Live Oak Bancshares, Inc. 10-Q

Item 1. Financial Statements Live Oak Bancshares, Inc. Condensed Consolidated Balance Sheets As of March 31, 2022 (unaudited) and December 31, 2021* (Dollars in thousands) March 31, 2022 December 31, 2021 Assets Cash and due from banks $ 477,778 $ 187,203 Federal funds sold 29,993 16,547 Certificates of deposit with other banks 4,250 4,750 Investment securities available-for-sale 844,577 906,052 Loans held for sale (includes $ 25,056 and $ 25,310 measured at fair value, respectively) 1,028,635 1,116,519 Loans and leases held for investment (includes $ 600,571 and $ 645,201 measured at fair value, respectively) 5,738,241 5,521,262 Allowance for credit losses on loans and leases ( 63,058 ) ( 63,584 ) Net loans and leases 5,675,183 5,457,678 Premises and equipment, net 254,865 240,196 Foreclosed assets 198 620 Servicing assets 36,286 33,574 Other assets 268,201 250,254 Total assets $ 8,619,966 $ 8,213,393 Liabilities and Shareholders’ Equity Liabilities Deposits: Noninterest-bearing $ 86,342 $ 89,279 Interest-bearing 7,550,821 7,022,765 Total deposits 7,637,163 7,112,044 Borrowings 196,911 318,289 Other liabilities 72,565 67,927 Total liabilities 7,906,639 7,498,260 Shareholders’ equity Preferred stock, no par value, 1,000,000 shares authorized, none issued or outstanding at March 31, 2022 and December 31, 2021 — — Class A common stock, no par value, 100,000,000 shares authorized, 43,787,660 and 43,494,046 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively 315,607 310,970 Class B common stock, no par value, 10,000,000 shares authorized, none issued or outstanding at March 31, 2022 and 125,024 shares issued and outstanding at December 31, 2021 — 1,324 Retained earnings 434,226 400,893 Accumulated other comprehensive (loss) income ( 36,506 ) 1,946 Total shareholders’ equity 713,327 715,133 Total liabilities and shareholders’ equity $ 8,619,966 $ 8,213,393 * 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, 2022 and 2021 (unaudited) (Dollars in thousands, except per share data) Three Months Ended March 31, 2022 2021 Interest income Loans and fees on loans $ 89,198 $ 84,993 Investment securities, taxable 3,399 2,929 Other interest earning assets 185 303 Total interest income 92,782 88,225 Interest expense Deposits 14,348 16,944 Borrowings 655 1,331 Total interest expense 15,003 18,275 Net interest income 77,779 69,950 Provision for (recovery of) loan and lease credit losses 1,836 ( 873 ) Net interest income after provision for (recovery of) loan and lease credit losses 75,943 70,823 Noninterest income Loan servicing revenue 6,356 6,434 Loan servicing asset revaluation ( 1,569 ) 1,493 Net gains on sales of loans 20,977 11,929 Net gain on loans accounted for under the fair value option 516 4,218 Equity method investments income (loss) ( 2,124 ) ( 1,157 ) Equity security investments gains (losses), net ( 44 ) 105 Lease income 2,503 2,599 Management fee income 1,488 1,934 Other noninterest income 4,565 3,502 Total noninterest income 32,668 31,057 Noninterest expense Salaries and employee benefits 38,507 31,366 Travel expense 1,897 659 Professional services expense 2,791 3,831 Advertising and marketing expense 1,729 652 Occupancy expense 2,327 2,112 Technology expense 6,053 4,878 Equipment expense 3,816 3,701 Other loan origination and maintenance expense 3,113 3,327 Renewable energy tax credit investment impairment — 3,127 FDIC insurance 1,972 1,765 Other expense 3,509 2,854 Total noninterest expense 65,714 58,272 Income before taxes 42,897 43,608 Income tax expense 8,388 4,181 Net income $ 34,509 $ 39,427 Basic earnings per share $ 0.79 $ 0.92 Diluted earnings per share $ 0.76 $ 0.88 See Notes to Unaudited Condensed Consolidated Financial Statements 2 Live Oak Bancshares, Inc. Condensed Consolidated Statements of Comprehensive Income For the three months ended March 31, 2022 and 2021 (unaudited) (Dollars in thousands) Three Months Ended March 31, 2022 2021 Net income $ 34,509 $ 39,427 Other comprehensive loss before tax: Net unrealized loss on investment securities arising during the period ( 50,594 ) ( 16,288 ) Reclassification adjustment for gain on sale of securities available-for-sale included in net income — — Other comprehensive loss before tax ( 50,594 ) ( 16,288 ) Income tax benefit 12,142 3,909 Other comprehensive loss, net of tax ( 38,452 ) ( 12,379 ) Total comprehensive (loss) income $ ( 3,943 ) $ 27,048 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, 2022 and 2021 (unaudited) (Dollars in thousands) Three Months Ended Common stock Accumulated other Shares Retained comprehensive Total Class A Class B Amount earnings income (loss) equity Balance at December 31, 2021 43,494,046 125,024 $ 312,294 $ 400,893 $ 1,946 $ 715,133 Net income — — — 34,509 — 34,509 Other comprehensive loss — — — — ( 38,452 ) ( 38,452 ) Issuance of restricted stock 95,537 — — — — — Tax withholding related to vesting of restricted stock and other — — ( 2,894 ) — — ( 2,894 ) Employee stock purchase program 11,119 — 534 — — 534 Stock option exercises 61,934 — 719 — — 719 Stock option based compensation expense — — 391 — — 391 Restricted stock expense — — 4,563 — — 4,563 Non-voting common stock converted to voting common stock in private sale 125,024 ( 125,024 ) — — — — Transfer from retained earnings to other assets for pro rata portion of equity method investee stock compensation expense — — — 136 — 136 Cash dividends ($ 0.03 per share) — — — ( 1,312 ) — ( 1,312 ) Balance at March 31, 2022 43,787,660 — $ 315,607 $ 434,226 $ ( 36,506 ) $ 713,327 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 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, 2022 and 2021 (unaudited) (Dollars in thousands) Three Months Ended March 31, 2022 2021 Cash flows from operating activities Net income $ 34,509 $ 39,427 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization 5,405 5,265 Provision for (recovery of) loan and lease credit losses 1,836 ( 873 ) Amortization of premium on securities, net of accretion 1,421 1,817 Deferred tax expense (benefit) 6,775 ( 3,984 ) Originations of loans held for sale ( 222,557 ) ( 253,588 ) Proceeds from sales of loans held for sale 349,364 182,685 Net gains on sale of loans held for sale ( 20,977 ) ( 11,929 ) Net loss on sale of foreclosed assets 17 24 Net gain on loans accounted for under fair value option ( 516 ) ( 4,218 ) Net increase in servicing assets ( 2,712 ) ( 3,826 ) Net gain on disposal of long-lived asset — ( 114 ) Net gain on disposal of property and equipment — ( 48 ) Impairment on premises and equipment, net — 904 Equity method investments (income) loss 2,124 1,157 Equity security investments (gains) losses, net 44 ( 105 ) Renewable energy tax credit investment impairment — 3,127 Stock option based compensation expense 391 344 Restricted stock expense 4,563 4,670 Stock based compensation excess tax benefit 1,119 5,152 Changes in assets and liabilities: Lease right-of-use assets and liabilities, net ( 12 ) ( 1 ) Other assets ( 3,095 ) 2,699 Other liabilities ( 1,260 ) ( 5,406 ) Net cash provided (used) by operating activities 156,439 ( 36,821 ) Cash flows from investing activities Purchases of securities available-for-sale ( 37,837 ) ( 108,223 ) Proceeds from sales, maturities, calls, and principal paydown of securities available-for-sale 47,297 65,039 Proceeds from SBA reimbursement/sale of foreclosed assets, net 333 152 Maturities of certificates of deposits with other banks 500 — Loan and lease originations and principal collections, net ( 243,463 ) ( 121,814 ) Proceeds from sale of long-lived asset — 8,988 Proceeds from sale of premises and equipment — 84 Purchases of premises and equipment, net ( 20,036 ) ( 674 ) Net cash used by investing activities ( 253,206 ) ( 156,448 ) 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, 2022 and 2021 (unaudited) (Dollars in thousands) Three Months Ended March 31, 2022 2021 Cash flows from financing activities Net increase in deposits $ 525,119 $ 603,176 Proceeds from borrowings 12,026 498,666 Repayment of borrowings ( 133,404 ) ( 580,291 ) Stock option exercises 719 1,213 Employee stock purchase program 534 296 Withholding cash issued in lieu of restricted stock and other ( 2,894 ) ( 11,287 ) Shareholder dividend distributions ( 1,312 ) ( 1,282 ) Net cash provided by financing activities 400,788 510,491 Net increase in cash and cash equivalents 304,021 317,222 Cash and cash equivalents, beginning 203,750 318,320 Cash and cash equivalents, ending $ 507,771 $ 635,542 Supplemental disclosures of cash flow information Interest paid $ 15,263 $ 18,469 Income tax paid, net 8 354 Supplemental disclosures of noncash operating, investing, and financing activities Unrealized holding losses on available-for-sale securities, net of taxes $ ( 38,452 ) $ ( 12,379 ) Transfers from loans and leases to foreclosed real estate and other repossessions or SBA receivable 6,692 2,246 Net transfers between foreclosed real estate and SBA receivable 72 196 Transfer of loans held for sale to loans and leases held for investment 70,649 176,285 Transfer of loans and leases held for investment to loans held for sale 110,452 24,260 Transfer from retained earnings to other assets for pro rata portion of equity method investee stock compensation expense 136 1,508 Recording of secured borrowing — 5,493 Equity method investment commitments 10,971 — Equity security investment commitments 500 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. ( collectively with its subsidiaries including Live Oak Banking Company, the “Company” ) is a bank holding company headquartered in Wilmington, North Carolina incorporated under the laws of the State of North Carolina in December 2008. The Company conducts business operations primarily through its commercial bank subsidiary, Live Oak Banking Company (the “Bank”). The Bank was organized and incorporated under the laws of the State of North Carolina on February 25, 2008 and commenced operations on May 12, 2008. The Bank specializes in 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, Inc. (“GLS”), Live Oak Grove, LLC (“Grove”), Live Oak Ventures, Inc. (“Live Oak Ventures”), and Canapi Advisors, LLC (“Canapi Advisors”). 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”). Live Oak Number One, Inc. holds properties foreclosed on by the Bank. LOCEF provides financing to entities for renewable energy applications. Live Oak Private Wealth provides high-net-worth individuals and families with strategic wealth and investment management services. During the first quarter of 2022, Jolley Asset Management, LLC (“JAM”) was merged into Live Oak Private Wealth. JAM was previously a wholly owned subsidiary of Live Oak Private Wealth. 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 Advisors 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. Income from the sale of loans is comprised of net gains on sales of loans along with loan servicing revenue and revaluation of related servicing assets. 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, 2022 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2022. The Unaudited Condensed Consolidated Balance Sheet as of December 31, 2021 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, 2021, filed with the Securities Exchange Commission on February 24, 2022 (SEC File No. 001-37497) (the "2021 Form 10-K"). A summary description of the significant accounting policies followed by the Company is set forth in Note 1 of the Notes to Consolidated Financial Statements in the Company’s 2021 Form 10-K. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes in the Company's 2021 Form 10-K. 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 an d liabilities and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates. Amounts in all tables in the Notes to Unaudited Condensed Consolidated Financial Statements have been presented in thousands, except percentage, time period, share and per share data or where otherwise indicated. Business Segments Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Management has determined that the Company has two significant operating segments: Banking and Fintech, as discussed more fully in Note 11. Segments. In determining the appropriateness of a segment definition, the Company considers the criteria of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 280, Segment Reporting . Reclassifications Certain reclassifications have been made to the prior period’s unaudited condensed consolidated financial statements to place them on a comparable basis with the current year. Net income and shareholders’ equity previously reported were not affected by these reclassifications . Note 2. Recent Accounting Pronouncements In March 2020, the FASB issued Accounting Standards Update (“ASU”) No. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”). ASU 2020-04 provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments are effective for and can be adopted by the Company as of March 12, 2020 , through December 31, 2022. The Company does not expect this standard will have a material impact on its consolidated financial statements. To address the discontinuance of LIBOR, the Company has stopped originating variable LIBOR-based loans effective December 31, 2021 and has started to negotiate loans using the preferred replacement index, the Secured Overnight Financing Rate (“SOFR”) or a relevant duration U.S. Treasury rate. For currently outstanding LIBOR-based loans, the timing and manner in which each customer’s contract transitions from LIBOR to another rate will vary on a case-by-case basis. The Company expects to complete all transitions by the second quarter of 2023 or at the next repricing date if later in 2023. In March 2022, the FASB issued ASU No. 2022-02 “Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings (“TDRs”) and Vintage Disclosures” (“ASU 2022-02”). ASU 2022-02 eliminates the accounting guidance for TDRs by creditors in ASC 310-40, Receivables – Troubled Debt Restructurings by Creditors , while enhancing disclosure requirements for certain loan refinancings and restructurings when a borrower is experiencing financial difficulty. Additionally, for public business entities, ASU 2022-02 requires that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of ASC 326-20, Financial Instruments – Credit Losses – Measured at Amortized Cost . The amendments in this standard will be effective for the Company on January 1, 2023. The Company does not believe this standard will have a material impact on its consolidated financial statements. 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, 2022 2021 Basic earnings per share: Net income $ 34,509 $ 39,427 Weighted-average basic shares outstanding 43,701,943 42,673,615 Basic earnings per share $ 0.79 $ 0.92 Diluted earnings per share: Net income, for diluted earnings per share $ 34,509 $ 39,427 Total weighted-average basic shares outstanding 43,701,943 42,673,615 Add effect of dilutive stock options and restricted stock grants 1,525,593 2,023,235 Total weighted-average diluted shares outstanding 45,227,536 44,696,850 Diluted earnings per share $ 0.76 $ 0.88 Anti-dilutive shares 172,631 — Note 4. Securities Available-for-Sale The carrying amount of securities and their approximate fair values are reflected in the following table: March 31, 2022 Amortized Cost Unrealized Gains Unrealized Losses Fair Value US government agencies $ 10,445 $ 58 $ — $ 10,503 Mortgage-backed securities 876,426 2,961 51,165 828,222 Municipal bonds 3,240 117 5 3,352 Other debt securities 2,500 — — 2,500 Total $ 892,611 $ 3,136 $ 51,170 $ 844,577 December 31, 2021 US government agencies $ 10,444 $ 193 $ — $ 10,637 Mortgage-backed securities 887,302 14,246 12,209 889,339 Municipal bonds 3,246 333 3 3,576 Other debt securities 2,500 — — 2,500 Total $ 903,492 $ 14,772 $ 12,212 $ 906,052 During the three months ended March 31, 2022, nine mortgage-backed securities totaling $ 13.9 million were settled. During the three months ended March 31, 2021, two mortgage-backed securities totaling $ 6.5 million were settled. Accrued interest receivable on available-for-sale securities totaled $ 2.0 million and $ 1.9 million at March 31, 2022 and December 31, 2021, respectively, and is included in other assets in the accompanying Unaudited Condensed Consolidated Balance Sheets. 9 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements 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, 2022 Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Mortgage-backed securities $ 472,660 $ 32,492 $ 184,166 $ 18,673 $ 656,826 $ 51,165 Municipal bonds — — 94 5 94 5 Total $ 472,660 $ 32,492 $ 184,260 $ 18,678 $ 656,920 $ 51,170 Less Than 12 Months 12 Months or More Total December 31, 2021 Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Mortgage-backed securities $ 479,322 $ 8,503 $ 110,633 $ 3,706 $ 589,955 $ 12,209 Municipal bonds — — 96 3 96 3 Total $ 479,322 $ 8,503 $ 110,729 $ 3,709 $ 590,051 $ 12,212 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, 2022, there were fifty-eight mortgage-backed securities and one municipal bond in unrealized loss positions for greater than 12 months and one hundred ninety mortgage-backed securities in unrealized loss positions for less than 12 months. Unrealized losses at December 31, 2021 were comprised of thirty-one mortgage-backed securities and one municipal bond in unrealized loss positions for greater than 12 months and one hundred forty-two mortgage-backed securities in unrealized loss positions for less than 12 months. These unrealized losses are primarily the result of non-credit-related volatility in the market and market interest rates. Since none of the unrealized losses relate to marketability of the securities or the issuer’s ability to honor redemption obligations and the Company has the intent and ability to hold the securities for a sufficient period of time to recover unrealized losses, none of the losses have been recognized in the Company’s Unaudited Condensed Consolidated Statements of Income. All mortgage-backed securities in the Company’s portfolio at March 31, 2022 and December 31, 2021 were backed by U.S. government sponsored enterprises (“GSEs”). 10 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements The following is a summary of investment securities by maturity: March 31, 2022 Available-for-Sale Amortized cost Fair value US government agencies Within one year $ 7,505 $ 7,542 One to five years 2,940 2,961 Total 10,445 10,503 Mortgage-backed securities Within one year 201 201 One to five years 79,667 79,248 Five to ten years 248,563 236,614 After 10 years 547,995 512,159 Total 876,426 828,222 Municipal bonds After 10 years 3,240 3,352 Total 3,240 3,352 Other debt securities Within one year 500 500 One to five years 2,000 2,000 Total 2,500 2,500 Total $ 892,611 $ 844,577 Mortgage-backed securities are included in maturity categories based on their contractual maturity date. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. There were no securities pledged at March 31, 2022 or December 31, 2021. Other Other investments, largely comprised of non-marketable equity investments, are generally accounted for under the equity method or equity security accounting and are included in other assets in the accompanying Unaudited Condensed Consolidated Balance Sheets. The below tables provide additional information related to investments accounted for under these two methods. 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, 2022 and December 31, 2021 is reflected in the following table: March 31, 2022 December 31, 2021 Amount Ownership % Amount Ownership % Apiture, Inc. $ 51,211 39.1 % $ 52,323 39.1 % Canapi Ventures SBIC Fund, LP (1) (4) 19,058 2.9 % 19,431 2.9 % Canapi Ventures Fund, LP (2) (4) 2,350 1.5 % 2,402 1.5 % Canapi Ventures Fund II, LP (3) (4) 7,500 1.7 % — N/A Other fintech investments in private companies (5) 5,077 Various 5,330 Various Other (6) 12,370 Various 4,664 Various Total $ 97,566 $ 84,150 (1) Includes unfunded commitments of $ 5.6 million and $ 6.8 million as of March 31, 2022 and December 31, 2021, respectively. (2) Includes unfunded commitments of $ 627 thousand and $ 770 thousand as of March 31, 2022 and December 31, 2021, respectively. (3 ) Includes unfunded commitments of $ 7.5 million as of March 31, 2022. There were no unfunded commitments as of December 31, 2021. (4) Investee is accounted for under equity method due to the Company's participation as an investment advisor. ( 5 ) Other fintech investments include Finxact, Inc., Payrailz, LLC and Kwipped, Inc. Investees are accounted for under equity method due to the company’s ability to exercise significant influence through executive management’s board involvement. ( 6 ) Other includes affordable housing and solar income tax credit projects. Includes unfunded commitments of $ 3.5 million as of March 31, 2022. There were no unfunded commitments as of December 31, 2021. Equity Security Accounting The carrying amount of the Company’s investments in non-marketable equity securities with no readily determinable fair value and amounts recognized in earnings on a cumulative basis as of March 31, 2022 and for the quarters ended March 31, 2022 and 2021 is reflected in the following table: As of and for the three month period ended Cumulative Adjustments 2022 2021 Carrying value (1) $ 64,728 $ 32,527 Carrying value adjustments: Impairment $ — — — Upward changes for observable prices (2) 48,469 — — Downward changes for observable prices ( 86 ) — — Net upward change $ 48,383 $ — $ — (1) Includes $ 3.2 million and $ 2.0 million in unfunded commitments for the quarters ended March 31, 2022 and 2021, respectively. (2) Excludes $ 13.9 million in realized cash gains for the sale of an investment in the second quarter of 2021. 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 held for investment and an aging analysis for the Company’s portfolio segments. Loans and leases are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Current or Less than 30 Days Past Due 30-89 Days Past Due 90 Days or More Past Due Total Past Due Total Carried at Amortized Cost 1 Loans Accounted for Under the Fair Value Option 2 Total Loans and Leases March 31, 2022 Commercial & Industrial Small Business Banking $ 1,181,570 $ 6,200 $ 10,291 $ 16,491 $ 1,198,061 $ 230,009 $ 1,428,070 Specialty Lending 1,024,894 331 — 331 1,025,225 60,646 1,085,871 Paycheck Protection Program 132,876 — 1,414 1,414 134,290 — 134,290 Total 2,339,340 6,531 11,705 18,236 2,357,576 290,655 2,648,231 Construction & Development Small Business Banking 308,995 2,670 1,366 4,036 313,031 — 313,031 Specialty Lending 79,994 — — — 79,994 — 79,994 Total 388,989 2,670 1,366 4,036 393,025 — 393,025 Commercial Real Estate Small Business Banking 1,661,997 7,159 9,507 16,666 1,678,663 235,524 1,914,187 Specialty Lending 339,775 — 1,718 1,718 341,493 17,179 358,672 Total 2,001,772 7,159 11,225 18,384 2,020,156 252,703 2,272,859 Commercial Land Small Business Banking 369,012 180 2,055 2,235 371,247 57,213 428,460 Total 369,012 180 2,055 2,235 371,247 57,213 428,460 Total $ 5,099,113 $ 16,540 $ 26,351 $ 42,891 $ 5,142,004 $ 600,571 $ 5,742,575 Net deferred fees ( 4,334 ) Loans and Leases, Net $ 5,738,241 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, 2021 Commercial & Industrial Small Business Banking $ 1,103,915 $ 13,171 $ 7,320 $ 20,491 $ 1,124,406 $ 248,806 $ 1,373,212 Specialty Lending 875,367 — — — 875,367 64,525 939,892 Paycheck Protection Program 266,893 68 1,414 1,482 268,375 — 268,375 Total 2,246,175 13,239 8,734 21,973 2,268,148 313,331 2,581,479 Construction & Development Small Business Banking 275,786 — 1,366 1,366 277,152 — 277,152 Specialty Lending 82,014 — — — 82,014 — 82,014 Total 357,800 — 1,366 1,366 359,166 — 359,166 Commercial Real Estate Small Business Banking 1,577,765 5,802 10,761 16,563 1,594,328 250,856 1,845,184 Specialty Lending 285,373 — 2,315 2,315 287,688 19,481 307,169 Total 1,863,138 5,802 13,076 18,878 1,882,016 270,337 2,152,353 Commercial Land Small Business Banking 362,881 7,399 2,055 9,454 372,335 61,533 433,868 Total 362,881 7,399 2,055 9,454 372,335 61,533 433,868 Total $ 4,829,994 $ 26,440 $ 25,231 $ 51,671 $ 4,881,665 $ 645,201 $ 5,526,866 Net deferred fees ( 5,604 ) Loans and Leases, Net $ 5,521,262 (1) Total loans and leases include $ 2.00 billion of U.S. government guaranteed loans as of March 31, 2022, of which $ 16.8 million is 90 days or more past due, $ 10.5 million is past due 30-89 days and $ 1.97 billion are current. Total loans and leases include $ 2.07 billion of U.S. government guaranteed loans as of December 31, 2021, of which $ 16.4 million is 90 days or more past due, $ 18.4 million is past due 30-89 days and $ 2.04 billion are current. (2) The Company measures the carrying value of the retained portion of loans sold at fair value under FASB ASC Subtopic 825-10, Financial Instruments: Overall . 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 present asset quality indicators by portfolio class and origination year. See Note 3. Loans and Leases Held for Investment and Credit Quality in the Company’s 2021 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 2022 2021 2020 2019 2018 Prior Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Total 1,2 March 31, 2022 Small Business Banking Risk Grades 1 - 4 $ 228,645 $ 1,095,845 $ 831,655 $ 511,688 $ 264,712 $ 270,411 $ 57,223 $ 384 $ 3,260,563 Risk Grade 5 — 7,048 30,708 58,116 60,421 53,324 2,882 350 212,849 Risk Grades 6 - 8 — 4,351 5,123 24,891 13,315 38,604 1,306 — 87,590 Total 228,645 1,107,244 867,486 594,695 338,448 362,339 61,411 734 3,561,002 Specialty Lending Risk Grades 1 - 4 174,145 634,405 233,734 68,634 42,605 41,474 139,641 124 1,334,762 Risk Grade 5 — 22,300 28,236 22,191 10,067 11,042 4,116 — 97,952 Risk Grades 6 - 8 — 236 17 3,079 8,944 1,718 4 — 13,998 Total 174,145 656,941 261,987 93,904 61,616 54,234 143,761 124 1,446,712 Paycheck Protection Program Risk Grades 1 - 4 — 100,841 33,449 — — — — — 134,290 Risk Grade 5 — — — — — — — — — Risk Grades 6 - 8 — — — — — — — — — Total — 100,841 33,449 — — — — — 134,290 Total $ 402,790 $ 1,865,026 $ 1,162,922 $ 688,599 $ 400,064 $ 416,573 $ 205,172 $ 858 $ 5,142,004 2021 2020 2019 2018 2017 Prior Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Total 1,2 December 31, 2021 Small Business Banking Risk Grades 1 - 4 $ 1,051,775 $ 853,250 $ 522,407 $ 285,397 $ 188,858 $ 116,645 $ 46,356 $ 1,771 $ 3,066,459 Risk Grade 5 7,838 19,651 65,715 60,615 37,661 13,933 5,066 195 210,674 Risk Grades 6 - 8 2,517 8,667 27,696 14,545 14,193 21,239 1,457 774 91,088 Total 1,062,130 881,568 615,818 360,557 240,712 151,817 52,879 2,740 3,368,221 Specialty Lending Risk Grades 1 - 4 644,851 238,409 73,978 42,452 38,703 — 133,889 1,816 1,174,098 Risk Grade 5 2,250 17,677 5,497 10,415 17,104 — 2,953 848 56,744 Risk Grades 6 - 8 — 17 3,166 8,654 — 2,315 75 14,227 Total 647,101 256,103 82,641 61,521 55,807 2,315 136,917 2,664 1,245,069 Paycheck Protection Program Risk Grades 1 - 4 204,803 63,572 — — — — — — 268,375 Risk Grade 5 — — — — — — — — — Risk Grades 6 - 8 — — — — — — — — — Total 204,803 63,572 — — — — — — 268,375 Total $ 1,914,034 $ 1,201,243 $ 698,459 $ 422,078 $ 296,519 $ 154,132 $ 189,796 $ 5,404 $ 4,881,665 15 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements (1) Total loans and leases include $ 2.00 billion of U.S. government guaranteed loans as of March 31, 2022, segregated by risk grade as follows: Risk Grades 1 – 4 = $ 1.80 billion, Risk Grade 5 = $ 137.3 million, Risk Grades 6 – 8 = $ 61.0 million. As of December 31, 2021, total loans and leases include $ 2.07 billion of U.S. government guaranteed loans, segregated by risk grade as follows: Risk Grades 1 – 4 = $ 1.88 billion, Risk Grade 5 = $ 134.2 million, Risk Grades 6 – 8 = $ 63.0 million. Total loans and leases exclude loans accounted for under the fair value option. (2) Excludes $ 600.6 million and $ 645.2 million of loans accounted for under the fair value option as of March 31, 2022 and December 31, 2021, respectively. Nonaccrual Loans and Leases As of March 31, 2022 and December 31, 2021 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, 2022 and 2021. Nonaccrual loans and leases are generally included in the held for investment portfolio. Accrued interest receivable on loans totaled $ 31.2 million and $ 31.0 million at March 31, 2022 and December 31, 2021, 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, 2022 and December 31, 2021 are as follows: March 31, 2022 Loan and Lease Balance 1 Guaranteed Balance Unguaranteed Balance Unguaranteed Exposure with No ACL Commercial & Industrial Small Business Banking $ 15,892 $ 12,639 $ 3,253 $ 407 Payroll Protection Program 1,414 1,414 — — Total 17,306 14,053 3,253 407 Construction & Development Small Business Banking 4,037 1,201 2,836 2,344 Total 4,037 1,201 2,836 2,344 Commercial Real Estate Small Business Banking 20,130 10,876 9,254 5,816 Specialty Lending 1,718 — 1,718 1,718 Total 21,848 10,876 10,972 7,534 Commercial Land Small Business Banking 9,112 6,699 2,413 827 Total 9,112 6,699 2,413 827 Total $ 52,303 $ 32,829 $ 19,474 $ 11,112 16 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements December 31, 2021 Loan and Lease Balance 1 Guaranteed Balance Unguaranteed Balance Unguaranteed Exposure with No ACL Commercial & Industrial Small Business Banking $ 16,911 $ 13,981 $ 2,930 $ — Payroll Protection Program 1,482 1,482 — — Total 18,393 15,463 2,930 — Construction & Development Small Business Banking 3,884 1,201 2,683 — Total 3,884 1,201 2,683 — Commercial Real Estate Small Business Banking 12,410 5,226 7,184 5,169 Specialty Lending 2,315 507 1,808 1,808 Total 14,725 5,733 8,992 6,977 Commercial Land Small Business Banking 5,531 4,148 1,383 — Total 5,531 4,148 1,383 — Total $ 42,533 $ 26,545 $ 15,988 $ 6,977 (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, 2022 and December 31, 2021: Total Collateral Dependent Loans Unguaranteed Portion March 31, 2022 Real Estate Business Assets Other Real Estate Business Assets Other Allowance for Credit Losses Commercial & Industrial Small Business Banking $ — $ 7,466 $ 34 $ — $ 2,051 $ 34 $ 1,631 Total — 7,466 34 — 2,051 34 1,631 Construction & Development Small Business Banking 4,011 — — 2,810 — — 180 Total 4,011 — — 2,810 — — 180 Commercial Real Estate Small Business Banking 5,028 1,751 103 3,968 451 23 280 Total 5,028 1,751 103 3,968 451 23 280 Commercial Land Small Business Banking 5,812 — — 1,596 — — 376 Total 5,812 — — 1,596 — — 376 Total $ 14,851 $ 9,217 $ 137 $ 8,374 $ 2,502 $ 57 $ 2,467 17 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Total Collateral Dependent Loans Unguaranteed Portion December 31, 2021 Real Estate Business Assets Other Real Estate Business Assets Other Allowance for Credit Losses Commercial & Industrial Small Business Banking $ 698 $ 7,475 $ — $ 152 $ 449 $ — $ 235 Total 698 7,475 — 152 449 — 235 Construction & Development Specialty Lending 3,858 — — 2,657 — — 57 Total 3,858 — — 2,657 — — 57 Commercial Real Estate Small Business Banking 5,172 700 64 4,038 14 13 65 Specialty Lending 512 — — 6 — — — Total 5,684 700 64 4,044 14 13 65 Commercial Land Small Business Banking 5,541 — — 1,393 — — 601 Total 5,541 — — 1,393 — — 601 Total $ 15,781 $ 8,175 $ 64 $ 8,246 $ 463 $ 13 $ 958 18 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Allowance for Credit Losses - Loans and Leases See Note 1. Organization and Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements in the Company’s 2021 Form 10-K for a description of the methodologies used to estimate the allowance for credit losses (“ACL”). The following table details activity in the ACL by portfolio segment allowance for the periods presented: Three Months Ended Commercial & Industrial Construction & Development Commercial Real Estate Commercial Land Total March 31, 2022 Beginning Balance $ 37,770 $ 3,435 $ 19,068 $ 3,311 $ 63,584 Charge offs ( 2,823 ) — — ( 334 ) ( 3,157 ) Recoveries 145 — 650 — 795 Provision ( 930 ) 667 1,896 203 1,836 Ending Balance $ 34,162 $ 4,102 $ 21,614 $ 3,180 $ 63,058 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 During the three months ended March 31, 2022, the ACL decreased primarily as a result of the charge-off of one large relationship as well as continued improvements in forecasted unemployment and default expectations. These decreases were offset by overall loan growth. Unemployment rates were forecasted for twelve months followed by a twelve-month straight-line reversion period. Additionally, the provision expense was impacted by net charge-offs during the periods. During the three months ended March 31, 2021, 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 recoveries during the periods. 19 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements The following tables represent the types of loans modified as troubled debt restructurings (“TDRs”) during the periods presented: Three Months Ended March 31, 2022 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 $ 1,015 1 $ 350 3 $ 3,809 6 $ 5,174 Total — — 2 1,015 1 350 3 3,809 6 5,174 Commercial Real Estate Small Business Banking — — — — — — 1 4,847 1 4,847 Total — — — — — — 1 4,847 1 4,847 Total — $ — 2 $ 1,015 1 $ 350 4 $ 8,656 7 $ 10,021 (1) Excludes loans accounted for under the fair value option. See Note 9. Fair Value of Financial Instruments for additional information. Three Months Ended March 31, 2021 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 — $ — 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) Excludes loans accounted for under the fair value option. See Note 9. Fair Value of Financial Instruments for additional information. Concessions made to improve a loan and lease’s performance have varying degrees of success. There were no TDRs that were modified within the twelve months ended March 31, 2022 that subsequently defaulted during the three months ended March 31, 2022. 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. 20 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Note 6. Leases Lessor Equipment Leasing The Company purchases new equipment for the purpose of leasing such equipment to customers within its verticals. Equipment purchased to fulfill commitments to commercial renewable energy projects is rented out under operating leases while leases of equipment outside of the renewable energy vertical are generally direct financing leases. Accordingly, leased assets under operating leases are included in premises and equipment while leased assets under direct financing leases are included in loans and leases held for investment in the accompanying Unaudited Condensed Consolidated Balance Sheets. Direct Financing Leases Interest income on direct financing leases is recognized when earned. Unearned interest is recognized over the lease term on a basis which results in a constant rate of return on the unrecovered lease investment. The term of each lease is generally 3 to 7 years which is consistent with the useful life of the equipment with no residual value. The gross lease payments receivable and the net investment included in accounts receivable for such leases are as follows: March 31, 2022 December 31, 2021 Gross direct finance lease payments receivable $ 6,291 $ 7,333 Less – unearned interest ( 797 ) ( 998 ) Net investment in direct financing leases $ 5,494 $ 6,335 Future minimum lease payments under finance leases are as follows: As of March 31, 2022 Amount 2022 $ 1,318 2023 2,182 2024 1,570 2025 1,104 2026 117 Total $ 6,291 Interest income of $ 115 thousand and $ 186 thousand was recognized in the three months ended March 31, 2022 and 2021, respectively. Operating Leases The term of each operating lease is generally 10 to 15 years . The Company retains ownership of the equipment and associated tax benefits such as investment tax credits and accelerated depreciation. At the end of the lease term, the lessee has the option to renew the lease for two additional terms or purchase the equipment at the then-current fair market value. Rental revenue from operating leases is recognized on a straight-line basis over the term of the lease. Rental equipment is recorded at cost and depreciated to an estimated residual value on a straight-line basis over the estimated useful life. The useful lives generally range from 20 to 25 years and residual values generally range from 20 % to 50 %, however, they are subject to periodic evaluation. Changes in useful lives or residual values will impact depreciation expense and any gain or loss from the sale of used equipment. The estimated useful lives and residual values of the Company's leasing equipment are based on industry disposal experience and the Company's expectations for future sale prices. If the Company decides to sell or otherwise dispose of rental equipment, it is carried at the lower of cost or fair value less costs to sell or dispose. Repair and maintenance costs that do not extend the lives of the rental equipment are charged to equipment expense at the time the costs are incurred. 21 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements As of March 31, 2022 and December 31, 2021, the Company had a net investment of $ 121.5 million and $ 123.9 million, respectively, in assets included in premises and equipment that are subject to operating leases. Of the net investment, the gross balance of the assets was $ 163.4 million as of March 31, 2022 and December 31, 2021, respectively, and accumulated depreciation was $ 41.9 million and $ 39.5 million as of March 31, 2022 and December 31, 2021, respectively. Depreciation expense recognized on these assets for the three months ended March 31, 2022 and 2021 was $ 2.4 million. Lease income of $ 2.4 million was recognized in the three months ended March 31, 2022 and 2021. A maturity analysis of future minimum lease payments to be received under non-cancelable operating leases is as follows: As of March 31, 2022 Amount 2022 $ 7,100 2023 9,075 2024 8,808 2025 8,935 2026 8,923 Thereafter 22,252 Total $ 65,093 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 $ 2.38 billion and $ 2.29 billion at March 31, 2022 and December 31, 2021, respectively. The unpaid principal balance for all loans serviced for others was $ 3.38 billion and $ 3.30 billion at March 31, 2022 and December 31, 2021, respectively. The following summarizes the activity pertaining to servicing rights: Three Months Ended March 31, 2022 2021 Balance at beginning of period $ 33,574 $ 33,918 Additions, net 4,281 2,333 Fair value changes: Due to changes in valuation inputs or assumptions 1,388 2,946 Decay due to increases in principal paydowns or runoff ( 2,957 ) ( 1,453 ) Balance at end of period $ 36,286 $ 37,744 The fair value of servicing rights was determined using a weighted average discount rate of 11.7 % on March 31, 2022 and 8.8 % on March 31, 2021. The fair value of servicing rights was determined using a weighted average prepayment speed of 16.1 % on March 31, 2022 and 18.6 % on March 31, 2021, with the actual rate depending on the stratification of the specific right. Changes to fair value are reported in loan servicing asset revaluation within the 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. 22 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Note 8. Borrowings Total outstanding borrowings consisted of the following: March 31, 2022 December 31, 2021 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. $ 40,376 $ 42,734 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 6, 2022 to May 4, 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 $ 136.6 million borrowing was fully advanced at March 31, 2022. 136,550 267,550 In September 2020, the Company renewed a $ 50.0 million revolving line of credit originally issued in 2017 with a third party correspondent bank. Subsequently on October 20, 2021, the Company renewed and increased the revolving line of credit from $ 50.0 million to $ 100.0 million and increased the term from 12 months to 36 months. The line of credit is unsecured and accrues interest at 30-day SOFR plus 1.25 %, with an interest rate cap of 4.25 % and an interest rate floor of 2.75 %. Payments are interest only with all principal and accrued interest due at maturity on October 10, 2024 . The terms of this loan require the Company to maintain minimum capital and debt service coverage ratios. The Company paid the Lender a non-refundable $ 750 thousand loan origination fee upon signing of the Note that will be amortized into interest expense over the life of the loan. The Company made an advance of $ 8.0 million on December 20, 2021 and $ 12.0 million on March 16, 2022. There is $ 80.0 million of available credit remaining at March 31, 2022. 19,982 8,000 Other short term debt (1) 3 5 Total borrowings $ 196,911 $ 318,289 (1) Includes finance leases. The Company may purchase federal funds through unsecured federal funds lines of credit with various correspondent banks, which totaled $ 167.5 million of available funding as of March 31, 2022 and December 31, 2021. 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, 2022 and December 31, 2021. The Company has entered into a repurchase agreement with a third party for an amount up to $ 5.0 million as of March 31, 2022 and December 31, 2021. 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, 2022 and December 31, 2021. 23 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements 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, 2022 and December 31, 2021, the Company had approximately $ 2.03 billion and $ 2.02 billion, respectively, in borrowing capacity available under these agreements. There are no advances outstanding and no collateral pledged as of March 31, 2022 and December 31, 2021. The Company may borrow funds through the Federal Reserve Bank’s discount window. These borrowings are secured by a blanket floating lien on qualifying loans with a balance of $ 2.68 billion and $ 2.44 billion as of March 31, 2022 and December 31, 2021, respectively. At March 31, 2022 and December 31, 2021, the Company had approximately $ 2.27 billion and $ 2.04 billion, respectively, in borrowing capacity available under these arrangements with no outstanding balance as of March 31, 2022 and December 31, 2021. 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 table below provides a rollforward of the Level 3 equity warrant asset fair values. Three Months Ended March 31, Equity Warrant Assets 2022 2021 Balance at beginning of period $ 1,672 $ 908 Issuances 656 21 Net gains on derivative instruments — 385 Settlements — — Balance at end of period $ 2,328 $ 1,314 The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis. March 31, 2022 Total Level 1 Level 2 Level 3 Investment securities available-for-sale US government agencies $ 10,503 $ — $ 10,503 $ — Mortgage-backed securities 828,222 — 828,222 — Municipal bonds (1) 3,352 — 3,258 94 Other debt securities 2,500 — 2,500 — Loans held for sale 25,056 — — 25,056 Loans held for investment 600,571 — — 600,571 Servicing assets (2) 36,286 — — 36,286 Mutual fund 2,327 — 2,327 — Equity warrant assets 2,328 — — 2,328 Total assets at fair value $ 1,511,145 $ — $ 846,810 $ 664,335 24 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements December 31, 2021 Total Level 1 Level 2 Level 3 Investment securities available-for-sale US government agencies $ 10,637 $ — $ 10,637 $ — Mortgage-backed securities 889,339 — 889,339 — Municipal bonds (1) 3,576 — 3,480 96 Other debt securities 2,500 — 2,500 — Loans held for sale 25,310 — — 25,310 Loans held for investment 645,201 — — 645,201 Servicing assets (2) 33,574 — — 33,574 Mutual fund 2,379 — 2,379 — Equity warrant assets 1,672 — — 1,672 Total assets at fair value $ 1,614,188 $ — $ 908,335 $ 705,853 (1) During the three months ended March 31, 2022, 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. (2) See Note 7 for a rollforward of recurring Level 3 fair values for servicing assets. For additional information on the valuation techniques and significant inputs for Level 2 and Level 3 assets and liabilities that are measured at fair value on a recurring basis, see Note 10. Fair Value of Financial Instruments in the Company’s 2021 Form 10-K. Fair Value Option The Company has historically elected to account for retained participating interests of all government guaranteed loans under the fair value option in order to align the accounting presentation with the Company’s viewpoint of the economics of the loans. Interest income is recognized in the same manner on loans reported at fair value as on non-fair value loans, except in regard to origination fees and costs which are recognized immediately upon fair value election. Beginning in the first quarter of 2021, the Company chose not to elect fair value for all retained participating interests arising from new government guaranteed loan sales. Not electing fair value generally results in a larger discount being recorded on the date of the sale. This discount is subsequently accreted into interest income over the underlying loan’s remaining term using the effective interest method. Management made this change of election in alignment with its ongoing effort to reduce volatility and drive more predictable revenue. In accordance with GAAP, any loans for which fair value was previously elected will continue to be measured as such . There were no loans accounted for under the fair value option that were 90 days or more past due and still accruing interest at March 31, 2022 or December 31, 2021. The unpaid principal balance of unguaranteed exposure for nonaccruals was $ 6.0 million and $ 6.9 million at March 31, 2022 and December 31, 2021, 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 March 31, 2022 and December 31, 2021. March 31, 2022 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 $ 25,056 $ 26,747 $ ( 1,691 ) $ — $ — $ — $ — $ — $ — Loans held for investment 600,571 620,121 ( 19,550 ) 35,301 40,012 ( 4,711 ) 17,411 20,845 ( 3,434 ) $ 625,627 $ 646,868 $ ( 21,241 ) $ 35,301 $ 40,012 $ ( 4,711 ) $ 17,411 $ 20,845 $ ( 3,434 ) 25 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements December 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 $ 25,310 $ 26,831 $ ( 1,521 ) $ — $ — $ — $ — $ — $ — Loans held for investment 645,201 666,066 ( 20,865 ) 38,262 42,841 ( 4,579 ) 24,057 25,633 ( 1,576 ) $ 670,511 $ 692,897 $ ( 22,386 ) $ 38,262 $ 42,841 $ ( 4,579 ) $ 24,057 $ 25,633 $ ( 1,576 ) 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 2022 2021 Loans held for sale $ ( 170 ) $ 36 Loans held for investment 686 4,182 $ 516 $ 4,218 Gains/(losses) related to borrower-specific credit risk were $( 2.1 ) million and $ 191 thousand for the three months ended March 31, 2022 and 2021, respectively. 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 2022 2021 Balance at beginning of period $ 25,310 $ 36,111 Issuances & repurchases 65 — Fair value changes ( 170 ) 36 Sales — — Settlements ( 149 ) ( 211 ) Balance at end of period $ 25,056 $ 35,936 Three Months Ended March 31, Loans held for investment 2022 2021 Balance at beginning of period $ 645,201 $ 815,374 Repurchases 1,525 5,570 Fair value changes 686 4,184 Settlements ( 46,841 ) ( 34,331 ) Balance at end of period $ 600,571 $ 790,797 Non-Recurring Fair Value The tables below present the recorded amount of assets and liabilities measured at fair value on a non-recurring basis. March 31, 2022 Total Level 1 Level 2 Level 3 Collateral-dependent loans $ 2,486 $ — $ — $ 2,486 Foreclosed assets 198 — — 198 Total assets at fair value $ 2,684 $ — $ — $ 2,684 26 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements December 31, 2021 Total Level 1 Level 2 Level 3 Collateral-dependent loans $ 1,567 $ — $ — $ 1,567 Foreclosed assets 620 — — 620 Total assets at fair value $ 2,187 $ — $ — $ 2,187 For additional information on the valuation techniques and significant inputs for Level 2 and Level 3 assets that are measured at fair value on a non-recurring basis, see Note 10. Fair Value of Financial Instruments in the Company’s 2021 Form 10-K. Level 3 Analysis For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of March 31, 2022 and December 31, 2021 the significant unobservable inputs used in the fair value measurements were as follows: March 31, 2022 Level 3 Assets with Significant Unobservable Inputs Fair Value Valuation Technique Significant Unobservable Inputs Range Recurring fair value Municipal bond $ 94 Discounted expected cash flows Discount rate Prepayment speed 5.3 % 5.0 % Loans held for sale $ 25,056 Discounted expected cash flows Discount rate Prepayment speed 6.3 % to 20.8 % WAVG 17.2 % Loans held for investment $ 600,571 Discounted expected cash flows Discounted appraisals Loss rate Discount rate Prepayment speed Appraisal adjustments 0 % to 70.2 % (WAVG 1.6 %) 6.3 % to 20.8 % WAVG 17.2 % 10.0 % to 81.0 % Equity warrant assets $ 2,328 Black-Scholes option pricing model Volatility Risk-free interest rate Marketability discount Remaining life 26.6 - 88.0 % 2.5 % 20.0 % 3 - 10 years Non-recurring fair value Collateral-dependent loans $ 2,486 Discounted appraisals Appraisal adjustments (1) 10.0 % to 99.0 % Foreclosed assets $ 198 Discounted appraisals Appraisal adjustments (1) 10.0 % 27 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements December 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 4.8 % 5.0 % Loans held for sale $ 25,310 Discounted expected cash flows Discount rate Prepayment speed 6.2 % to 21.9 % WAVG 17.4 % Loans held for investment $ 645,201 Discounted expected cash flows Discounted appraisals Loss rate Discount rate Prepayment speed Appraisal adjustments 0.0 % to 70.2 % (WAVG 1.5 %) 6.2 % to 21.9 % WAVG 17.4 % 10.0 % to 85.0 % Equity warrant assets $ 1,672 Black-Scholes option pricing model Volatility Risk-free interest rate Marketability discount Remaining life 26.2 - 88.2 % 1.3 % to 1.5 % 20.0 % 4 - 10 years Non-recurring fair value Collateral-dependent loans $ 1,567 Discounted appraisals Appraisal adjustments (1) 10.0 % to 99.0 % Foreclosed assets $ 620 Discounted appraisals Appraisal adjustments (1) 9.0 % to 10.0 % (1) Appraisals may be adjusted by management for customized discounting criteria, estimated sales costs, and other qualitative adjustments. Estimated Fair Value of Other Financial Instruments GAAP also requires disclosure of the fair value of financial instruments carried at book value on the Unaudited Condensed Consolidated Balance Sheets. 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, 2022 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 $ 477,778 $ 477,778 $ — $ — $ 477,778 Federal funds sold 29,993 29,993 — — 29,993 Certificates of deposit with other banks 4,250 4,316 — — 4,316 Loans held for sale 1,003,579 — — 1,074,381 1,074,381 Loans and leases held for investment, net of allowance for credit losses on loans and leases 5,074,612 — — 5,176,365 5,176,365 Financial liabilities Deposits 7,637,163 — 7,247,748 — 7,247,748 Borrowings 196,911 — — 188,221 188,221 28 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements December 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 $ 187,203 $ 187,203 $ — $ — $ 187,203 Federal funds sold 16,547 16,547 — — 16,547 Certificates of deposit with other banks 4,750 4,930 — — 4,930 Loans held for sale 1,091,209 — — 1,197,307 1,197,307 Loans and leases held for investment, net of allowance for credit losses on loans and leases 4,812,477 — — 4,958,875 4,958,875 Financial liabilities Deposits 7,112,044 — 6,942,512 — 6,942,512 Borrowings 318,289 — — 312,036 312,036 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. On October 12, 2021, the Company reached an agreement to settle the case with a proposed class of all persons (with certain exclusions) employed by the Company or its wholly-owned subsidiary, Live Oak Banking Company, Apiture, Inc. or nCino, Inc. in North Carolina at any time from January 27, 2017, through March 31, 2021. In the agreement, the Company agreed to pay $ 3.9 million. On October 13, 2021, the plaintiff filed a motion for preliminary approval of the settlement, which the court granted by order entered on November 23, 2021. After class-wide noticing, the plaintiff filed a motion for final approval on March 28, 2022, which the court granted by order entered on April 28, 2022. Pursuant to the terms of the settlement, the Company expects the settlement to become finally effective no later than June 30, 2022. 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, 2022 December 31, 2021 Commitments to extend credit $ 2,980,984 $ 2,634,387 Standby letters of credit 24,087 10,753 Total unfunded off-balance-sheet credit risk $ 3,005,071 $ 2,645,140 29 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements 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. In December 2021, the Company entered into a lease agreement to rent real property for a term of 91 months with $ 1.1 million of future expected lease payments. There is an option to renew the lease for an additional 5 year period . As of March 31, 2022, the lease had not commenced. The balance of the allowance for off-balance sheet credit exposures was $ 884 thousand and $ 739 thousand at March 31, 2022 and December 31, 2021, respectively. As of March 31, 2022 and December 31, 2021, the Company recorded unfunded commitments to provide capital contributions for on-balance-sheet investments in the amount of $ 20.4 million and $ 10.4 million, respectively. Concentrations of Credit Risk The distribution of commitments to extend credit approximates the distribution of loans outstanding. The Company does not have a significant number of credits to any single borrower or group of related borrowers whereby their retained unguaranteed exposure exceeds $ 15.0 million, except for thirty-five relationships that have a retained unguaranteed exposure of $ 850.8 million of which $ 480.9 million of the unguaranteed exposure has been disbursed. Additionally, the Company has future minimum lease payments receivable under non-cancelable operating leases totaling $ 65.1 million, of which $ 20.0 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. Segments The Company's management reporting process measures the performance of its operating segments based on internal operating structure, which is subject to change from time to time. Accordingly, the Company operates two reportable segments for management reporting purposes as discussed below: Banking - This segment specializes in providing financing services to small businesses nationwide in targeted industries and deposit-related services to small businesses, consumers and other customers nationwide. The primary source of revenue for this segment is net interest income and secondarily the origination and sale of government guaranteed loans. Fintech - This segment is involved in making strategic investments into emerging financial technology companies. The primary sources of revenue for this segment are principally gains and losses on equity method and equity security investments and management fees. The Fintech segment is comprised of the Company's direct wholly owned subsidiaries Live Oak Ventures and Canapi Advisors, and the investments held by those entities, as well as the Bank's investment in Apiture. 30 Live Oak Bancshares, Inc. Notes to Unaudited Condensed Consolidated Financial Statements The following tables provide financial information for the Company's segments. The information provided under the caption “Other” represents operations not considered to be reportable segments and/or general operating expenses of the Company, and includes the parent company, other non-bank subsidiaries and elimination adjustments to reconcile the results of the operating segments to the unaudited condensed consolidated financial statements prepared in conformity with GAAP. Banking Fintech Other Consolidated As of and for the three months ended March 31, 2022 Interest income $ 92,746 $ 36 $ — $ 92,782 Interest expense 14,530 — 473 15,003 Net interest income 78,216 36 ( 473 ) 77,779 Provision for loan and lease credit losses 1,836 — — 1,836 Noninterest income 31,935 237 496 32,668 Noninterest expense 61,399 2,168 2,147 65,714 Income tax expense (benefit) 9,076 ( 146 ) ( 542 ) 8,388 Net income (loss) $ 37,840 $ ( 1,749 ) $ ( 1,582 ) $ 34,509 Total assets $ 8,450,425 $ 121,471 $ 48,070 $ 8,619,966 As of and for the 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 Note 12. Subsequent Event On April 1, 2022, Fiserv, Inc., (“Fiserv”) acquired all of the ownership interests in Finxact, Inc. (“Finxact”) that it did not already own (the “Transaction”), including the interest of the Company, pursuant to the previously announced definitive agreement between Fiserv and Finxact. The Company received initial cash of $ 125.3 million, and the Transaction resulted in a pre-tax gain of approximately $ 120.5 million which will be included in the Company’s noninterest income for the second quarter of 2022 . 31