair value Collateral-dependent loans $ 13,400 Discounted appraisals Appraisal adjustments (2) 0.0 % - 92.9 % 48.7 % 35 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements December 31, 2023 Level 3 Assets with Significant Unobservable Inputs Fair Value Valuation Technique Significant Unobservable Inputs Range Weighted Average (1) Recurring fair value Municipal bond $ 85 Discounted expected cash flows Discount rate 7.0 % N/A Prepayment speed 5.0 % N/A Loans held for investment $ 388,036 Discounted expected cash flows Loss rate 0.0 % - 7.4 % 1.2 % Discount rate 6.7 % - 18.0 % 9.6 % Prepayment speed 14.0 % - 30.3 % 16.0 % Servicing assets $ 48,186 Discounted expected cash flows Discount rate 14.5 % 14.5 % Prepayment speed 11.8 % - 17.8 % 15.3 % Equity warrant assets $ 2,874 Black-Scholes option pricing model Volatility 26.9 % - 90.0 % 35.8 % Risk-free interest rate 3.8 % - 3.9 % 3.9 % Marketability discount 20.0 % - 25.0 % 22.7 % Remaining life 3.9 - 10 years 7.6 years Non-recurring fair value Collateral-dependent loans $ 4,503 Discounted appraisals Appraisal adjustments (2) 10.0 % - 70.0 % 38.7 % Foreclosed assets $ 6,481 Discounted appraisals Appraisal adjustments (2) 10.0 % - 17.4 % 10.4 % (1) Weighted averages are determined by the relative fair value of the instruments or the relative contribution to the instruments fair value. (2) Appraisals may be adjusted by management for customized discounting criteria, estimated sales costs, and other qualitative adjustments. Estimated Fair Value of Other Financial Instruments GAAP also requires disclosure of the fair value of financial instruments carried at book value on the Unaudited Condensed Consolidated Balance Sheets. 36 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements The carrying amounts and estimated fair values of the Company’s financial instruments not measured at fair value on a recurring or non-recurring basis are as follows: September 30, 2024 Carrying Amount Quoted Price In Active Markets for Identical Assets/Liabilities (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Fair Value Financial assets Cash and due from banks $ 666,585 $ 666,585 $ — $ — $ 666,585 Certificates of deposit with other banks 250 250 — — 250 Loans held for sale 359,977 — — 382,752 382,752 Loans and leases held for investment, net of allowance for credit losses on loans and leases 9,319,783 — — 9,781,850 9,781,850 Financial liabilities Deposits 11,400,547 — 11,294,804 — 11,294,804 Borrowings 115,371 — — 125,733 125,733 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 Financial assets Cash and due from banks $ 582,540 $ 582,540 $ — $ — $ 582,540 Certificates of deposit with other banks 250 250 — — 250 Loans held for sale 387,037 — — 402,096 402,096 Loans and leases held for investment, net of allowance for credit losses on loans and leases 8,119,971 — — 8,600,046 8,600,046 Financial liabilities Deposits 10,275,019 — 10,080,182 — 10,080,182 Borrowings 23,354 — — 22,844 22,844 Note 10. Commitments and Contingencies Litigation In the normal course of business, the Company is involved in various legal proceedings. Management believes that the outcome of such proceedings will not materially affect the financial position, results of operations or cash flows of the Company. Financial Instruments with Off-Balance-Sheet Risk The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, credit risk in excess of the amount recognized in the balance sheet. 37 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed 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. The Company uses the same credit policies in making commitments and conditional obligations as for on-balance-sheet instruments. A summary of the Company’s commitments is as follows: September 30, 2024 December 31, 2023 Commitments to extend credit (1) $ 3,428,065 $ 2,921,978 Standby letters of credit 7,926 20,487 Airplane purchase agreement commitments — 9,000 Total unfunded off-balance-sheet credit risk $ 3,435,991 $ 2,951,465 (1) Includes unfunded overdraft protection. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the party. Collateral held varies, but may include accounts receivable, inventory, property and equipment, residential real estate and income-producing commercial properties. Commitment letters are issued after approval of the loan by the Credit Department and generally expire ninety days after issuance. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held varies as specified above and is required in instances which the Company deems necessary. The allowance for off-balance-sheet credit exposures was $ 12.4 million and $ 4.8 million at September 30, 2024 and December 31, 2023, respectively. During the three and nine months ended September 30, 2024, the Company recorded $ 1.9 million and $ 7.5 million, respectively, in expense related to the allowance for off-balance sheet credit exposures. During the three and nine months ended September 30, 2023, the Company recorded a $ 161 thousand expense reversal and $ 3.1 million in expense, respectively, related to the allowance for off-balance sheet credit exposures. Beginning in the second quarter of 2024, this expense was presented in the provision for credit losses. This expense has historically been presented in other expense and that classification remains unchanged for prior periods. Other Commitments As of September 30, 2024 and December 31, 2023, the Company recorded unfunded commitments to provide capital contributions for on-balance-sheet investments in the amount of $ 26.4 million and $ 29.0 million, respectively. Concentrations of Credit Risk The distribution of commitments to extend credit approximates the distribution of loans outstanding. The Company generally does not have a significant number of credits to any single borrower or group of related borrowers whereby their retained unguaranteed exposure exceeds $ 20.0 million, except for forty-four relationships that have a retained unguaranteed exposure of $ 1.71 billion of which $ 1.12 billion of the unguaranteed exposure has been disbursed. Additionally, the Company has future minimum lease payments receivable under non-cancelable operating leases totaling $ 42.5 million, of which no relationships exceed $ 20.0 million. The Company from time-to-time may have cash and cash equivalents on deposit with other financial institutions that exceed federally-insured limits. 38 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Geographic Concentration s The following table presents the geographic concentration of the Company's loan and lease portfolio at September 30, 2024: % of Total Geographic Regions (1) Southeast 32.1 % West 25.1 Northeast 17.3 Midwest 12.6 Southwest 12.4 Non-U.S. 0.5 Total 100.0 % (1) Concentrations are stated as a percentage of total unguaranteed loans held for investment. Midwest consists of ND, SD, NE, KS, MN, IA,WI, MO, IL, IN, MI and OH. Northeast consists of MD, DE, PA, NJ, NY, CT, RI, MA, VT, ME and NH. Southeast consists of AR, LA, MS, TN, AL, GA, FL, SC, KY, NC, VA, WV, DC, PR and VI. Southwest consists of AZ, NM, TX and OK. West consists of WA, OR, CA, NV, ID, MT, WY, CO, UT, AK and HI. Non-U.S. includes addressees with foreign domicile. Domicile is determined by the principal resident or business address of the entity. Note 11. Segments The Company's management reporting process measures the performance of its operating segments based on internal operating structure, which is subject to change from time-to-time. Accordingly, the Company operates two reportable segments for management reporting purposes as discussed below: Banking - This segment specializes in providing financing services to small businesses nationwide in targeted industries and deposit-related services to small businesses, consumers and other customers nationwide. The primary source of revenue for this segment is net interest income and secondarily the origination and sale of government guaranteed loans. Fintech - This segment is involved in making strategic investments into emerging financial technology companies. The primary sources of revenue for this segment are principally gains and losses on equity method and equity security investments and management fees. The Fintech segment is comprised of the Company's direct wholly owned subsidiaries Live Oak Ventures and Canapi Advisors, and the investments held by those entities, as well as the Bank's investment in Apiture. 39 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements The following tables provide financial information for the Company's segments. The information provided under the caption “Other” represents operations not considered to be reportable segments and/or general operating expenses of the Company, and includes the parent company, other non-bank subsidiaries and elimination adjustments to reconcile the results of the operating segments to the Unaudited Condensed Consolidated Financial Statements prepared in conformity with GAAP. Banking Fintech Other Consolidated As of and for the three months ended September 30, 2024 Interest income $ 208,897 $ 3 $ 36 $ 208,936 Interest expense 110,176 — 1,760 111,936 Net interest income (loss) 98,721 3 ( 1,724 ) 97,000 Provision for credit losses 34,502 — — 34,502 Noninterest income 31,196 ( 56 ) 1,792 32,932 Noninterest expense 73,383 1,469 2,737 77,589 Income tax expense (benefit) 5,824 ( 411 ) ( 597 ) 4,816 Net income (loss) $ 16,208 $ ( 1,111 ) $ ( 2,072 ) $ 13,025 Total assets $ 12,470,278 $ 137,272 $ ( 204 ) $ 12,607,346 As of and for the three months ended September 30, 2023 Interest income $ 180,416 $ ( 6 ) $ 201 $ 180,611 Interest expense 90,914 — 287 91,201 Net interest income (loss) 89,502 ( 6 ) ( 86 ) 89,410 Provision for credit losses 10,279 — — 10,279 Noninterest income 35,730 1,652 509 37,891 Noninterest expense 69,480 3,069 1,713 74,262 Income tax expense (benefit) 3,084 ( 5 ) ( 112 ) 2,967 Net income (loss) $ 42,389 $ ( 1,418 ) $ ( 1,178 ) $ 39,793 Total assets $ 10,800,881 $ 110,914 $ 38,665 $ 10,950,460 40 Table of Contents Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Banking Fintech Other Consolidated As of and for the nine months ended September 30, 2024 Interest income $ 599,534 $ 30 $ 240 $ 599,804 Interest expense 317,532 — 3,841 321,373 Net interest income (loss) 282,002 30 ( 3,601 ) 278,431 Provision for credit losses 62,631 — — 62,631 Noninterest income 88,536 1,569 3,083 93,188 Noninterest expense 219,517 6,540 6,925 232,982 Income tax expense (benefit) 12,285 ( 1,279 ) ( 2,574 ) 8,432 Net income (loss) $ 76,105 $ ( 3,662 ) $ ( 4,869 ) $ 67,574 Total assets $ 12,470,278 $ 137,272 $ ( 204 ) $ 12,607,346 As of and for the nine months ended September 30, 2023 Interest income $ 501,271 $ 14 $ 454 $ 501,739 Interest expense 245,094 — 916 246,010 Net interest income (loss) 256,177 14 ( 462 ) 255,729 Provision for credit losses 42,328 — — 42,328 Noninterest income 74,215 5,689 1,722 81,626 Noninterest expense 215,879 8,032 5,770 229,681 Income tax expense (benefit) 7,785 177 ( 351 ) 7,611 Net income (loss) $ 64,400 $ ( 2,506 ) $ ( 4,159 ) $ 57,735 Total assets $ 10,800,881 $ 110,914 $ 38,665 $ 10,950,460 41 Table of Contents