Live Oak Bancshares, Inc. 10-Q

Item 1. Financial Statements Live Oak Bancshares, Inc. Condensed Consolidated Balance Sheets As of March 31, 2021 (unaudited) and December 31, 2020* (Dollars in thousands) March 31, 2021 December 31, 2020 Assets Cash and due from banks $ 630,081 $ 297,167 Federal funds sold 5,461 21,153 Certificates of deposit with other banks 6,500 6,500 Investment securities available-for-sale 775,177 750,098 Loans held for sale (includes $ 35,936 and $ 36,111 measured at fair value, respectively) 1,076,741 1,175,470 Loans and leases held for investment (includes $ 790,797 and $ 815,374 measured at fair value, respectively) 5,456,754 5,144,930 Allowance for credit losses on loans and leases ( 52,417 ) ( 52,306 ) Net loans and leases 5,404,337 5,092,624 Premises and equipment, net 253,774 259,267 Foreclosed assets 4,185 4,155 Servicing assets 37,744 33,918 Other assets 223,875 231,951 Total assets $ 8,417,875 $ 7,872,303 Liabilities and Shareholders’ Equity Liabilities Deposits: Noninterest-bearing $ 75,794 $ 75,287 Interest-bearing 6,240,210 5,637,541 Total deposits 6,316,004 5,712,828 Borrowings 1,465,961 1,542,093 Other liabilities 45,550 49,532 Total liabilities 7,827,515 7,304,453 Shareholders’ equity 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 41,344,689 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively 298,525 298,890 Class B common stock, no par value, 10,000,000 shares authorized, 692,253 and 1,107,757 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively 7,330 11,729 Retained earnings 275,377 235,724 Accumulated other comprehensive income 9,128 21,507 Total shareholders’ equity 590,360 567,850 Total liabilities and shareholders’ equity $ 8,417,875 $ 7,872,303 * Derived from audited consolidated financial statements. See Notes to Unaudited Condensed Consolidated Financial Statements 1 Live Oak Bancshares, Inc. Condensed Consolidated Statements of Income For the three months ended March 31, 2021 and 2020 (unaudited) (Dollars in thousands, except per share data) Three Months Ended March 31, 2021 2020 Interest income Loans and fees on loans $ 84,993 $ 58,961 Investment securities, taxable 2,929 3,762 Other interest earning assets 303 750 Total interest income 88,225 63,473 Interest expense Deposits 16,944 23,255 Borrowings 1,331 57 Total interest expense 18,275 23,312 Net interest income 69,950 40,161 (Recovery of) provision for loan and lease credit losses ( 873 ) 11,792 Net interest income after (recovery of) provision for loan and lease credit losses 70,823 28,369 Noninterest income Loan servicing revenue 6,434 6,422 Loan servicing asset revaluation 1,493 ( 4,692 ) Net gains on sales of loans 11,929 11,112 Net gain (loss) on loans accounted for under the fair value option 4,218 ( 10,638 ) Equity method investments income (loss) ( 1,157 ) ( 2,478 ) Equity security investments gains (losses), net 105 ( 64 ) Loss on sale of investment securities available-for-sale, net — ( 79 ) Lease income 2,599 2,624 Management fee income 1,934 1,644 Other noninterest income 3,502 1,891 Total noninterest income 31,057 5,742 Noninterest expense Salaries and employee benefits 31,366 28,063 Travel expense 659 1,781 Professional services expense 3,831 1,937 Advertising and marketing expense 652 1,361 Occupancy expense 2,112 2,421 Data processing expense 3,894 3,157 Equipment expense 4,354 4,635 Other loan origination and maintenance expense 3,327 2,456 Renewable energy tax credit investment impairment 3,127 — FDIC insurance 1,765 1,510 Other expense 3,185 2,170 Total noninterest expense 58,272 49,491 Income (loss) before taxes 43,608 ( 15,380 ) Income tax expense (benefit) 4,181 ( 7,778 ) Net income (loss) $ 39,427 $ ( 7,602 ) Basic earnings (loss) per share $ 0.92 $ ( 0.19 ) Diluted earnings (loss) per share $ 0.88 $ ( 0.19 ) See Notes to Unaudited Condensed Consolidated Financial Statements 2 Live Oak Bancshares, Inc. Condensed Consolidated Statements of Comprehensive Income (Loss) For the three months ended March 31, 2021 and 2020 (unaudited) (Dollars in thousands) Three Months Ended March 31, 2021 2020 Net income (loss) $ 39,427 $ ( 7,602 ) Other comprehensive (loss) income before tax: Net unrealized (loss) gain on investment securities arising during the period ( 16,288 ) 7,849 Reclassification adjustment for loss on sale of securities available-for-sale included in net income — 79 Other comprehensive (loss) income before tax ( 16,288 ) 7,928 Income tax benefit (expense) 3,909 ( 1,903 ) Other comprehensive (loss) income, net of tax ( 12,379 ) 6,025 Total comprehensive income (loss) $ 27,048 $ ( 1,577 ) See Notes to Unaudited Condensed Consolidated Financial Statements 3 Live Oak Bancshares, Inc. Condensed Consolidated Statements of Changes in Shareholders’ Equity For the three months ended March 31, 2021 and 2020 (unaudited) (Dollars in thousands) Three Months Ended Common stock Accumulated other Shares Retained comprehensive Total Class A Class B Amount earnings income equity Balance at December 31, 2020 41,344,689 1,107,757 $ 310,619 $ 235,724 $ 21,507 $ 567,850 Net income — — — 39,427 — 39,427 Other comprehensive loss — — — — ( 12,379 ) ( 12,379 ) Issuance of restricted stock 292,216 — — — — — Tax withholding related to vesting of restricted stock and other — — ( 11,287 ) — — ( 11,287 ) Employee stock purchase program 5,686 — 296 — — 296 Stock option exercises 200,996 — 1,213 — — 1,213 Stock option based compensation expense — — 344 — — 344 Restricted stock expense — — 4,670 — — 4,670 Non-voting common stock converted to voting common stock in private sale 415,504 ( 415,504 ) — — — — Transfer from retained earnings to other assets for pro rata portion of equity method investee stock compensation expense — — — 1,508 — 1,508 Cash dividends ($ 0.03 per share) — — — ( 1,282 ) — ( 1,282 ) Balance at March 31, 2021 42,259,091 692,253 $ 305,855 $ 275,377 $ 9,128 $ 590,360 Balance at December 31, 2019 37,401,443 2,915,531 $ 340,397 $ 180,265 $ 11,724 $ 532,386 Net loss — — — ( 7,602 ) — ( 7,602 ) Other comprehensive income — — — — 6,025 6,025 Issuance of restricted stock 7,424 — — — — — Tax withholding related to vesting of restricted stock and other — — ( 48 ) — — ( 48 ) Employee stock purchase program 25,161 — 232 — — 232 Stock option exercises 30,642 — 258 — — 258 Stock option based compensation expense — — 366 — — 366 Restricted stock expense — — 2,542 — — 2,542 Non-voting common stock converted to voting common stock in private sale 200,000 ( 200,000 ) — — — — Cumulative effect of accounting change for Accounting Standards Update 2016-13 — — — 822 — 822 Cash dividends ($ 0.03 per share) — — — ( 1,209 ) — ( 1,209 ) Balance at March 31, 2020 37,664,670 2,715,531 $ 343,747 $ 172,276 $ 17,749 $ 533,772 See Notes to Unaudited Condensed Consolidated Financial Statements 4 Live Oak Bancshares, Inc. Condensed Consolidated Statements of Cash Flows For the three months ended March 31, 2021 and 2020 (unaudited) (Dollars in thousands) Three Months Ended March 31, 2021 2020 Cash flows from operating activities Net income (loss) $ 39,427 $ ( 7,602 ) Adjustments to reconcile net income (loss) to net cash used by operating activities: Depreciation and amortization 5,265 5,621 (Recovery of) provision for loan and lease credit losses ( 873 ) 11,792 Amortization of premium on securities, net of accretion 1,817 269 Deferred tax (benefit) expense ( 3,984 ) 1,264 Originations of loans held for sale ( 253,588 ) ( 274,678 ) Proceeds from sales of loans held for sale 182,685 203,340 Net gains on sale of loans held for sale ( 11,929 ) ( 11,112 ) Net loss on sale of foreclosed assets 24 49 Net (gain) loss on loans accounted for under fair value option ( 4,218 ) 10,638 Net (increase) decrease in servicing assets ( 3,826 ) 1,833 Loss on sale of investment securities available-for-sale, net — 79 Net gain on disposal of long-lived asset ( 114 ) — Net (gain) loss on disposal of property and equipment ( 48 ) 38 Impairment on premises and equipment, net 904 — Equity method investments (income) loss 1,157 2,478 Equity security investments (gains) losses, net ( 105 ) 64 Renewable energy tax credit investment impairment 3,127 — Stock option based compensation expense 344 366 Restricted stock expense 4,670 2,542 Stock based compensation excess tax benefit (shortfall) 5,152 ( 34 ) Changes in assets and liabilities: Lease right-of-use assets and liabilities, net ( 1 ) ( 12 ) Other assets 855 ( 31,905 ) Other liabilities ( 5,406 ) ( 6,493 ) Net cash used by operating activities ( 38,665 ) ( 91,463 ) Cash flows from investing activities Purchases of securities available-for-sale ( 108,223 ) ( 52,757 ) Proceeds from sales, maturities, calls, and principal paydown of securities available-for-sale 65,039 26,214 Proceeds from SBA reimbursement/sale of foreclosed assets 152 613 Loan and lease originations and principal collections, net ( 119,970 ) ( 152,616 ) Proceeds from sale of long-lived asset 8,988 — Proceeds from sale of premises and equipment 84 — Purchases of premises and equipment, net ( 674 ) ( 737 ) Net cash used by investing activities ( 154,604 ) ( 179,283 ) See Notes to Unaudited Condensed Consolidated Financial Statements 5 Live Oak Bancshares, Inc. Condensed Consolidated Statements of Cash Flows (Continued) For the three months ended March 31, 2021 and 2020 (unaudited) (Dollars in thousands) Three Months Ended March 31, 2021 2020 Cash flows from financing activities Net increase in deposits $ 603,176 $ 412,421 Proceeds from borrowings 498,666 50,000 Repayment of borrowings ( 580,291 ) ( 2 ) Stock option exercises 1,213 258 Employee stock purchase program 296 232 Withholding cash issued in lieu of restricted stock ( 11,287 ) ( 48 ) Shareholder dividend distributions ( 1,282 ) ( 1,209 ) Net cash provided by financing activities 510,491 461,652 Net increase in cash and cash equivalents 317,222 190,906 Cash and cash equivalents, beginning 318,320 221,397 Cash and cash equivalents, ending $ 635,542 $ 412,303 Supplemental disclosures of cash flow information Interest paid $ 18,469 $ 23,858 Income tax paid, net 354 362 Supplemental disclosures of noncash operating, investing, and financing activities Unrealized holding (losses) gains on available-for-sale securities, net of taxes $ ( 12,379 ) $ 6,025 Transfers from loans and leases to foreclosed real estate and other repossessions 402 1,764 Net transfers between foreclosed real estate and SBA receivable 196 30 Transfer of loans held for sale to loans and leases held for investment 176,285 35,233 Transfer of loans and leases held for investment to loans held for sale 24,260 2,949 Transfer from retained earnings to other assets for pro rata portion of equity method investee stock compensation expense 1,508 — Recording of secured borrowing 5,493 — Equity security investment commitments 1,500 — See Notes to Unaudited Condensed Consolidated Financial Statements 6 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Note 1. Basis of Presentation Nature of Operations Live Oak Bancshares, Inc. (the “Company” or “LOB”) is a bank holding company headquartered in Wilmington, North Carolina incorporated under the laws of 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 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’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. holds properties foreclosed on by the Bank. LOCEF provides financing to entities for renewable energy applications and became a wholly owned subsidiary of the Bank during the first quarter of 2019. Live Oak Private Wealth, LLC and 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. GLS primarily provides services in connection with the settlement, accounting, and securitization processes for government guaranteed loans, including loans originated under the SBA 7(a) loan programs and USDA guaranteed loans. The Grove provides Company employees and business visitors an on-site restaurant location. Live Oak Ventures’ purpose is investing in businesses that align with the Company's strategic initiative to be a leader in financial technology. Canapi provides investment advisory services to a series of 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 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 in its fintech segment. General In the opinion of management, all adjustments necessary for a fair presentation of the financial position and results of operations for the periods presented have been included, and all intercompany transactions have been eliminated in consolidation. Results of operations for the three 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 audited consolidated financial statements and footnotes in the Company's 2020 Annual Report. 7 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. Actual results could differ significantly from those estimates. Amounts in all tables in the Notes to Unaudited Condensed Consolidated Financial Statements have been presented in thousands, except percentage, time period, stock option, share and per share data or where otherwise indicated. Business Segments 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. Segments. In determining the appropriateness of segment definition, the Company considers the criteria of ASC 280, Segment Reporting . Business Combination On April 1, 2020, the Company acquired 100 % of the equity interests of JAM, a registered investment advisor based in Rocky Mount, North Carolina. Goodwill, intangible assets and contingent consideration of $ 1.8 million, $ 2.3 million and $ 2.1 million, respectively, have been recorded by the Company. Intangible assets are almost entirely comprised of customer relationships that are being amortized using the straight-line method over 15 years. As a result of this acquisition, the Bank's subsidiary Live Oak Private Wealth, LLC, expects to broaden service offerings to existing high-net-worth individuals and families, attract new clients from an expanded footprint and benefit from economies of scale. The acquisition did not materially impact the Company's financial position, results of operations or cash flows. Given the impact of the above acquisition was immaterial to the Company and its result of operations, pro forma information has not been included. Reclassifications Certain reclassifications have been made to the prior period’s condensed consolidated financial statements to place them on a comparable basis with the current year. Net income and shareholders’ equity previously reported were not affected by these reclassifications . Note 2. Recent Accounting Pronouncements In 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. In January 2020, the FASB issued ASU No. 2020-01, “Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)-Clarifying the Interactions between Topic 321, Topic 323, and Topic 815” (“ASU 2020-01”). ASU 2020-01 clarifies the interaction between accounting standards related to equity securities, equity method investments, and certain derivatives including accounting for the transition into and out of the equity method and measuring certain purchased options and forward contracts to acquire investments. The 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. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”). ASU 2020-04 provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments are effective for the Company as of March 12, 2020 through December 31, 2022. The Company does not believe this standard will have a material impact on its consolidated financial statements. 8 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Note 3. Earnings Per Share Basic and diluted earnings per share are computed based on the weighted average number of shares outstanding during each period. Diluted earnings per share reflects the potential dilution that could occur upon the exercise of stock options or upon the vesting of restricted stock grants, any of which would result in the issuance of common stock that would then share in the net income of the Company. Three Months Ended March 31, 2021 2020 Basic earnings (loss) per share: Net income (loss) $ 39,427 $ ( 7,602 ) Weighted-average basic shares outstanding 42,673,615 40,334,179 Basic earnings (loss) per share $ 0.92 $ ( 0.19 ) Diluted earnings (loss) per share: Net income (loss), for diluted earnings (loss) per share $ 39,427 $ ( 7,602 ) Total weighted-average basic shares outstanding 42,673,615 40,334,179 Add effect of dilutive stock options and restricted stock grants 2,023,235 739,870 Total weighted-average diluted shares outstanding 44,696,850 41,074,049 Diluted earnings (loss) per share $ 0.88 $ ( 0.19 ) Anti-dilutive shares — 1,839,601 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. 9 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Note 4. Securities Available-for-Sale The carrying amount of securities and their approximate fair values are reflected in the following table: March 31, 2021 Amortized Cost Unrealized Gains Unrealized Losses Fair Value US government agencies $ 15,442 $ 387 $ — $ 15,829 Mortgage-backed securities 744,462 20,208 8,895 755,775 Municipal bonds 3,262 315 4 3,573 Total $ 763,166 $ 20,910 $ 8,899 $ 775,177 December 31, 2020 US government agencies $ 15,440 $ 479 $ — $ 15,919 Mortgage-backed securities 703,092 28,302 940 730,454 Municipal bonds 3,267 462 4 3,725 Total $ 721,799 $ 29,243 $ 944 $ 750,098 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. Less Than 12 Months 12 Months or More Total March 31, 2021 Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Mortgage-backed securities $ 357,905 $ 8,892 $ 650 $ 3 $ 358,555 $ 8,895 Municipal bonds — — 96 4 96 4 Total $ 357,905 $ 8,892 $ 746 $ 7 $ 358,651 $ 8,899 Less Than 12 Months 12 Months or More Total December 31, 2020 Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Mortgage-backed securities $ 156,904 $ 917 $ 1,853 $ 23 $ 158,757 $ 940 Municipal bonds — — 96 4 96 4 Total $ 156,904 $ 917 $ 1,949 $ 27 $ 158,853 $ 944 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 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. 10 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 Unaudited Condensed C onsolidated S tatements of I ncome. 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: March 31, 2021 Available-for-Sale Amortized cost Fair value US government agencies Within one year $ 5,000 $ 5,007 One to five years 7,513 7,737 Five to ten years 2,929 3,085 Total 15,442 15,829 Mortgage-backed securities One to five years 10,248 10,848 Five to ten years 227,756 237,693 After 10 years 506,458 507,234 Total 744,462 755,775 Municipal bonds After 10 years 3,262 3,573 Total 3,262 3,573 Total $ 763,166 $ 775,177 The table above reflects contractual maturities. Actual results will differ as the loans underlying the mortgage-backed securities may repay sooner than scheduled. There were no securities pledged at March 31, 2021 or December 31, 2020. Other 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. 11 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 Amount Ownership % Amount Ownership % Apiture, Inc. $ 53,927 39.1 % $ 53,344 39.1 % Canapi Ventures SBIC Fund, LP (1) (3) 15,530 2.9 % 14,843 3.1 % Canapi Ventures Fund, LP (2) (3) 1,780 1.5 % 1,686 1.5 % Other fintech investments in private companies (4) 6,237 Various 1,634 Various Other (5) 3,273 Various 6,421 Various Total $ 80,747 $ 77,928 (1) Includes unfunded commitments of $ 9.4 million and $ 11.3 million as of March 31, 2021 and December 31, 2020, respectively. (2) Includes unfunded commitments of $ 1.0 million as of March 31, 2021 and December 31, 2020. (3) Investee is accounted for under equity method due to the Company's participation as an investment advisor. (4) Other fintech investments include Finxact, Inc., Payrailz, Inc. and Kwipped, Inc. (5) 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 Amount Cumulative Adjustments Carrying value (1) $ 32,527 Carrying value adjustments: Impairment — $ — Upward changes for observable prices — 18,272 Downward changes for observable prices — ( 86 ) Net upward change $ — $ 18,186 (1) Includes $ 2.0 million in unfunded commitments. 12 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Note 5. Loans and Leases Held for Investment and Credit Quality The following tables present total loans and leases and an aging analysis for the Company’s portfolio segments. Loans and leases are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Current or Less than 30 Days Past Due 30-89 Days Past Due 90 Days or More Past Due Total Past Due Total Carried at Amortized Cost 1 Loans Accounted for Under the Fair Value Option 2 Total Loans and Leases March 31, 2021 Commercial & Industrial Small Business Banking $ 762,178 $ — $ 12,545 $ 12,545 $ 774,723 $ 299,291 $ 1,074,014 Specialty Lending 431,358 — — — 431,358 73,751 505,109 Paycheck Protection Program 1,478,995 — — — 1,478,995 — 1,478,995 Total 2,672,531 — 12,545 12,545 2,685,076 373,042 3,058,118 Construction & Development Small Business Banking 204,996 1,629 — 1,629 206,625 — 206,625 Specialty Lending 77,792 — 3,723 3,723 81,515 — 81,515 Total 282,788 1,629 3,723 5,352 288,140 — 288,140 Commercial Real Estate Small Business Banking 1,176,005 — 11,854 11,854 1,187,859 313,466 1,501,325 Specialty Lending 173,531 — 6,606 6,606 180,137 19,776 199,913 Total 1,349,536 — 18,460 18,460 1,367,996 333,242 1,701,238 Commercial Land Small Business Banking 346,206 2,325 2,055 4,380 350,586 84,513 435,099 Total 346,206 2,325 2,055 4,380 350,586 84,513 435,099 Total $ 4,651,061 $ 3,954 $ 36,783 $ 40,737 $ 4,691,798 $ 790,797 $ 5,482,595 Net deferred (fees) costs $ ( 25,841 ) Loan and Leases, Net of unearned $ 5,456,754 13 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Current or Less than 30 Days Past Due 30-89 Days Past Due 90 Days or More Past Due Total Past Due Total Carried at Amortized Cost 1 Loans Accounted for Under the Fair Value Option 2 Total Loans and Leases December 31, 2020 Commercial & Industrial Small Business Banking $ 695,090 $ 10,341 $ 10,765 $ 21,106 $ 716,196 $ 308,341 $ 1,024,537 Specialty Lending 341,952 337 — 337 342,289 71,090 413,379 Paycheck Protection Program 1,528,180 — — — 1,528,180 — 1,528,180 Total 2,565,222 10,678 10,765 21,443 2,586,665 379,431 2,966,096 Construction & Development Small Business Banking 183,087 — — — 183,087 — 183,087 Specialty Lending 88,890 — 3,723 3,723 92,613 — 92,613 Total 271,977 — 3,723 3,723 275,700 — 275,700 Commercial Real Estate Small Business Banking 987,358 3,730 8,609 12,339 999,697 321,352 1,321,049 Specialty Lending 148,264 5,374 1,693 7,067 155,331 20,317 175,648 Total 1,135,622 9,104 10,302 19,406 1,155,028 341,669 1,496,697 Commercial Land Small Business Banking 329,638 — 2,243 2,243 331,881 94,274 426,155 Total 329,638 — 2,243 2,243 331,881 94,274 426,155 Total $ 4,302,459 $ 19,782 $ 27,033 $ 46,815 $ 4,349,274 $ 815,374 $ 5,164,648 Net deferred (fees) costs $ ( 19,718 ) Loan and Leases, Net of unearned $ 5,144,930 (1) Total loans and leases include $ 2.75 billion of U.S. 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. (2) The Company measures the carrying value of the retained portion of loans sold at fair value under ASC Subtopic 825-10. See Note 9. Fair Value of Financial Instruments for additional information. 14 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Credit Quality Indicators The following tables presents asset quality indicators by portfolio class and origination year. See Note 5. Loans and Leases Held for Investment and Credit Quality in the Company’s 2020 Form 10-K for additional discussion around the asset quality indicators that the Company uses to manage and monitor credit risk. Term Loans and Leases Amortized Cost Basis by Origination Year 2021 2020 2019 2018 2017 Prior Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Total 1,2 March 31, 2021 Small Business Banking Risk Grades 1 - 4 $ 174,311 $ 799,012 $ 491,138 $ 277,191 $ 242,859 $ 198,955 $ 36,619 $ 1,794 $ 2,221,879 Risk Grade 5 — 19,387 76,377 70,633 42,121 14,779 1,682 434 225,413 Risk Grades 6 - 8 — 92 13,899 14,572 23,664 19,073 1,002 199 72,501 Total 174,311 818,491 581,414 362,396 308,644 232,807 39,303 2,427 2,519,793 Specialty Lending Risk Grades 1 - 4 118,627 295,067 95,893 44,784 41,547 — 52,833 929 649,680 Risk Grade 5 250 7,674 6,832 967 11,368 — 2,160 — 29,251 Risk Grades 6 - 8 — — — 8,636 — 5,307 136 — 14,079 Total 118,877 302,741 102,725 54,387 52,915 5,307 55,129 929 693,010 Paycheck Protection Program Risk Grades 1 - 4 507,428 971,567 — — — — — — 1,478,995 Risk Grade 5 — — — — — — — — — Risk Grades 6 - 8 — — — — — — — — — Total 507,428 971,567 — — — — — — 1,478,995 Total $ 800,616 $ 2,092,799 $ 684,139 $ 416,783 $ 361,559 $ 238,114 $ 94,432 $ 3,356 $ 4,691,798 2020 2019 2018 2017 2016 Prior Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Total 1,2 December 31, 2020 Small Business Banking Risk Grades 1 - 4 $ 724,506 $ 475,593 $ 287,712 $ 230,653 $ 159,877 $ 59,065 $ 32,373 $ 1,392 $ 1,971,171 Risk Grade 5 16,080 59,595 62,857 44,478 11,203 3,666 2,131 212 200,222 Risk Grades 6 - 8 81 8,976 14,639 15,090 11,424 8,418 631 209 59,468 Total 740,667 544,164 365,208 290,221 182,504 71,149 35,135 1,813 2,230,861 Specialty Lending Risk Grades 1 - 4 296,537 96,553 48,930 40,626 — — 55,229 632 538,507 Risk Grade 5 7,672 6,379 2,752 18,718 — — 1,711 — 37,232 Risk Grades 6 - 8 — — 8,635 — 5,782 — 77 — 14,494 Total 304,209 102,932 60,317 59,344 5,782 — 57,017 632 590,233 Paycheck Protection Program Risk Grades 1 - 4 1,528,180 — — — — — — — 1,528,180 Risk Grade 5 — — — — — — — — — Risk Grades 6 - 8 — — — — — — — — — Total 1,528,180 — — — — — — — 1,528,180 Total $ 2,573,056 $ 647,096 $ 425,525 $ 349,565 $ 188,286 $ 71,149 $ 92,152 $ 2,445 $ 4,349,274 15 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements (1) Total loans and leases include $ 2.75 billion of U.S. 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, 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 = $ 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. (2) 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 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 $ 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 Balance 1 Guaranteed Balance Unguaranteed Balance Unguaranteed Exposure with No ACL Commercial & Industrial Small Business Banking $ 23,249 $ 15,612 $ 7,637 $ 271 Total 23,249 15,612 7,637 271 Construction & Development Specialty Lending 3,723 — 3,723 3,723 Total 3,723 — 3,723 3,723 Commercial Real Estate Small Business Banking 21,738 10,409 11,329 6,054 Specialty Lending 6,606 5,071 1,535 1,228 Total 28,344 15,480 12,864 7,282 Commercial Land Small Business Banking 2,055 1,541 514 — Total 2,055 1,541 514 — Total $ 57,371 $ 32,633 $ 24,738 $ 11,276 December 31, 2020 Loan and Lease Balance 1 Guaranteed Balance Unguaranteed Balance Unguaranteed Exposure with No ACL Commercial & Industrial Small Business Banking $ 17,992 $ 12,046 $ 5,946 $ — Total 17,992 12,046 5,946 — Construction & Development Specialty Lending 3,723 — 3,723 3,723 Total 3,723 — 3,723 3,723 Commercial Real Estate Small Business Banking 15,085 6,725 8,360 5,327 Specialty Lending 7,068 5,533 1,535 — Total 22,153 12,258 9,895 5,327 Commercial Land Small Business Banking 2,242 1,728 514 — Total 2,242 1,728 514 — Total $ 46,110 $ 26,032 $ 20,078 $ 9,050 16 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements (1) Excludes nonaccrual loans accounted for under the fair value option. See Note 9. Fair Value of Financial Instruments for additional information. The following table presents the amortized cost basis of collateral-dependent loans and leases, which are individually evaluated to determine expected credit losses, as of March 31, 2021 and December 31, 2020: Total Collateral Dependent Loans Unguaranteed Portion March 31, 2021 Real Estate Business Assets Other Real Estate Business Assets Other Allowance for Credit Losses Commercial & Industrial Small Business Banking $ 2,779 $ 4,010 $ 1,615 $ 2,031 $ 120 $ 338 $ 495 Total 2,779 4,010 1,615 2,031 120 338 495 Construction & Development Specialty Lending 3,767 — — 3,767 — — — Total 3,767 — — 3,767 — — — Commercial Real Estate Small Business Banking 18,800 251 330 10,407 9 338 296 Specialty Lending 6,617 — — 1,546 — — 23 Total 25,417 251 330 11,953 9 338 319 Commercial Land Small Business Banking 2,075 — — 534 — — 309 Total 2,075 — — 534 — — 309 Total $ 34,038 $ 4,261 $ 1,945 $ 18,285 $ 129 $ 676 $ 1,123 Total Collateral Dependent Loans Unguaranteed Portion December 31, 2020 Real Estate Business Assets Other Real Estate Business Assets Other Allowance for Credit Losses Commercial & Industrial Small Business Banking $ 1,279 $ 9,440 $ 197 $ 531 $ 4,077 $ 66 $ 1,281 Total 1,279 9,440 197 531 4,077 66 1,281 Construction & Development Specialty Lending 3,767 — — 3,767 — — — Total 3,767 — — 3,767 — — — Commercial Real Estate Small Business Banking 11,568 258 332 6,873 9 335 175 Specialty Lending 13,196 — — 7,663 — — 23 Total 24,764 258 332 14,536 9 335 198 Commercial Land Small Business Banking 2,263 — — 534 — — 302 Total 2,263 — — 534 — — 302 Total $ 32,073 $ 9,698 $ 529 $ 19,368 $ 4,086 $ 401 $ 1,781 17 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Allowance for Credit Losses - Loans and Leases The following table details activity in the ACL by portfolio segment allowance for the periods presented: Three Months Ended Commercial & Industrial Construction & Development Commercial Real Estate Commercial Land Total March 31, 2021 Beginning Balance $ 26,941 $ 5,663 $ 18,148 $ 1,554 $ 52,306 Charge offs ( 152 ) — ( 517 ) ( 12 ) ( 681 ) Recoveries 9 — 1,656 — 1,665 Provision ( 221 ) 224 ( 641 ) ( 235 ) ( 873 ) Ending Balance $ 26,577 $ 5,887 $ 18,646 $ 1,307 $ 52,417 March 31, 2020 Beginning Balance, prior to adoption of ASC 326 $ 15,757 $ 2,732 $ 8,427 $ 1,318 $ 28,234 Impact of adopting ASC 326 ( 4,561 ) 1,131 1,916 193 ( 1,321 ) Charge offs ( 2,345 ) — ( 109 ) ( 408 ) ( 2,862 ) Recoveries 35 — 28 — 63 Provision 7,451 960 2,848 533 11,792 Ending Balance $ 16,337 $ 4,823 $ 13,110 $ 1,636 $ 35,906 The following tables represent the types of TDRs that were made during the periods presented: Three Months Ended March 31, 2021 Interest Only Payment Deferral Extend Amortization Other (1) Total TDRs (2) Number of Loans Recorded investment at period end Number of Loans Recorded investment at period end Number of Loans Recorded investment at period end Number of Loans Recorded investment at period end Number of Loans Recorded investment at period end Commercial & Industrial Small Business Banking — $ — 1 $ 3,269 — $ — — $ — 1 $ 3,269 Total — — 1 3,269 — — — — 1 3,269 Commercial Real Estate Small Business Banking — — 1 629 — — 1 3,141 2 3,770 Total — — 1 629 — — 1 3,141 2 3,770 Total — $ — 2 $ 3,898 — $ — 1 $ 3,141 3 $ 7,039 (1) Includes one small business banking with extend amortization and a rate concession TDR. (2) Excludes loans accounted for under the fair value option. See Note 9. Fair Value of Financial Instruments for additional information. 18 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Three Months Ended March 31, 2020 Interest Only Payment Deferral Extend Amortization Other Total TDRs (1) Number of Loans Recorded investment at period end Number of Loans Recorded investment at period end Number of Loans Recorded investment at period end Number of Loans Recorded investment at period end Number of Loans Recorded investment at period end Commercial & Industrial Small Business Banking — $ — 2 $ 1,487 — $ — — $ — 2 $ 1,487 Specialty Lending — — — — 1 973 — — 1 973 Total — — 2 1,487 1 973 — — 3 2,460 Commercial Real Estate Small Business Banking — — 1 3,589 — — — — 1 3,589 Total — — 1 3,589 — — — — 1 3,589 Total — $ — 3 $ 5,076 1 $ 973 — $ — 4 $ 6,049 (1) Excludes loans accounted for under the fair value option. See Note 9. 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. Note 6. Leases Lessor Equipment Leasing The Company purchases new equipment for the purpose of leasing such equipment to customers within its verticals. Equipment purchased to fulfill commitments to commercial renewable energy projects is rented out under operating leases while leases of equipment outside of the renewable energy vertical are generally direct financing leases. Accordingly, leased assets under operating leases are included in premises and equipment while leased assets under direct financing leases are included in loans and leases held for investment. Direct Financing Leases Interest income on direct financing leases is recognized when earned. Unearned interest is recognized over the lease term on a basis which results in a constant rate of return on the unrecovered lease investment. The term of each lease is generally 3 - 7 years which is consistent with the useful life of the equipment with no residual value. The gross lease payments receivable and the net investment included in accounts receivable for such leases are as follows: March 31, 2021 December 31, 2020 Gross direct finance lease payments receivable $ 9,741 $ 10,629 Less – unearned interest ( 1,492 ) ( 1,685 ) Net investment in direct financing leases $ 8,249 $ 8,944 Future minimum lease payments under finance leases are as follows: As of March 31, 2021 Amount 2021 $ 2,149 2022 2,620 2023 2,182 2024 1,570 2025 1,104 Thereafter 116 Total $ 9,741 19 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 The term of each operating lease is generally 10 to 15 years . The Company retains ownership of the equipment and associated tax benefits such as investment tax credits and accelerated depreciation. At the end of the lease term, the lessee has the option to renew the lease for two additional terms or purchase the equipment at the then-current fair market value. Rental revenue from operating leases is recognized on a straight-line basis over the term of the lease. Rental equipment is recorded at cost and depreciated to an estimated residual value on a straight-line basis over the estimated useful life. The useful lives generally range from 20 to 25 years and residual values generally range from 20 % to 50 %, however, they are subject to periodic evaluation. Changes in useful lives or residual values will impact depreciation expense and any gain or loss from the sale of used equipment. The estimated useful lives and residual values of the Company's leasing equipment are based on industry disposal experience and the Company's expectations for future sale prices. If the Company decides to sell or otherwise dispose of rental equipment, it is carried at the lower of cost or fair value less costs to sell or dispose. Repair and maintenance costs that do not extend the lives of the rental equipment are charged to direct operating expenses at the time the costs are incurred. 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 Amount 2021 $ 7,083 2022 9,044 2023 9,075 2024 8,808 2025 8,935 Thereafter 31,175 Total $ 74,120 20 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Note 7. Servicing Assets 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 March 31, 2021 2020 Balance at beginning of period $ 33,918 $ 35,365 Additions, net 2,333 2,859 Fair value changes: Due to changes in valuation inputs or assumptions 2,946 ( 2,039 ) Decay due to increases in principal paydowns or runoff ( 1,453 ) ( 2,653 ) Balance at end of period $ 37,744 $ 33,532 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. Changes in prepayment speed assumptions typically have the most significant impact on the fair value of servicing rights. Generally, as interest rates rise on variable rate loans, loan prepayments increase due to an increase in refinance activity, which results in a decrease in the fair value of servicing assets, however, weakening economic conditions or significant declines in interest rates can also increase loan prepayment activity. Measurement of fair value is limited to the conditions existing and the assumptions used as of a particular point in time, and those assumptions may not be appropriate if they are applied at a different time. 21 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Note 8. Borrowings Total outstanding borrowings consisted of the following: March 31, 2021 December 31, 2020 Borrowings In March 2021, the Company entered into a 60 -month term loan agreement of $ 50.0 million with a third party correspondent bank. The loan accrues interest at a fixed rate of 2.95 % with a monthly payment sufficient to fully amortize the loan, with all remaining unpaid principal and interest due at maturity on March 30, 2026 . The Company paid the Lender a non-refundable $ 325 thousand loan origination fee upon signing of the Note that is presented as a direct deduction from the carrying amount of the loan and will be amortized into interest expense over the life of the loan. $ 49,675 $ — 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. — 14,488 In April 2020, the Company entered into the Federal Reserve Bank's Paycheck Protection Program Liquidity Facility ("PPPLF"). Under the PPPLF, advances must be secured by pledges of loans to small businesses originated by the Company under the U.S. Small Business Administration's 7(a) loan program titled the Paycheck Protection Program. The PPPLF accrues interest at thirty-five basis points and matures at various dates equal to the maturity date of the PPPLF collateral pledged to secure the advance, ranging from April 1, 2022 to 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 $ 1.41 billion borrowing was fully advanced at March 31, 2021. 1,410,785 1,527,596 Other long term debt (1) 5,501 9 Total borrowings $ 1,465,961 $ 1,542,093 (1) 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 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 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 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. 22 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements The Company may borrow funds through the Federal Reserve Bank’s discount window. These borrowings are secured by a blanket floating lien on qualifying loans with a balance of $ 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. Note 9. Fair Value of Financial Instruments Fair Value Hierarchy There are three levels of inputs in the fair value hierarchy that may be used to measure fair value. Financial instruments are considered Level 1 when valuation can be based on quoted prices in active markets for identical assets or liabilities. Level 2 financial instruments are valued using quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or models using inputs that are observable or can be corroborated by observable market data of substantially the full term of the assets or liabilities. Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable and when determination of the fair value requires significant management judgment or estimation. Recurring Fair Value The following sections provide a description of the valuation methodologies used for instruments measured at fair value on a recurring basis, as well as the general classification of such instruments pursuant to the fair value hierarchy: Investment securities: Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, discounted cash flow or at net asset value per share. Level 2 securities would include U.S. government agency securities, mortgage-backed securities, obligations of states and political subdivisions and certain corporate, asset backed mutual fund and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. Loans held for sale: The fair values of loans held for sale are determined by discounting estimated cash flows using interest rates approximating prevailing market rates for similar loans adjusted to reflect the inherent credit risk. Due to the nature of the valuation inputs, loans held for sale are classified within Level 3 of the valuation hierarchy. Loans held for investment: The fair values of loans held for investment are typically determined based on discounted cash flow analyses using market-based interest rate spreads. Discounted cash flow analyses are adjusted, as appropriate, to reflect current market conditions and borrower-specific credit risk. If the loan is collateral dependent, the fair value is determined based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date. Fair value of the loan’s collateral is determined by appraisals, independent valuation, or management’s estimation of fair value which is then adjusted for the cost related to liquidation of the collateral. Due to the nature of the valuation inputs, loans held for investment are classified within Level 3 of the valuation hierarchy. Servicing assets: Servicing rights do not trade in an active, open market with readily observable prices. While sales of servicing rights do occur, the precise terms and conditions typically are not readily available. Accordingly, the Company estimates the fair value of servicing rights using discounted cash flow models incorporating numerous assumptions from the perspective of a market participant including servicing income, servicing costs, market discount rates and prepayment speeds. Due to the nature of the valuation inputs, servicing rights are classified within Level 3 of the valuation hierarchy. Mutual fund: The 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. This investment is valued using quoted prices in markets that are not active and is classified as Level 2 within the valuation hierarchy. 23 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Equity warrant assets: Fair value measurements of equity warrant assets of private companies are priced based on a Black-Scholes option pricing model to estimate the asset value by using stated strike prices, option expiration dates, risk-free interest rates and option volatility assumptions. Option volatility assumptions used in the Black-Scholes model are based on public companies that operate in similar industries as the companies in the Company’s private company portfolio. Option expiration dates are modified to account for estimates 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. The Company classifies equity warrant assets within Level 3 of the valuation hierarchy. The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis. March 31, 2021 Total Level 1 Level 2 Level 3 Investment securities available-for-sale US government agencies $ 15,829 $ — $ 15,829 $ — Mortgage-backed securities 755,775 — 755,775 — Municipal bonds 1 3,573 — 3,477 96 Loans held for sale 35,936 — — 35,936 Loans held for investment 790,797 — — 790,797 Servicing assets 2 37,744 — — 37,744 Mutual fund 2,331 — 2,331 — Equity warrant assets 3 1,314 — — 1,314 Total assets at fair value $ 1,643,299 $ — $ 777,412 $ 865,887 December 31, 2020 Total Level 1 Level 2 Level 3 Investment securities available-for-sale US government agencies $ 15,919 $ — $ 15,919 $ — Mortgage-backed securities 730,454 — 730,454 — Municipal bonds 1 3,725 — 3,629 96 Loans held for sale 36,111 — — 36,111 Loans held for investment 815,374 — — 815,374 Servicing assets 2 33,918 — — 33,918 Mutual fund 2,351 — 2,351 — Equity warrant assets 3 908 — — 908 Total assets at fair value $ 1,638,760 $ — $ 752,353 $ 886,407 (1) 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. (2) See Note 7 for a rollforward of recurring Level 3 fair values for servicing assets. (3) 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. 24 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements The following tables provide more information about the fair value carrying amount and the unpaid principal outstanding of loans accounted for under the fair value option at March 31, 2021 and December 31, 2020. March 31, 2021 Total Loans Nonaccruals 90 Days or More Past Due Fair Value Carrying Amount Unpaid Principal Balance Difference Fair Value Carrying Amount Unpaid Principal Balance Difference Fair Value Carrying Amount Unpaid Principal Balance Difference Fair Value Option Elections Loans held for sale $ 35,936 $ 37,923 $ ( 1,987 ) $ — $ — $ — $ — $ — $ — Loans held for investment 790,797 814,729 ( 23,932 ) 40,234 43,973 ( 3,739 ) 26,249 29,089 ( 2,840 ) $ 826,733 $ 852,652 $ ( 25,919 ) $ 40,234 $ 43,973 $ ( 3,739 ) $ 26,249 $ 29,089 $ ( 2,840 ) December 31, 2020 Total Loans Nonaccruals 90 Days or More Past Due Fair Value Carrying Amount Unpaid Principal Balance Difference Fair Value Carrying Amount Unpaid Principal Balance Difference Fair Value Carrying Amount Unpaid Principal Balance Difference Fair Value Option Elections Loans held for sale $ 36,111 $ 38,135 $ ( 2,024 ) $ — $ — $ — $ — $ — $ — Loans held for investment 815,374 845,082 ( 29,708 ) 35,499 39,318 ( 3,819 ) 25,532 28,741 ( 3,209 ) $ 851,485 $ 883,217 $ ( 31,732 ) $ 35,499 $ 39,318 $ ( 3,819 ) $ 25,532 $ 28,741 $ ( 3,209 ) The following table presents the net gains (losses) from changes in fair value. Three Months Ended March 31, Gains (Losses) on Loans Accounted for under the Fair Value Option 2021 2020 Loans held for sale $ 36 $ 120 Loans held for investment 4,182 ( 10,758 ) $ 4,218 $ ( 10,638 ) 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 March 31, Loans held for sale 2021 2020 Balance at beginning of period $ 36,111 $ 16,198 Issuances & repurchases — 3,045 Fair value changes 36 120 Sales — — Settlements ( 211 ) ( 212 ) Balance at end of period $ 35,936 $ 19,151 Three Months Ended March 31, Loans held for investment 2021 2020 Balance at beginning of period $ 815,374 $ 824,520 Issuances & repurchases 5,570 61,611 Fair value changes 4,184 ( 10,758 ) Settlements ( 34,331 ) ( 43,947 ) Balance at end of period $ 790,797 $ 831,426 25 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 The following sections provide a description of the valuation methodologies used for instruments measured at fair value on a non-recurring basis, as well as the general classification of such instruments pursuant to the fair value hierarchy: Collateral dependent loans : Loans are considered collateral dependent when the Company has determined that foreclosure of the collateral is probable or when a borrower is experiencing financial difficulty and the loan is expected to be repaid substantially through the operation or sale of collateral. A collateral dependent loan’s ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date. Fair value of the loan’s collateral is determined by appraisals, independent valuation, or management’s estimation of fair value which is then adjusted for the cost related to liquidation of the collateral. Collateral dependent loans are generally classified as Level 3 based on management’s judgment and estimation. Loans with agreed upon sales prices are classified as Level 1. Foreclosed assets: Foreclosed real estate is adjusted to fair value less selling costs upon transfer of the loans to foreclosed real estate. Subsequently, foreclosed real estate is carried at the lower of carrying value or fair value less selling costs. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. Given the lack of observable market prices for identical properties and market discounts applied to appraised values, the Company generally classifies foreclosed assets as nonrecurring Level 3. Long-lived asset held for sale: Long-lived assets held for sale are carried at the lower of carrying value or fair value less selling costs. Fair value is based upon an independent market valuation of the property. Given the lack of observable market prices for identical assets and market discounts applied to market prices, the Company generally classifies long-lived assets held for sale as nonrecurring Level 3. Equity security investments with a non-readily determinable fair value: Equity security investments are measured at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. When an observable price change in an orderly transaction occurs for an identical investment of the same issuer, the investment is generally classified as nonrecurring Level 1 within the valuation hierarchy. When an observable price change in an orderly transaction occurs for a similar investment of the same issuer, the investment is generally classified as nonrecurring Level 2 within the valuation hierarchy. The tables below present the recorded amount of assets and liabilities measured at fair value on a non-recurring basis. March 31, 2021 Total Level 1 Level 2 Level 3 Collateral dependent loans $ 6,935 $ — $ — $ 6,935 Foreclosed assets 4,185 — — 4,185 Total assets at fair value $ 11,120 $ — $ — $ 11,120 December 31, 2020 Total Level 1 Level 2 Level 3 Collateral dependent loans $ 4,159 $ — $ — $ 4,159 Foreclosed assets 4,155 — — 4,155 Long-lived asset held for sale 8,874 8,874 — — Equity security investment with a non-readily determinable fair value 25,367 — 25,367 — Total assets at fair value $ 42,555 $ 8,874 $ 25,367 $ 8,314 26 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 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 Unobservable Inputs Fair Value Valuation Technique Significant Unobservable Inputs Range Recurring fair value Municipal bond $ 96 Discounted expected cash flows Discount rate Prepayment speed 4.5 % 5.0 % Loans held for sale $ 35,936 Discounted expected cash flows Discount rate Prepayment speed 0.8 % to 17.4 % WAVG 19.0 % Loans held for investment $ 790,797 Discounted expected cash flows Discounted appraisals Loss rate Discount rate Prepayment speed Appraisal adjustments 0.0 % to 76.3 % (WAVG 1.2 %) 0.8 % to 17.4 % WAVG 19.0 % 10.0 % to 65.0 % Equity warrant assets $ 1,314 Black-Scholes option pricing model Volatility Risk-free interest rate Marketability discount Remaining life 26.6 % to 89.4 % 0.92 % to 1.74 % 20.0 % 4 - 10 years Non-recurring fair value Collateral dependent loans $ 6,935 Discounted appraisals Appraisal adjustments (1) 10.0 % to 65.0 % Foreclosed assets $ 4,185 Discounted appraisals Appraisal adjustments (1) 7.5 % to 10.0 % December 31, 2020 Level 3 Assets with Significant Unobservable Inputs Fair Value Valuation Technique Significant Unobservable Inputs Range Recurring fair value Municipal bond $ 96 Discounted expected cash flows Discount rate Prepayment speed 4.3 % 5.0 % Loans held for sale $ 36,111 Discounted expected cash flows Discount rate Prepayment speed 4.2 % to 18.5 % WAVG 19.0 % Loans held for investment $ 815,374 Discounted expected cash flows Discounted appraisals Loss rate Discount rate Prepayment speed Appraisal adjustments 0.0 % to 73.2 % (WAVG 1.5 %) 4.2 % to 18.5 % WAVG 19.0 % 10.0 % to 83.0 % Equity warrant assets $ 908 Black-Scholes option pricing model Volatility Risk-free interest rate Marketability discount Remaining life 26.5 - 87.1 % 0.36 % to 0.93 % 20.0 % 5 - 10 years Non-recurring fair value Collateral dependent loans $ 4,159 Discounted appraisals Appraisal adjustments (1) 10.0 % to 83.0 % Foreclosed assets $ 4,155 Discounted appraisals Appraisal adjustments (1) 10.0 % to 20.0 % (1) Appraisals may be adjusted by management for customized discounting criteria, estimated sales costs, and other qualitative adjustments. 27 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Estimated Fair Value of Other Financial Instruments GAAP also requires disclosure of the fair value of financial instruments carried at book value on the consolidated balance sheets. The carrying amounts and estimated fair values of the Company’s financial instruments not measured at fair value on a recurring or non-recurring basis are as follows: March 31, 2021 Carrying Amount Quoted Price In Active Markets for Identical Assets /Liabilities (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Fair Value Financial assets Cash and due from banks $ 630,081 $ 630,081 $ — $ — $ 630,081 Federal funds sold 5,461 5,461 — — 5,461 Certificates of deposit with other banks 6,500 6,839 — — 6,839 Loans held for sale 1,040,805 — — 1,136,156 1,136,156 Loans and leases, net of allowance for credit losses on loans and leases 4,613,540 — — 4,722,518 4,722,518 Financial liabilities Deposits 6,316,004 — 6,227,312 — 6,227,312 Borrowings 1,465,961 — — 1,451,459 1,451,459 December 31, 2020 Carrying Amount Quoted Price In Active Markets for Identical Assets /Liabilities (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Fair Value Financial assets Cash and due from banks $ 297,167 $ 297,167 $ — $ — $ 297,167 Federal funds sold 21,153 21,153 — — 21,153 Certificates of deposit with other banks 6,500 6,906 — — 6,906 Loans held for sale 1,139,359 — — 1,235,122 1,235,122 Loans and leases, net of allowance for credit losses on loans and leases 4,277,250 — — 4,366,489 4,366,489 Financial liabilities Deposits 5,712,828 — 5,711,781 — 5,711,781 Borrowings 1,542,093 — — 1,542,171 1,542,171 28 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Note 10. Commitments and Contingencies Litigation In the normal course of business, the Company is involved in various legal proceedings. Management believes that the outcome of such proceedings will not materially affect the financial position, results of operations or cash flows of the Company. 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. et al . 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 The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, credit risk in excess of the amount recognized in the balance sheet. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as for on-balance-sheet instruments. A summary of the Company’s commitments is as follows: March 31, 2021 December 31, 2020 Commitments to extend credit $ 2,526,132 $ 2,054,910 Standby letters of credit 5,929 22,913 Total unfunded off-balance-sheet credit risk $ 2,532,061 $ 2,077,823 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the party. Collateral held varies, but may include accounts receivable, inventory, property and equipment, residential real estate and income-producing commercial properties. Commitment letters are issued after approval of the loan by the Credit Department and generally expire ninety days after issuance. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held varies as specified above and is required in instances which the Company deems necessary. 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. 29 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Concentrations of Credit Risk Although the Company is not subject to any geographic concentrations, a substantial amount of the Company’s loans, leases, and commitments to extend credit have been granted to customers in the agriculture, healthcare and veterinary verticals. The concentrations of credit by type of loan are set forth in Note 5. The distribution of commitments to extend credit approximates the distribution of loans outstanding. The Company does not have a significant number of credits to any single borrower or group of related borrowers whereby their retained unguaranteed exposure exceeds $ 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 $ 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. Note 11. Stock Plans On March 20, 2015, the Company adopted the 2015 Omnibus Stock Incentive Plan which replaced the previously existing Amended Incentive Stock Option Plan and Nonstatutory Stock Option Plan. Subsequently on May 24, 2016, the 2015 Omnibus Stock Incentive Plan was amended to authorize awards covering a maximum of 7,000,000 common voting shares and has an expiration date of March 20, 2025. On May 15, 2018, the Amended and Restated 2015 Omnibus Stock Incentive Plan was amended to authorize awards covering a maximum of 8,750,000 common voting shares. Options or restricted shares granted under the Amended and Restated 2015 Omnibus Stock Incentive Plan (the "Plan") expire no more than 10 years from the date of grant. Exercise prices under the Plan are set by the Board of Directors at the date of grant, but shall not be less than 100 % of fair market value of the related stock at the date of the grant. Options vest over a minimum of three years from the date of the grant. Restricted stock grants vest in equal installments ranging from immediate vesting to over a seven-year period from the date of the grant. Market Restricted Stock Units also have a restriction based on the passage of time and 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 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 Restricted stock awards are authorized in the form of restricted stock awards or units ("RSU"s) and restricted stock awards or units with a market price condition ("Market RSU"s). RSUs have a restriction based on the passage of time and may also have a restriction based on a non-market-related performance criteria. The fair value of the RSUs is based on the closing price on the date of the grant. 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. The fair value of the Market RSUs and the implied service period is calculated using the Monte Carlo simulation method. 30 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements 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. Note 12. Segments The Company's management reporting process measures the performance of its operating segments based on internal operating structure, which is subject to change from time to time. Accordingly, the Company operates two reportable segments for management reporting purposes as discussed below: Banking - This segment specializes in providing financing services to small businesses nationwide in targeted industries and deposit-related services to small businesses, consumers and other customers nationwide. The primary source of revenue for this segment is net interest income and secondarily the origination and sale of government guaranteed loans. Fintech - This segment is involved in making strategic investments into emerging financial technology companies. The primary sources of revenue for this segment are principally gains and losses on equity method and equity security investments and management fees. The Fintech segment is comprised of the Company's 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. Banking Fintech Other Consolidated Three months ended March 31, 2021 Interest income $ 88,099 $ 122 $ 4 $ 88,225 Interest expense 18,165 — 110 18,275 Net interest income 69,934 122 ( 106 ) 69,950 (Recovery of) provision for loan and lease credit losses ( 873 ) — — ( 873 ) Noninterest income 30,524 ( 4 ) 537 31,057 Noninterest expense 55,625 1,020 1,627 58,272 Income tax expense (benefit) 4,650 5 ( 474 ) 4,181 Net income (loss) $ 41,056 $ ( 907 ) $ ( 722 ) $ 39,427 Total assets $ 8,281,729 $ 91,662 $ 44,484 $ 8,417,875 Three months ended March 31, 2020 Interest income $ 63,448 $ — $ 25 $ 63,473 Interest expense 23,255 — 57 23,312 Net interest income 40,193 — ( 32 ) 40,161 Provision for loan and lease credit losses 11,792 — — 11,792 Noninterest income 5,964 ( 880 ) 658 5,742 Noninterest expense 46,687 1,490 1,314 49,491 Income tax benefit ( 4,170 ) ( 244 ) ( 3,364 ) ( 7,778 ) Net (loss) income $ ( 8,152 ) $ ( 2,126 ) $ 2,676 $ ( 7,602 ) Total assets $ 5,133,447 $ 84,366 $ 55,756 $ 5,273,569 31 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Note 13. 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 . 32