Live Oak Bancshares, Inc. 10-Q

Item 1. Financial Statements Live Oak Bancshares, Inc. Condensed Consolidated Balance Sheets As of September 30, 2020 (unaudited) and December 31, 2019* (Dollars in thousands) September 30, 2020 December 31, 2019 Assets Cash and due from banks $ 608,826 $ 124,610 Federal funds sold 25,924 96,787 Certificates of deposit with other banks 7,250 7,250 Investment securities available-for-sale 765,777 540,045 Loans held for sale (includes $ 30,443 and $ 16,198 measured at fair value, respectively) 1,190,200 966,447 Loans and leases held for investment (includes $ 845,747 and $ 824,520 measured at fair value, respectively) 5,037,199 2,627,286 Allowance for credit losses on loans and leases ( 44,210 ) ( 28,234 ) Net loans and leases 4,992,989 2,599,052 Premises and equipment, net 253,737 279,099 Foreclosed assets 3,264 5,612 Servicing assets 37,831 35,365 Operating lease right-of-use assets 2,697 2,427 Other assets 204,886 156,134 Total assets $ 8,093,381 $ 4,812,828 Liabilities and Shareholders’ Equity Liabilities Deposits: Noninterest-bearing $ 58,771 $ 51,965 Interest-bearing 5,647,273 4,175,015 Total deposits 5,706,044 4,226,980 Borrowings 1,747,083 14 Operating lease liabilities 2,931 2,619 Other liabilities 53,159 50,829 Total liabilities 7,509,217 4,280,442 Shareholders’ equity Preferred stock, no par value, 1,000,000 authorized, none issued or outstanding at September 30, 2020 and December 31, 2019 — — Class A common stock, no par value, 100,000,000 shares authorized, 38,110,451 and 37,401,443 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively 325,753 309,526 Class B common stock, no par value, 10,000,000 shares authorized, 2,465,531 and 2,915,531 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively 26,106 30,871 Retained earnings 207,400 180,265 Accumulated other comprehensive income 24,905 11,724 Total shareholders’ equity 584,164 532,386 Total liabilities and shareholders’ equity $ 8,093,381 $ 4,812,828 * Derived from audited consolidated financial statements. See Notes to Unaudited Condensed Consolidated Financial Statements 1 Live Oak Bancshares, Inc. Condensed Consolidated Statements of Income For the three and nine months ended September 30, 2020 and 2019 (unaudited) (Dollars in thousands, except per share data) Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Interest income Loans and fees on loans $ 70,621 $ 55,939 $ 191,604 $ 150,819 Investment securities, taxable 4,123 4,001 11,671 11,434 Other interest earning assets 334 1,167 2,093 3,914 Total interest income 75,078 61,107 205,368 166,167 Interest expense Deposits 22,155 23,576 70,531 64,096 Borrowings 1,560 — 2,415 — Total interest expense 23,715 23,576 72,946 64,096 Net interest income 51,363 37,531 132,422 102,071 Provision for loan and lease credit losses 10,274 3,960 32,024 10,403 Net interest income after provision for loan and lease credit losses 41,089 33,571 100,398 91,668 Noninterest income Loan servicing revenue 6,803 6,831 19,916 21,304 Loan servicing asset revaluation 2,061 ( 5,161 ) ( 4,202 ) ( 12,446 ) Net gains on sales of loans 12,690 7,425 34,497 17,638 Net gain (loss) on loans accounted for under the fair value option 3,403 1,102 ( 8,324 ) 5,976 Equity method investments income (loss) ( 1,231 ) ( 2,370 ) ( 5,952 ) ( 6,120 ) Equity security investments gains (losses), net 14,705 3,343 14,802 3,478 Gain on sale of investment securities available-for-sale, net 1,225 87 1,880 92 Lease income 2,634 2,361 7,893 7,055 Management fee income 1,296 95 4,146 186 Construction supervision fee income 1,365 360 2,439 1,525 Other noninterest income 2,093 1,355 8,102 4,706 Total noninterest income 47,044 15,428 75,197 43,394 Noninterest expense Salaries and employee benefits 24,203 22,717 83,048 66,562 Travel expense 250 1,934 2,395 4,675 Professional services expense 1,346 2,073 4,668 5,876 Advertising and marketing expense 552 1,277 2,537 4,306 Occupancy expense 2,079 2,131 6,455 5,588 Data processing expense 3,009 3,072 8,930 7,418 Equipment expense 4,314 4,361 13,601 11,925 Other loan origination and maintenance expense 2,669 3,535 7,617 6,882 Renewable energy tax credit investment impairment — — — 602 FDIC insurance 2,095 101 5,326 1,435 Other expense 2,133 1,536 5,664 5,245 Total noninterest expense 42,650 42,737 140,241 120,514 Income before taxes 45,483 6,262 35,354 14,548 Income tax expense 11,703 2,367 5,399 3,346 Net income $ 33,780 $ 3,895 $ 29,955 $ 11,202 Basic earnings per share $ 0.83 $ 0.10 $ 0.74 $ 0.28 Diluted earnings per share $ 0.81 $ 0.09 $ 0.73 $ 0.27 See Notes to Unaudited Condensed Consolidated Financial Statements 2 Live Oak Bancshares, Inc. Condensed Consolidated Statements of Comprehensive Income For the three and nine months ended September 30, 2020 and 2019 (unaudited) (Dollars in thousands) Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Net income $ 33,780 $ 3,895 $ 29,955 $ 11,202 Other comprehensive (loss) income before tax: Net unrealized gain on investment securities arising during the period 701 4,528 19,223 23,683 Reclassification adjustment for gain on sale of securities available-for-sale included in net income ( 1,225 ) ( 87 ) ( 1,880 ) ( 92 ) Other comprehensive (loss) income before tax ( 524 ) 4,441 17,343 23,591 Income tax benefit (expense) 126 ( 1,066 ) ( 4,162 ) ( 5,662 ) Other comprehensive (loss) income, net of tax ( 398 ) 3,375 13,181 17,929 Total comprehensive income $ 33,382 $ 7,270 $ 43,136 $ 29,131 See Notes to Unaudited Condensed Consolidated Financial Statements 3 Live Oak Bancshares, Inc. Condensed Consolidated Statements of Changes in Shareholders’ Equity For the three and nine months ended September 30, 2020 and 2019 (unaudited) (Dollars in thousands) Three Months Ended Common stock Accumulated other Shares Retained comprehensive Total Class A Class B Amount earnings income equity Balance at June 30, 2020 37,810,101 2,715,531 $ 348,295 $ 174,837 $ 25,303 $ 548,435 Net income — — — 33,780 — 33,780 Other comprehensive loss — — — — ( 398 ) ( 398 ) Issuance of restricted stock 13,057 — — — — — Withholding cash issued in lieu of restricted stock issuance — — ( 126 ) — — ( 126 ) Employee stock purchase program 14,092 — 288 — — 288 Stock option exercises 23,201 — 147 — — 147 Stock option based compensation expense — — 461 — — 461 Restricted stock expense — — 2,794 — — 2,794 Non-voting common stock converted to voting common stock in private sale 250,000 ( 250,000 ) — — — — Cash dividends ($ 0.03 per share) — — — ( 1,217 ) — ( 1,217 ) Balance at September 30, 2020 38,110,451 2,465,531 $ 351,859 $ 207,400 $ 24,905 $ 584,164 Balance at June 30, 2019 35,577,386 4,643,530 $ 334,155 $ 171,954 $ 12,877 $ 518,986 Net income — — — 3,895 — 3,895 Other comprehensive income — — — — 3,375 3,375 Issuance of restricted stock 18,891 — — — — — Withholding cash issued in lieu of restricted stock issuance — — ( 142 ) — — ( 142 ) Employee stock purchase program 15,434 — 255 — — 255 Stock option exercises 17,667 — 115 — — 115 Stock option based compensation expense — — 440 — — 440 Restricted stock expense — — 2,503 — — 2,503 Non-voting common stock converted to voting common stock in private sale 827,999 ( 827,999 ) — — — — Cash dividends ($ 0.03 per share) — — — ( 1,208 ) — ( 1,208 ) Balance at September 30, 2019 36,457,377 3,815,531 $ 337,326 $ 174,641 $ 16,252 $ 528,219 See Notes to Unaudited Condensed Consolidated Financial Statements 4 Live Oak Bancshares, Inc. Condensed Consolidated Statements of Changes in Shareholders’ Equity (Continued) For the three and nine months ended September 30, 2020 and 2019 (unaudited) (Dollars in thousands) Nine Months Ended Common stock Accumulated other Shares Retained comprehensive Total Class A Class B Amount earnings income (loss) equity Balance at December 31, 2019 37,401,443 2,915,531 $ 340,397 $ 180,265 $ 11,724 $ 532,386 Net income — — — 29,955 — 29,955 Other comprehensive income — — — — 13,181 13,181 Issuance of restricted stock 42,446 — — — — — Withholding cash issued in lieu of restricted stock issuance — — ( 235 ) — — ( 235 ) Employee stock purchase program 39,253 — 520 — — 520 Stock option exercises 87,382 — 553 — — 553 Stock option based compensation expense — — 1,233 — — 1,233 Restricted stock expense — — 8,269 — — 8,269 Issuance of common stock in connection with acquisition of wholly-owned subsidiary 89,927 — 1,122 — — 1,122 Non-voting common stock converted to voting common stock in private sale 450,000 ( 450,000 ) — — — — Cumulative effect of accounting change for Accounting Standards Update 2016-13 — — — 822 — 822 Cash dividends ($ 0.09 per share) — — — ( 3,642 ) — ( 3,642 ) Balance at September 30, 2020 38,110,451 2,465,531 $ 351,859 $ 207,400 $ 24,905 $ 584,164 Balance at December 31, 2018 35,512,262 4,643,530 $ 328,113 $ 167,124 $ ( 1,677 ) $ 493,560 Net income — — — 11,202 — 11,202 Other comprehensive income — — — — 17,929 17,929 Issuance of restricted stock 40,377 — — — — — Withholding cash issued in lieu of restricted stock issuance — — ( 228 ) — — ( 228 ) Employee stock purchase program 29,493 — 437 — — 437 Stock option exercises 47,246 — 287 — — 287 Stock option based compensation expense — — 1,310 — — 1,310 Restricted stock expense — — 7,407 — — 7,407 Non-voting common stock converted to voting common stock in private sale 827,999 ( 827,999 ) — — — — Cumulative effect of accounting change for Accounting Standards Update 2016-02 — — — ( 66 ) — ( 66 ) Cash dividends ($ 0.09 per share) — — — ( 3,619 ) — ( 3,619 ) Balance at September 30, 2019 36,457,377 3,815,531 $ 337,326 $ 174,641 $ 16,252 $ 528,219 See Notes to Unaudited Condensed Consolidated Financial Statements 5 Live Oak Bancshares, Inc. Condensed Consolidated Statements of Cash Flows For the nine months ended September 30, 2020 and 2019 (unaudited) (Dollars in thousands) Nine Months Ended September 30, 2020 2019 Cash flows from operating activities Net income $ 29,955 $ 11,202 Adjustments to reconcile net income to net cash used by operating activities: Depreciation and amortization 16,545 14,303 Provision for loan and lease credit losses 32,024 10,403 Amortization of premium on securities, net of accretion 1,778 429 Deferred tax (benefit) expense ( 7,535 ) 533 Originations of loans held for sale ( 920,213 ) ( 712,000 ) Proceeds from sales of loans held for sale 607,588 310,852 Net gains on sale of loans held for sale ( 34,497 ) ( 17,638 ) Net (gain) loss on sale of foreclosed assets ( 17 ) 7 Net loss (gain) on loans accounted for under fair value option 8,324 ( 5,976 ) Net (increase) decrease in servicing assets ( 2,466 ) 10,058 Gain on sale of investment securities available-for-sale, net ( 1,880 ) ( 92 ) Net gain on disposal of long-lived asset — ( 357 ) Net loss on disposal of property and equipment 38 109 Impairment on premises and equipment, net 1,019 — Equity method investments (income) loss 5,952 6,120 Equity security investments (gains) losses, net ( 14,802 ) ( 3,478 ) Renewable energy tax credit investment impairment — 602 Stock option based compensation expense 1,233 1,310 Restricted stock expense 8,269 7,407 Stock based compensation expense tax shortfall ( 137 ) ( 63 ) Changes in assets and liabilities: Lease right-of-use assets and liabilities, net 42 87 Other assets ( 26,626 ) 9,727 Other liabilities 3,267 1,526 Net cash used by operating activities ( 292,139 ) ( 354,929 ) Cash flows from investing activities Purchases of securities available-for-sale ( 343,245 ) ( 230,256 ) Proceeds from sales, maturities, calls, and principal paydown of securities available-for-sale 134,958 63,205 Proceeds from SBA reimbursement/sale of foreclosed assets 4,283 724 Business combination, net of cash acquired ( 895 ) — Loan and lease originations and principal collections, net ( 2,311,629 ) ( 394,425 ) Proceeds from sale of long-lived asset — 10,895 Proceeds from sale of premises and equipment 4 — Purchases of premises and equipment, net ( 1,313 ) ( 30,003 ) Net cash used by investing activities ( 2,517,837 ) ( 579,860 ) See Notes to Unaudited Condensed Consolidated Financial Statements 6 Live Oak Bancshares, Inc. Condensed Consolidated Statements of Cash Flows (Continued) For the nine months ended September 30, 2020 and 2019 (unaudited) (Dollars in thousands) Nine Months Ended September 30, 2020 2019 Cash flows from financing activities Net increase in deposits $ 1,479,064 $ 865,028 Proceeds from borrowings 1,808,033 — Repayment of borrowings ( 60,964 ) ( 149 ) Stock option exercises 553 287 Employee stock purchase program 520 437 Withholding cash issued in lieu of restricted stock ( 235 ) ( 228 ) Shareholder dividend distributions ( 3,642 ) ( 3,619 ) Net cash provided by financing activities 3,223,329 861,756 Net increase (decrease) in cash and cash equivalents 413,353 ( 73,033 ) Cash and cash equivalents, beginning 221,397 319,311 Cash and cash equivalents, ending $ 634,750 $ 246,278 Supplemental disclosures of cash flow information Interest paid $ 71,899 $ 62,963 Income tax paid (received), net 9,049 ( 11,092 ) Supplemental disclosures of noncash operating, investing, and financing activities Unrealized holding gains on available-for-sale securities, net of taxes $ 13,181 $ 17,929 Transfers from loans and leases to foreclosed real estate and other repossessions 2,034 5,058 Net transfers between foreclosed real estate and SBA receivable 116 ( 281 ) Transfer aircraft from premises and equipment, net to held for sale assets 9,069 — Transfer of loans held for sale to loans and leases held for investment 178,453 225,217 Transfer of loans and leases held for investment to loans held for sale 97,033 35,936 Right-of-use assets obtained in exchange for lessee operating lease liabilities — 2,241 Accrued premises and equipment additions — 2,927 Equity method investment commitments — 16,751 Business combination: Assets acquired (excluding goodwill) 2,523 — Liabilities assumed 2,074 — Goodwill recorded 1,797 — See Notes to Unaudited Condensed Consolidated Financial Statements 7 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Note 1. Basis of Presentation Nature of Operations Live Oak Bancshares, Inc. (the “Company” or “LOB”) is a bank holding company headquartered in Wilmington, North Carolina incorporated under the laws 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 services to small businesses nationwide. The Bank identifies and grows lending to credit-worthy borrowers both within specific industries, also called verticals, through expertise within those industries, and more broadly to select borrowers outside of those industries. A significant portion of the loans originated by the Bank are guaranteed by the Small Business Administration (“SBA”) under the 7(a) Loan Program and the U.S. Department of Agriculture ("USDA") Rural Energy for America Program ("REAP"), Water and Environmental Program (“WEP”) and Business & Industry ("B&I") loan programs. The Bank’s wholly owned subsidiaries are Live Oak Number One, Inc., Live Oak Clean Energy Financing LLC (“LOCEF”), and Live Oak Private Wealth, LLC. Live Oak Private Wealth, LLC’s wholly owned subsidiary is Jolley Asset Management, LLC (“JAM”). See Business Combination discussion below for more information on this new subsidiary. The Company’s wholly owned subsidiaries are the Bank, Government Loan Solutions (“GLS”), Live Oak Grove, LLC (“the Grove”), Live Oak Ventures, Inc. (“Live Oak Ventures”), and Canapi Advisors, LLC (“Canapi”). Live Oak Number One, Inc. holds properties foreclosed on by the Bank. LOCEF provides financing to entities for renewable energy applications and became a wholly owned subsidiary of the Bank during the first quarter of 2019. Live Oak Private Wealth, LLC and JAM provide high-net-worth individuals and families with strategic wealth and investment management services. GLS is a management and technology consulting firm that advises and offers solutions and services to participants in the government guaranteed lending sector. GLS primarily provides services in connection with the settlement, accounting, and securitization processes for government guaranteed loans, including loans originated under the SBA 7(a) loan programs and USDA guaranteed loans. The Grove provides Company employees and business visitors an on-site restaurant location. Live Oak Ventures’ purpose is investing in businesses that align with the Company's strategic initiative to be a leader in financial technology. Canapi provides investment advisory services to a series of new funds focused on providing venture capital to new and emerging financial technology companies. The Company jointly formed 504 Fund Advisors, LLC (“504FA”) to serve as the investment adviser for the 504 Fund, a closed-end mutual fund organized to invest in SBA section 504 loans. 504FA exited as advisor for the 504 Fund in May 2019 and the Company subsequently dissolved this legal entity. 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 of interest income. The Company elects to account for certain loans under the fair value option with interest reported in interest income and changes in fair value reported in the net gain (loss) on loans accounted for under the fair value option line item of the consolidated statements of income. Income from the sale of loans is comprised of loan servicing revenue and revaluation of related servicing assets along with net gains on sales of loans. Offsetting these revenues are the cost of funding sources, provision for loan and lease credit losses, any costs related to foreclosed assets and other operating costs such as salaries and employee benefits, travel, professional services, advertising and marketing and tax expense. The Company also has less routinely generated gains and losses arising from its financial technology investments. 8 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 nine months ended September 30, 2020 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2020. The condensed consolidated balance sheet as of December 31, 2019 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, 2019, filed with the Securities Exchange Commission on February 27, 2020 (SEC File No. 001-37497) (the "2019 Annual Report"). 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 2019 Annual Report. These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes in the Company's 2019 Annual Report. The preparation of financial statements in conformity with United States generally accepted accounting principles, or 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, stock option, share and per share data or where otherwise indicated. Business Segments Management has determined that the Company has one significant operating segment, which is providing a lending platform for small businesses nationwide. In determining the appropriateness of segment definition, the Company considers the materiality of a potential segment, the components of the business about which financial information is available, and components for which management regularly evaluates relative to resource allocation and performance assessment. Reclassifications Certain reclassifications have been made to the prior period’s consolidated financial statements to place them on a comparable basis with the current year. Net income and shareholders’ equity previously reported were not affected by these reclassifications. Current period reclassifications were primarily related to fair value presentation requirements for loans in which the fair value option had previously been elected and included a reclassification of amounts representing the credit component of the fair value discount that was previously reported as a component of the allowance for credit losses on loans and leases to be netted directly against loans and leases held for investment on the Company’s consolidated balance sheet. Amounts reclassified from the allowance for credit losses on loans and leases to net directly against total loans and leases held for investment was $ 20.0 million, as of December 31, 2019. In addition, the change in the credit component of the fair value discount was previously reported in the provision for loan and lease credit losses while the change in the liquidity component of the fair value discount was previously reported in the loan servicing asset revaluation in the consolidated statements of income, but both have now been reclassified to net gain (loss) on loans accounted for under the fair value option. Amounts reclassified from the provision for loan and lease credit losses and the loan servicing asset revaluation to net gain (loss) on loans accounted for under the fair value option were $( 3.2 ) million and $ 4.3 million, respectively, for the three months ended September 30, 2019, and $( 3.0 ) million and $ 8.9 million, respectively for the nine months ended September 30, 2019. 9 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements The effect of the above discussed reclassifications on the consolidated balance sheet as of December 31, 2019 is reflected in the March 31, 2020 10-Q. The effect on the consolidated statements of income and consolidated statements of cash flows for each period are presented below: As Reported Reclassifications As Reclassified Consolidated Statement of Income for the three months ended September 30, 2019 Provision for loan and lease credit losses $ 7,160 $ ( 3,200 ) $ 3,960 Net interest income after provision for loan and lease credit losses 30,371 3,200 33,571 Loan servicing asset revaluation ( 859 ) ( 4,302 ) ( 5,161 ) Net gain (loss) on loans accounted for under the fair value option — 1,102 1,102 Total noninterest income 18,628 ( 3,200 ) 15,428 Net income 3,895 — 3,895 Consolidated Statement of Income for the nine months ended September 30, 2019 Provision for loan and lease credit losses $ 13,365 $ ( 2,962 ) $ 10,403 Net interest income after provision for loan and lease credit losses 88,706 2,962 91,668 Loan servicing asset revaluation ( 3,508 ) ( 8,938 ) ( 12,446 ) Net gain (loss) on loans accounted for under the fair value option — 5,976 5,976 Total noninterest income 46,356 ( 2,962 ) 43,394 Net income 11,202 — 11,202 Consolidated Statement of Cash Flows for the nine months ended September 30, 2019 Provision for loan and lease credit losses $ 13,365 $ ( 2,962 ) $ 10,403 Net decrease in servicing assets 10,058 — 10,058 Change in discount on unguaranteed loans ( 6,815 ) 6,815 — Net loss (gain) on loans accounted for under fair value option — ( 5,976 ) ( 5,976 ) Net cash used by operating activities ( 352,806 ) ( 2,123 ) ( 354,929 ) Loan and lease originations and principal collections, net ( 396,548 ) 2,123 ( 394,425 ) Net cash used by investing activities ( 581,983 ) 2,123 ( 579,860 ) As a result of the increase in number and diversification of the industry verticals that the Company serves, management also made changes effective in the second quarter of 2020 to the loan and lease classes used in the credit quality disclosures in Note 5. Loans and leases are now grouped in one of the following classes (also referred to as divisions): Small Business Banking, Specialty Lending, or Paycheck Protection Program. Small Business Banking includes loans to customers in verticals that generally have traditional loan structures. Specialty Lending includes loans to customers in verticals that generally have atypical ownership structures as well as complex collateral arrangements, underwriting requirements, and servicing needs. Paycheck Protection Program (“PPP”) includes all loans originated under the PPP pursuant to the Coronavirus Aid, Relief, and Economic Security Act’s (“CARES Act”) economic relief program and carry a 100 % government guarantee. These loan and lease classes were determined based on industry risk characteristics and management’s method for monitoring credit risk and managing those lending divisions. There were no changes to the Company’s portfolio segments. 10 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Adoption of New Accounting Standard On January 1, 2020 , the Company adopted Accounting Standards Update (“ASU”) No. 2016-13 “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”) along with its amendments, which replaces the incurred loss impairment methodology in current standards with the current expected credit loss methodology (“CECL”) and requires consideration of a broader range of information to determine credit loss estimates. ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities management does not intend to sell. The Company adopted Accounting Standards Codification (“ASC”) 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance-sheet credit exposures. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a net increase to retained earnings of $ 822 thousand, comprised of a $ 1.3 million decrease in the allowance for credit losses combined with a $ 499 thousand increase in reserve on unfunded commitments, as of January 1, 2020 for the cumulative effect of adopting ASC 326. Allowance for Credit Losses – Loans and Leases Held for Investment The allowance for credit losses (“ACL”) is a valuation account that is deducted from, or added to, the amortized cost basis of loans and leases to present a net amount expected to be collected. The ACL excludes loans held for sale and loans accounted for under the fair value option. Loans and leases are charged-off against the ACL when management believes the uncollectibility of a loan or lease balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. The Company’s ACL on loans and leases is estimated using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The Company’s historical credit loss experience provides the basis for the estimation of expected credit losses. Management adjusts historical loss information for differences in current risk characteristics such as portfolio risk grading, delinquency levels, or portfolio mix as well as for changes in environmental conditions such as changes in unemployment rates. The ACL is measured on a pooled basis when similar risk characteristics are present in the portfolio. The Company has identified portfolio segments based on industry and whether the receivable is secured by real estate or another form of collateral. Additional information related to the portfolio segments can be found in the Company’s 2019 Form 10-K. Expected credit losses for pooled loans and leases are estimated using a discounted cash flow (“DCF”) methodology. Loans or leases that do not share risk characteristics are evaluated on an individual basis and are excluded from the pooled evaluation. This generally occurs when, based on current information and events, it is probable that the Company will be unable to collect all interest and principal payments due according to the originally contracted, or reasonably modified, terms of the loan or lease agreement. The Company has determined that loans and leases meeting the criteria defined below must be reviewed quarterly to determine if they should be evaluated for expected credit losses on an individual basis. • All commercial loans and leases classified substandard or worse. • Any loan or lease that is on nonaccrual, or any loan or lease that is delinquent greater than 90 days past due and still accruing interest. • Any loan or lease that meets the definition of a troubled debt restructuring (“TDR”). 11 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Expected credit losses are estimated over the contractual term of the loan or lease, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless management has a reasonable expectation at the reporting date that a TDR will be executed with an individual borrower or the extension or renewal options are included in the contract at the reporting date and are not unconditionally cancellable by the Company. When the ACL, for pooled or individually evaluated loans and leases, is estimated using the DCF method, the effective interest rate used to discount expected cash flows is adjusted for expected prepayments. Past due status of loans and leases is determined based on contractual terms. Loans and leases are placed in nonaccrual status and interest accrual is discontinued if they become 90 days delinquent or there is evidence that the borrower’s ability to make the required payments is impaired. When interest accrual is discontinued, all unpaid accrued interest is reversed. Management has made the accounting policy election to exclude accrued interest receivable on loans from the estimate of credit losses. A loan or lease is accounted for as a TDR if the Company, for reasons related to the borrower’s financial difficulties, restructures a loan or lease, and grants a concession to the borrower that it would not otherwise grant. A TDR typically involves a more than short-term modification of terms such as a reduction of the interest rate below the current market rate for a loan or lease with similar risk characteristics or the waiving of certain financial covenants without corresponding offsetting compensation or additional support. When management determines that foreclosure is probable or when the borrower is experiencing financial difficulty at the reporting date and repayment is expected to be provided substantially through the operation or sale of the collateral, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. Allowance for Credit Losses – Off-Balance Sheet Credit Exposures Expected credit losses on off-balance sheet credit exposures is estimated over the contractual period in which the Company is exposed to such losses, unless the obligation to extend credit is unconditionally cancellable. The estimate of off-balance sheet credit exposures includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated losses. The estimate is influenced by historical loss experience, adjusted for current risk characteristics, and economic forecasts. Allowance for Credit Losses – Available-for-Sale Securities When available-for-sale debt securities are in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. Available-for-sale debt securities that do not meet the aforementioned criteria are evaluated to determine whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected from the security is less than the amortized cost basis, a credit loss exists and an ACL is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Changes in the ACL are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectibility of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Management has made the accounting policy election to exclude accrued interest receivable on available-for-sale debt securities from the estimate of credit losses. Available-for-sale securities are charged-off against the allowance or, in the absence of any allowance, written down through income when deemed uncollectible by management or when either of the aforementioned criteria regarding intent or requirement to sell is met. 12 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Common Stock On March 15, 2020, the Board of Directors of the Company authorized the repurchase of up to $ 20,000,000 in shares of the Company’s voting common stock from time to time through December 31, 2020 (the “Repurchase Program”). The Repurchase Program enables the Company to acquire shares through open market purchases or privately negotiated transactions, including through a Rule 10b5-1 plan, at the discretion of management and on terms (including quantity, timing, and price) that management determines to be advisable. Actions in connection with the repurchase program will be subject to various factors, including the Company’s capital and liquidity positions, regulatory and accounting considerations, the Company’s financial and operational performance, alternative uses of capital, the trading price of the Company’s common stock, and market conditions. The repurchase program does not obligate the Company to acquire a specific dollar amount or number of shares and may be extended, modified, or discontinued at any time. There were no shares repurchased during the three and nine months ended September 30, 2020 . Business Combination On April 1, 2020, the Company acquired 100 % of the equity interests of JAM, a registered investment advisor based in Rocky Mount, North Carolina. Goodwill, intangible assets and contingent consideration of $ 1.8 million, $ 2.3 million and $ 2.1 million, respectively, have been recorded by the Company. Intangible assets are almost entirely comprised of customer relationships that are being amortized using the straight-line method over 15 years. As a result of this acquisition, the Bank's subsidiary Live Oak Private Wealth, LLC, expects to broaden service offerings to existing high-net-worth individuals and families, attract new clients from an expanded footprint and benefit from economies of scale. The acquisition did not materially impact the Company's financial position, results of operations or cash flows. Given the impact of the above acquisition was immaterial to the Company and its result of operations, pro forma information has not been included . Long-Lived Asset Reclassified to Held for Sale During the third quarter of 2020, the Company determined to sell one of its aircraft as it looks to modify outreach practices while continuing to support origination activities and the needs of an expanding nationwide customer base. As a result of this determination, the Company began marketing the aircraft for sale and recorded an impairment of $ 1.0 million reflected in the three and nine months ended September 30, 2020 condensed consolidated statements of income in the "Other expense" line item. The Company expects the aircraft to sell within one year from the time marketing began. The carrying amount of the aircraft of $ 9.1 million is reflected in the September 30, 2020 condensed consolidated balance sheet in the "Other assets" line item. Any gain or loss associated with the sale of the aircraft will be recorded at the time of the sale. Note 2. Recent Accounting Pronouncements In August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). ASU 2018-13 removes, modifies and adds certain fair value disclosure requirements on fair value measurements. The Company adopted the standard on January 1, 2020 with no material effect on its consolidated financial statements. In August 2018, the FASB issued ASU No. 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU 2018-15”). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The Company adopted the standard on January 1, 2020 with no material effect on its consolidated financial statements. In March 2019, the FASB issued ASU No. 2019-01, “Leases (Topic 842): Codification Improvements” (“ASU 2019-01”). ASU 2019-01 provides updates to Topic 842 including: (i) guidance on how to determine fair value of leased items for lessors who are not dealers or manufacturers, (ii) cash flow presentation for lessors of sales-type and direct financing leases and (iii) clarifies certain transition disclosures. The Company adopted the standard on January 1, 2020 with no material effect on its consolidated financial statements. 13 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements In April 2019, the FASB issued ASU No. 2019-04, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments” (“ASU 2019-04”). ASU 2019-04 provides clarification and minor improvements related to ASU 2016-01 “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” ASU 2016-13 “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” and ASU 2017-12 “Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities.” The Company adopted the standard on January 1, 2020 with no material effect on its consolidated financial statements. In January 2020, the FASB issued ASU No. 2020-01, “Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)-Clarifying the Interactions between Topic 321, Topic 323, and Topic 815” (“ASU 2020-01”). ASU 2020-01 clarifies the interaction between accounting standards related to equity securities, equity method investments, and certain derivatives including accounting for the transition into and out of the equity method and measuring certain purchased options and forward contracts to acquire investments. The amendments in this standard will be effective for the Company on January 1, 2021. The Company does not expect this standard to have a material effect on its consolidated financial statements. In March 2020 , the FASB issued ASU No. 2020-03, “Codification Improvements to Financial Instruments” (“ASU 2020-03”). The amendments represent clarification and improvements to the codification and correct unintended application. This standard was effective immediately upon issuance and its adoption did not have a material effect on the Company’s consolidated financial statements. In March 2020, the FASB issued 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. The amendments are effective for the Company as of March 12, 2020 through December 31, 2022. 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 be shared in the net income of the Company. Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Basic earnings per share: Net income $ 33,780 $ 3,895 $ 29,955 $ 11,202 Weighted-average basic shares outstanding 40,542,696 40,240,740 40,461,479 40,199,468 Basic earnings per share $ 0.83 $ 0.10 $ 0.74 $ 0.28 Diluted earnings per share: Net income, for diluted earnings per share $ 33,780 $ 3,895 $ 29,955 $ 11,202 Total weighted-average basic shares outstanding 40,542,696 40,240,740 40,461,479 40,199,468 Add effect of dilutive stock options and restricted stock grants 1,006,936 872,835 787,387 812,140 Total weighted-average diluted shares outstanding 41,549,632 41,113,575 41,248,866 41,011,608 Diluted earnings per share $ 0.81 $ 0.09 $ 0.73 $ 0.27 Anti-dilutive shares 395,582 1,100,645 395,582 1,100,645 14 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Note 4. Investment Securities The carrying amount of investment securities and their approximate fair values are reflected in the following table: September 30, 2020 Amortized Cost Unrealized Gains Unrealized Losses Allowance for Credit Losses Fair Value US government agencies $ 17,941 $ 565 $ — $ — $ 18,506 Mortgage-backed securities 711,794 32,357 576 — 743,575 Municipal bonds 3,272 429 5 — 3,696 Total $ 733,007 $ 33,351 $ 581 $ — $ 765,777 December 31, 2019 US treasury securities $ 4,988 $ 27 $ — $ — $ 5,015 US government agencies 22,444 335 — — 22,779 Mortgage-backed securities 488,694 15,530 927 — 503,297 Municipal bonds 8,493 469 8 — 8,954 Total $ 524,619 $ 16,361 $ 935 $ — $ 540,045 During the three months ended September 30, 2020, one US government agency matured at $ 2.0 million, one US Treasury note matured at $ 5.0 million, and five mortgage-backed securities totaling $ 10.2 million were sold resulting in a net gain of $ 1.2 million. During the three months ended September 30, 2019, four US government agencies totaling $ 14.3 million were sold resulting in a net gain of $ 87 thousand. During the nine months ended September 30, 2020, two US government agency matured at $ 4.5 million, one US Treasury note matured at $ 5.0 million, eighteen mortgage-backed securities totaling $ 24.4 million were sold resulting in a net gain of $ 1.3 million, and two municipal bonds totaling $ 5.2 million were sold resulting in a net gain of $ 620 thousand. During the nine months ended September 30, 2019, $ 900 thousand of one municipal bond was sold and four US government agencies totaling $ 14.3 million were sold resulting in a net gain of $ 92 thousand . Accrued interest receivable on available-for-sale securities totaled $ 2.0 million and $ 1.6 million at September 30, 2020 and December 31, 2019, respectively, and is included in other assets in the accompanying 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, 2020 Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Mortgage-backed securities $ 15,004 $ 553 $ 2,086 $ 23 $ 17,090 $ 576 Municipal bonds — — 95 5 95 5 Total $ 15,004 $ 553 $ 2,181 $ 28 $ 17,185 $ 581 Less Than 12 Months 12 Months or More Total December 31, 2019 Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Mortgage-backed securities $ 42,835 $ 460 $ 36,518 $ 467 $ 79,353 $ 927 Municipal bonds — — 92 8 92 8 Total $ 42,835 $ 460 $ 36,610 $ 475 $ 79,445 $ 935 15 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Management evaluates available-for-sale debt securities to determine whether the unrealized loss is due to credit related factors or non-credit related factors. The evaluation considers the extent to which the security’s fair value is less than cost, the financial condition and near-term prospects of the issuer, and intent and ability of the Company to retain its investment in the security for a period of time sufficient to allow for any anticipated recovery in fair value. At September 30, 2020, there were three mortgage-backed securities and one municipal bond in unrealized loss positions for greater than 12 months and twenty-four mortgage-backed securities in unrealized loss positions for less than 12 months. Unrealized losses at December 31, 2019 were comprised of twenty-two mortgage-backed securities and one municipal bond in unrealized loss positions for greater than 12 months and twenty mortgage-backed securities in unrealized loss positions for less than 12 months. These unrealized losses are primarily the result of non-credit related volatility in the market and market interest rates. Since none of the unrealized losses relate to marketability of the securities or the issuer’s ability to honor redemption obligations and the Company has the intent and ability to hold the securities for a sufficient period of time to recover unrealized losses, none of the losses have been recognized in the Company’s consolidated statements of income. All mortgage-backed securities in the Company’s portfolio at September 30, 2020 and December 31, 2019 were backed by U.S. government sponsored enterprises (“GSEs”). The following is a summary of investment securities by maturity: September 30, 2020 Amortized cost Fair value US government agencies Within one year $ 7,500 $ 7,586 One to five years 7,517 7,812 Five to ten years 2,924 3,108 Total 17,941 18,506 Mortgage-backed securities One to five years 8,801 9,244 Five to ten years 208,964 227,065 After 10 years 494,029 507,266 Total 711,794 743,575 Municipal bonds After 10 years 3,272 3,696 Total 3,272 3,696 Total $ 733,007 $ 765,777 The table above reflects contractual maturities. Actual results will differ as the loans underlying the mortgage-backed securities may repay sooner than scheduled. There were no securities pledged at September 30, 2020 or December 31, 2019. 16 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Note 5. Loans and Leases Held for Investment and Credit Quality As described in Note 1. Basis of Presentation, loan and lease classes were changed during the current period. Small Business Banking includes loans to customers in verticals that generally have traditional loan structures. Specialty Lending includes loans to customers in verticals that generally have atypical ownership structures as well as complex collateral arrangements, underwriting requirements, and servicing needs. Paycheck Protection Program includes all loans originated under the CARES Act’s economic relief program and carry a 100 % government guarantee. The following tables present total loans and leases 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 1 Loans Accounted for Under the Fair Value Option 2 Total Loans and Leases September 30, 2020 Commercial & Industrial Small Business Banking $ 567,970 $ 3,306 $ 8,292 $ 11,598 $ 579,568 $ 309,454 $ 889,022 Specialty Lending 265,719 — — — 265,719 68,770 334,489 Paycheck Protection Program 1,755,012 — — — 1,755,012 — 1,755,012 Total 2,588,701 3,306 8,292 11,598 2,600,299 378,224 2,978,523 Construction & Development Small Business Banking 156,149 — — — 156,149 — 156,149 Specialty Lending 72,303 — 3,723 3,723 76,026 — 76,026 Total 228,452 — 3,723 3,723 232,175 — 232,175 Commercial Real Estate Small Business Banking 924,850 3,525 5,403 8,928 933,778 337,865 1,271,643 Specialty Lending 118,935 — 1,693 1,693 120,628 21,173 141,801 Total 1,043,785 3,525 7,096 10,621 1,054,406 359,038 1,413,444 Commercial Land Small Business Banking 333,129 — 4,223 4,223 337,352 108,485 445,837 Total 333,129 — 4,223 4,223 337,352 108,485 445,837 Total $ 4,194,067 $ 6,831 $ 23,334 $ 30,165 $ 4,224,232 $ 845,747 $ 5,069,979 Net deferred (fees) costs $ ( 32,780 ) Loan and Leases, Net of unearned $ 5,037,199 17 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 1 Loans Accounted for Under the Fair Value Option 2 Total Loans and Leases December 31, 2019 Commercial & Industrial Small Business Banking $ 374,283 $ 7,363 $ 4,577 $ 11,940 $ 386,223 $ 275,269 $ 661,492 Specialty Lending 166,710 532 776 1,308 168,018 58,044 226,062 Total 540,993 7,895 5,353 13,248 554,241 333,313 887,554 Construction & Development Small Business Banking 302,470 — — — 302,470 — 302,470 Specialty Lending 44,848 — — — 44,848 — 44,848 Total 347,318 — — — 347,318 — 347,318 Commercial Real Estate Small Business Banking 525,858 7,210 5,586 12,796 538,654 358,359 897,013 Specialty Lending 121,191 1,849 — 1,849 123,040 27,291 150,331 Total 647,049 9,059 5,586 14,645 661,694 385,650 1,047,344 Commercial Land Small Business Banking 234,133 — — — 234,133 105,557 339,690 Total 234,133 — — — 234,133 105,557 339,690 Total $ 1,769,493 $ 16,954 $ 10,939 $ 27,893 $ 1,797,386 $ 824,520 $ 2,621,906 Net deferred (fees) costs $ 5,380 Loan and Leases, Net of unearned $ 2,627,286 1 Total loans and leases include $ 2.69 billion of U.S. government guaranteed loans as of September 30, 2020, of which $ 12.3 million is 90 days or more past due, $ 3.3 million is past due 30-89 days and $ 2.68 billion are current. Total loans and leases include $ 622.6 million of U.S. government guaranteed loans as of December 31, 2019, of which $ 6.4 million is 90 days or more past due, $ 13.6 million is past due 30-89 days and $ 602.6 million are current. 2 The Company measures the carrying value of the retained portion of loans sold at fair value under ASC Subtopic 825-10. See Note 9. Fair Value of Financial Instruments for additional information. 18 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Credit Quality Indicators The following tables presents asset quality indicators by portfolio class and origination year. See Note 5. Loans and Leases Held for Investment and Credit Quality in the Company’s 2019 Form 10-K for additional discussion around the asset quality indicators that the Company uses to manage and monitor credit risk. Term Loans and Leases Amortized Cost Basis by Origination Year 2020 2019 2018 2017 2016 Prior Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Total 1,2 September 30, 2020 Small Business Banking Risk Grades 1 - 4 $ 450,474 $ 472,888 $ 332,546 $ 285,835 $ 180,376 $ 69,584 $ 28,872 $ 1,091 $ 1,821,666 Risk Grade 5 8,010 43,236 31,998 30,636 13,745 4,725 1,753 64 134,167 Risk Grades 6 - 8 — 8,128 7,491 13,170 11,452 10,158 442 173 51,014 Total 458,484 524,252 372,035 329,641 205,573 84,467 31,067 1,328 2,006,847 Specialty Lending Risk Grades 1 - 4 196,462 97,483 43,701 44,238 — — 48,102 497 430,483 Risk Grade 5 — — 2,861 13,173 — — 1,262 — 17,296 Risk Grades 6 - 8 — — 8,657 — 5,782 — 155 — 14,594 Total 196,462 97,483 55,219 57,411 5,782 — 49,519 497 462,373 Paycheck Protection Program Risk Grades 1 - 4 1,755,012 — — — — — — — 1,755,012 Risk Grade 5 — — — — — — — — — Risk Grades 6 - 8 — — — — — — — — — Total 1,755,012 — — — — — — — 1,755,012 Total $ 2,409,958 $ 621,735 $ 427,254 $ 387,052 $ 211,355 $ 84,467 $ 80,586 $ 1,825 $ 4,224,232 Total 1,2 December 31, 2019 Small Business Banking Risk Grades 1 - 4 $ 1,361,220 Risk Grade 5 63,015 Risk Grades 6 - 8 37,249 Total 1,461,484 Specialty Lending Risk Grades 1 - 4 307,098 Risk Grade 5 26,497 Risk Grades 6 - 8 2,307 Total 335,902 Total $ 1,797,386 1 Total loans and leases include $ 2.69 billion of U.S. government guaranteed loans as of September 30, 2020, segregated by risk grade as follows: Risk Grades 1 – 4 = $ 2.58 billion, Risk Grade 5 = $ 84.4 million, Risk Grades 6 – 8 = $ 34.3 million. As of December 31, 2019, total loans and leases include $ 622.6 million of U.S. government guaranteed loans, segregated by risk grade as follows: Risk Grades 1 – 4 = $ 556.8 million, Risk Grade 5 = $ 42.7 million, Risk Grades 6 – 8 = $ 23.1 million. Total loans and leases exclude loans accounted for under the fair value option. 2 Excludes $ 845.7 million and $ 824.5 million of loans accounted for under the fair value option as of September 30, 2020 and December 31, 2019, respectively. 19 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Nonaccrual Loans and Leases As of September 30, 2020 and December 31, 2019 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, 2020 and 2019. Nonaccrual loans and leases are generally included in the held for investment portfolio. Accrued interest receivable on loans totaled $ 31.6 million and $ 19.8 million at September 30, 2020 and December 31, 2019, respectively, and is included in other assets in the accompanying condensed consolidated balance sheets. Nonaccrual loans and leases held for investment as of September 30, 2020 and December 31, 2019 are as follows: September 30, 2020 Loan Balance 1 Guaranteed Balance Unguaranteed Balance Unguaranteed Exposure with No ACL Commercial & Industrial Small Business Banking $ 17,547 $ 11,706 $ 5,841 $ — Specialty Lending — — — — Total 17,547 11,706 5,841 — Construction & Development Specialty Lending 3,723 — 3,723 3,723 Total 3,723 — 3,723 3,723 Commercial Real Estate Small Business Banking 14,168 6,020 8,148 5,353 Specialty Lending 7,089 5,549 1,540 — Total 21,257 11,569 9,688 5,353 Commercial Land Small Business Banking 4,222 3,321 901 32 Total 4,222 3,321 901 32 Total $ 46,749 $ 26,596 $ 20,153 $ 9,108 December 31, 2019 Loan Balance 1 Guaranteed Balance Unguaranteed Balance Commercial & Industrial Small Business Banking $ 6,162 $ 5,399 $ 763 Specialty Lending 776 157 619 Total 6,938 5,556 1,382 Commercial Real Estate Small Business Banking 8,245 4,130 4,115 Total 8,245 4,130 4,115 Commercial Land Small Business Banking 6,756 5,028 1,728 Total 6,756 5,028 1,728 Total $ 21,939 $ 14,714 $ 7,225 1 Excludes nonaccrual loans accounted for under the fair value option. See Note 9. Fair Value of Financial Instruments for additional information. 20 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements The following table presents the amortized cost basis of collateral-dependent loans and leases, which are individually evaluated to determine expected credit losses, as of September 30, 2020: Total Collateral Dependent Loans Unguaranteed Portion September 30, 2020 Real Estate Business Assets Other Real Estate Business Assets Other Allowance for Credit Losses Commercial & Industrial Small Business Banking $ 2,468 $ 9,643 $ 232 $ 572 $ 4,124 $ 101 $ 1,361 Total 2,468 9,643 232 572 4,124 101 1,361 Construction & Development Specialty Lending 3,767 — — 3,767 — — — Total 3,767 — — 3,767 — — — Commercial Real Estate Small Business Banking 11,306 352 331 6,819 96 344 183 Specialty Lending 13,233 — — 7,684 — — 6 Total 24,539 352 331 14,503 96 344 189 Commercial Land Small Business Banking 4,243 — — 920 — — 294 Total 4,243 — — 920 — — 294 Total $ 35,017 $ 9,995 $ 563 $ 19,762 $ 4,220 $ 445 $ 1,844 Allowance for Credit Losses - Loans and Leases On January 1, 2020, the Company adopted ASC 326. Upon adoption, the Company maintains the ACL at levels management believes represents the future expected credit losses in the loan and lease portfolios as of the balance sheet date. See Note 1. Basis of Presentation for additional information around the Company’s methodology for estimating the ACL. See Note 1. Organization and Summary of Significant Accounting Policies and Note 5. Loans and Leases Held for Investment and Credit Quality in the Company’s 2019 Form 10-K for additional information related to the Company’s methodology for estimating the prior period allowance for credit losses under ASC 310. The following table details activity in the ACL by portfolio segment allowance for the periods presented: Three Months Ended Construction & Development Commercial Real Estate Commercial & Industrial Commercial Land Total September 30, 2020 Beginning Balance $ 4,861 $ 16,097 $ 21,503 $ 1,622 $ 44,083 Charge offs — ( 10,155 ) — — ( 10,155 ) Recoveries — — 8 — 8 Provision 131 10,842 ( 567 ) ( 132 ) 10,274 Ending Balance $ 4,992 $ 16,784 $ 20,944 $ 1,490 $ 44,210 September 30, 2019 Beginning Balance $ 2,924 $ 6,848 $ 9,341 $ 1,728 $ 20,841 Charge offs — ( 615 ) ( 118 ) ( 149 ) ( 882 ) Recoveries — 3 38 1 42 Provision ( 629 ) 248 4,615 ( 274 ) 3,960 Ending Balance $ 2,295 $ 6,484 $ 13,876 $ 1,306 $ 23,961 21 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Nine Months Ended Construction & Development Commercial Real Estate Commercial & Industrial Commercial Land Total September 30, 2020 Beginning Balance, prior to adoption of ASC 326 $ 2,732 $ 8,427 $ 15,757 $ 1,318 $ 28,234 Impact of adopting ASC 326 1,131 1,916 ( 4,561 ) 193 ( 1,321 ) Charge offs — ( 10,264 ) ( 4,170 ) ( 408 ) ( 14,842 ) Recoveries — 43 72 — 115 Provision 1,129 16,662 13,846 387 32,024 Ending Balance $ 4,992 $ 16,784 $ 20,944 $ 1,490 $ 44,210 September 30, 2019 Beginning Balance $ 2,042 $ 5,259 $ 6,524 $ 607 $ 14,432 Charge offs — ( 615 ) ( 263 ) ( 173 ) ( 1,051 ) Recoveries — 17 159 1 177 Provision 253 1,823 7,456 871 10,403 Ending Balance $ 2,295 $ 6,484 $ 13,876 $ 1,306 $ 23,961 During the three and nine months ended September 30, 2020, increases to the ACL were primarily related to the severity of forecasted unemployment rates and ongoing developments as a result of the COVID-19 pandemic. Unemployment rates were forecasted for twelve months followed by a twelve-month straight-line reversion period. Additionally, the provision expense was impacted by loan and lease growth and net charge-offs during the period. The following tables represent the types of TDRs that were made during the periods presented: Three Months Ended September 30, 2020 Extended Amortization Payment Deferral Total TDRs Number of Loans Recorded investment at period end Number of Loans Recorded investment at period end Number of Loans Recorded investment at period end Commercial & Industrial Small Business Banking — $ — 1 $ 24 1 $ 24 Specialty Lending 1 116 — — 1 116 Total 1 116 1 24 2 140 Construction & Development Small Business Banking 1 879 — — 1 879 Total 1 879 — — 1 879 Commercial Real Estate Small Business Banking — — 1 326 1 326 Specialty Lending — — 1 3,627 1 3,627 Total — — 2 3,953 2 3,953 Total 2 $ 995 3 $ 3,977 5 $ 4,972 Three Months Ended September 30, 2019 Interest Only Payment Deferral & Rate Concession Total TDRs Number of Loans Recorded investment at period end Number of Loans Recorded investment at period end Number of Loans Recorded investment at period end Commercial & Industrial Small Business Banking 1 $ 350 — $ — 1 $ 350 Total 1 350 — — 1 350 Commercial Real Estate Small Business Banking — — 1 260 1 260 Total — — 1 260 1 260 Total 1 $ 350 1 $ 260 2 $ 610 22 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Nine Months Ended September 30, 2020 Extended Amortization Payment Deferral Total TDRs Number of Loans Recorded investment at period end Number of Loans Recorded investment at period end Number of Loans Recorded investment at period end Commercial & Industrial Small Business Banking — $ — 6 $ 1,903 6 $ 1,903 Specialty Lending 2 526 — — 2 526 Total 2 526 6 1,903 8 2,429 Construction & Development Small Business Banking 1 879 — — 1 879 Total 1 879 — — 1 879 Commercial Real Estate Small Business Banking — — 2 3,738 2 3,738 Specialty Lending — — 1 3,627 1 3,627 Total — — 3 7,365 3 7,365 Commercial Land Small Business Banking 1 4,885 — — 1 4,885 Total 1 4,885 — — 1 4,885 Total 4 $ 6,290 9 $ 9,268 13 $ 15,558 Nine Months Ended September 30, 2019 Payment Deferral Interest Only Payment Deferral & Rate Concession Total TDRs Number of Loans Recorded investment at period end Number of Loans Recorded investment at period end Number of Loans Recorded investment at period end Number of Loans Recorded investment at period end Commercial & Industrial Small Business Banking — $ — 1 $ 350 — $ — 1 $ 350 Total — — 1 350 — — 1 350 Commercial Real Estate Small Business Banking 1 $ 1,841 — $ — 1 $ 260 2 $ 2,101 Total 1 1,841 — — 1 260 2 2,101 Total 1 $ 1,841 1 $ 350 1 $ 260 3 $ 2,451 Concessions made to improve a loan or lease’s performance have varying degrees of success. No TDRs that were modified within the twelve months ended September 30, 2020 subsequently defaulted during the three and nine months ended September 30, 2020. One TDR was modified within the twelve months ended September 30, 2019 and subsequently defaulted during the three and nine months ended September 30, 2019. The TDR that defaulted was a Commercial Real Estate Small Business Banking loan that had been previously modified for payment deferral and had a recorded investment of $ 1.8 million at September 30, 2019. 23 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements The following tables detail the recorded allowance for loan and lease losses and the investment in loans and leases related to each portfolio segment, disaggregated on the basis of impairment evaluation methodology: December 31, 2019 Construction & Development Commercial Real Estate Commercial & Industrial Commercial Land Total 1,2 Allowance for credit losses on loans and leases: Loans and leases individually evaluated for impairment $ 17 $ 2,067 $ 3,989 $ 748 $ 6,821 Loans and leases collectively evaluated for impairment 2,715 6,360 11,768 570 21,413 Total allowance for credit losses on loans and leases $ 2,732 $ 8,427 $ 15,757 $ 1,318 $ 28,234 Loans and leases receivable: Loans and leases individually evaluated for impairment $ 719 $ 25,389 $ 14,052 $ 17,347 $ 57,507 Loans and leases collectively evaluated for impairment 346,599 636,305 540,189 216,786 1,739,879 Total loans and leases receivable $ 347,318 $ 661,694 $ 554,241 $ 234,133 $ 1,797,386 1 As of December 31, 2019, loans and leases receivable includes $ 622.6 million of U.S. government guaranteed loans, of which $ 36.0 million are considered impaired. 2 Loans and leases receivable exclude $ 824.5 million of loans accounted for under the fair value option. Loans and leases classified as impaired as of the dates presented are summarized in the following tables. December 31, 2019 Recorded Investment Guaranteed Balance Unguaranteed Exposure Commercial & Industrial Small Business Banking $ 11,612 $ 7,841 $ 3,771 Specialty Lending 2,440 157 2,283 Total 14,052 7,998 6,054 Construction & Development Small Business Banking 719 530 189 Total 719 530 189 Commercial Real Estate Small Business Banking 23,473 13,198 10,275 Specialty Lending 1,916 1,387 529 Total 25,389 14,585 10,804 Commercial Land Small Business Banking 17,347 12,898 4,449 Total 17,347 12,898 4,449 Total $ 57,507 $ 36,011 $ 21,496 24 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements The following table presents evaluated balances of loans and leases classified as impaired at the dates presented that carried an associated reserve as compared to those with no reserve. The recorded investment includes accrued interest and net deferred loan and lease fees or costs. December 31, 2019 Recorded Investment With a Recorded Allowance With No Recorded Allowance Total Unpaid Principal Balance Related Allowance Recorded Commercial & Industrial Small Business Banking $ 11,607 $ 5 $ 11,612 $ 12,577 $ 1,967 Specialty Lending 2,440 — 2,440 2,307 2,022 Total 14,047 5 14,052 14,884 3,989 Construction & Development Small Business Banking 719 — 719 706 17 Total 719 — 719 706 17 Commercial Real Estate Small Business Banking 21,370 2,103 23,473 23,996 2,055 Specialty Lending 1,916 — 1,916 1,849 12 Total 23,286 2,103 25,389 25,845 2,067 Commercial Land Small Business Banking 17,347 — 17,347 17,399 748 Total 17,347 — 17,347 17,399 748 Total Impaired Loans and Leases $ 55,399 $ 2,108 $ 57,507 $ 58,834 $ 6,821 The following table presents the average recorded investment of impaired loans and leases for each period presented and interest income recognized during the period in which the loans and leases were considered impaired. Three Months Ended September 30, 2019 Average Balance Interest Income Recognized Commercial & Industrial Small Business Banking $ 10,101 $ 35 Specialty Lending 1,945 10 Total 12,046 45 Construction & Development Small Business Banking 724 4 Total 724 4 Commercial Real Estate Small Business Banking 16,087 162 Specialty Lending 744 — Total 16,831 162 Commercial Land Small Business Banking 17,342 170 Total 17,342 170 Total $ 46,943 $ 381 25 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Nine Months Ended September 30, 2019 Average Balance Interest Income Recognized Commercial & Industrial Small Business Banking $ 10,448 $ 89 Specialty Lending 1,934 34 Total 12,382 123 Construction & Development Small Business Banking 724 4 Total 724 4 Commercial Real Estate Small Business Banking 16,203 471 Specialty Lending 1,226 — Total 17,429 471 Commercial Land Small Business Banking 17,469 602 Total 17,469 602 Total $ 48,004 $ 1,200 26 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Note 6. Leases Lessor Equipment Leasing The Company purchases new equipment for the purpose of leasing such equipment to customers within its verticals. Equipment purchased to fulfill commitments to commercial renewable energy projects is rented out under operating leases while leases of equipment outside of the renewable energy vertical are generally direct financing leases. Accordingly, leased assets under operating leases are included in premises and equipment while leased assets under direct financing leases are included in loans and leases held for investment. 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 - 7 years which is consistent with the useful life of the equipment with no residual value. The gross lease payments receivable and the net investment included in accounts receivable for such leases are as follows: September 30, 2020 December 31, 2019 Gross direct finance lease payments receivable $ 11,355 $ 13,959 Less – unearned interest ( 1,874 ) ( 2,562 ) Net investment in direct financing leases $ 9,481 $ 11,397 Future minimum lease payments under finance leases are as follows: As of September 30, 2020 Amount 2020 $ 763 2021 2,910 2022 2,665 2023 2,223 2024 1,580 Thereafter 1,214 Total $ 11,355 Interest income of $ 199 thousand and $ 244 thousand was recognized in the three months ended September 30, 2020 and 2019, respectively. Interest income of $ 644 thousand and $ 745 thousand was recognized in the nine months ended September 30, 2020 and 2019, 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 direct operating expenses at the time the costs are incurred. 27 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements As of September 30, 2020 and December 31, 2019, the Company had a net investment of $ 136.9 million and $ 144.3 million, respectively, in assets included in premises and equipment that are subject to operating leases. Of the net investment, the gross balance of the assets was $ 164.3 million as of September 30, 2020 and December 31, 2019 and accumulated depreciation was $ 27.3 million and $ 20.0 million as of September 30, 2020 and December 31, 2019, respectively. Depreciation expense recognized on these assets for the three months ended September 30, 2020 and 2019 was $ 2.4 million. Depreciation expense recognized on these assets for the nine months ended September 30, 2020 and 2019 was $ 7.3 million and $ 7.2 million, respectively. Lease income of $ 2.4 million was recognized in the three months ended September 30, 2020 and 2019, respectively. Lease income of $ 7.1 million and $ 7.0 million was recognized in the nine months ended September 30, 2020 and 2019, respectively. A maturity analysis of future minimum lease payments under non-cancelable operating leases is as follows: As of September 30, 2020 Amount 2020 $ 2,005 2021 9,052 2022 9,044 2023 9,075 2024 8,808 Thereafter 40,110 Total $ 78,094 Note 7. Servicing Assets Loans serviced for others are not included in the accompanying condensed consolidated balance sheets. The unpaid principal balances of loans serviced for others requiring recognition of a servicing asset were $ 2.27 billion and $ 2.26 billion at September 30, 2020 and December 31, 2019, respectively. The unpaid principal balance for all loans serviced for others was $ 3.14 billion and $ 2.97 billion at September 30, 2020 and December 31, 2019, respectively. The following summarizes the activity pertaining to servicing rights: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Balance at beginning of period $ 33,834 $ 41,687 $ 35,365 $ 47,641 Additions, net 1,936 1,057 6,668 2,388 Fair value changes: Due to changes in valuation inputs or assumptions 3,758 ( 1,542 ) 1,596 ( 1,850 ) Decay due to increases in principal paydowns or runoff ( 1,697 ) ( 3,619 ) ( 5,798 ) ( 10,596 ) Balance at end of period $ 37,831 $ 37,583 $ 37,831 $ 37,583 The fair value of servicing rights was determined using a weighted average discount rate of 9.1 % on September 30, 2020 and 14.1 % on September 30, 2019. The fair value of servicing rights was determined using a weighted average prepayment speed of 19.1 % on September 30, 2020 and 15.7 % on September 30, 2019, depending on the stratification of the specific right. Changes to fair value are reported in loan servicing asset revaluation within the consolidated statements of income. The fair value of servicing rights is highly sensitive to changes in underlying assumptions. Changes in prepayment speed assumptions typically have the most significant impact on the fair value of servicing rights. Generally, as interest rates rise on variable rate loans, loan prepayments increase due to an increase in refinance activity, which results in a decrease in the fair value of servicing assets, however, weakening economic conditions or significant declines in interest rates can also increase loan prepayment activity. Measurement of fair value is limited to the conditions existing and the assumptions used as of a particular point in time, and those assumptions may not be appropriate if they are applied at a different time. 28 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Note 8. Borrowings Total outstanding borrowings consisted of the following: September 30, 2020 December 31, 2019 Borrowings In September 2020, the Company renewed a revolving line of credit originally issued in 2017. The line of credit is unsecured and accrues interest at 30-day LIBOR plus 1.15 % for a term of 13 months. Payments are interest only with all principal and accrued interest due on October 10, 2021 . The terms of this loan require the Company to maintain minimum capital and debt service coverage ratios. The $ 50.0 million line of credit was fully advanced at March 31, 2020. The Company made a principal paydown of $ 45.0 million on May 28, 2020 and $ 12 thousand on September 20, 2020 and there is $ 45.0 million of available credit at September 30, 2020. $ 4,988 $ — In April 2020, the Company entered into the Federal Reserve Bank's Paycheck Protection Program Liquidity Facility ("PPPLF"). Under the PPPLF, advances must be secured by pledges of loans to small businesses originated by the Company under the U.S. Small Business Administration's 7(a) loan program titled the Paycheck Protection Program. The PPPLF accrues interest at thirty-five basis points and matures at various dates equal to the maturity date of the PPPLF collateral pledged to secure the advance, ranging from April 1, 2022 to June 24, 2022 , and will be accelerated on and to the extent of any 7(a) loan forgiveness reimbursement by the SBA for any PPPLF collateral or the date of purchase by the SBA from the borrower of any PPPLF collateral. On the maturity date of each advance, the Company shall repay the advance plus accrued interest. This $ 1.74 billion borrowing was fully advanced at September 30, 2020. 1,742,085 — In October 2017, the Company entered into a financing lease of $ 19 thousand with an unaffiliated equipment lease company, secured by fitness equipment which is included in other assets on the consolidated balance sheet. Payments are principal and interest due monthly starting December 15, 2017 over a term of 60 months. At the end of the lease term there is a $ 1.00 bargain purchase option. As of January 1, 2019, this borrowing was revised in accordance with ASU 2016-02. 10 14 Total borrowings $ 1,747,083 $ 14 The Company may purchase federal funds through unsecured federal funds lines of credit with various correspondent banks, which totaled $ 72.5 million as of September 30, 2020 and December 31, 2019. These lines are intended for short-term borrowings and are subject to restrictions limiting the frequency and terms of advances. These lines of credit are payable on demand and bear interest based upon the daily federal funds rate. The Company had no outstanding balances on the lines of credit as of September 30, 2020 and December 31, 2019. The Company has entered into a repurchase agreement with a third party for $ 5.0 million as of September 30, 2020 and December 31, 2019. At the time the Company enters into a transaction with the third party, the Company must transfer securities or other assets against the funds received. The terms of the agreement are set at market conditions at the time the Company enters into such transaction. The Company had no outstanding balance on the repurchase agreement as of September 30, 2020 and December 31, 2019. On June 18, 2018, the Company entered into a borrowing agreement with the Federal Home Loan Bank of Atlanta. These borrowings must be secured with eligible collateral approved by the Federal Home Loan Bank of Atlanta. At September 30, 2020 and December 31, 2019, the Company had approximately $ 2.05 billion and $ 1.14 billion, respectively, in borrowing capacity available under these agreements. There is no collateral pledged and no advances outstanding as of September 30, 2020 and December 31, 2019. 29 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements The Company may borrow funds through the Federal Reserve Bank’s discount window. These borrowings are secured by a blanket floating lien on qualifying loans with a balance of $ 1.83 billion and $ 526.8 million as of September 30, 2020 and December 31, 2019, respectively. At September 30, 2020 and December 31, 2019, the Company had approximately $ 1.43 billion and $ 294.5 million, respectively, in borrowing capacity available under these arrangements with no outstanding balance as of September 30, 2020 and December 31, 2019. Note 9. Fair Value of Financial Instruments Fair Value Hierarchy There are three levels of inputs in the fair value hierarchy that may be used to measure fair value. Financial instruments are considered Level 1 when valuation can be based on quoted prices in active markets for identical assets or liabilities. Level 2 financial instruments are valued using quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or models using inputs that are observable or can be corroborated by observable market data of substantially the full term of the assets or liabilities. Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable and when determination of the fair value requires significant management judgment or estimation. Recurring Fair Value The following sections provide a description of the valuation methodologies used for instruments measured at fair value on a recurring basis, as well as the general classification of such instruments pursuant to the fair value hierarchy: Investment securities: Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, discounted cash flow or at net asset value per share. Level 2 securities would include U.S. government agency securities, mortgage-backed securities, obligations of states and political subdivisions and certain corporate, asset backed mutual fund and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. Loans held for sale: The fair values of loans held for sale are determined by discounting estimated cash flows using interest rates approximating prevailing market rates for similar loans adjusted to reflect the inherent credit risk. Loans held for investment: The fair values of loans held for investment are typically determined based on discounted cash flow analyses using market-based interest rate spreads. Discounted cash flow analyses are adjusted, as appropriate, to reflect current market conditions and borrower-specific credit risk. If the loan is collateral dependent, the fair value is determined based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date. Fair value of the loan’s collateral is determined by appraisals, independent valuation, or management’s estimation of fair value which is then adjusted for the cost related to liquidation of the collateral. Servicing assets: Servicing rights do not trade in an active, open market with readily observable prices. While sales of servicing rights do occur, the precise terms and conditions typically are not readily available. Accordingly, the Company estimates the fair value of servicing rights using discounted cash flow models incorporating numerous assumptions from the perspective of a market participant including servicing income, servicing costs, market discount rates and prepayment speeds. Due to the nature of the valuation inputs, servicing rights are classified within Level 3 of the valuation hierarchy. Mutual fund: The following mutual fund is registered with the Securities and Exchange Commission as a closed-end, non-diversified management investment company and operates as an interval fund. The fund primarily invests in the unguaranteed portion of SBA504 First Lien Loans secured by owner-occupied commercial real estate. This investment is valued using quoted prices in markets that are not active and is classified as Level 2 within the valuation hierarchy. 30 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Equity warrant assets: Fair value measurements of equity warrant assets of private companies are priced based on a Black-Scholes option pricing model to estimate the asset value by using stated strike prices, option expiration dates, risk-free interest rates and option volatility assumptions. Option volatility assumptions used in the Black-Scholes model are based on public companies that operate in similar industries as the companies in the Company’s private company portfolio. Option expiration dates are modified to account for estimates to actual life relative to stated expiration. Values are further adjusted for a general lack of liquidity due to the private nature of the associated underlying company. The Company classifies equity warrant assets within Level 3 of the valuation hierarchy. The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis. September 30, 2020 Total Level 1 Level 2 Level 3 Investment securities available-for-sale US government agencies $ 18,506 $ — $ 18,506 $ — Mortgage-backed securities 743,575 — 743,575 — Municipal bonds 1 3,696 — 3,601 95 Loans held for sale 30,443 — — 30,443 Loans held for investment 845,747 — — 845,747 Servicing assets 2 37,831 — — 37,831 Mutual fund 2,339 — 2,339 — Equity warrant assets 3 869 — — 869 Total assets at fair value $ 1,683,006 $ — $ 768,021 $ 914,985 December 31, 2019 Total Level 1 Level 2 Level 3 Investment securities available-for-sale US treasury securities $ 5,015 $ — $ 5,015 $ — US government agencies 22,779 — 22,779 — Mortgage-backed securities 503,297 — 503,297 — Municipal bonds 1 8,954 — 8,862 92 Loans held for sale 16,198 — — 16,198 Loans held for investment 824,520 — — 824,520 Servicing assets 2 35,365 — — 35,365 Mutual fund 2,206 — 2,206 — Equity warrant assets 3 570 — — 570 Total assets at fair value $ 1,418,904 $ — $ 542,159 $ 876,745 1 During the three and nine months ended September 30, 2020, the Company recorded a fair value adjustment gain of $ 1 thousand and $ 3 thousand, respectively. During the nine months ended September 30, 2019, the Company sold $ 900 thousand of a municipal bond to a third party and recorded a fair value adjustment loss of $ 9 thousand. During the three months ended September 30, 2019, the Company recorded a fair value adjustment loss of $ 2 thousand. 2 See Note 7 for a rollforward of recurring Level 3 fair values for servicing assets. 3 During the nine months ended September 30 ,2020, the Company entered into equity warrant assets with a fair value of $ 179 thousand at the time of issuance and recorded net gains on derivative instruments of $ 120 thousand. During the three months ended September 30, 2020, the Company recorded net gains on derivative instruments of $ 14 thousand. During the nine months ended September 30, 2019, the Company recorded net gains on derivative instruments of $ 161 thousand. During the three months ended September 30, 2019, the Company recorded net losses on derivative instruments of $ 32 thousand. 31 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Fair Value Option The Company elects to account for retained participating interests of government guaranteed loans under the fair value option in order to align the accounting presentation with the Company’s viewpoint of the economics of the loans. Interest income on loans accounted for under the fair value option is recognized in loans and fees on loans on the Company’s consolidated statements of income. 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, 2020 or December 31, 2019. The unpaid principal balance of unguaranteed exposure for nonaccruals was $ 10.0 million and $ 10.7 million at September 30, 2020 and December 31, 2019, 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, 2020 and December 31, 2019. September 30, 2020 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 sale $ 30,443 $ 32,615 $ ( 2,172 ) $ — $ — $ — $ — $ — $ — Loans held for investment 845,747 870,587 ( 24,840 ) 47,434 52,278 ( 4,844 ) 24,977 27,575 ( 2,598 ) $ 876,190 $ 903,202 $ ( 27,012 ) $ 47,434 $ 52,278 $ ( 4,844 ) $ 24,977 $ 27,575 $ ( 2,598 ) December 31, 2019 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 sale $ 16,198 $ 17,230 $ ( 1,032 ) $ — $ — $ — $ — $ — $ — Loans held for investment 824,520 842,456 ( 17,936 ) 49,739 54,370 ( 4,631 ) 26,644 28,137 ( 1,493 ) $ 840,718 $ 859,686 $ ( 18,968 ) $ 49,739 $ 54,370 $ ( 4,631 ) $ 26,644 $ 28,137 $ ( 1,493 ) 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 2020 2019 2020 2019 Loans held for sale $ 109 $ ( 95 ) $ 123 $ 376 Loans held for investment 3,294 1,197 ( 8,447 ) 5,600 $ 3,403 $ 1,102 $ ( 8,324 ) $ 5,976 32 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Losses related to borrower-specific credit risk were $ 1.5 million and $ 3.3 million for the three and nine months ended September 30, 2020, respectively, and $ 2.6 million and $ 4.3 million for the three and nine months ended September 30, 2019, respectively. The following tables summarize the activity pertaining to loans accounted for under the fair value option. Three Months Ended September 30, Nine Months Ended September 30, Loans held for sale 2020 2019 2020 2019 Balance at beginning of period $ 32,071 $ 26,603 $ 16,198 $ 17,745 Issuances 4,560 9,354 20,759 29,196 Fair value changes 109 ( 95 ) 123 376 Sales ( 6,082 ) ( 21,108 ) ( 6,082 ) ( 32,452 ) Settlements ( 215 ) ( 32 ) ( 555 ) ( 143 ) Balance at end of period $ 30,443 $ 14,722 $ 30,443 $ 14,722 Three Months Ended September 30, Nine Months Ended September 30, Loans held for investment 2020 2019 2020 2019 Balance at beginning of period $ 834,602 $ 839,080 $ 824,520 $ 885,527 Issuances 37,346 39,842 136,718 94,363 Fair value changes 3,294 1,197 ( 8,447 ) 5,600 Settlements ( 29,495 ) ( 48,806 ) ( 107,044 ) ( 154,177 ) Balance at end of period $ 845,747 $ 831,313 $ 845,747 $ 831,313 Non-recurring Fair Value The following sections provide a description of the valuation methodologies used for instruments measured at fair value on a non-recurring basis, as well as the general classification of such instruments pursuant to the fair value hierarchy: Collateral dependent loans : Loans are considered collateral dependent when the Company has determined that foreclosure of the collateral is probable or when a borrower is experiencing financial difficulty and the loan is expected to be repaid substantially through the operation or sale of collateral. A collateral dependent loan’s ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date. Fair value of the loan’s collateral is determined by appraisals, independent valuation, or management’s estimation of fair value which is then adjusted for the cost related to liquidation of the collateral. Collateral dependent loans are generally classified as Level 3 based on management’s judgment and estimation. Loans with agreed upon sales prices are classified as Level 1. Foreclosed assets: Foreclosed real estate is adjusted to fair value less selling costs upon transfer of the loans to foreclosed real estate. Subsequently, foreclosed real estate is carried at the lower of carrying value or fair value less selling costs. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. Given the lack of observable market prices for identical properties and market discounts applied to appraised values, the Company generally classifies foreclosed assets as nonrecurring Level 3. Long-lived asset held for sale: Long-lived assets held for sale are carried at the lower of carrying value or fair value less selling costs. Fair value is based upon an independent market valuation of the property. Given the lack of observable market prices for identical assets and market discounts applied to market prices, the Company generally classifies long-lived assets held for sale as nonrecurring Level 3. Equity security investments with a non-readily determinable fair value: Equity security investments are measured at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. When an observable price change in an orderly transaction occurs for an identical investment of the same issuer, the investment is generally classified as nonrecurring Level 1 within the valuation hierarchy. When an observable price change in an orderly transaction occurs for a similar investment of the same issuer, the investment is generally classified as nonrecurring Level 2 within the valuation hierarchy. 33 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements The tables below present the recorded amount of assets and liabilities measured at fair value on a non-recurring basis. September 30, 2020 Total Level 1 Level 2 Level 3 Collateral dependent loans $ 10,387 $ 6,149 $ — $ 4,238 Foreclosed assets 3,264 — — 3,264 Long-lived asset held for sale 9,070 — — 9,070 Equity security investments with a non-readily determinable fair value 25,367 — 25,367 — Total assets at fair value $ 48,088 $ 6,149 $ 25,367 $ 16,572 December 31, 2019 Total Level 1 Level 2 Level 3 Collateral dependent loans $ 1,245 $ — $ — $ 1,245 Foreclosed assets 5,612 — — 5,612 Equity security investment with a non-readily determinable fair value 8,738 8,738 — — Total assets at fair value $ 15,595 $ 8,738 $ — $ 6,857 Level 3 Analysis For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of September 30, 2020 and December 31, 2019 the significant unobservable inputs used in the fair value measurements were as follows: September 30, 2020 Level 3 Assets with Significant Unobservable Inputs Fair Value Valuation Technique Significant Unobservable Inputs Range Recurring fair value Municipal bond $ 95 Discounted expected cash flows Discount rate Prepayment speed 4.2 % 5.0 % Loans held for sale $ 30,443 Discounted expected cash flows Discount rate Prepayment speed 0.7 % to 16.9 % WAVG 19.1 % Loans held for investment $ 845,747 Discounted expected cash flows Discounted appraisals Loss rate Discount rate Prepayment speed Appraisal adjustments 0.0 % to 73.6 % (WAVG 1.4 %) 0.7 % to 16.9 % WAVG 19.1 % 10.0 % to 60.0 % Equity warrant assets $ 869 Black-Scholes option pricing model Volatility Risk-free interest rate Marketability discount Remaining life 26.0 % to 87.3 % 0.28 % to 0.69 % 20.0 % 5 - 10 years Non-recurring fair value Collateral dependent loans $ 4,238 Discounted appraisals Appraisal adjustments (1) 10.0 % to 55.0 % Foreclosed assets $ 3,264 Discounted appraisals Appraisal adjustments (1) 4.0 % to 20.0 % Long-lived asset held for sale $ 9,070 Discounted independent market valuation Independent market valuation adjustments 1.4 % 34 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements December 31, 2019 Level 3 Assets with Significant Unobservable Inputs Fair Value Valuation Technique Significant Unobservable Inputs Range Recurring fair value Municipal bond $ 92 Discounted expected cash flows Discount rate Prepayment speed 4.6 % 5.0 % Loans held for sale $ 16,198 Discounted expected cash flows Discount rate Prepayment speed 7.7 % to 21.4 % WAVG 13.1 % Loans held for investment $ 824,520 Discounted expected cash flows Discounted appraisals Loss rate Discount rate Prepayment speed Appraisal adjustments 0.0 % to 10.9 % (WAVG 1.3 %) 7.7 % to 21.4 % WAVG 13.1 % 10.0 % to 70.0 % Equity warrant assets $ 570 Black-Scholes option pricing model Volatility Risk-free interest rate Marketability discount Remaining life 21.0 - 75.0 % 1.90 % 20.0 % 8 - 10 years Non-recurring fair value Collateral dependent loans $ 1,245 Discounted appraisals Appraisal adjustments (1) 10.0 % to 57.0 % Foreclosed assets $ 5,612 Discounted appraisals Appraisal adjustments (1) 10.0 % to 37.0 % (1) Appraisals may be adjusted by management for customized discounting criteria, estimated sales costs, and proprietary 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 consolidated balance sheets. The carrying amounts and estimated fair values of the Company’s financial instruments not measured at fair value on a recurring or non-recurring basis are as follows: September 30, 2020 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 $ 608,826 $ 608,826 $ — $ — $ 608,826 Federal funds sold 25,924 25,924 — — 25,924 Certificates of deposit with other banks 7,250 7,701 — — 7,701 Loans held for sale 1,159,757 — — 1,260,154 1,260,154 Loans and leases, net of allowance for credit losses on loans and leases 4,191,452 — — 4,225,566 4,225,566 Financial liabilities Deposits 5,706,044 — 5,736,521 — 5,736,521 Borrowings 1,747,083 — — 1,747,119 1,747,119 35 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements December 31, 2019 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 $ 124,610 $ 124,610 $ — $ — $ 124,610 Federal funds sold 96,787 96,787 — — 96,787 Certificates of deposit with other banks 7,250 7,568 — — 7,568 Loans held for sale 950,249 — — 1,004,135 1,004,135 Loans and leases, net of allowance for credit losses on loans and leases 1,774,532 — — 1,822,569 1,822,569 Financial liabilities Deposits 4,226,980 — 4,211,522 — 4,211,522 Borrowings 14 — — 14 14 Note 10. Commitments and Contingencies Litigation In the normal course of business the Company is involved in various legal proceedings. Management believes that the outcome of such proceedings will not materially affect the financial position, results of operations or cash flows of the Company. Financial Instruments with Off-balance-sheet Risk The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, credit risk in excess of the amount recognized in the balance sheet. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as for on-balance-sheet instruments. A summary of the Company’s commitments is as follows: September 30, 2020 December 31, 2019 Commitments to extend credit $ 1,810,114 $ 1,834,449 Standby letters of credit 27,197 25,532 Total unfunded off-balance-sheet credit risk $ 1,837,311 $ 1,859,981 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. In 2012, the Company began issuing commitment letters after approval of the loan by the Credit Department. Commitment letters 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. 36 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements As of September 30, 2020 and December 31, 2019, the Company had unfunded commitments to provide capital contributions for on-balance-sheet investments in the amount of $ 14.7 million and $ 16.9 million, respectively. Concentrations of Credit Risk Although the Company is not subject to any geographic concentrations, a substantial amount of the Company’s loans, leases, and commitments to extend credit have been granted to customers in the agriculture, healthcare and veterinary verticals. The concentrations of credit by type of loan are set forth in Note 5. The distribution of commitments to extend credit approximates the distribution of loans outstanding. The Company does not have a significant number of credits to any single borrower or group of related borrowers whereby their retained unguaranteed exposure exceeds $ 7.5 million, except for 38 relationships that have a retained unguaranteed exposure of $ 521.0 million of which $ 269.9 million of the unguaranteed exposure has been disbursed. Additionally, the Company has future minimum lease payments due under non-cancelable operating leases totaling $ 78.1 million, of which $ 56.1 million is due from four relationships. The Company from time-to-time may have cash and cash equivalents on deposit with financial institutions that exceed federally-insured limits. Note 11. Stock Plans On March 20, 2015, the Company adopted the 2015 Omnibus Stock Incentive Plan which replaced the previously existing Amended Incentive Stock Option Plan and Nonstatutory Stock Option Plan. Subsequently on May 24, 2016, the 2015 Omnibus Stock Incentive Plan was amended to authorize awards covering a maximum of 7,000,000 common voting shares and has an expiration date of March 20, 2025. On May 15, 2018, the Amended and Restated 2015 Omnibus Stock Incentive Plan was amended to authorize awards covering a maximum of 8,750,000 common voting shares. Options or restricted shares granted under the Amended and Restated 2015 Omnibus Stock Incentive Plan (the "Plan") expire no more than 10 years from the date of grant. Exercise prices under the Plan are set by the Board of Directors at the date of grant, but shall not be less than 100 % of fair market value of the related stock at the date of the grant. Options vest over a minimum of three years from the date of the grant. Restricted stock grants vest in equal installments ranging from immediate vesting to over a seven year period from the date of the grant. Market Restricted Stock Units also have a restriction based on the passage of time and non-market-related performance criteria, but also have a restriction based on market price criteria related to the Company’s share price closing at or above a specified price defined at time of grant. Stock Options There were no stock options granted during the three and nine months ended September 30, 2020. At September 30, 2020, unrecognized compensation costs relating to stock options amounted to $ 2.8 million which will be recognized over a weighted average period of 1.87 years. Restricted Stock Restricted stock awards are authorized in the form of restricted stock awards or units ("RSU"s) and restricted stock awards or units with a market price condition ("Market RSU"s). RSUs have a restriction based on the passage of time and may also have a restriction based on a non-market-related performance criteria. The fair value of the RSUs is based on the closing price on the date of the grant. Market RSUs have a restriction based on the passage of time and non-market-related performance criteria, but also have a restriction based on market price criteria related to the Company’s share price closing at or above a specified price ranging from $ 34.00 to $ 55.00 per share for at least twenty (20) consecutive trading days at any time prior to expiration date. The amount of Market RSUs earned will not exceed 100 % of the Market RSUs awarded. The fair value of the Market RSUs and the implied service period is calculated using the Monte Carlo simulation method. 37 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements For the three months ended September 30, 2020, 39,999 RSUs were granted with a weighted average grant date fair value of $ 19.99 . For the nine months ended September 30, 2020, 581,678 RSUs were granted with a weighted average grant date fair value of $ 17.57 . Of the RSUs granted in the nine month period, 447,273 were awarded in connection with annual long term incentive stock compensation. At September 30, 2020, unrecognized compensation costs relating to RSUs amounted to $ 15.6 million which will be recognized over a weighted average period of 4.39 years. There were no Market RSUs granted during the three and nine months ended September 30, 2020. At September 30, 2020, unrecognized compensation costs relating to Market RSUs amounted to $ 8.8 million which will be recognized over a weighted average period of 2.92 years. Note 12. Significant Equity Method Investments In accordance with Rule 10-01(b)(1) of Regulation S-X, the Company must assess whether any of its equity method investments are significant equity method investments. In evaluating the significance of these investments, the Company performed the income test and the investment test described in S-X 3-05 and S-X 1-02(w). Rule 10-01(b)(1) of Regulation S-X requires summarized financial information in a quarterly report if any of the two tests exceeds 20%. The following table provides summarized balance sheet information for the Company’s equity method investments as of September 30, 2020 and December 31, 2019. The Company’s equity method investments are included in the other assets line on the condensed consolidated balance sheets and are largely concentrated in new or emerging financial service technology companies. September 30, 2020 December 31, 2019 Balance sheet data Current assets $ 59,966 $ 56,710 Noncurrent assets 180,648 162,304 Total assets $ 240,614 $ 219,014 Current liabilities $ 23,787 $ 19,910 Noncurrent liabilities 672 683 Total liabilities 24,459 20,593 Equity interests 216,155 198,421 Total liabilities and equity $ 240,614 $ 219,014 The following table provides summarized income statement information for the Company’s equity method investments for the three and nine months ended September 30, 2020 and 2019. Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Summary of operations Total revenues $ 19,026 $ 13,567 $ 50,998 $ 40,807 Net loss ( 8,713 ) ( 9,336 ) ( 38,199 ) ( 22,556 ) 38