What changed in this filing

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Item 1. Financial Statements

2021-05-05 compared with 2020-11-04 · 338 added, 569 removed, 728 unchanged (55% of the section changed)

2 unchanged sentences

Condensed Consolidated Balance Sheets

As of September 30, 2020 (unaudited) and December 31, 2019*

As of March 31, 2021 (unaudited) and December 31, 2020*

(Dollars in thousands)

September 30,

Cash and due from banks

11 unchanged sentences

Servicing assets

Operating lease right-of-use assets

Liabilities and Shareholders’ Equity

2 unchanged sentences

Total deposits

Operating lease liabilities

Other liabilities

1 unchanged sentence

Shareholders’ equity

Preferred stock, no par value, 1,000,000 authorized, none issued or outstanding

at September 30, 2020 and December 31, 2019

Preferred stock, no par value, 1,000,000 shares authorized, none issued or outstanding

at March 31, 2021 and December 31, 2020

Class A common stock, no par value, 100,000,000 shares authorized, 42,259,091

and 37,401,443 shares issued and outstanding at September 30, 2020 and

and 41,344,689 shares issued and outstanding at March 31, 2021 and

December 31, 2020, respectively

Class B common stock, no par value, 10,000,000 shares authorized, 692,253 and

2,915,531 shares issued and outstanding at September 30, 2020 and

1,107,757 shares issued and outstanding at March 31, 2021 and

December 31, 2020, respectively

7 unchanged sentences

Condensed Consolidated Statements of Income

For the three and nine months ended September 30, 2020 and 2019 (unaudited)

For the three months ended March 31, 2021 and 2020 (unaudited)

(Dollars in thousands, except per share data)

Three Months Ended

September 30,

Nine Months Ended

September 30,

Interest income

6 unchanged sentences

Net interest income

Provision for loan and lease credit losses

Net interest income after provision for loan and lease credit

(Recovery of) provision for loan and lease credit losses

Net interest income after (recovery of) provision for loan

and lease credit losses

Noninterest income

5 unchanged sentences

Equity security investments gains (losses), net

Gain on sale of investment securities available-for-sale, net

Loss on sale of investment securities available-for-sale, net

Management fee income

Construction supervision fee income

Other noninterest income

13 unchanged sentences

Total noninterest expense

Income before taxes

Income tax expense

Basic earnings per share

Diluted earnings per share

Income (loss) before taxes

Income tax expense (benefit)

Net income (loss)

Basic earnings (loss) per share

Diluted earnings (loss) per share

See Notes to Unaudited Condensed Consolidated Financial Statements

Live Oak Bancshares, Inc.

Condensed Consolidated Statements of Comprehensive Income

For the three and nine months ended September 30, 2020 and 2019 (unaudited)

Condensed Consolidated Statements of Comprehensive Income (Loss)

For the three months ended March 31, 2021 and 2020 (unaudited)

(Dollars in thousands)

Three Months Ended

September 30,

Nine Months Ended

September 30,

Net income (loss)

Other comprehensive (loss) income before tax:

Net unrealized gain on investment securities

Net unrealized (loss) gain on investment securities

arising during the period

Reclassification adjustment for gain on sale of

Reclassification adjustment for loss on sale of

securities available-for-sale included in net income

2 unchanged sentences

Other comprehensive (loss) income, net of tax

Total comprehensive income

Total comprehensive income (loss)

See Notes to Unaudited Condensed Consolidated Financial Statements

1 unchanged sentence

Condensed Consolidated Statements of Changes in Shareholders’ Equity

For the three and nine months ended September 30, 2020 and 2019 (unaudited)

For the three months ended March 31, 2021 and 2020 (unaudited)

(Dollars in thousands)

1 unchanged sentence

comprehensive

Balance at June 30, 2020

Other comprehensive loss

Issuance of restricted stock

Withholding cash issued in lieu of

restricted stock issuance

Employee stock purchase program

Stock option exercises

Stock option based compensation expense

Restricted stock expense

Non-voting common stock converted to

voting common stock in private sale

Cash dividends ($ 0.03 per share)

Balance at September 30, 2020

Balance at June 30, 2019

Other comprehensive income

Issuance of restricted stock

Withholding cash issued in lieu of

restricted stock issuance

Employee stock purchase program

Stock option exercises

Stock option based compensation expense

Restricted stock expense

Non-voting common stock converted to

voting common stock in private sale

Cash dividends ($ 0.03 per share)

Balance at September 30, 2019

See Notes to Unaudited Condensed Consolidated Financial Statements

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

comprehensive

income (loss)

Balance at December 31, 2020

Other comprehensive income

Other comprehensive loss

Issuance of restricted stock

Withholding cash issued in lieu of

restricted stock issuance

Tax withholding related to vesting of

restricted stock and other

Employee stock purchase program

2 unchanged sentences

Restricted stock expense

Issuance of common stock in connection with

acquisition of wholly-owned subsidiary

Non-voting common stock converted to

voting common stock in private sale

Cumulative effect of accounting change for

Accounting Standards Update 2016-13

Transfer from retained earnings to other assets

for pro rata portion of equity method

investee stock compensation expense

Cash dividends ($ 0.03 per share)

Balance at September 30, 2020

Balance at March 31, 2021

Balance at December 31, 2019

1 unchanged sentence

Issuance of restricted stock

Withholding cash issued in lieu of

restricted stock issuance

Tax withholding related to vesting of

restricted stock and other

Employee stock purchase program

7 unchanged sentences

Cash dividends ($ 0.03 per share)

Balance at September 30, 2019

Balance at March 31, 2020

See Notes to Unaudited Condensed Consolidated Financial Statements

1 unchanged sentence

Condensed Consolidated Statements of Cash Flows

For the nine months ended September 30, 2020 and 2019 (unaudited)

For the three months ended March 31, 2021 and 2020 (unaudited)

(Dollars in thousands)

Nine Months Ended

September 30,

Three Months Ended

Cash flows from operating activities

Adjustments to reconcile net income to net cash used by operating activities:

Net income (loss)

Adjustments to reconcile net income (loss) to net cash used by operating activities:

Depreciation and amortization

Provision for loan and lease credit losses

(Recovery of) provision for loan and lease credit losses

Amortization of premium on securities, net of accretion

3 unchanged sentences

Net gains on sale of loans held for sale

Net (gain) loss on sale of foreclosed assets

Net loss (gain) on loans accounted for under fair value option

Net loss on sale of foreclosed assets

Net (gain) loss on loans accounted for under fair value option

Net (increase) decrease in servicing assets

Gain on sale of investment securities available-for-sale, net

Loss on sale of investment securities available-for-sale, net

Net gain on disposal of long-lived asset

Net loss on disposal of property and equipment

Net (gain) loss on disposal of property and equipment

Impairment on premises and equipment, net

4 unchanged sentences

Restricted stock expense

Stock based compensation expense tax shortfall

Stock based compensation excess tax benefit (shortfall)

Changes in assets and liabilities:

7 unchanged sentences

Proceeds from SBA reimbursement/sale of foreclosed assets

Business combination, net of cash acquired

Loan and lease originations and principal collections, net

6 unchanged sentences

Condensed Consolidated Statements of Cash Flows (Continued)

For the nine months ended September 30, 2020 and 2019 (unaudited)

For the three months ended March 31, 2021 and 2020 (unaudited)

(Dollars in thousands)

Nine Months Ended

September 30,

Three Months Ended

Cash flows from financing activities

7 unchanged sentences

Net cash provided by financing activities

Net increase (decrease) in cash and cash equivalents

Net increase in cash and cash equivalents

Cash and cash equivalents, beginning

2 unchanged sentences

Interest paid

Income tax paid (received), net

Income tax paid, net

Supplemental disclosures of noncash operating, investing, and financing activities

Unrealized holding gains on available-for-sale securities, net of taxes

Unrealized holding (losses) gains on available-for-sale securities, net of taxes

Transfers from loans and leases to foreclosed real estate and other repossessions

Net transfers between foreclosed real estate and SBA receivable

Transfer aircraft from premises and equipment, net to held for sale assets

Transfer of loans held for sale to loans and leases held for investment

Transfer of loans and leases held for investment to loans held for sale

Right-of-use assets obtained in exchange for lessee operating lease liabilities

Accrued premises and equipment additions

Equity method investment commitments

Business combination:

Assets acquired (excluding goodwill)

Liabilities assumed

Goodwill recorded

Transfer from retained earnings to other assets for pro rata portion of equity

method investee stock compensation expense

Recording of secured borrowing

Equity security investment commitments

See Notes to Unaudited Condensed Consolidated Financial Statements

4 unchanged sentences

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” or “LOB”) is a bank holding company headquartered in Wilmington, North Carolina incorporated under the laws of the state of North Carolina in December 2008.

The Company conducts business operations primarily through its commercial bank subsidiary, Live Oak Banking Company (the “Bank”).

The Bank was organized and incorporated under the laws of the State of North Carolina on February 25, 2008 and commenced operations on May 12, 2008.

The Bank specializes in providing lending 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.

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

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

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.

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

The Company’s wholly owned subsidiaries are the Bank, Government Loan Solutions (“GLS”), Live Oak Grove, LLC (“Grove”), Live Oak Ventures, Inc.

(“Live Oak Ventures”), and Canapi Advisors, LLC (“Canapi”).

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 Number One, Inc.

1 unchanged sentence

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.

Live Oak Private Wealth, LLC and its wholly owned subsidiary, Jolley Asset Management, LLC (“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.

2 unchanged sentences

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.

Canapi provides investment advisory services to a series of funds focused on providing venture capital to new and emerging financial technology companies.

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.

The Company has historically elected 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.

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

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.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

The Company also has less routinely generated gains and losses arising from its financial technology investments in its fintech segment.

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.

Results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2021.

The Unaudited Condensed Consolidated Balance Sheet as of December 31, 2020 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, 2020, filed with the Securities Exchange Commission on February 25, 2021 (SEC File No.

001-37497) (the "2020 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 2020 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.

These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes in the Company's 2020 Annual Report.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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.

2 unchanged sentences

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.

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:

Reclassifications

As Reclassified

Consolidated Statement of Income for the three months ended

September 30, 2019

Provision for loan and lease credit losses

Net interest income after provision for loan and lease credit losses

Loan servicing asset revaluation

Net gain (loss) on loans accounted for under the fair value option

Total noninterest income

Consolidated Statement of Income for the nine months ended

September 30, 2019

Provision for loan and lease credit losses

Net interest income after provision for loan and lease credit losses

Loan servicing asset revaluation

Net gain (loss) on loans accounted for under the fair value option

Total noninterest income

Consolidated Statement of Cash Flows for the nine months ended

September 30, 2019

Provision for loan and lease credit losses

Net decrease in servicing assets

Change in discount on unguaranteed loans

Net loss (gain) on loans accounted for under fair value option

Net cash used by operating activities

Loan and lease originations and principal collections, net

Net cash used by investing activities

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.

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”).

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.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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 .

Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.

Management has determined that the Company has two significant operating segments:

Banking and Fintech, as discussed more fully in Note 12.

In determining the appropriateness of segment definition, the Company considers the criteria of ASC 280, Segment Reporting .

Business Combination

5 unchanged sentences

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.

Reclassifications

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

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

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.

In December 2019, the Financial Accounting Standards Board (“ FASB”) issued Accounting Standards Update (“ASU”) No.

2019-12, “Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes” (“ASU 2019-12”).

ASU 2019-12 simplifies accounting for income taxes by removing specific technical exceptions in ASC 740 related to the incremental approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition for deferred tax liabilities for outside basis differences.

ASU 2019-12 also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill.

The Company adopted the standard on January 1, 2021 with no material effect on its consolidated financial statements.

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.

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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.

The Company adopted the standard on January 1, 2021 with no material effect on its consolidated financial statements.

In March 2020, the FASB issued ASU No.

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

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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.

Diluted earnings per share reflects the potential dilution that could occur upon the exercise of stock options or upon the vesting of restricted stock grants, any of which would result in the issuance of common stock that would then share in the net income of the Company.

Three Months Ended

September 30,

Nine Months Ended

September 30,

Basic earnings per share:

Basic earnings (loss) per share:

Net income (loss)

Weighted-average basic shares outstanding

Basic earnings per share

Diluted earnings per share:

Net income, for diluted earnings per share

Basic earnings (loss) per share

Diluted earnings (loss) per share:

Net income (loss), for diluted earnings (loss) per share

Total weighted-average basic shares outstanding

Add effect of dilutive stock options and restricted stock

Add effect of dilutive stock options and restricted stock grants

Total weighted-average diluted shares outstanding

Diluted earnings per share

Diluted earnings (loss) per share

Anti-dilutive shares

On April 6, 2021, 178 thousand restricted stock unit awards with market price conditions vested as the Company's share price satisfied applicable target price criteria.

After net settlement for related tax withholding, the Company issued approximately 99 thousand shares.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Investment Securities

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

September 30, 2020

Allowance for Credit Losses

Available-for-Sale

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

March 31, 2021

US government agencies

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December 31, 2020

US treasury securities

US government agencies

1 unchanged sentence

Municipal bonds

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.

During the three months ended March 31, 2021, two mortgage-backed securities totaling $ 6.5 million were paid off.

During the three months ended March 31, 2020, two mortgage-backed securities totaling $ 4.5 million were sold resulting in a net loss of $ 79 thousand.

Accrued interest receivable on available-for-sale securities totaled $ 1.9 million and $ 1.8 million at March 31, 2021 and December 31, 2020, respectively, and is included in other assets in the accompanying Unaudited Condensed Consolidated Balance Sheets.

The following tables show debt securities available-for-sale in an unrealized loss position for which an allowance for credit losses has not been recorded, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position.

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12 Months or More

September 30, 2020

March 31, 2021

Mortgage-backed securities

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Municipal bonds

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.

At March 31, 2021, there were two mortgage-backed securities and one municipal bond in unrealized loss positions for greater than 12 months and eighty-seven mortgage-backed securities in unrealized loss positions for less than 12 months.

Unrealized losses at December 31, 2020 were comprised of three mortgage-backed securities and one municipal bond in unrealized loss positions for greater than 12 months and twenty-nine mortgage-backed securities in unrealized loss positions for less than 12 months.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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.

All mortgage-backed securities in the Company’s portfolio at March 31, 2021 and December 31, 2020 were backed by U.S.

government sponsored enterprises (“GSEs”).

The following is a summary of investment securities by maturity:

September 30, 2020

March 31, 2021

Available-for-Sale

US government agencies

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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.

There were no securities pledged at March 31, 2021 or December 31, 2020.

Other investments, largely comprised of non-marketable equity investments, are generally accounted for under the equity method or equity security accounting.

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

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Equity Method Accounting

The carrying amount and ownership percentage of each equity investment over which the Company has significant influence at March 31, 2021 and December 31, 2020 is reflected in the following table:

March 31, 2021

December 31, 2020

Apiture, Inc.

Canapi Ventures SBIC Fund, LP (1) (3)

Canapi Ventures Fund, LP (2) (3)

Other fintech investments in private companies (4)

Includes unfunded commitments of $ 9.4 million and $ 11.3 million as of March 31, 2021 and December 31, 2020, respectively.

Includes unfunded commitments of $ 1.0 million as of March 31, 2021 and December 31, 2020.

Investee is accounted for under equity method due to the Company's participation as an investment advisor.

Other fintech investments include Finxact, Inc., Payrailz, Inc.

and Kwipped, Inc.

Includes unfunded commitments of $ 2.9 million at December 31, 2020.

Equity Security Accounting

The carrying amount of the Company’s investments in non-marketable equity securities with no readily determinable fair value and amounts recognized in earnings for the three months ended March 31, 2021, and on a cumulative basis is reflected in the following table:

As of and for the three month period ended March 31, 2021

Cumulative Adjustments

Carrying value (1)

Carrying value adjustments:

Upward changes for observable prices

Downward changes for observable prices

Net upward change

Includes $ 2.0 million in unfunded commitments.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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.

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.

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Total Loans and Leases

September 30, 2020

March 31, 2021

Commercial & Industrial

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Specialty Lending

Paycheck Protection Program

Construction & Development

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Total loans and leases include $ 2.75 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.

government guaranteed loans as of March 31, 2021, of which $ 19.2 million is 90 days or more past due, $ 1.2 million is past due 30-89 days and $ 2.73 billion are current.

Total loans and leases include $ 2.61 billion of U.S.

government guaranteed loans as of December 31, 2020, of which $ 12.9 million is 90 days or more past due, $ 16.7 million is past due 30-89 days and $ 2.58 billion are current.

The Company measures the carrying value of the retained portion of loans sold at fair value under ASC Subtopic 825-10.

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Revolving Loans Converted to Term

September 30, 2020

March 31, 2021

Small Business Banking

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Risk Grades 6 - 8

Revolving Loans Amortized Cost Basis

Revolving Loans Converted to Term

December 31, 2020

5 unchanged sentences

Risk Grades 6 - 8

Paycheck Protection Program

Risk Grades 1 - 4

Risk Grades 6 - 8

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Total loans and leases include $ 2.75 billion of U.S.

government guaranteed loans as of September 30, 2020, segregated by risk grade as follows:

government guaranteed loans as of March 31, 2021, segregated by risk grade as follows:

Risk Grades 1 – 4 = $ 2.57 billion, Risk Grade 5 = $ 141.1 million, Risk Grades 6 – 8 = $ 47.6 million.

As of December 31, 2019, total loans and leases include $ 622.6 million of U.S.

As of December 31, 2020, total loans and leases include $ 2.61 billion 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.

Risk Grades 1 – 4 = $ 2.44 billion, Risk Grade 5 = $ 128.0 million, Risk Grades 6 – 8 = $ 40.9 million.

Total loans and leases exclude loans accounted for under the fair value option.

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.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Excludes $ 790.8 million and $ 815.4 million of loans accounted for under the fair value option as of March 31, 2021 and December 31, 2020, respectively.

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.

As of March 31, 2021 and December 31, 2020 there were no loans greater than 90 days past due and still accruing.

There was no interest income recognized on nonaccrual loans and leases during the three months ended March 31, 2021 and 2020.

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

Accrued interest receivable on loans totaled $ 38.1 million and $ 41.0 million at March 31, 2021 and December 31, 2020, respectively, and is included in other assets in the accompanying Unaudited Condensed Consolidated Balance Sheets.

Nonaccrual loans and leases held for investment as of March 31, 2021 and December 31, 2020 are as follows:

March 31, 2021

Loan and Lease

Unguaranteed Balance

2 unchanged sentences

Small Business Banking

Specialty Lending

Construction & Development

6 unchanged sentences

December 31, 2020

Loan and Lease

Unguaranteed Balance

Exposure with No ACL

Commercial & Industrial

Small Business Banking

Construction & Development

Specialty Lending

1 unchanged sentence

Small Business Banking

Specialty Lending

Commercial Land

Small Business Banking

Excludes nonaccrual loans accounted for under the fair value option.

Fair Value of Financial Instruments for additional information.

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:

Excludes nonaccrual loans accounted for under the fair value option.

Fair Value of Financial Instruments for additional information.

The following table presents the amortized cost basis of collateral-dependent loans and leases, which are individually evaluated to determine expected credit losses, as of March 31, 2021 and December 31, 2020:

Total Collateral Dependent Loans

Unguaranteed Portion

September 30, 2020

March 31, 2021

Business Assets

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Small Business Banking

Total Collateral Dependent Loans

Unguaranteed Portion

December 31, 2020

Business Assets

Allowance for Credit Losses

Commercial & Industrial

Small Business Banking

Construction & Development

Specialty Lending

Commercial Real Estate

Small Business Banking

Specialty Lending

Commercial Land

Small Business Banking

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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.

Basis of Presentation for additional information around the Company’s methodology for estimating the ACL.

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:

1 unchanged sentence

Construction &

September 30, 2020

Beginning Balance

Ending Balance

September 30, 2019

March 31, 2021

Beginning Balance

Ending Balance

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Nine Months Ended

Construction &

September 30, 2020

March 31, 2020

Beginning Balance, prior to adoption of ASC 326

1 unchanged sentence

Ending Balance

September 30, 2019

Beginning Balance

Ending Balance

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

Three Months Ended March 31, 2021

Interest Only

Payment Deferral

Recorded investment at period end

Extend Amortization

Total TDRs (2)

Recorded investment at period end

Commercial & Industrial

Small Business Banking

Specialty Lending

Construction & Development

Small Business Banking

Commercial Real Estate

Small Business Banking

Specialty Lending

Three Months Ended September 30, 2019

Interest Only

Payment Deferral & Rate Concession

Recorded investment at period end

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Small Business Banking

Includes one small business banking with extend amortization and a rate concession TDR.

Excludes loans accounted for under the fair value option.

Fair Value of Financial Instruments for additional information.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2020

Extended Amortization

Three Months Ended March 31, 2020

Interest Only

Payment Deferral

Recorded investment at period end

Extend Amortization

Total TDRs (1)

Recorded investment at period end

Commercial & Industrial

Small Business Banking

Specialty Lending

Construction & Development

Small Business Banking

Commercial Real Estate

Small Business Banking

Specialty Lending

Commercial Land

Small Business Banking

Nine Months Ended September 30, 2019

Payment Deferral

Interest Only

Payment Deferral & Rate Concession

Recorded investment at period end

4 unchanged sentences

Small Business Banking

Commercial Real Estate

Small Business Banking

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.

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 &

Allowance for credit losses on loans and leases:

Loans and leases individually evaluated for

Loans and leases collectively evaluated for

Total allowance for credit losses on loans and leases

Loans and leases receivable:

Loans and leases individually evaluated for

Loans and leases collectively evaluated for

Total loans and leases receivable

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.

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

Commercial & Industrial

Small Business Banking

Specialty Lending

Construction & Development

Small Business Banking

Commercial Real Estate

Small Business Banking

Specialty Lending

Commercial Land

Small Business Banking

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

Commercial & Industrial

Small Business Banking

Specialty Lending

Construction & Development

Small Business Banking

Commercial Real Estate

Small Business Banking

Specialty Lending

Commercial Land

Small Business Banking

Total Impaired Loans and Leases

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

Commercial & Industrial

Small Business Banking

Specialty Lending

Construction & Development

Small Business Banking

Commercial Real Estate

Small Business Banking

Specialty Lending

Commercial Land

Small Business Banking

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Nine Months Ended

September 30, 2019

Commercial & Industrial

Small Business Banking

Specialty Lending

Construction & Development

Small Business Banking

Commercial Real Estate

Small Business Banking

Specialty Lending

Commercial Land

Small Business Banking

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Excludes loans accounted for under the fair value option.

Fair Value of Financial Instruments for additional information.

One TDR that was modified within the twelve months ended March 31, 2021 subsequently defaulted during the three months ended March 31, 2021.

The TDR that defaulted was a Commercial Real Estate Small Business Banking loan that had previously been modified for a payment deferral and had a recorded investment of $ 629 thousand at March 31, 2021.

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

Lessor Equipment Leasing

7 unchanged sentences

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

September 30, 2020

March 31, 2021

December 31, 2020

3 unchanged sentences

Future minimum lease payments under finance leases are as follows:

As of September 30, 2020

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.

As of March 31, 2021

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Interest income of $ 186 thousand and $ 233 thousand was recognized in the three months ended March 31, 2021 and 2020, respectively.

Operating Leases

9 unchanged sentences

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.

As of March 31, 2021 and December 31, 2020, the Company had a net investment of $ 131.2 million and $ 134.5 million, respectively, in assets included in premises and equipment that are subject to operating leases.

Of the net investment, the gross balance of the assets was $ 163.4 million and $ 164.3 million as of March 31, 2021 and December 31, 2020 and accumulated depreciation was $ 32.2 million and $ 29.8 million as of March 31, 2021 and December 31, 2020, respectively.

Depreciation expense recognized on these assets for the three months ended March 31, 2021 and 2020 was $ 2.4 million.

Lease income of $ 2.4 million was recognized in the three months ended March 31, 2021 and 2020, respectively.

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

As of March 31, 2021

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

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.

Loans serviced for others are not included in the accompanying Unaudited Condensed Consolidated Balance Sheets.

The unpaid principal balances of loans serviced for others requiring recognition of a servicing asset were $ 2.24 billion and $ 2.21 billion at March 31, 2021 and December 31, 2020, respectively.

The unpaid principal balance for all loans serviced for others was $ 3.22 billion and $ 3.21 billion at March 31, 2021 and December 31, 2020, respectively.

The following summarizes the activity pertaining to servicing rights:

Three Months Ended

September 30,

Nine Months Ended

September 30,

Balance at beginning of period

4 unchanged sentences

Balance at end of period

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 was determined using a weighted average discount rate of 8.8 % on March 31, 2021 and 13.0 % on March 31, 2020.

The fair value of servicing rights was determined using a weighted average prepayment speed of 18.6 % on March 31, 2021 and 17.9 % on March 31, 2020, with the actual rate depending on the stratification of the specific right.

Changes to fair value are reported in loan servicing asset revaluation within the Unaudited Condensed Consolidated Statements of Income.

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

5 unchanged sentences

Total outstanding borrowings consisted of the following:

September 30,

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.

In March 2021, the Company entered into a 60 -month term loan agreement of $ 50.0 million with a third party correspondent bank.

The loan accrues interest at a fixed rate of 2.95 % with a monthly payment sufficient to fully amortize the loan, with all remaining unpaid principal and interest due at maturity on March 30, 2026 .

The Company paid the Lender a non-refundable $ 325 thousand loan origination fee upon signing of the Note that is presented as a direct deduction from the carrying amount of the loan and will be amortized into interest expense over the life of the loan.

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

The line of credit was unsecured and accrued interest at 30-day LIBOR plus 1.15 % for a term of 13 months.

Payments were interest only with all principal and accrued interest due on October 10, 2021 .

On March 31, 2021 the remaining outstanding balance of $ 14.5 million was paid in full and the revolving line was closed.

No available credit remains at March 31, 2021.

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

1 unchanged sentence

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.

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 March 20, 2026 , 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.

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.

This $ 1.41 billion borrowing was fully advanced at March 31, 2021.

Other long term debt (1)

Total borrowings

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.

Includes finance leases and loan participations accounted for as secured borrowings.

The Company may purchase federal funds through unsecured federal funds lines of credit with various correspondent banks, which totaled $ 167.5 million as of March 31, 2021 and December 31, 2020.

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.

The Company had no outstanding balances on the lines of credit as of March 31, 2021 and December 31, 2020.

The Company has entered into a repurchase agreement with a third party for $ 5.0 million as of March 31, 2021 and December 31, 2020.

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.

The Company had no outstanding balance on the repurchase agreement as of March 31, 2021 and December 31, 2020.

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.

At March 31, 2021 and December 31, 2020, the Company had approximately $ 1.96 billion and $ 2.01 billion, respectively, in borrowing capacity available under these agreements.

There is no collateral pledged and no advances outstanding as of March 31, 2021 and December 31, 2020.

Live Oak Bancshares, Inc.

1 unchanged sentence

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.

These borrowings are secured by a blanket floating lien on qualifying loans with a balance of $ 2.23 billion and $ 2.22 billion as of March 31, 2021 and December 31, 2020, respectively.

At March 31, 2021 and December 31, 2020, the Company had approximately $ 1.79 billion and $ 1.77 billion, respectively, in borrowing capacity available under these arrangements with no outstanding balance as of March 31, 2021 and December 31, 2020.

Fair Value of Financial Instruments

17 unchanged sentences

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.

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

Loans held for investment:

3 unchanged sentences

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.

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

Servicing assets:

3 unchanged sentences

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

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 below 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.

5 unchanged sentences

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.

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

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

1 unchanged sentence

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

September 30, 2020

March 31, 2021

Investment securities available-for-sale

9 unchanged sentences

Investment securities available-for-sale

US treasury securities

US government agencies

6 unchanged sentences

Total assets at fair value

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.

During the three months ended March 31, 2021, the Company recorded no fair value adjustment gain/loss.

During the three months ended March 31, 2020, the Company recorded a fair value adjustment gain of $ 1 thousand.

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

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.

During the three months ended March 31, 2021, the Company entered into equity warrant assets with a fair value of $ 21 thousand at the time of issuance and recorded net gains on derivative instruments of $ 385 thousand.

During the three months ended March 31, 2020, the Company entered into equity warrant assets with a fair value of $ 164 thousand at the time of issuance and recorded net losses on derivative instruments of $ 32 thousand.

Fair Value Option

Prior to January 1, 2021, the Company elected to account for retained participating interests of all government guaranteed loans under the fair value option in order to align the accounting presentation with the Company’s viewpoint of the economics of the loans.

Interest income on loans accounted for under the fair value option is recognized in loans and fees on loans on the Company’s Unaudited Condensed 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 March 31, 2021 or December 31, 2020.

The unpaid principal balance of unguaranteed exposure for nonaccruals was $ 7.4 million and $ 6.9 million at March 31, 2021 and December 31, 2020, respectively.

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

The following tables provide more information about the fair value carrying amount and the unpaid principal outstanding of loans accounted for under the fair value option at March 31, 2021 and December 31, 2020.

March 31, 2021

90 Days or More Past Due

20 unchanged sentences

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

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

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

1 unchanged sentence

Loans held for investment

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.

Gains/(Losses) related to borrower-specific credit risk were $ 191 thousand for the three months ended March 31, 2021 and $( 922 ) thousand for the three months ended March 31, 2020.

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,

Three Months Ended March 31,

Loans held for sale

Balance at beginning of period

Issuances & repurchases

Fair value changes

Balance at end of period

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

Loans held for investment

Balance at beginning of period

Issuances & repurchases

Fair value changes

Balance at end of period

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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

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

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

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

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

Non-recurring Fair Value

19 unchanged sentences

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.

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

March 31, 2021

Collateral dependent loans

Foreclosed assets

Long-lived asset held for sale

Equity security investments with a non-readily

determinable fair value

Total assets at fair value

2 unchanged sentences

Foreclosed assets

Long-lived asset held for sale

Equity security investment with a non-readily

1 unchanged sentence

Total assets at fair value

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Level 3 Analysis

For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of September 30, 2020 and December 31, 2019 the significant unobservable inputs used in the fair value measurements were as follows:

September 30, 2020

For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of March 31, 2021 and December 31, 2020 the significant unobservable inputs used in the fair value measurements were as follows:

March 31, 2021

Level 3 Assets with Significant

36 unchanged sentences

7.5 % to 10.0 %

Long-lived asset held

Discounted independent market valuation

Independent market valuation adjustments

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 2020

27 unchanged sentences

26.5 - 87.1 %

0.36 % to 0.93 %

Non-recurring fair value

7 unchanged sentences

10.0 % to 20.0 %

Appraisals may be adjusted by management for customized discounting criteria, estimated sales costs, and proprietary qualitative adjustments.

Appraisals may be adjusted by management for customized discounting criteria, estimated sales costs, and other qualitative adjustments.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Estimated Fair Value of Other Financial Instruments

1 unchanged sentence

The carrying amounts and estimated fair values of the Company’s financial instruments not measured at fair value on a recurring or non-recurring basis are as follows:

September 30, 2020

March 31, 2021

Identical Assets

7 unchanged sentences

Financial liabilities

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 2020

8 unchanged sentences

Financial liabilities

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Commitments and Contingencies

1 unchanged sentence

Management believes that the outcome of such proceedings will not materially affect the financial position, results of operations or cash flows of the Company.

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

Live Oak Bancshares, Inc.

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

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

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

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

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

Given the uncertainty of litigation, the preliminary stage of the case, and the legal standards that must be met for, among other things, class certification and success on the merits, we cannot estimate the reasonably possible loss or range of loss that may result from this action.

Financial Instruments with Off-balance-sheet Risk

5 unchanged sentences

A summary of the Company’s commitments is as follows:

September 30,

Commitments to extend credit

7 unchanged sentences

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.

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

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

2 unchanged sentences

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

As of March 31, 2021 and December 31, 2020, the Company had unfunded commitments to provide capital contributions for on-balance-sheet investments in the amount of $ 12.4 million and $ 15.8 million, respectively.

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

3 unchanged sentences

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 $ 15.0 million, except for 14 relationships that have a retained unguaranteed exposure of $ 321.2 million of which $ 132.2 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.

Additionally, the Company has future minimum lease payments due under non-cancelable operating leases totaling $ 74.1 million, of which $ 22.4 million is due from one relationship.

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

6 unchanged sentences

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.

Market Restricted Stock Units also have a restriction based on the passage of time and may have non-market-related performance criteria, but also have a restriction based on market price criteria related to the Company’s share price closing at or above a specified price 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.

There were no stock options granted during the three months ended March 31, 2021.

At March 31, 2021, unrecognized compensation costs relating to stock options amounted to $ 1.9 million which will be recognized over a weighted average period of 1.42 years.

Restricted Stock

2 unchanged sentences

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.

For the quarter ended March 31, 2021, 397,500 Market RSUs met the performance stock price conditions for the $ 45.00 , $ 48.00 , and $ 50.00 stock price for twenty (20) consecutive trading days.

The remaining expense of $ 2.1 million was fully recognized due to the accelerated vesting.

The weighted average grant date fair value for the 397,500 vested Market RSUs was $ 7.89 .

Remaining Market RSUs at March 31, 2021 have a restriction based on the passage of time, but also have a restriction based on market price criteria related to the Company’s share price closing at $ 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.

2 unchanged sentences

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.

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

Noncurrent assets

Current liabilities

Noncurrent liabilities

Total liabilities

Equity interests

Total liabilities and equity

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,

Summary of operations

Total revenues

For the three months ended March 31, 2021, 792,893 RSUs were granted with a weighted average grant date fair value of $ 50.66 .

Of the RSUs granted in the three month period, 288,680 were awarded in connection with annual long term incentive stock compensation and 500,000 were awarded as a special retention RSU award.

At March 31, 2021, unrecognized compensation costs relating to RSUs amounted to $ 51.6 million which will be recognized over a weighted average period of 5.18 years.

There were no Market RSUs granted during the three months ended March 31, 2021.

At March 31, 2021, unrecognized compensation costs relating to Market RSUs amounted to $ 1.1 million which will be recognized over a weighted average period of 0.02 years.

The Company's management reporting process measures the performance of its operating segments based on internal operating structure, which is subject to change from time to time.

Accordingly, the Company operates two reportable segments for management reporting purposes as discussed below:

Banking - This segment specializes in providing financing services to small businesses nationwide in targeted industries and deposit-related services to small businesses, consumers and other customers nationwide.

The primary source of revenue for this segment is net interest income and secondarily the origination and sale of government guaranteed loans.

Fintech - This segment is involved in making strategic investments into emerging financial technology companies.

The primary sources of revenue for this segment are principally gains and losses on equity method and equity security investments and management fees.

The Fintech segment is comprised of the Company's wholly owned subsidiaries Live Oak Ventures, Canapi and the Bank's investment in Apiture.

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

The information provided under the caption “Other” represents operations not considered to be reportable segments and/or general operating expenses of the Company, and includes the parent company, other non-bank subsidiaries and elimination adjustments to reconcile the results of the operating segments to the consolidated financial statements prepared in conformity with GAAP.

Three months ended March 31, 2021

Interest income

Interest expense

Net interest income

(Recovery of) provision for loan and lease credit

Noninterest income

Noninterest expense

Income tax expense (benefit)

Net income (loss)

Three months ended March 31, 2020

Interest income

Interest expense

Net interest income

Provision for loan and lease credit losses

Noninterest income

Noninterest expense

Income tax benefit

Net (loss) income

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Subsequent Event

On April 27, 2021, the Company’s equity security investee, Greenlight Financial Technology, Inc.

(“Greenlight”), announced the close of $ 260.0 million in newly issued shares in an orderly transaction.

As a result of this transaction the Company expects to recognize a pre-tax non-cash gain of approximately $ 6.9 million during the second quarter of 2021, arising from the increase in the observable fair market value of its investment in Greenlight .

In assessing the effect of transactions at Greenlight giving rise to this gain, the Company reevaluated its ownership percentage and other factors to reassess the existence of significant influence and determined that this investment should continue to be accounted for as an equity security investment .

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements