UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2023

or

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ________ to ________.

Commission file number: 001-37497

LIVE OAK BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

North Carolina	26-4596286
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
1741 Tiburon Drive Wilmington, North Carolina	28403
(Address of principal executive offices)	(Zip Code)

(910) 790-5867

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Voting Common Stock, no par value per share	LOB	New York Stock Exchange LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer	x	Accelerated filer	o
Non-accelerated filer	o	Smaller reporting company	o
		Emerging growth company	o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of August 1, 2023, there were 44,363,165 shares of the registrant’s voting common stock outstanding.

Live Oak Bancshares, Inc.

Form 10-Q

For the Quarterly Period Ended June 30, 2023

TABLE OF CONTENTS

		Page
	PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022	1
	Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2023 and 2022	2
	Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2023 and 2022	3
	Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three and Six Months Ended June 30, 2023 and 2022	4
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2023 and 2022	6
	Notes to Unaudited Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	60
Item 4.	Controls and Procedures	61
	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	63
Item 1A.	Risk Factors	63
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	63
Item 3.	Defaults Upon Senior Securities	63
Item 4.	Mine Safety Disclosures	63
Item 5.	Other Information	63
Item 6.	Exhibits	64
	Index to Exhibits	64
	Signatures	65

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Live Oak Bancshares, Inc.

Condensed Consolidated Balance Sheets

As of June 30, 2023 (unaudited) and December 31, 2022*

(Dollars in thousands)

	June 30, 2023		December 31, 2022
Assets
Cash and due from banks	$	808,131	$	280,239
Federal funds sold	—		136,397
Certificates of deposit with other banks	4,000		4,000
Investment securities available-for-sale	1,133,146		1,014,719
Loans held for sale	523,776		554,610
Loans and leases held for investment (includes $441,781 and $494,458 measured at fair value, respectively)	7,836,398		7,344,178
Allowance for credit losses on loans and leases	(120,116)		(96,566)
Net loans and leases	7,716,282		7,247,612
Premises and equipment, net	269,485		263,290
Servicing assets	31,042		26,323
Other assets	333,334		328,308
Total assets	$	10,819,196	$	9,855,498
Liabilities and Shareholders’ Equity
Liabilities
Deposits:
Noninterest-bearing	$	229,833	$	194,100
Interest-bearing	9,649,278		8,690,828
Total deposits	9,879,111		8,884,928
Borrowings	28,317		83,203
Other liabilities	79,280		76,334
Total liabilities	9,986,708		9,044,465
Shareholders’ equity
Preferred stock, no par value, 1,000,000 shares authorized, none issued or outstanding at June 30, 2023 and December 31, 2022	—		—
Class A common stock, no par value, 100,000,000 shares authorized, 44,351,715 and 44,061,244 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively	341,032		330,854
Class B common stock, no par value, 10,000,000 shares authorized, none issued or outstanding at June 30, 2023 and December 31, 2022	—		—
Retained earnings	589,036		572,497
Accumulated other comprehensive loss	(97,580)		(92,318)
Total shareholders’ equity	832,488		811,033
Total liabilities and shareholders’ equity	$	10,819,196	$	9,855,498

*Derived from audited consolidated financial statements.

See Notes to Unaudited Condensed Consolidated Financial Statements

1

Live Oak Bancshares, Inc.

Condensed Consolidated Statements of Income

For the three and six months ended June 30, 2023 and 2022 (unaudited)

(Dollars in thousands, except per share data)

	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Interest income
Loans and fees on loans	$	152,362	$	94,157	$	291,414	$	183,355
Investment securities, taxable	8,503		4,046		16,050		7,445
Other interest earning assets	8,847		1,044		13,664		1,229
Total interest income	169,712		99,247		321,128		192,029
Interest expense
Deposits	85,003		18,777		152,598		33,125
Borrowings	407		536		2,211		1,191
Total interest expense	85,410		19,313		154,809		34,316
Net interest income	84,302		79,934		166,319		157,713
Provision for loan and lease credit losses	13,028		5,267		32,049		7,103
Net interest income after provision for loan and lease credit losses	71,274		74,667		134,270		150,610
Noninterest income
Loan servicing revenue	6,687		6,477		13,067		12,833
Loan servicing asset revaluation	(2,831)		(8,668)		(2,475)		(10,237)
Net gains on sales of loans	10,804		5,630		20,979		26,607
Net gain (loss) on loans accounted for under the fair value option	1,728		(4,461)		(2,801)		(3,945)
Equity method investments (loss) income	(2,055)		119,056		(5,007)		116,932
Equity security investments gains (losses), net	121		1,655		198		1,611
Lease income	2,535		2,510		5,070		5,013
Management fee income	3,266		2,558		6,738		4,046
Other noninterest income	3,901		3,772		7,966		8,337
Total noninterest income	24,156		128,529		43,735		161,197
Noninterest expense
Salaries and employee benefits	43,066		46,276		87,831		84,783
Travel expense	2,770		2,358		5,181		4,255
Professional services expense	1,996		3,988		2,923		6,779
Advertising and marketing expense	3,009		2,301		6,612		4,030
Occupancy expense	2,205		2,773		4,130		5,100
Technology expense	8,005		5,762		15,734		11,815
Equipment expense	4,023		3,784		7,841		7,600
Other loan origination and maintenance expense	3,442		3,022		7,369		6,135
Renewable energy tax credit investment impairment	—		50		69		50
FDIC insurance	5,061		2,164		8,464		4,136
Contributions and donations	—		5,515		—		6,238
Other expense	2,880		2,886		9,265		5,672
Total noninterest expense	76,457		80,879		155,419		146,593
Income before taxes	18,973		122,317		22,586		165,214
Income tax expense	1,429		25,278		4,644		33,666
Net income	$	17,544	$	97,039	$	17,942	$	131,548
Basic earnings per share	$	0.40	$	2.22	$	0.41	$	3.01
Diluted earnings per share	$	0.39	$	2.16	$	0.40	$	2.92

See Notes to Unaudited Condensed Consolidated Financial Statements

2

Live Oak Bancshares, Inc.

Condensed Consolidated Statements of Comprehensive Income

For the three and six months ended June 30, 2023 and 2022 (unaudited)

(Dollars in thousands)

	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Net income	$	17,544	$	97,039	$	17,942	$	131,548
Other comprehensive loss before tax:
Net unrealized loss on investment securities available-for-sale during the period	(17,348)		(29,967)		(6,916)		(80,561)
Reclassification adjustment for gain on sale of securities available-for-sale included in net income	—		—		—		—
Other comprehensive loss before tax	(17,348)		(29,967)		(6,916)		(80,561)
Income tax benefit	4,163		7,190		1,654		19,332
Other comprehensive loss, net of tax	(13,185)		(22,777)		(5,262)		(61,229)
Total comprehensive income	$	4,359	$	74,262	$	12,680	$	70,319

See Notes to Unaudited Condensed Consolidated Financial Statements

3

Live Oak Bancshares, Inc.

Condensed Consolidated Statements of Changes in Shareholders’ Equity

For the three and six months ended June 30, 2023 and 2022 (unaudited)

(Dollars in thousands)

	Three Months Ended
	Common stock				Retained earnings		Accumulated other comprehensive income (loss)		Total equity
	Shares		Amount
	Class A	Class B
Balance at March 31, 2023	44,290,840	—	$	334,672	$	572,530	$	(84,395)	$	822,807
Net income	—	—	—		17,544		—		17,544
Other comprehensive loss	—	—	—		—		(13,185)		(13,185)
Issuance of restricted stock	38,145	—	—		—		—		—
Tax withholding related to vesting of restricted stock and other	—	—	(249)		—		—		(249)
Stock option exercises	22,730	—	297		—		—		297
Stock option compensation expense	—	—	4		—		—		4
Restricted stock compensation expense	—	—	6,308		—		—		6,308
Transfer from retained earnings to other assets for pro rata portion of equity method investee stock compensation expense	—	—	—		292		—		292
Cash dividends ($0.03 per share)	—	—	—		(1,330)		—		(1,330)
Balance at June 30, 2023	44,351,715	—	$	341,032	$	589,036	$	(97,580)	$	832,488
Balance at March 31, 2022	43,787,660	—	$	315,607	$	434,226	$	(36,506)	$	713,327
Net income	—	—	—		97,039		—		97,039
Other comprehensive loss	—	—	—		—		(22,777)		(22,777)
Issuance of restricted stock	17,156	—	—		—		—		—
Tax withholding related to vesting of restricted stock and other	—	—	(197)		—		—		(197)
Stock option exercises	49,195	—	434		—		—		434
Stock option compensation expense	—	—	234		—		—		234
Restricted stock compensation expense	—	—	4,846		—		—		4,846
Transfer from retained earnings to other assets for pro rata portion of equity method investee stock compensation expense	—	—	—		71		—		71
Cash dividends ($0.03 per share)	—	—	—		(1,315)		—		(1,315)
Balance at June 30, 2022	43,854,011	—	$	320,924	$	530,021	$	(59,283)	$	791,662

4

Live Oak Bancshares, Inc.

Condensed Consolidated Statements of Changes in Shareholders’ Equity (Continued)

For the three and six months ended June 30, 2023 and 2022 (unaudited)

(Dollars in thousands)

	Six Months Ended
	Common stock				Retained earnings		Accumulated other comprehensive income (loss)		Total equity
	Shares		Amount
	Class A	Class B
Balance at December 31, 2022	44,061,244	—	$	330,854	$	572,497	$	(92,318)	$	811,033
Net income	—	—	—		17,942		—		17,942
Other comprehensive loss	—	—	—		—		(5,262)		(5,262)
Issuance of restricted stock	201,019	—	—		—		—		—
Tax withholding related to vesting of restricted stock and other	—	—	(3,602)		—		—		(3,602)
Employee stock purchase program	31,059	—	631		—		—		631
Stock option exercises	58,393	—	664		—		—		664
Stock option based compensation expense	—	—	137		—		—		137
Restricted stock compensation expense	—	—	12,348		—		—		12,348
Adoption of ASU 2022-02	—	—	—		676		—		676
Transfer from retained earnings to other assets for pro rata portion of equity method investee stock compensation expense	—	—	—		578		—		578
Cash dividends ($0.06 per share)	—	—	—		(2,657)		—		(2,657)
Balance at June 30, 2023	44,351,715	—	$	341,032	$	589,036	$	(97,580)	$	832,488
Balance at December 31, 2021	43,494,046	125,024	$	312,294	$	400,893	$	1,946	$	715,133
Net income	—	—	—		131,548		—		131,548
Other comprehensive loss	—	—	—		—		(61,229)		(61,229)
Issuance of restricted stock	112,693	—	—		—		—		—
Tax withholding related to vesting of restricted stock and other	—	—	(3,091)		—		—		(3,091)
Employee stock purchase program	11,119	—	534		—		—		534
Stock option exercises	111,129	—	1,153		—		—		1,153
Stock option based compensation expense	—	—	625		—		—		625
Restricted stock compensation expense	—	—	9,409		—		—		9,409
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	—	—	—		207		—		207
Cash dividends ($0.06 per share)	—	—	—		(2,627)		—		(2,627)
Balance at June 30, 2022	43,854,011	—	$	320,924	$	530,021	$	(59,283)	$	791,662

See Notes to Unaudited Condensed Consolidated Financial Statements

5

Live Oak Bancshares, Inc.

Condensed Consolidated Statements of Cash Flows

For the six months ended June 30, 2023 and 2022 (unaudited)

(Dollars in thousands)

	Six Months Ended June 30,
	2023		2022
Cash flows from operating activities
Net income	$	17,942	$	131,548
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	10,447		10,553
Provision for loan and lease credit losses	32,049		7,103
Amortization of premium on securities, net of accretion	132		2,378
Deferred tax (benefit) expense	(9,723)		17,439
Originations of loans held for sale	(425,441)		(495,699)
Proceeds from sales of loans held for sale	649,306		529,989
Net gains on sale of loans held for sale	(20,979)		(26,607)
Net loss on sale of foreclosed assets	—		41
Net loss on loans accounted for under fair value option	2,801		3,945
Net (increase) decrease in servicing assets	(4,719)		4,913
Net loss on disposal of property and equipment	402		22
Equity method investments loss (income)	5,007		(116,932)
Equity security investments (gains) losses, net	(198)		(1,611)
Renewable energy tax credit investment impairment	69		50
Stock option compensation expense	137		625
Restricted stock compensation expense	12,348		9,409
Stock based compensation excess tax (shortfall) benefit	(574)		1,106
Lease right-of-use assets and liabilities, net	(30)		569
Changes in assets and liabilities:
Other assets	20,429		(11,017)
Other liabilities	5,533		9,847
Net cash provided by operating activities	294,938		77,671
Cash flows from investing activities
Purchases of investment securities available-for-sale	(174,710)		(200,285)
Proceeds from maturities, calls, and principal paydown of investment securities available-for-sale	49,235		95,429
Proceeds from SBA reimbursement/sale of foreclosed assets, net	—		333
Maturities of certificates of deposits with other banks	—		500
Loan and lease originations and principal collections, net	(689,804)		(449,892)
Purchases of equity security investments	(1,206)		—
Purchases of equity method investments	(4,323)		—
Proceeds from sale of equity method investments	—		125,321
Proceeds from sale of premises and equipment	—		2
Purchases of premises and equipment, net	(16,968)		(28,231)
Net cash used by investing activities	(837,776)		(456,823)

See Notes to Unaudited Condensed Consolidated Financial Statements

6

Live Oak Bancshares, Inc.

Condensed Consolidated Statements of Cash Flows (Continued)

For the six months ended June 30, 2023 and 2022 (unaudited)

(Dollars in thousands)

	Six Months Ended June 30,
	2023		2022
Cash flows from financing activities
Net increase in deposits	$	994,183	$	1,043,700
Proceeds from borrowings	2,906,039		12,051
Repayment of borrowings	(2,960,925)		(244,131)
Stock option exercises	664		1,153
Employee stock purchase program	631		534
Withholding cash issued in lieu of restricted stock and other	(3,602)		(3,091)
Shareholder dividend distributions	(2,657)		(2,627)
Net cash provided by financing activities	934,333		807,589
Net increase in cash and cash equivalents	391,495		428,437
Cash and cash equivalents, beginning	416,636		203,750
Cash and cash equivalents, ending	$	808,131	$	632,187
Supplemental disclosures of cash flow information
Interest paid	$	153,724	$	34,850
Income tax paid, net	5,233		6,778
Supplemental disclosures of noncash operating, investing, and financing activities
Unrealized holding losses on investment securities available-for-sale, net of taxes	$	(5,262)	$	(61,229)
Transfers from loans and leases to foreclosed real estate and other repossessions or SBA receivable	14,908		11,278
Net transfers between foreclosed real estate and SBA receivable	—		55
Transfer of loans held for sale to loans and leases held for investment	56,852		88,915
Transfer of loans and leases held for investment to loans held for sale	284,081		227,705
Transfer from retained earnings to other assets for pro rata portion of equity method investee stock compensation expense	578		207
Equity method investment commitments	7,721		10,566
Equity security investment commitments	—		415

See Notes to Unaudited Condensed Consolidated Financial Statements

7

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1. Basis of Presentation

Nature of Operations

Live Oak Bancshares, Inc. (collectively with its subsidiaries including Live Oak Banking Company, the “Company”) is a bank holding company headquartered in Wilmington, North Carolina incorporated under the laws of the State of North Carolina in December 2008. The Company conducts business operations primarily through its commercial bank subsidiary, Live Oak Banking Company (the “Bank”). The Bank was organized and incorporated under the laws of the State of North Carolina on February 25, 2008 and commenced operations on May 12, 2008. The Bank specializes in providing lending and deposit related services to small businesses nationwide. A significant portion of the loans originated by the Bank are guaranteed by the Small Business Administration (“SBA”) under the 7(a) Loan Program and the U.S. Department of Agriculture’s (“USDA”) Rural Energy for America Program ("REAP"), Water and Environmental Program (“WEP”), Business & Industry (“B&I”) and Community Facilities loan programs. These loans are to small businesses and professionals with what the Bank believes are lower risk characteristics. Industries, or “verticals,” on which the Bank focuses its lending efforts are carefully selected. The Bank also lends more broadly to select borrowers outside of those verticals.

The Company’s wholly owned subsidiaries are the Bank, Government Loan Solutions, Inc. (“GLS”), Live Oak Grove, LLC (“Grove”), Live Oak Ventures, Inc. (“Live Oak Ventures”), and Canapi Advisors, LLC (“Canapi Advisors”). GLS is a management and technology consulting firm that advises and offers solutions and services to participants in the government guaranteed lending sector. GLS primarily provides services in connection with the settlement, accounting, and securitization processes for government guaranteed loans, including loans originated under the SBA 7(a) loan programs and USDA guaranteed loans. The Grove provides Company employees and business visitors 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 Bank’s wholly owned subsidiaries are Live Oak Number One, Inc., Live Oak Clean Energy Financing LLC (“LOCEF”), Live Oak Private Wealth, LLC (“Live Oak Private Wealth”) and Tiburon Land Holdings, LLC (“TLH”). Live Oak Number One, Inc. holds properties foreclosed on by the Bank. LOCEF provides financing to entities for renewable energy applications. Live Oak Private Wealth provides high-net-worth individuals and families with strategic wealth and investment management services. 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. TLH was formed in the third quarter of 2022 to hold land adjacent to the Bank's headquarters consisting of wetlands and other protected property for the use and enjoyment of the Bank's employees and customers.

The Company generates revenue primarily from net interest income and secondarily through the origination and sale of government guaranteed loans. Income from the retention of loans is comprised principally of interest income. Income from the sale of loans is comprised of loan servicing revenue and revaluation of related servicing rights along with net gains on sales of loans. Offsetting these revenues are the cost of funding sources, provision for 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 predominantly in its fintech segment.

8

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

General

In the opinion of management, all adjustments necessary for a fair presentation of the financial position and results of operations for the periods presented have been included, and all intercompany transactions have been eliminated in consolidation. Results of operations for the three and six months ended June 30, 2023 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2023. The Condensed Consolidated Balance Sheet as of December 31, 2022 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, 2022, filed with the Securities Exchange Commission (“SEC”) on February 23, 2023 (SEC File No. 001-37497) (the “2022 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 2022 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 2022 Form 10-K.

The preparation of financial statements in conformity with United States (“US”) generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates.

Amounts in all tables in the Notes to Unaudited Condensed Consolidated Financial Statements have been presented in thousands, except percentage, time period, share and per share data or where otherwise indicated.

Business Segments

Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Management has determined that the Company has two reportable operating segments: Banking and Fintech, as discussed more fully in Note 11. Segments.

Changes in Accounting Estimates

During the first quarter of 2023, the Company refined its allowance for credit losses (“ACL”) methodology for estimating probability of default (“PD”) and loss given default (“LGD”). Additionally, the Company began using internally calculated prepayment rates based on its historical information. These changes, based on the continued maturity of internal data, resulted in a $1.5 million increase in the ACL in the first quarter of 2023.

The Company also refined its methodology for estimating its reserve on unfunded loan commitments by incorporating historical utilization rates on unused lines of credit and updating probability assumptions related to construction loan commitments. These changes resulted in a $2.4 million increase in the reserve on unfunded commitments in the first quarter of 2023.

These refinements have been accounted for as changes in accounting estimates under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 250, Accounting Changes and Error Corrections, with prospective application beginning in the period of change.

9

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 2. Recent Accounting Pronouncements

In March 2020, the FASB issued Accounting Standards Update (“ASU”) No. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”). ASU 2020-04 provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. In December 2022, ASU 2022-06 “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848” was issued deferring the sunset date of Topic 848. With the amendments, the ASU can be adopted by the Company as of March 12, 2020, through December 31, 2024. The Company does not believe these standards will have a material impact on its consolidated financial statements. To address the discontinuance of LIBOR, the Company stopped originating variable LIBOR-based loans effective December 31, 2021 and started to negotiate loans using the preferred replacement index, the Secured Overnight Financing Rate (“SOFR”) or a relevant duration U.S. Treasury rate. 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. As of June 30, 2023, the Company has transitioned nearly all its LIBOR-based loan exposure to an alternative index. The remaining LIBOR-based loans will transition to an alternative index at their next repricing date.

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 Company adopted the standard on January 1, 2023 using the modified retrospective method resulting in a net increase to retained earnings of $676 thousand.

In June 2022, the FASB issued ASU No. 2022-03 “Fair Value Measurement (Topic 820) Fair Value Measurement of Equity Securities Subject to Contractual Restrictions” (“ASU 2022-03”). ASU 2022-03 indicates a contractual sale restriction on equity securities should not be considered in measuring fair value, however, disclosure should be made about such restrictions. The amendments in this standard will be effective for the Company on January 1, 2024. The Company does not believe this standard will have a material impact on its consolidated financial statements.

In March 2023, the FASB issued ASU No. 2023-02 “Investments-Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method” (“ASU 2023-02”). ASU 2023-02 permits companies to account for tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method if certain conditions are met. The amendments in this standard will be effective for the Company on January 1, 2024. The Company does not believe this standard will have a material impact on its consolidated financial statements.

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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 June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Basic earnings per share:
Net income	$	17,544	$	97,039	$	17,942	$	131,548
Weighted-average basic shares outstanding	44,327,474		43,824,707		44,242,785		43,763,681
Basic earnings per share	$	0.40	$	2.22	$	0.41	$	3.01
Diluted earnings per share:
Net income, for diluted earnings per share	$	17,544	$	97,039	$	17,942	$	131,548
Total weighted-average basic shares outstanding	44,327,474		43,824,707		44,242,785		43,763,681
Add effect of dilutive stock options and restricted stock grants	507,615		978,571		657,538		1,252,082
Total weighted-average diluted shares outstanding	44,835,089		44,803,278		44,900,323		45,015,763
Diluted earnings per share	$	0.39	$	2.16	$	0.40	$	2.92
Anti-dilutive stock options and restricted shares	2,096,220		869,753		2,096,220		869,753

Note 4. Securities

Available-for-Sale

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

June 30, 2023	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
US government agencies	$	31,032	$	—	$	536	$	30,496
Mortgage-backed securities	1,226,789		107		127,759		1,099,137
Municipal bonds	3,212		—		177		3,035
Other debt securities	500		—		22		478
Total	$	1,261,533	$	107	$	128,494	$	1,133,146

December 31, 2022
US government agencies	$	16,080	$	—	$	412	$	15,668
Mortgage-backed securities	1,116,387		270		121,083		995,574
Municipal bonds	3,223		—		246		2,977
Other debt securities	500		—		—		500
Total	$	1,136,190	$	270	$	121,741	$	1,014,719

During the three and six months ended June 30, 2023, two mortgage-backed securities totaling $2.7 million were settled. During the three months ended June 30, 2022, nine mortgage-backed securities totaling $18.8 million were settled. During the six months ended June 30, 2022, eighteen mortgage-backed securities totaling $32.7 million were settled.

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Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Accrued interest receivable on available-for-sale securities totaled $3.4 million and $2.9 million at June 30, 2023 and December 31, 2022, 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
June 30, 2023	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
US government agencies	$	23,832	$	246	$	6,664	$	290	$	30,496	$	536
Mortgage-backed securities	346,178		12,368		742,007		115,391		1,088,185		127,759
Municipal bonds	—		—		3,035		177		3,035		177
Other debt securities	478		22		—		—		478		22
Total	$	370,488	$	12,636	$	751,706	$	115,858	$	1,122,194	$	128,494

	Less Than 12 Months				12 Months or More				Total
December 31, 2022	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
US government agencies	$	15,668	$	412	$	—	$	—	$	15,668	$	412
Mortgage-backed securities	513,639		29,060		456,972		92,023		970,611		121,083
Municipal bonds	2,884		241		93		5		2,977		246
Total	$	532,191	$	29,713	$	457,065	$	92,028	$	989,256	$	121,741

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 June 30, 2023, there were 359 mortgage-backed securities, two US government agency securities and two municipal bonds in unrealized loss positions for greater than 12 months. There were 88 mortgage-backed securities, seven US government agency securities, and one other debt security in unrealized loss positions for less than 12 months. Unrealized losses at December 31, 2022 were comprised of 185 mortgage-backed securities and one municipal bond in unrealized loss positions for greater than 12 months and 236 mortgage-backed securities, five US government agency securities and one municipal bond 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 issuers' 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 June 30, 2023 and December 31, 2022 were backed by U.S. government sponsored enterprises (“GSEs”).

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Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

The following is a summary of investment securities by maturity:

	June 30, 2023
	Available-for-Sale
	Amortized Cost		Fair Value
US government agencies
Within one year	$	8,000	$	7,939
One to five years	20,421		20,027
Five to ten years	2,611		2,530
Total	31,032		30,496
Mortgage-backed securities
Within one year	629		626
One to five years	173,870		163,603
Five to ten years	257,837		227,520
After 10 years	794,453		707,388
Total	1,226,789		1,099,137
Municipal bonds
Five to ten years	3,114		2,951
After 10 years	98		84
Total	3,212		3,035
Other debt securities
Within one year	500		478
Total	500		478
Total	$	1,261,533	$	1,133,146

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 June 30, 2023 or December 31, 2022.

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.

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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 June 30, 2023 and December 31, 2022 is reflected in the following table:

	June 30, 2023				December 31, 2022
	Amount		Ownership %		Amount		Ownership %
Apiture, Inc.	$	57,658	40.3	%	$	60,320	40.3	%
Canapi Ventures SBIC Fund, LP (1) (5)	18,281		2.9	%	19,246		2.9	%
Canapi Ventures Fund, LP (2) (5)	2,279		1.5	%	2,382		1.5	%
Canapi Ventures Fund II, LP (3) (5)	7,335		1.6	%	7,412		1.6	%
Canapi Ventures SBIC Fund II, LP (4) (5)	7,856		2.9	%	7,981		3.7	%
Other Fintech investments in private companies (6)	—		—	%	241		4.3	%
Other (7)	20,554		Various		12,476		Various
Total	$	113,963			$	110,058

(1)	Includes unfunded commitments of $5.4 million and $5.5 million as of June 30, 2023 and December 31, 2022, respectively.
(2)	Includes unfunded commitments of $613 thousand and $617 thousand as of June 30, 2023 and December 31, 2022, respectively.
(3)	Includes unfunded commitments of $6.9 million as of June 30, 2023 and December 31, 2022.
(4)	Includes unfunded commitments of $7.6 million and $7.5 million as of June 30, 2023 and December 31, 2022, respectively.
(5)	Investee is accounted for under equity method due to the Company's participation as an investment advisor.
(6)	As of December 31, 2022, Other Fintech investments include Kwipped, Inc. As of June 30, 2023, the investment has been moved to equity security as the preferred shares do not qualify as in-substance common stock.
(7)	As of June 30, 2023, Other investments include low income housing tax credit (“LIHTC”) in Estrella Landing Apartments LLC (“Estrella Landing”), in which the company holds a 99.9% limited member interest. Also included in Other investments are solar income tax credit investments in Green Sun Tenant LLC (“Green Sun”), SVA 2021-2 TE Holdco LLC (“Sun Vest”) and EG5 CSP1 Holding LLC (“HEP”), which the Company holds a 99.0% limited member interest in all investments. Also included are Cape Fear Collective Impact Opportunity 1 LLC (“Cape Fear Collective”), Cape Fear Collective Impact Opportunity 2 LLC (“Cape Fear Collective 2”) and OTR Fund I, LLC ("OTR") which the Company holds 99.0%, 32.3%, and 11.5% of limited member interests, respectively. As of June 30, 2023, there was an unfunded commitment of $7.7 million for Estrella Landing. The Company also has an unrecorded commitment related to a solar income tax credit investment for $18.1 million. As of December 31, 2022, Other investments include Green Sun, Sun Vest, and HEP, which the Company holds a 99.0% limited member interest in all investments. Also included within Other investments are Cape Fear Collective and Cape Fear Collective 2, which the Company holds 99.0% and 32.3% of limited member interests, respectively. As of December 31, 2022 an unfunded commitment of $2.6 million was recorded as a liability for HEP, and as of June 30, 2023, this commitment has been funded. Managing control of the above investments resides with the managing members.

14

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Equity Security Accounting

The carrying amount of the Company’s investments in non-marketable equity securities with no readily determinable fair value and amounts recognized in earnings on a cumulative basis as of June 30, 2023 and as of and for the six months ended June 30, 2023 and 2022 is reflected in the following table:

			As of and for the six month period ended
	Cumulative Adjustments		June 30, 2023		June 30, 2022
Carrying value (1)			$	77,586	$	72,760
Carrying value adjustments:
Impairment	$	—	—		—
Upward changes for observable prices (2)	50,492		—		1,492
Downward changes for observable prices	(86)		—		—
Net upward change	$	50,406	$	—	$	1,492

(1)	Includes $2.8 million and $3.2 million in unfunded commitments as of June 30, 2023, and June 30, 2022, respectively.
(2)	Cumulative adjustments excludes $13.9 million in realized gains for sale of an investment in the second quarter of 2021.

For the three and six months ended June 30, 2023, the Company recognized unrealized losses on all equity securities held at the reporting date of $20 thousand and $4 thousand, respectively. For the three and six months ended June 30, 2022, the Company recognized unrealized gains on all equity securities held at the reporting date of $1.5 million and $1.4 million, respectively.

Variable Interest Entities

Variable interests are defined as contractual ownership or other interests in an entity that change with fluctuations in the fair value of an entity's net asset value (a “VIE”). The primary beneficiary consolidates the VIE. The primary beneficiary is defined as the enterprise that has both the power to direct the activities of the VIE that most significantly impact the entity's economic performance and the obligation to absorb losses or the right to receive benefits that could be significant to the VIE.

Solar Renewable Energy Tax Credit Investments

The Company has equity interests in several limited liability companies that own and operate solar renewable energy projects which are accounted for as equity method investments. Over the course of the investments, the Company will receive federal and state tax credits, tax-related benefits, and excess cash available for distribution, if any. The Company may be called to sell its interest in the limited partnerships through a call option once all investment tax credits have been recognized.

Affordable Housing

The Company has an equity investment in a limited liability company (“LIHTC”) that qualifies as an affordable housing project, managed by an unrelated general partner. The Company accounts for the investment under the proportional amortization method. Under this method an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance as a component of income tax expense. The Company also has equity interests in two limited liability companies that invest in the acquisition, rehabilitation, or new construction of local qualified housing projects which are accounted for as equity method investments.

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Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Canapi Funds

The Company’s limited partnership investments in the Canapi Funds focus on providing venture capital to new and emerging financial technology companies. After initial commitment and over the course of the investment period, the Company will make capital contributions and receive profit and return of capital distributions as a result of fund performance until the funds wind down.

Non-marketable and Other Equity Investments

The Company also has limited interests in several non-marketable funds, including Small Business Investment Company (“SBIC”) and venture capital funds, which are accounted for as equity security investments. After the initial commitment and over the course of the investment period, the Company will make capital contributions and receive profit and return of capital distributions as a result of fund performance until the funds wind down. While the partnership agreements allow the Company to remove the general partner, this right is not deemed to be substantive as the general partner can only be removed for cause. All investments are generally non-redeemable and distributions are expected to be received through the liquidation of the underlying investments throughout the life of the investment fund. Investments may only be sold or transferred subject to the notice and approval provisions of the underlying investment agreement.

The above investments meet the criteria of a VIE, however, the Company is not the primary beneficiary of the entities, as it does not have the power to direct the activities that most significantly impact the economic performance of the entities.

The Company’s investment in the unconsolidated VIEs are carried in other assets and the Company’s unfunded capital and other commitments related to the unconsolidated VIEs are carried in other liabilities on the Unaudited Condensed Consolidated Balance Sheets.

The Company’s maximum exposure to loss from unconsolidated VIEs includes the investment recorded on the Company’s Unaudited Condensed Consolidated Balance Sheets. For solar ITC investments, the balance sheet figures are net of any impairment recognized, and includes previously recorded tax credits which remain subject to recapture by taxing authorities based on compliance features required to be met at the project level. While the Company believes the potential for loss from these investments is remote, the maximum exposure for solar tax credit investments was determined by assuming a scenario where related tax credits were recaptured.

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Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

The following table provides a summary of the VIEs that the Company has not consolidated as of June 30, 2023 and December 31, 2022:

June 30, 2023	Investment Carrying Amount		Maximum Exposure to Loss		Liability Recognized		Classification
Solar tax credit investments	$	4,079	$	19,203	$	—	Other assets (1)
Affordable housing	15,964		15,964		7,721		Other assets & other liabilities (2)
Canapi Funds	35,751		35,751		20,525		Other assets & other liabilities
Non-marketable and other equity investments	8,986		8,986		2,769		Other assets & other liabilities

December 31, 2022	Investment Carrying Amount		Maximum Exposure to Loss		Liability Recognized		Classification
Solar tax credit investments	$	5,221	$	24,295	$	2,641	Other assets & other liabilities(3)
Affordable housing	7,255		7,255		—		Other assets
Canapi Funds	37,021		37,021		20,474		Other assets & other liabilities
Non-marketable and other equity investments	8,509		8,509		3,033		Other assets & other liabilities

(1)	Maximum exposure to loss represents $4.1 million of current investments and a scenario in which related tax credits are recaptured, collectively totaling $19.2 million.
(2)	Maximum exposure to loss represents $16.0 million of investments. As there are no tax credits allocated in the current year, there is no increase to the maximum exposure to loss related to recaptured tax credits on the $8.8 million LIHTC investment.
(3)	Maximum exposure to loss represents $5.2 million of current investments and a scenario in which related tax credits are recaptured, collectively totaling $24.3 million.

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Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 5. Loans and Leases Held for Investment and Credit Quality

The following tables present total loans and leases held for investment and an aging analysis for the Company’s portfolio segments. Loans and leases are considered past due if the required principal and interest payments have not been received as of the date such payments were due.

	Current or Less than 30 Days Past Due		30-89 Days Past Due		90 Days or More Past Due		Total Past Due		Total Carried at Amortized Cost		Loans Accounted for Under the Fair Value Option(1)		Total Loans and Leases
June 30, 2023
Commercial & Industrial
Small Business Banking	$	1,800,842	$	8,096	$	28,490	$	36,586	$	1,837,428	$	160,621	$	1,998,049
Specialty Lending	1,253,649		—		1,865		1,865		1,255,514		23,100		1,278,614
Energy & Infrastructure	495,580		3,854		3,082		6,936		502,516		47,580		550,096
Paycheck Protection Program	8,068		—		—		—		8,068		—		8,068
Total	3,558,139		11,950		33,437		45,387		3,603,526		231,301		3,834,827
Construction & Development
Small Business Banking	479,107		—		—		—		479,107		—		479,107
Specialty Lending	108,210		—		—		—		108,210		—		108,210
Energy & Infrastructure	6,779		—		—		—		6,779		—		6,779
Total	594,096		—		—		—		594,096		—		594,096
Commercial Real Estate
Small Business Banking	2,199,359		9,789		22,227		32,016		2,231,375		148,696		2,380,071
Specialty Lending	353,604		12,232		—		12,232		365,836		2,153		367,989
Energy & Infrastructure	118,230		—		3,072		3,072		121,302		18,565		139,867
Total	2,671,193		22,021		25,299		47,320		2,718,513		169,414		2,887,927
Commercial Land
Small Business Banking	493,789		—		1,917		1,917		495,706		41,066		536,772
Total	493,789		—		1,917		1,917		495,706		41,066		536,772
Total	$	7,317,217	$	33,971	$	60,653	$	94,624	$	7,411,841	$	441,781	$	7,853,622
Net deferred fees													(17,224)
Loans and Leases, Net													$	7,836,398
Guaranteed Balance	$	2,655,758	$	11,414	$	47,265	$	58,679	$	2,714,437	$	74,225	$	2,788,662
% Guaranteed	36.3%		33.6%		77.9%		62.0%		36.6%		16.8%		35.5%

18

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

	Current or Less than 30 Days Past Due		30-89 Days Past Due		90 Days or More Past Due		Total Past Due		Total Carried at Amortized Cost		Loans Accounted for Under the Fair Value Option(1)		Total Loans and Leases
December 31, 2022
Commercial & Industrial
Small Business Banking	$	1,719,165	$	21,589	$	16,221	$	37,810	$	1,756,975	$	182,348	$	1,939,323
Specialty Lending	1,022,615		398		266		664		1,023,279		29,084		1,052,363
Energy & Infrastructure	420,447		—		3,082		3,082		423,529		50,094		473,623
Paycheck Protection Program	13,134		—		—		—		13,134		—		13,134
Total	3,175,361		21,987		19,569		41,556		3,216,917		261,526		3,478,443
Construction & Development
Small Business Banking	471,243		1,500		—		1,500		472,743		—		472,743
Specialty Lending	104,069		—		—		—		104,069		—		104,069
Energy & Infrastructure	13,753		—		—		—		13,753		—		13,753
Total	589,065		1,500		—		1,500		590,565		—		590,565
Commercial Real Estate
Small Business Banking	2,137,028		12,082		5,771		17,853		2,154,881		166,595		2,321,476
Specialty Lending	319,419		—		—		—		319,419		2,050		321,469
Energy & Infrastructure	136,706		—		3,072		3,072		139,778		22,123		161,901
Total	2,593,153		12,082		8,843		20,925		2,614,078		190,768		2,804,846
Commercial Land
Small Business Banking	429,014		1,663		1,917		3,580		432,594		42,164		474,758
Total	429,014		1,663		1,917		3,580		432,594		42,164		474,758
Total	$	6,786,593	$	37,232	$	30,329	$	67,561	$	6,854,154	$	494,458	$	7,348,612
Net deferred fees													(4,434)
Loans and Leases, Net													$	7,344,178
Guaranteed Balance	$	2,657,770	$	20,199	$	26,026	$	46,225	$	2,703,995	$	67,268	$	2,771,263
% Guaranteed	39.2%		54.3%		85.8%		68.4%		39.5%		13.6%		37.7%

(1)Retained portions of government guaranteed loans sold prior to January 1, 2021 are carried at fair value under FASB ASC Subtopic 825-10, Financial Instruments: Overall. See Note 9. Fair Value of Financial Instruments for additional information.

19

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 2022 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
	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term		Total(1)
June 30, 2023
Small Business Banking
Risk Grades 1 - 4	$	440,780	$	1,453,858	$	1,301,691	$	734,205	$	387,068	$	341,376	$	68,046	$	4,361	$	4,731,385
Risk Grade 5	1,573		41,286		27,317		39,763		36,410		50,466		15,666		1,055		213,536
Risk Grades 6 - 8	—		7,790		13,165		14,139		24,268		38,225		1,108		—		98,695
Total	442,353		1,502,934		1,342,173		788,107		447,746		430,067		84,820		5,416		5,043,616
Specialty Lending
Risk Grades 1 - 4	352,528		548,744		332,847		112,710		17,730		5,930		160,775		9,965		1,541,229
Risk Grade 5	—		43,148		45,208		16,882		12,439		4,042		23,930		7,500		153,149
Risk Grades 6 - 8	—		—		20,088		1,328		5,002		166		8,598		—		35,182
Total	352,528		591,892		398,143		130,920		35,171		10,138		193,303		17,465		1,729,560
Energy & Infrastructure
Risk Grades 1-4	113,399		176,727		152,760		39,360		50,716		28,752		12,822		—		574,536
Risk Grade 5	—		4,024		2,634		13,517		7,104		10,358		—		—		37,637
Risk Grades 6 - 8	—		—		6,436		3,572		—		8,416		—		—		18,424
Total	113,399		180,751		161,830		56,449		57,820		47,526		12,822		—		630,597
Paycheck Protection Program
Risk Grades 1 - 4	—		—		4,151		3,917		—		—		—		—		8,068
Total	—		—		4,151		3,917		—		—		—		—		8,068
Total	$	908,280	$	2,275,577	$	1,906,297	$	979,393	$	540,737	$	487,731	$	290,945	$	22,881	$	7,411,841
Year-To-Date Gross Charge-offs
Small Business Banking	$	—	$	1,426	$	621	$	255	$	586	$	513	$	50	$	—	$	3,451
Specialty Lending	—		—		4,315		514		—		—		888		—		5,717
Total	$	—	$	1,426	$	4,936	$	769	$	586	$	513	$	938	$	—	$	9,168

20

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

	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)
December 31, 2022
Small Business Banking
Risk Grades 1 - 4	$	1,427,182	$	1,400,726	$	795,647	$	426,401	$	217,893	$	204,933	$	65,455	$	1,738	$	4,539,975
Risk Grade 5	15,942		17,745		40,202		45,712		26,124		27,212		13,210		204		186,351
Risk Grades 6 - 8	1,806		4,277		17,845		23,470		14,094		27,215		1,638		522		90,867
Total	1,444,930		1,422,748		853,694		495,583		258,111		259,360		80,303		2,464		4,817,193
Specialty Lending
Risk Grades 1 - 4	635,079		355,785		144,545		25,849		6,574		788		153,062		31,504		1,353,186
Risk Grade 5	7,341		33,272		12,329		10,201		4,399		—		6,619		248		74,409
Risk Grades 6 - 8	—		11,433		416		5,577		166		—		1,343		237		19,172
Total	642,420		400,490		157,290		41,627		11,139		788		161,024		31,989		1,446,767
Energy & Infrastructure
Risk Grades 1 - 4	199,338		176,855		39,600		51,190		23,374		19,694		12,751		351		523,153
Risk Grade 5	4,024		4,409		500		6,976		4,706		5,142		—		—		25,757
Risk Grades 6 - 8	—		3,082		16,589		—		8,479		—		—		—		28,150
Total	203,362		184,346		56,689		58,166		36,559		24,836		12,751		351		577,060
Paycheck Protection Program
Risk Grades 1 - 4	—		7,421		5,713		—		—		—		—		—		13,134
Total	—		7,421		5,713		—		—		—		—		—		13,134
Total	$	2,290,712	$	2,015,005	$	1,073,386	$	595,376	$	305,809	$	284,984	$	254,078	$	34,804	$	6,854,154

(1) Excludes $441.8 million and $494.5 million of loans accounted for under the fair value option as of June 30, 2023 and December 31, 2022, respectively.

The following tables present guaranteed and unguaranteed loan and lease balances by asset quality indicator:

June 30, 2023	Loan and Lease Balance(1)		Guaranteed Balance		Unguaranteed Balance		% Guaranteed
Risk Grades 1 - 4	$	6,855,218	$	2,487,302	$	4,367,916	36.3	%
Risk Grade 5	404,322		133,822		270,500		33.1
Risk Grades 6 - 8	152,301		93,313		58,988		61.3
Total	$	7,411,841	$	2,714,437	$	4,697,404	36.6	%

December 31, 2022	Loan and Lease Balance(1)		Guaranteed Balance		Unguaranteed Balance		% Guaranteed
Risk Grades 1 - 4	$	6,429,448	$	2,508,229	$	3,921,219	39.0	%
Risk Grade 5	286,517		115,573		170,944		40.3
Risk Grades 6 - 8	138,189		80,193		57,996		58.0
Total	$	6,854,154	$	2,703,995	$	4,150,159	39.5	%

(1) Excludes $441.8 million and $494.5 million of loans accounted for under the fair value option as of June 30, 2023 and December 31, 2022, respectively.

21

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Nonaccrual Loans and Leases

As of June 30, 2023 and December 31, 2022 there were no loans greater than 90 days past due and still accruing. There was no interest income recognized on nonaccrual loans and leases during the three and six months ended June 30, 2023 and 2022. Accrued interest receivable on loans totaled $51.8 million and $46.5 million at June 30, 2023 and December 31, 2022, respectively, and is included in other assets in the accompanying Unaudited Condensed Consolidated Balance Sheets.

Nonaccrual loans and leases held for investment as of June 30, 2023 and December 31, 2022 are as follows:

June 30, 2023	Loan and Lease Balance(1)		Guaranteed Balance		Unguaranteed Balance		Unguaranteed Exposure with No ACL
Commercial & Industrial
Small Business Banking	$	31,105	$	27,185	$	3,920	$	407
Specialty Lending	15,824		4,619		11,205		—
Energy & Infrastructure	6,936		2,794		4,142		2,629
Total	53,865		34,598		19,267		3,036
Commercial Real Estate
Small Business Banking	35,410		23,529		11,881		5,651
Specialty Lending	12,232		—		12,232		—
Energy & Infrastructure	3,072		2,799		273		—
Total	50,714		26,328		24,386		5,651
Commercial Land
Small Business Banking	6,642		5,396		1,246		196
Total	6,642		5,396		1,246		196
Total	$	111,221	$	66,322	$	44,899	$	8,883

December 31, 2022	Loan and Lease Balance(1)		Guaranteed Balance		Unguaranteed Balance		Unguaranteed Exposure with No ACL
Commercial & Industrial
Small Business Banking	$	22,321	$	19,302	$	3,019	$	407
Specialty Lending	3,647		384		3,263		—
Energy & Infrastructure	3,082		2,794		288		288
Total	29,050		22,480		6,570		695
Commercial Real Estate
Small Business Banking	34,520		23,830		10,690		3,611
Energy & Infrastructure	3,072		2,799		273		—
Total	37,592		26,629		10,963		3,611
Commercial Land
Small Business Banking	6,750		5,499		1,251		196
Total	6,750		5,499		1,251		196
Total	$	73,392	$	54,608	$	18,784	$	4,502

(1)Excludes nonaccrual loans accounted for under the fair value option. See Note 9. Fair Value of Financial Instruments for additional information.

22

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

When a loan or lease is placed on nonaccrual status, any accrued interest is reversed from loan interest income. The following table summarizes the amount of accrued interest reversed during the periods presented:

	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Commercial & Industrial	$	963	$	141	$	1,342	$	310
Commercial Real Estate	294		4		467		182
Commercial Land	—		—		—		105
Total	$	1,257	$	145	$	1,809	$	597

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 June 30, 2023 and December 31, 2022:

	Total Collateral Dependent Loans						Unguaranteed Portion
June 30, 2023	Real Estate		Business Assets		Other		Real Estate		Business Assets		Other		Allowance for Credit Losses
Commercial & Industrial
Small Business Banking	$	5,549	$	—	$	—	$	1,085	$	—	$	—	$	490
Specialty Lending	—		7,964		—		—		7,964		—		5,858
Energy & Infrastructure	3,022		—		—		227		—		—		—
Total	8,571		7,964		—		1,312		7,964		—		6,348
Commercial Real Estate
Small Business Banking	16,963		—		—		8,093		—		—		420
Total	16,963		—		—		8,093		—		—		420
Commercial Land
Small Business Banking	4,917		—		—		999		—		—		16
Total	4,917		—		—		999		—		—		16
Total	$	30,451	$	7,964	$	—	$	10,404	$	7,964	$	—	$	6,784

	Total Collateral Dependent Loans						Unguaranteed Portion
December 31, 2022	Real Estate		Business Assets		Other		Real Estate		Business Assets		Other		Allowance for Credit Losses
Commercial & Industrial
Small Business Banking	$	2,730	$	—	$	—	$	414	$	—	$	—	$	—
Specialty Lending	—		371		—		—		371		—		291
Energy & Infrastructure	16,378		—		—		13,583		—		—		—
Total	19,108		371		—		13,997		371		—		291
Commercial Real Estate
Small Business Banking	15,286		—		—		6,440		—		—		152
Total	15,286		—		—		6,440		—		—		152
Commercial Land
Small Business Banking	1,743		—		—		202		—		—		—
Total	1,743		—		—		202		—		—		—
Total	$	36,137	$	371	$	—	$	20,639	$	371	$	—	$	443

23

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 2022 Form 10-K for a description of the methodologies used to estimate the ACL.

The following table details activity in the ACL by portfolio segment allowance for the periods presented:

Three Months Ended	Commercial & Industrial		Construction & Development		Commercial Real Estate		Commercial Land		Total
June 30, 2023
Beginning Balance	$	72,058	$	6,954	$	25,062	$	4,168	$	108,242
Charge offs	(2,198)		—		(278)		—		(2,476)
Recoveries	558		—		764		—		1,322
Provision	8,989		(526)		4,360		205		13,028
Ending Balance	$	79,407	$	6,428	$	29,908	$	4,373	$	120,116
June 30, 2022
Beginning Balance	$	34,162	$	4,102	$	21,614	$	3,180	$	63,058
Charge offs	(1,812)		—		(433)		(318)		(2,563)
Recoveries	35		—		66		—		101
Provision	8,793		(598)		(3,407)		479		5,267
Ending Balance	$	41,178	$	3,504	$	17,840	$	3,341	$	65,863

Six Months Ended	Commercial & Industrial		Construction & Development		Commercial Real Estate		Commercial Land		Total
June 30, 2023
Beginning Balance	$	64,995	$	5,101	$	22,901	$	3,569	$	96,566
Adoption of ASU 2022-02	(25)		(166)		(83)		(402)		(676)
Charge offs	(8,476)		—		(692)		—		(9,168)
Recoveries	581		—		764		—		1,345
Provision	22,332		1,493		7,018		1,206		32,049
Ending Balance	$	79,407	$	6,428	$	29,908	$	4,373	$	120,116
June 30, 2022
Beginning Balance	$	37,770	$	3,435	$	19,068	$	3,311	$	63,584
Charge offs	(4,635)		—		(433)		(652)		(5,720)
Recoveries	180		—		716		—		896
Provision	7,863		69		(1,511)		682		7,103
Ending Balance	$	41,178	$	3,504	$	17,840	$	3,341	$	65,863

During the three and six months ended June 30, 2023, the ACL increased as a result of continued loan growth, combined with portfolio trends and changes in the macroeconomic outlook. Additionally, during the first quarter of 2023, certain assumptions were refined, drawing more heavily on internal data, in the calculations of PD, LGD, and prepayment rates. These refinements increased the ACL by $1.5 million during the six months ended June 30, 2023. Loss rates are adjusted for twelve month forecasted unemployment followed by a twelve-month straight-line reversion period.

During the three and six month periods ended June 30, 2022, the ACL increased primarily as a result of the charge-offs that contributed to increased loss given default rates. Loss rates are adjusted for twelve month forecasted unemployment followed by a twelve-month straight-line reversion period.

24

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Loan Modifications for Borrowers Experiencing Financial Difficulty

The Company may agree to modify the contractual terms of a loan to a borrower experiencing financial difficulty as a part of ongoing loss mitigation strategies. These modifications may result in an interest rate reduction, term extension, an other-than-insignificant payment delay, or a combination thereof. The Company typically does not offer principal forgiveness.

The following tables summarize the amortized cost basis of loans that were modified during the periods presented.

Three Months Ended June 30, 2023	Other-Than-Insignificant Payment Delay		Term Extension		Interest Rate Reduction		Combination - Term Extension & Payment Delay		% of Total Class of Financing Receivable
Small Business Banking	$	—	$	—	$	—	$	361	0.01	%
Specialty Lending	—		4,427		—		—		0.26
Total	$	—	$	4,427	$	—	$	361	0.27	%

Six Months Ended June 30, 2023	Other-Than-Insignificant Payment Delay		Term Extension		Interest Rate Reduction		Combination - Term Extension & Payment Delay		% of Total Class of Financing Receivable
Small Business Banking	$	—	$	—	$	3,436	$	361	0.08	%
Specialty Lending	—		244		—		4,183		0.26
Energy & Infrastructure	—		13,517		—		—		2.14
Total	$	—	$	13,761	$	3,436	$	4,544	2.48	%

As of June 30, 2023, the Company had commitments to lend additional funds to these borrowers totaling $5.4 million.

The following table presents an aging analysis of loans that were modified on or after January 1, 2023, the date the Company adopted ASU 2022-02, through June 30, 2023.

	Current		30-89 Days Past Due		90 Days or More Past Due		Total Past Due
Small Business Banking	$	3,797	$	—	$	—	$	—
Specialty Lending	4,427		—		—		—
Energy & Infrastructure	13,517		—		—		—
Total	$	21,741	$	—	$	—	$	—

The following tables summarize the financial impacts of loan modifications made to borrowers experiencing financial difficulty during the periods presented.

	Three Months Ended June 30, 2023
	Weighted Average Interest Rate Reduction		Weighted Average Term Extension (in Months)
Small Business Banking	—	%	161
Specialty Lending	—		72

	Six Months Ended June 30, 2023
	Weighted Average Interest Rate Reduction		Weighted Average Term Extension (in Months)
Small Business Banking	1.45	%	161
Specialty Lending	—		72
Energy & Infrastructure	—		12

25

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

There were no loans that were modified on or after January 1, 2023, the date the Company adopted ASU 2022-02, through June 30, 2023 that subsequently defaulted during the periods presented.

The Company’s ACL is estimated using lifetime historical loan performance adjusted to reflect current conditions and reasonable and supportable forecasts. Upon determination that a modified loan, or portion of a modified loan, has subsequently been deemed uncollectible, the uncollectible portion is written off. The amortized cost basis is reduced by the uncollectible amount and the ACL is adjusted by the same amount. As a result, the impact of loss mitigation strategies is captured in the estimates of PD and LGD.

Troubled Debt Restructurings

The following tables present the types of loans modified as troubled debt restructurings (“TDRs”):

	Three Months Ended June 30, 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
Specialty Lending	—	$	—	1	$	734	—	$	—	—	$	—	1	$	734
Total	—	—		1	734		—	—		—	—		1	734
Total	—	$	—	1	$	734	—	$	—	—	$	—	1	$	734

(1)Excludes loans accounted for under the fair value option. See Note 9. Fair Value of Financial Instruments for additional information.

	Six Months Ended June 30, 2022
	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	—	$	—	3	$	3,119	2	$	1,528	1	$	527	6	$	5,174
Specialty Lending	—	—		1	734		—	—		—	—		1	734
Total	—	—		4	3,853		2	1,528		1	527		7	5,908
Commercial Real Estate
Small Business Banking	—	—		—	—		1	4,847		—	—		1	4,847
Total	—	—		—	—		1	4,847		—	—		1	4,847
Total	—	$	—	4	$	3,853	3	$	6,375	1	$	527	8	$	10,755

(1)Includes one small business banking loan 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.

26

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Concessions made to improve a loan’s performance have varying degrees of success. Two TDRs that were modified within the twelve months ended June 30, 2022 subsequently defaulted during the three months ended June 30, 2022. The two TDR defaults were Commercial & Industrial Small Business Banking loans. One of the defaults had previously been modified to extend amortization and had a recorded investment of $349 thousand at June 30, 2022. The second default had previously been modified for a payment deferral and had a recorded investment of $2.1 million at June 30, 2022. There was one TDR that was modified within the twelve months ended June 30, 2022 that subsequently defaulted during the six months ended June 30, 2022. The TDR had previously been modified for a payment default and had a recorded investment of $633 thousand at June 30, 2022.

Note 6. Leases

Lessor Equipment Leasing

The Company may purchase new equipment for the purpose of leasing such equipment to customers within its verticals. Equipment purchased to fulfill commitments to commercial renewable energy projects is rented out under operating leases while leases of equipment outside of the renewable energy vertical are generally direct financing leases. Accordingly, leased assets under operating leases are included in premises and equipment 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 net investment in direct finance leases included in loans and leases held for investment are as follows:

	June 30, 2023		December 31, 2022
Gross direct finance lease payments receivable	$	3,196	$	4,284
Less – unearned interest	(336)		(479)
Net investment in direct financing leases	$	2,860	$	3,805

Future minimum lease payments under finance leases are as follows:

As of June 30, 2023	Amount
2023	$	811
2024	1,288
2025	980
2026	117
Total	$	3,196

Interest income of $66 thousand and $93 thousand was recognized in the three months ended June 30, 2023 and 2022, respectively. Interest income of $139 thousand and $208 thousand was recognized in the six months ended June 30, 2023 and 2022, 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.

27

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Rental revenue from operating leases is recognized on a straight-line basis over the term of the lease. Rental equipment is recorded at cost and depreciated to an estimated residual value on a straight-line basis over the estimated useful life. The useful lives generally range from 20 to 25 years and residual values generally range from 20% to 50%, however, they are subject to periodic evaluation. Changes in useful lives or residual values will impact depreciation expense and any gain or loss from the sale of used equipment. The estimated useful lives and residual values of the Company's leasing equipment are based on industry disposal experience and the Company's expectations for future sale prices.

If the Company decides to sell or otherwise dispose of rental equipment, it is carried at the lower of cost or fair value less costs to sell or dispose. Repair and maintenance costs that do not extend the lives of the rental equipment are charged to equipment expense at the time the costs are incurred.

As of June 30, 2023 and December 31, 2022, the Company had a net investment of $109.4 million and $114.2 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 June 30, 2023 and December 31, 2022 and accumulated depreciation was $54.0 million and $49.2 million as of June 30, 2023 and December 31, 2022, respectively. Depreciation expense recognized on these assets was $2.4 million for the three months ended June 30, 2023 and 2022. Depreciation expense recognized on these assets was $4.8 million for the six months ended June 30, 2023 and 2022.

Lease income of $2.4 million was recognized in the three months ended June 30, 2023 and 2022. Lease income of $4.8 million and $4.7 million was recognized in the six months ended June 30, 2023 and 2022, respectively.

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

As of June 30, 2023	Amount
2023	$	3,918
2024	8,808
2025	8,935
2026	8,923
2027	8,690
Thereafter	13,562
Total	$	52,836

Note 7. Servicing Assets

Loans serviced for others are not included in the accompanying Unaudited Condensed Consolidated Balance Sheets. The unpaid principal balance of loans serviced for others requiring recognition of a servicing asset was $2.38 billion and $2.67 billion at June 30, 2023 and December 31, 2022, respectively. The unpaid principal balance for all loans serviced for others was $3.81 billion and $3.48 billion at June 30, 2023 and December 31, 2022, respectively.

The following summarizes the activity pertaining to servicing rights:

	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Balance at beginning of period	$	29,357	$	36,286	$	26,323	$	33,574
Additions, net	4,516		1,043		7,194		5,324
Fair value changes:
Due to changes in valuation inputs or assumptions	(501)		(5,436)		2,123		(4,048)
Decay due to increases in principal paydowns or runoff	(2,330)		(3,232)		(4,598)		(6,189)
Balance at end of period	$	31,042	$	28,661	$	31,042	$	28,661

28

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

The fair value of servicing rights was determined using a weighted average discount rate of 17.3% on June 30, 2023 and 16.2% on June 30, 2022. The fair value of servicing rights was determined using a weighted average prepayment speed of 15.8% on June 30, 2023 and 15.9% on June 30, 2022, 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.

Note 8. Borrowings

Total outstanding borrowings consisted of the following:

	June 30, 2023		December 31, 2022
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.	$	28,317	$	33,203
On December 30, 2022, the Company made an advance of $50.0 million on an overnight Fed Funds line of credit that is unsecured with a variable interest rate of 4.65%. The Company paid down the balance in full on January 3, 2023 and there is $100.0 million of available credit remaining at June 30, 2023.	—		50,000
Total borrowings	$	28,317	$	83,203

As of June 30, 2023 the Company’s unused borrowing capacity was $3.77 billion, remaining consistent with March 31, 2023. Unused borrowing capacity consists of access through the Federal Reserve Bank's discount window, available lines of credit with the Federal Home Loan Bank and other correspondent banks as well as access to a repurchase agreement. As of December 31, 2022 the Company's unused borrowing capacity was $3.55 billion based upon securities and loans identified as available for collateral and $4.88 billion based principally upon the stated available limits from sources mentioned above. New borrowing capacity added in the first quarter of 2023 was from the Bank Term Funding Program (“BTFP”). Under the BTFP, advances must be secured by pledging eligible securities owned by the Company on March 12, 2023. BTFP advances can be requested for a term of up to one year at a fixed market rate until the program ends March 11, 2024.

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.

29

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Recurring Fair Value

The table below provides a rollforward of the Level 3 equity warrant asset fair values.

	Three Months Ended June 30,				Six Months Ended June 30,
Equity Warrant Assets	2023		2022		2023		2022
Balance at beginning of period	$	2,187	$	2,328	$	2,210	$	1,672
New equity warrant assets	91		48		244		704
Changes in fair value, net	194		46		18		46
Settlements	(221)		—		(221)		—
Balance at end of period	$	2,251	$	2,422	$	2,251	$	2,422

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

June 30, 2023	Total		Level 1		Level 2		Level 3
Investment securities available-for-sale
US government agencies	$	30,496	$	—	$	30,496	$	—
Mortgage-backed securities	1,099,137		—		1,099,137		—
Municipal bonds(1)	3,035		—		2,951		84
Other debt securities(2)	478		—		—		478
Loans held for investment	441,781		—		—		441,781
Servicing assets(3)	31,042		—		—		31,042
Mutual fund	1,652		—		1,652		—
Equity warrant assets	2,251		—		—		2,251
Total assets at fair value	$	1,609,872	$	—	$	1,134,236	$	475,636

December 31, 2022	Total		Level 1		Level 2		Level 3
Investment securities available-for-sale
US government agencies	$	15,668	$	—	$	15,668	$	—
Mortgage-backed securities	995,574		—		995,574		—
Municipal bonds(1)	2,977		—		2,884		93
Other debt securities	500		—		500		—
Loans held for investment	494,458		—		—		494,458
Servicing assets(3)	26,323		—		—		26,323
Mutual fund	1,656		—		1,656		—
Equity warrant assets	2,210		—		—		2,210
Total assets at fair value	$	1,539,366	$	—	$	1,016,282	$	523,084

(1) During the three and six months ended June 30, 2023, the Company recorded a level 3 fair value adjustment gain of $1 thousand and loss of $9 thousand, respectively. During the three and six months ended June 30, 2022, the Company recorded a level 3 fair value adjustment loss of $1 thousand and $3 thousand, respectively.

(2) During the three and six months ended June 30, 2023, the Company recorded a level 3 fair value adjustment loss of $2 thousand and $22 thousand, respectively. During the three and six months ended June 30, 2022, the Company recorded a level 3 fair value adjustment loss of $10 thousand.

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

30

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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 2022 Form 10-K.

Fair Value Option

Until the first quarter of 2021, the Company had historically elected to account for retained participating interests of all government guaranteed loans under the fair value option in order to align the accounting presentation with the Company’s viewpoint of the economics of the loans. Interest income is recognized in the same manner on loans reported at fair value as on non-fair value loans, except in regard to origination fees and costs which are recognized immediately upon fair value election. Not electing fair value generally results in a larger discount being recorded on the date of the sale. This discount is subsequently accreted into interest income over the underlying loan’s remaining term using the effective interest method. Management made this change of election in alignment with its ongoing effort to reduce volatility and drive more predictable revenue. In accordance with GAAP, any loans for which fair value was previously elected continue to be measured as such.

There were no loans accounted for under the fair value option that were 90 days or more past due and still accruing interest at June 30, 2023 or December 31, 2022. The unpaid principal balance of unguaranteed exposure for nonaccruals was $10.7 million and $7.2 million at June 30, 2023 and December 31, 2022, 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 June 30, 2023 and December 31, 2022.

	June 30, 2023
	Total Loans						Nonaccruals						90 Days or More Past Due
	Fair Value Carrying Amount		Unpaid Principal Balance		Difference		Fair Value Carrying Amount		Unpaid Principal Balance		Difference		Fair Value Carrying Amount		Unpaid Principal Balance		Difference
Fair Value Option Elections
Loans held for investment	$	441,781	$	462,827	$	(21,046)	$	53,716	$	57,561	$	(3,845)	$	35,070	$	37,099	$	(2,030)
	$	441,781	$	462,827	$	(21,046)	$	53,716	$	57,561	$	(3,845)	$	35,070	$	37,099	$	(2,030)

	December 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 investment	$	494,458	$	513,219	$	(18,761)	$	44,890	$	46,993	$	(2,103)	$	24,663	$	26,321	$	(1,658)
	$	494,458	$	513,219	$	(18,761)	$	44,890	$	46,993	$	(2,103)	$	24,663	$	26,321	$	(1,658)

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

	Three Months Ended June 30,				Six Months Ended June 30,
Gains (Losses) on Loans Accounted for under the Fair Value Option	2023		2022		2023		2022
Loans held for sale	$	—	$	(56)	$	—	$	(226)
Loans held for investment	1,728		(4,405)		(2,801)		(3,719)
	$	1,728	$	(4,461)	$	(2,801)	$	(3,945)

31

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Losses related to borrower-specific credit risk were $291 thousand and $3.5 million for the three and six months ended June 30, 2023, respectively, and $711 thousand and $2.8 million for the three and six months ended June 30, 2022, respectively.

The following tables summarize the activity pertaining to loans accounted for under the fair value option.

	Three Months Ended June 30,				Six Months Ended June 30,
Loans held for sale	2023		2022		2023		2022
Balance at beginning of period	$	—	$	25,056	$	—	$	25,310
Repurchases	—		—		—		65
Fair value changes	—		(56)		—		(226)
Settlements	—		(1,548)		—		(1,697)
Balance at end of period	$	—	$	23,452	$	—	$	23,452

	Three Months Ended June 30,				Six Months Ended June 30,
Loans held for investment	2023		2022		2023		2022
Balance at beginning of period	$	466,950	$	600,571	$	494,458	$	645,201
Repurchases	4,063		1,380		15,897		2,905
Fair value changes	1,728		(4,405)		(2,801)		(3,719)
Settlements	(30,960)		(66,902)		(65,773)		(113,743)
Balance at end of period	$	441,781	$	530,644	$	441,781	$	530,644

Non-Recurring Fair Value

The tables below present the recorded amount of assets measured at fair value on a non-recurring basis. The Company has no liabilities recorded at fair value on a non-recurring basis.

June 30, 2023	Total		Level 1		Level 2		Level 3
Collateral-dependent loans	$	7,085	$	—	$	—	$	7,085
Total assets at fair value	$	7,085	$	—	$	—	$	7,085

December 31, 2022	Total		Level 1		Level 2		Level 3
Collateral-dependent loans	$	4,840	$	—	$	—	$	4,840
Total assets at fair value	$	4,840	$	—	$	—	$	4,840

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 2022 Form 10-K.

32

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 June 30, 2023 and December 31, 2022, the significant unobservable inputs used in the fair value measurements were as follows:

June 30, 2023
Level 3 Assets with Significant Unobservable Inputs	Fair Value		Valuation Technique	Significant Unobservable Inputs	Range		Weighted Average(1)
Recurring fair value
Municipal bond	$	84	Discounted expected cash flows	Discount rate	6.7	%	N/A
				Prepayment speed	5.0	%	N/A
Other debt security	$	478	Discounted expected cash flows	Discount rate	7.1	%	N/A
Loans held for investment	$	441,781	Discounted expected cash flows	Loss rate	0.0 % - 65.8 %		2.1	%
				Discount rate	6.3 % - 10.2 %		8.9	%
				Prepayment speed	12.6	%	12.6	%
Equity warrant assets	$	2,251	Black-Scholes option pricing model	Volatility	26.8 % - 90.0 %		36.3	%
				Risk-free interest rate	3.7 % - 3.9 %		3.7	%
				Marketability discount	20.0	%	20.0	%
				Remaining life	3 - 10 years		6.8 years
Non-recurring fair value
Collateral-dependent loans	$	7,085	Discounted appraisals	Appraisal adjustments (2)	10.0 % - 100.0 %		37.7	%

December 31, 2022
Level 3 Assets with Significant Unobservable Inputs	Fair Value		Valuation Technique	Significant Unobservable Inputs	Range		Weighted Average(1)
Recurring fair value
Municipal bond	$	93	Discounted expected cash flows	Discount rate	6.0	%	N/A
				Prepayment speed	5.0	%	N/A
Loans held for investment	$	494,458	Discounted expected cash flows	Loss rate	0.0 % - 79.3 %		1.9	%
				Discount rate	7.5 % - 11.2 %		10.0	%
				Prepayment speed	16.5	%	16.5	%
			Discounted appraisals	Appraisal adjustments	0.0 % - 77.3 %		28.6	%
Equity warrant assets	$	2,210	Black-Scholes option pricing model	Volatility	26.5 % - 90.0 %		34.2	%
				Risk-free interest rate	3.9 % - 4.0 %		3.9	%
				Marketability discount	20.0	%	20.0	%
				Remaining life	3 - 10 years		7.7 years
Non-recurring fair value
Collateral-dependent loans	$	4,840	Discounted appraisals	Appraisal adjustments (2)	10.0 % - 66.5 %		34.2	%

(1)Weighted averages are determined by the relative fair value of the instruments or the relative contribution to the instruments fair value.

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

33

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 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:

June 30, 2023	Carrying Amount		Quoted Price In Active Markets for Identical Assets /Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value
Financial assets
Cash and due from banks	$	808,131	$	808,131	$	—	$	—	$	808,131
Certificates of deposit with other banks	4,000		4,000		—		—		4,000
Loans held for sale	523,776		—		—		546,912		546,912
Loans and leases held for investment, net of allowance for credit losses on loans and leases	7,274,501		—		—		7,572,899		7,572,899
Financial liabilities
Deposits	9,879,111		—		9,625,941		—		9,625,941
Borrowings	28,317		—		—		27,684		27,684

December 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	$	280,239	$	280,239	$	—	$	—	$	280,239
Federal funds sold	136,397		136,397		—		—		136,397
Certificates of deposit with other banks	4,000		4,000		—		—		4,000
Loans held for sale	554,610		—		—		577,254		577,254
Loans and leases held for investment, net of allowance for credit losses on loans and leases	6,753,154		—		—		6,652,936		6,652,936
Financial liabilities
Deposits	8,884,928		—		8,532,615		—		8,532,615
Borrowings	83,203		—		—		82,258		82,258

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.

34

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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:

	June 30, 2023		December 31, 2022
Commitments to extend credit	$	3,120,016	$	2,731,866
Standby letters of credit	24,474		26,454
Airplane purchase agreement commitments	18,000		24,000
Total unfunded off-balance-sheet credit risk	$	3,162,490	$	2,782,320

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the party. Collateral held varies, but may include accounts receivable, inventory, property and equipment, residential real estate and income-producing commercial properties. Commitment letters are issued after approval of the loan by the Credit Department and generally expire ninety days after issuance.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held varies as specified above and is required in instances which the Company deems necessary.

The allowance for off-balance-sheet credit exposures was $4.8 million and $1.5 million at June 30, 2023 and December 31, 2022, respectively.

The Company is in the early phase of constructing a new facility to accommodate expansion of its main campus. The total estimated cost to complete the construction program is approximately $33.6 million. At June 30, 2023, the Company has paid and was committed to approximately $7.0 million of the total estimated amount.

As of June 30, 2023 and December 31, 2022, the Company recorded unfunded commitments to provide capital contributions for on-balance-sheet investments in the amount of $31.0 million and $26.1 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 $20.0 million, except for twenty-eight relationships that have a retained unguaranteed exposure of $932.0 million of which $578.3 million of the unguaranteed exposure has been disbursed.

Additionally, the Company has future minimum lease payments receivable under non-cancelable operating leases totaling $52.8 million, of which no relationships exceed $20.0 million.

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

35

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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.

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 June 30, 2023
Interest income	$	169,586	$	8	$	118	$	169,712
Interest expense	85,103		—		307		85,410
Net interest income (loss)	84,483		8		(189)		84,302
Provision for loan and lease credit losses	13,028		—		—		13,028
Noninterest income	21,488		1,998		670		24,156
Noninterest expense	71,916		2,707		1,834		76,457
Income tax expense (benefit)	1,404		26		(1)		1,429
Net income (loss)	$	19,623	$	(727)	$	(1,352)	$	17,544
Total assets	$	10,642,872	$	124,459	$	51,865	$	10,819,196
As of and for the three months ended June 30, 2022
Interest income	$	99,215	$	36	$	(4)	$	99,247
Interest expense	18,850		—		463		19,313
Net interest income (loss)	80,365		36		(467)		79,934
Provision for loan and lease credit losses	5,267		—		—		5,267
Noninterest income	5,168		122,661		700		128,529
Noninterest expense	76,779		2,146		1,954		80,879
Income tax expense (benefit)	(268)		25,868		(322)		25,278
Net income (loss)	$	3,755	$	94,683	$	(1,399)	$	97,039
Total assets	$	8,963,851	$	158,930	$	(1,884)	$	9,120,897

36

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

	Banking		Fintech		Other		Consolidated
As of and for the six months ended June 30, 2023
Interest income	$	320,855	$	20	$	253	$	321,128
Interest expense	154,180		—		629		154,809
Net interest income (loss)	166,675		20		(376)		166,319
Provision for loan and lease credit losses	32,049		—		—		32,049
Noninterest income	38,485		4,037		1,213		43,735
Noninterest expense	146,399		4,963		4,057		155,419
Income tax expense (benefit)	4,701		182		(239)		4,644
Net income (loss)	$	22,011	$	(1,088)	$	(2,981)	$	17,942
Total assets	$	10,642,872	$	124,459	$	51,865	$	10,819,196
As of and for the six months ended June 30, 2022
Interest income	$	191,961	$	72	$	(4)	$	192,029
Interest expense	33,380		—		936		34,316
Net interest income (loss)	158,581		72		(940)		157,713
Provision for loan and lease credit losses	7,103		—		—		7,103
Noninterest income	37,103		122,898		1,196		161,197
Noninterest expense	138,178		4,314		4,101		146,593
Income tax expense (benefit)	8,808		25,722		(864)		33,666
Net income (loss)	$	41,595	$	92,934	$	(2,981)	$	131,548
Total assets	$	8,963,851	$	158,930	$	(1,884)	$	9,120,897

37

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following presents management’s discussion and analysis of the financial condition and results of operations of Live Oak Bancshares, Inc. (individually, “Bancshares” and collectively with its subsidiaries including Live Oak Banking Company, the “Company”). This discussion should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included elsewhere in this quarterly report on Form 10-Q and with the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (the “2022 Form 10-K”). Results of operations for the periods included in this quarterly report on Form 10-Q are not necessarily indicative of results to be obtained during any future period.

Important Note Regarding Forward-Looking Statements

This quarterly report on Form 10-Q contains statements that management believes are forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995.

These statements generally relate to the financial condition, results of operations, plans, objectives, future performance or business of Live Oak Bancshares, Inc. (the “Company”). They usually can be identified by the use of forward-looking terminology, such as “believes,” “expects,” or “are expected to,” “plans,” “projects,” “goals,” “estimates,” “will,” “may,” “should,” “could,” “would,” “continues,” “intends to,” “outlook” or “anticipates,” or variations of these and similar words, or by discussions of strategies that involve risks and uncertainties. You should not place undue reliance on these statements, as they are subject to risks and uncertainties, including but not limited to, those described in this Report. When considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements management may make. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information actually known to the Company at the time. Management undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Forward-looking statements contained in this Report are based on current expectations, estimates and projections about the Company’s business, management’s beliefs and assumptions made by management. These statements are not guarantees of the Company’s future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in the forward-looking statements. These risks, uncertainties and assumptions include, without limitation:

•deterioration in the financial condition of borrowers resulting in significant increases in the Company’s loan and lease losses and provisions for those losses and other adverse impacts to results of operations and financial condition;

•changes in Small Business Administration (“SBA”) rules, regulations and loan products, including specifically the Section 7(a) program, changes in SBA standard operating procedures or changes to the status of Live Oak Banking Company (the “Bank”) as an SBA Preferred Lender;

•changes in rules, regulations or procedures for other government loan programs, including those of the United States Department of Agriculture (“USDA”);

•changes in interest rates that affect the level and composition of deposits, loan demand and the values of loan collateral, securities, and interest sensitive assets and liabilities;

•the failure of assumptions underlying the establishment of reserves for possible loan and lease losses;

•changes in loan underwriting, credit review or loss reserve policies associated with economic conditions, examination conclusions, or regulatory developments;

•recent adverse developments in the banking industry highlighted by high-profile bank failures and the potential impact of such developments on customer confidence, liquidity, and regulatory responses to these developments;

•the impacts of global health crises and pandemics, such as the Coronavirus Disease 2019 (“COVID-19”) pandemic, on trade (including supply chains and export levels), travel, employee productivity and other economic activities that may have a destabilizing and negative effect on financial markets, economic activity and customer behavior;

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•a reduction in or the termination of the Company’s ability to use the technology-based platform that is critical to the success of the Company’s business model or to develop a next-generation banking platform, including a failure in or a breach of the Company’s operational or security systems or those of its third party service providers;

•changes in financial market conditions, either internationally, nationally or locally in areas in which the Company conducts operations, including reductions in rates of business formation and growth, demand for the Company’s products and services, commercial and residential real estate development and prices, premiums paid in the secondary market for the sale of loans, and valuation of servicing rights;

•changes in accounting principles, policies, and guidelines applicable to bank holding companies and banking;

•fluctuations in markets for equity, fixed-income, commercial paper and other securities, which could affect availability, market liquidity levels, and pricing;

•the effects of competition from other commercial banks, non-bank lenders, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and mutual funds, and other financial institutions operating in the Company’s market area and elsewhere, including institutions operating regionally, nationally and internationally, together with such competitors offering banking products and services by mail, telephone and the Internet;

•the Company's ability to attract and retain key personnel;

•changes in governmental monetary and fiscal policies as well as other legislative and regulatory changes, including with respect to SBA or USDA lending programs and investment tax credits;

•a deterioration of the credit rating for U.S. long-term sovereign debt, actions that the U.S. government may take to avoid exceeding the debt ceiling, and uncertainties surrounding the debt ceiling and the federal budget;

•changes in political and economic conditions;

•the impact of heightened regulatory scrutiny of financial products and services, primarily led by the Consumer Financial Protection Bureau and various state agencies;

•the Company's ability to comply with any requirements imposed on it by regulators, and the potential negative consequences that may result;

•operational, compliance and other factors, including conditions in local areas in which the Company conducts business such as inclement weather or a reduction in the availability of services or products for which loan proceeds will be used, that could prevent or delay closing and funding loans before they can be sold in the secondary market;

•the effect of any mergers, acquisitions or other transactions, to which the Company or the Bank may from time to time be a party, including management’s ability to successfully integrate any businesses acquired;

•adverse results, including related fees and expenses, from pending or future lawsuits, government investigations or private actions;

•other risk factors listed from time to time in reports that the Company files with the SEC, including those described under “Risk Factors” in this Report; and

•the Company’s success at managing the risks involved in the foregoing.

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Except as otherwise disclosed, forward-looking statements do not reflect: (i) the effect of any acquisitions, divestitures or similar transactions that have not been previously disclosed; (ii) any changes in laws, regulations or regulatory interpretations; or (iii) any change in current dividend or repurchase strategies, in each case after the date as of which such statements are made. All forward-looking statements speak only as of the date on which such statements are made, and the Company undertakes no obligation to update any statement, to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.

Amounts in all tables in Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) have been presented in thousands, except percentage, time period, stock option, share and per share data or where otherwise indicated.

Nature of Operations

Bancshares is a financial holding company and 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 incorporated in February 2008 as a North Carolina-chartered commercial bank. The Bank specializes in providing lending and deposit related services to small businesses nationwide. A significant portion of the loans originated by the Bank are guaranteed by the SBA under the 7(a) Loan Program and the U.S. Department of Agriculture’s (“USDA”) Rural Energy for America Program (“REAP”), Water and Environmental Program (“WEP”), Business & Industry (“B&I”) and Community Facilities loan programs. These loans are to small businesses and professionals with what the Bank believes are lower risk characteristics. Industries, or “verticals,” on which the Bank focuses its lending efforts are carefully selected. The Bank also lends more broadly to select borrowers outside of those verticals.

The Company’s wholly owned material subsidiaries are the Bank, Government Loan Solutions (“GLS”), Live Oak Grove, LLC (“Grove”), Live Oak Ventures, Inc. (“Live Oak Ventures”) and Canapi Advisors, LLC (“Canapi Advisors”). GLS is a management and technology consulting firm that advises and offers solutions and services to participants in the government guaranteed lending sector. GLS primarily provides services in connection with the settlement, accounting, and securitization processes for government guaranteed loans, including loans originated under the SBA 7(a) loan programs and USDA guaranteed loans. The Grove provides Company employees and business visitors 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 (the “Canapi Funds”) focused on providing venture capital to new and emerging financial technology companies.

The Bank’s wholly owned subsidiaries are Live Oak Number One, Inc., Live Oak Clean Energy Financing LLC (“LOCEF”), Live Oak Private Wealth, LLC (“Live Oak Private Wealth”) and Tiburon Land Holdings, LLC (“TLH”). Live Oak Number One, Inc. holds properties foreclosed on by the Bank. LOCEF provides financing to entities for renewable energy applications. Live Oak Private Wealth provides high-net-worth individuals and families with strategic wealth and investment management services. 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. TLH was formed in the third quarter of 2022 to hold land adjacent to the Bank's headquarters consisting of wetlands and other protected property for the use and enjoyment of the Bank's employees and customers.

The Company generates revenue primarily from net interest income and secondarily through origination and sale of government guaranteed loans. Income from the retention of loans is comprised principally of interest income. Income from the sale of loans is comprised of loan servicing revenue and revaluation of related servicing 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 predominantly in its fintech segment, as discussed more fully later in this section under the caption “Results of Segment Operations.”

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Results of Operations

Performance Summary

Three months ended June 30, 2023 compared with three months ended June 30, 2022

For the three months ended June 30, 2023, the Company reported net income of $17.5 million, or $0.39 per diluted share, compared to net income of $97.0 million, or $2.16 per diluted share, for the second quarter of 2022.

The decrease in net income was largely due to the following items:

•Decrease in equity method investment income of $121.1 million, largely driven by the second quarter of 2022 gain of $120.5 million related to the Company's sale of its investment in Finxact, Inc. (“Finxact”); and

•Provision for loan and lease credit losses increased by $7.8 million to $13.0 million, compared to $5.3 million for the second quarter of 2022. The level of provision expense in the second quarter of 2023 was primarily the result of continued growth of the loan and lease portfolio combined with portfolio trends largely comprised of specific reserve increases in two impaired loans.

Key factors partially offsetting the decrease in net income for the second quarter of 2023 were:

•Increase in net interest income of $4.4 million, or 5.5%, predominately from increases in variable interest-earning assets following the first quarter of 2023 Federal Reserve rate increases combined with increased levels of cash, investments and the total loan and lease portfolio, partially mitigated by a decrease in the net interest margin arising from an increase in interest-bearing liabilities combined with average cost of funds outpacing the average yield on interest-earning assets;

•The net loss on loan servicing asset revaluation decreased $5.8 million, or 67.3%, to $2.8 million compared to a net loss of $8.7 million in the second quarter of 2022;

•Increased net gains on sales of loans of $5.2 million, or 91.9%, principally the result of a higher volume of loan sales in the second quarter of 2023;

•The net gain on loans accounted for under the fair value option of $1.7 million, improved by $6.2 million, from a net loss of $4.5 million in the second quarter of 2022;

•Decreased contributions and donations expense of $5.5 million, principally related to a special 2022 charitable donation of $5.0 million made in connection with the above discussed Finxact gain; and

•Decreased income tax expense of $23.8 million, or 94.3%, principally related to above discussed decrease in net income.

Six months ended June 30, 2023 compared with six months ended June 30, 2022

For the six months ended June 30, 2023, the Company reported net income of $17.9 million, or $0.40 per diluted share, compared to net income of $131.5 million, or $2.92 per diluted share, for the first half of 2022.

The decrease in net income was largely due to the following items:

•Decrease in equity method investment income of $121.9 million, principally a product of the above discussed Finxact gain of $120.5 million in the second quarter of 2022;

•Provision for loan and lease credit losses increased by $24.9 million, to $32.0 million, compared to $7.1 million for the first half of 2022. The level of provision expense in the first half of 2023 was primarily the result of continued growth of the loan and lease portfolio combined with portfolio trends and changes in the macroeconomic outlook;

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•Decreased net gains on sales of loans of $5.6 million, or 21.2%, principally the result of comparatively negative market premiums in the first half of 2023; and

•Increased FDIC insurance expense of $4.3 million, or 104.6%, largely a product of rate increases effective in 2023 combined with the ongoing growth of Live Oak Banking Company.

Key factors partially offsetting the decrease in net income for the first half of 2023 were:

•Increase in net interest income of $8.6 million, or 5.5%, principally the result of the above discussed drivers of the quarter over quarter increase;

•A net loss on loan servicing asset revaluation of $2.5 million compared to a net loss of $10.2 million in the first half of 2022, resulting in a positive change of $7.8 million, or 75.8%;

•Decreased contributions and donations expense of $6.2 million, principally related to a special 2022 charitable donation of $5.0 million discussed above related to the 2022 Finxact gain; and

•Decreased income tax expense of $29.0 million, or 86.2%, principally related to above discussed decrease in net income.

Net Interest Income and Margin

Net interest income represents the difference between the income that the Company earns on interest-earning assets and the cost of interest-bearing liabilities. The Company’s net interest income depends upon the volume of interest-earning assets and interest-bearing liabilities and the interest rates that the Company earns or pays on them, respectively. Net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as “volume changes.” It is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds, referred to as “rate changes.” As a bank without a branch network, the Bank gathers deposits over the Internet and in the community in which it is headquartered. Due to the nature of a branchless bank and the relatively low overhead required for deposit gathering, the rates that the Bank offers are generally above the industry average.

Three months ended June 30, 2023 compared with three months ended June 30, 2022

For the three months ended June 30, 2023, net interest income increased $4.4 million, or 5.5%, to $84.3 million compared to $79.9 million for the three months ended June 30, 2022. This increase was principally due to the growth in the held for investment loan and lease portfolio outpacing growth in interest-bearing liabilities offset by an increase in average cost of funds which exceeded the increase in average yield on interest-earning assets. Excluding PPP loan impacts, comprised of amortization of net deferred fees combined with a 1% annualized interest rate less the related interest expense from funding activity, net interest income increased by $5.5 million. Average interest-earning assets increased by $2.03 billion, or 24.6%, to $10.27 billion for the second quarter of 2023, compared to $8.25 billion for the second quarter of 2022, while the yield on average interest-earning assets increased one hundred-eighty basis points to 6.63%. The cost of funds on interest-bearing liabilities for the second quarter of 2023 increased two hundred-sixty basis points to 3.59%, and the average balance of interest-bearing liabilities increased by $1.69 billion, or 21.6%, over the second quarter of 2022.

The increase in average interest-bearing liabilities was largely driven by funding for significant loan originations and growth as well as maintenance of the Company's target liquidity profile. This increase was muted by a $95.0 million reduction in average borrowings largely related to Paycheck Protection Program Liquidity Facility, or PPPLF, repayments in 2022. As indicated in the rate/volume table below, the overall increase discussed above is reflected in increased interest income of $70.5 million outpacing growth in interest expense of $66.1 million for the second quarter of 2023 compared to the second quarter of 2022. The net interest margin decreased from 3.89% for the second quarter of 2022 to 3.29% for the second quarter of 2023.

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Six months ended June 30, 2023 compared with six months ended June 30, 2022

For the six months ended June 30, 2023, net interest income increased $8.6 million, or 5.5%, to $166.3 million compared to $157.7 million for the six months ended June 30, 2022. This increase was principally due to the growth in the held for investment loan and lease portfolio outpacing growth in interest-bearing liabilities offset by an increase in average cost of funds which exceeded the increase in average yield on interest-earning assets. Excluding PPP loan impacts, comprised of amortization of net deferred fees combined with a 1% annualized interest rate less the related interest expense from funding activity, net interest income increased by $13.8 million. Average interest-earning assets increased by $1.94 billion, or 24.1%, to $9.99 billion for the first half of 2023, compared to $8.05 billion for the first half of 2022, while the yield on average interest-earning assets increased one hundred-sixty-seven basis points to 6.48%. The cost of funds on interest-bearing liabilities for the first half of 2023 increased two hundred-forty-six basis points to 3.36%, and the average balance of interest-bearing liabilities increased by $1.61 billion, or 21.0%, over the first half of 2022.

The increase in average interest-bearing liabilities was largely driven by funding for significant loan originations and growth as well as maintenance of the Company's target liquidity profile. This increase was muted by a $99.4 million reduction in average borrowings largely related to Paycheck Protection Program Liquidity Facility, or PPPLF, repayments in 2022. As indicated in the rate/volume table below, the overall increase discussed above is reflected in increased interest income of $129.1 million outpacing growth in interest expense of $120.5 million for the first half of 2023 compared to the first half of 2022. The net interest margin decreased from 3.95% for the first half of 2022 to 3.36% for the first half of 2023.

During the first half of 2023, the Federal Reserve increased the federal funds upper target rate by 75 basis points. Subsequently, on July 26, 2023 the Federal Reserve further increased the federal funds upper target rate by 25 basis points, to 5.50%. In June 2023, the Federal Reserve released its most current federal funds target rate midpoint projections which implied an increase of the median Federal Funds rate to 5.6% by the end of 2023 and a decrease of approximately 100 basis points to 4.6% by the end of 2024. There can be no assurance that any further increases in the Federal Funds rate will occur, and if they do, the amount and timing of actual increases are subject to change. See Item 3. Quantitative and Qualitative Disclosures About Market Risk for information about the Company’s sensitivity to interest rates.

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Average Balances and Yields. The following table presents information regarding average balances for assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amount of interest expense on average interest-bearing liabilities, and the resulting average yields and costs. The yields and costs for the periods indicated are derived by dividing the income or expense by the average balances for assets or liabilities, respectively, for the periods presented and annualizing that result. Loan fees are included in interest income on loans.

	Three Months Ended June 30,
	2023						2022
	Average Balance		Interest		Average Yield/Rate		Average Balance		Interest		Average Yield/Rate
Interest-earning assets:
Interest-earning balances in other banks	$	731,427	$	8,847	4.85	%	$	328,014	$	848	1.04	%
Federal funds sold	—		—		—		78,216		196		1.01
Investment securities	1,252,320		8,503		2.72		915,106		4,046		1.77
Loans held for sale	516,378		12,153		9.44		1,119,094		15,969		5.72
Loans and leases held for investment(1)	7,773,816		140,209		7.23		5,805,907		78,188		5.40
Total interest-earning assets	10,273,941		169,712		6.63		8,246,337		99,247		4.83
Less: Allowance for credit losses on loans and leases	(108,552)						(62,566)
Noninterest-earning assets	499,661						644,495
Total assets	$	10,665,050					$	8,828,266
Interest-bearing liabilities:
Interest-bearing checking	$	300,046	$	3,968	5.30	%	$	—	$	—	—	%
Savings	4,277,850		41,930		3.93		3,894,177		7,538		0.78
Money market accounts	121,382		184		0.61		93,072		56		0.24
Certificates of deposit	4,792,289		38,921		3.26		3,714,882		11,183		1.21
Total deposits	9,491,567		85,003		3.59		7,702,131		18,777		0.98
Borrowings	37,997		407		4.30		132,969		536		1.62
Total interest-bearing liabilities	9,529,564		85,410		3.59		7,835,100		19,313		0.99
Noninterest-bearing deposits	205,741						96,123
Noninterest-bearing liabilities	80,427						55,725
Shareholders' equity	849,318						841,318
Total liabilities and shareholders' equity	$	10,665,050					$	8,828,266
Net interest income and interest rate spread			$	84,302	3.04	%			$	79,934	3.84	%
Net interest margin					3.29	%					3.89	%
Ratio of average interest-earning assets to average interest-bearing liabilities					107.81	%					105.25	%

(1)Average loan and lease balances include non-accruing loans and leases.

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	Six Months Ended June 30,
	2023						2022
	Average Balance		Interest		Average Yield/Rate		Average Balance		Interest		Average Yield/Rate
Interest-earning assets:
Interest-earning balances in other banks	$	530,205	$	12,040	4.58	%	$	276,114	$	1,027	0.75	%
Federal funds sold	69,629		1,624		4.70		43,897		202		0.93
Investment securities	1,220,028		16,050		2.65		905,403		7,445		1.66
Loans held for sale	538,385		24,139		9.04		1,117,360		31,152		5.62
Loans and leases held for investment(1)	7,636,343		267,275		7.06		5,708,084		152,203		5.38
Total interest-earning assets	9,994,590		321,128		6.48		8,050,858		192,029		4.81
Less: Allowance for credit losses on loans and leases	(101,457)						(62,649)
Noninterest-earning assets	496,925						616,486
Total assets	$	10,390,058					$	8,604,695
Interest-bearing liabilities:
Interest-bearing checking	$	161,626	$	4,239	5.29	%	$	—	$	—	—	%
Savings	4,242,763		78,181		3.72		3,750,838		12,378		0.67
Money market accounts	117,753		321		0.55		92,272		110		0.24
Certificates of deposit	4,664,536		69,857		3.02		3,633,547		20,637		1.15
Total deposits	9,186,678		152,598		3.35		7,476,657		33,125		0.89
Borrowings	97,920		2,211		4.55		197,369		1,191		1.22
Total interest-bearing liabilities	9,284,598		154,809		3.36		7,674,026		34,316		0.90
Noninterest-bearing deposits	191,489						91,373
Noninterest-bearing liabilities	72,467						53,841
Shareholders' equity	841,504						785,455
Total liabilities and shareholders' equity	$	10,390,058					$	8,604,695
Net interest income and interest rate spread			$	166,319	3.12	%			$	157,713	3.91	%
Net interest margin					3.36	%					3.95	%
Ratio of average interest-earning assets to average interest-bearing liabilities					107.65	%					104.91	%

(1)Average loan and lease balances include non-accruing loans and leases.

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Rate/Volume Analysis. The following table sets forth the effects of changing rates and volumes on net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, increases or decreases attributable to changes in both rate and volume that cannot be segregated have been allocated proportionally based on the changes due to rate and the changes due to volume.

	Three Months Ended June 30,						Six Months Ended June 30,
	2023 vs. 2022						2023 vs. 2022
	Increase (Decrease) Due to						Increase (Decrease) Due to
	Rate		Volume		Total		Rate		Volume		Total
Interest income:
Interest-earning balances in other banks	$	5,038	$	2,961	$	7,999	$	7,655	$	3,358	$	11,013
Federal funds sold	—		(196)		(196)		1,063		359		1,422
Investment securities	2,567		1,890		4,457		5,242		3,363		8,605
Loans held for sale	7,577		(11,393)		(3,816)		14,037		(21,050)		(7,013)
Loans and leases held for investment	31,023		30,998		62,021		55,619		59,453		115,072
Total interest income	46,205		24,260		70,465		83,616		45,483		129,099
Interest expense:
Interest-bearing checking	—		3,968		3,968		—		4,239		4,239
Savings	32,140		2,252		34,392		60,459		5,344		65,803
Money market accounts	98		30		128		161		50		211
Certificates of deposit	21,741		5,997		27,738		38,572		10,648		49,220
Borrowings	571		(700)		(129)		2,443		(1,423)		1,020
Total interest expense	54,550		11,547		66,097		101,635		18,858		120,493
Net interest income	$	(8,345)	$	12,713	$	4,368	$	(18,019)	$	26,625	$	8,606

Provision for Loan and Lease Credit Losses

The provision for loan and lease credit losses represents the amount necessary to be charged against the current period’s earnings to maintain the allowance for credit losses (“ACL”) on loans and leases at a level that the Company believes is appropriate in relation to the estimated losses inherent in the loan and lease portfolio.

Losses inherent in loan relationships are mitigated if a portion of the loan is guaranteed by the SBA or USDA. Typical SBA 7(a) and USDA guarantees range from 50% to 90% depending on loan size and type, which serve to reduce the risk profile of these loans. The Company believes that its focus on compliance with regulations and guidance from the SBA and USDA are key factors to managing this risk.

For the second quarter of 2023, there was a provision for loan and lease credit losses of $13.0 million compared to $5.3 million for the same period in 2022, an increase of $7.8 million. For the first six months of 2023, there was a provision for loan and lease credit losses of $32.0 million compared to $7.1 million for the same period in 2022, an increase of $24.9 million. The increase in provision expense as compared to the second quarter of 2022 and first six months of 2022 was primarily the result of loan growth, combined with portfolio trends and changes in the macroeconomic outlook.

Loans and leases held for investment at historical cost were $7.39 billion as of June 30, 2023, increasing by $2.07 billion, or 38.7%, compared to June 30, 2022.

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Net charge-offs for loans and leases carried at historical cost were $1.2 million, or 0.06% of average quarterly loans and leases held for investment, carried at historical cost, on an annualized basis, for the three months ended June 30, 2023, compared to net charge-offs of $2.5 million, or 0.19%, for the three months ended June 30, 2022. For the six months ended June 30, 2023, net charge-offs totaled $7.8 million compared to $4.8 million for the six months ended June 30, 2022, an increase of $3.0 million, or 62.2%. The increase in net charge-offs for the first half of 2023 was primarily isolated to two relationships. Net charge-offs are a key element of historical experience in the Company's estimation of the allowance for credit losses on loans and leases.

In addition, nonperforming loans and leases not guaranteed by the SBA or USDA, excluding $8.6 million and $3.6 million accounted for under the fair value option at June 30, 2023 and 2022, respectively, totaled $44.9 million, which was 0.61% of the held for investment loan and lease portfolio carried at historical cost at June 30, 2023, compared to $12.0 million, or 0.22% of loans and leases held for investment carried at historical cost at June 30, 2022. The increase in total nonperforming loans and leases not guaranteed and carried at historical cost was principally isolated to two large relationships.

Noninterest Income

Noninterest income is principally comprised of net gains from the sale of SBA and USDA-guaranteed loans along with loan servicing revenue and related revaluation of the servicing asset. Revenue from the sale of loans depends upon the volume, maturity structure and rates of underlying loans as well as the pricing and availability of funds in the secondary markets prevailing in the period between completed loan funding and closing of sale. In addition, the loan servicing revaluation is significantly impacted by changes in market rates and other underlying assumptions such as prepayment speeds and default rates. Net gain (loss) on loans accounted for under the fair value option is also significantly impacted by changes in market rates, prepayment speeds and inherent credit risk. Other less consistent elements of noninterest income include gains and losses on investments.

The following table shows the components of noninterest income and the dollar and percentage changes for the periods presented.

	Three Months Ended June 30,				2023/2022 Increase (Decrease)
	2023		2022		Amount		Percent
Noninterest income
Loan servicing revenue	$	6,687	$	6,477	$	210	3.2	%
Loan servicing asset revaluation	(2,831)		(8,668)		5,837		67.3
Net gains on sales of loans	10,804		5,630		5,174		91.9
Net gain (loss) on loans accounted for under the fair value option	1,728		(4,461)		6,189		138.7
Equity method investments (loss) income	(2,055)		119,056		(121,111)		(101.7)
Equity security investments gains (losses), net	121		1,655		(1,534)		(92.7)
Lease income	2,535		2,510		25		1.0
Management fee income	3,266		2,558		708		27.7
Other noninterest income	3,901		3,772		129		3.4
Total noninterest income	$	24,156	$	128,529	$	(104,373)	(81.2)	%

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	Six Months Ended June 30,				2023/2022 Increase (Decrease)
	2023		2022		Amount		Percent
Noninterest income
Loan servicing revenue	$	13,067	$	12,833	$	234	1.8	%
Loan servicing asset revaluation	(2,475)		(10,237)		7,762		75.8
Net gains on sales of loans	20,979		26,607		(5,628)		(21.2)
Net gain (loss) on loans accounted for under the fair value option	(2,801)		(3,945)		1,144		29.0
Equity method investments (loss) income	(5,007)		116,932		(121,939)		(104.3)
Equity security investments gains (losses), net	198		1,611		(1,413)		(87.7)
Lease income	5,070		5,013		57		1.1
Management fee income	6,738		4,046		2,692		66.5
Other noninterest income	7,966		8,337		(371)		(4.5)
Total noninterest income	$	43,735	$	161,197	$	(117,462)	(72.9)	%

For the three months ended June 30, 2023, noninterest income decreased by $104.4 million, or 81.2%, compared to the three months ended June 30, 2022. The decrease over the prior year is primarily a result of the $120.5 million Finxact gain included in equity method investment income in the second quarter of 2022. Partially offsetting the decrease over the second quarter of 2022 was lower losses of $5.8 million related to the servicing asset revaluation, an increase in net gains on sales of loans of $5.2 million, combined with an incremental $6.2 million net gain on loans accounted for under the fair value option.

For the six months ended June 30, 2023, noninterest income decreased by $117.5 million, or 72.9%, compared to the six months ended June 30, 2022. The decrease over the prior year is primarily a result of the above mentioned Finxact gain in the second quarter of 2022 combined with a decrease in net gains on sales of loans of $5.6 million. Partially offsetting the decrease over the prior year to date period was lower losses of $7.8 million related to the servicing asset revaluation combined with a $2.7 million increase in management fee income generated by Canapi Advisors. Canapi Advisors is included in the Company's Fintech segment.

The following table reflects loan and lease production, sales of guaranteed loans and the aggregate balance in guaranteed loans sold. These components are key drivers of the Company's noninterest income.

	Three months ended June 30,				Three months ended March 31,
	2023		2022		2023		2022
Amount of loans and leases originated	$	861,033	$	959,635	$	1,030,882	$	865,063
Guaranteed portions of loans sold	245,074		68,818		167,826		219,703
Outstanding balance of guaranteed loans sold (1)	2,808,200		2,681,079		2,695,757		2,786,403

	Six Months Ended June 30,				For years ended December 31,
	2023		2022		2022		2021		2020		2019
Amount of loans and leases originated	$	1,891,915	$	1,824,698	$	4,007,621	$	4,480,725	$	4,450,198	$	2,001,886
Guaranteed portions of loans sold	412,900		288,521		580,889		668,462		542,596		340,374
Outstanding balance of guaranteed loans sold (1)	2,808,200		2,681,079		2,668,110		2,756,915		2,819,625		2,746,480

(1)This represents the outstanding principal balance of guaranteed loans serviced, as of the last day of the applicable period, which have been sold into the secondary market.

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Changes in various components of noninterest income are discussed in more detail below.

Loan Servicing Asset Revaluation: The Company revalues its serviced loan portfolio at least quarterly. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as adequate compensation for servicing, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses, with the prepayment speed being one of the most sensitive assumptions. For the three months ended June 30, 2023, there was a net loss on loan servicing asset revaluation of $2.8 million, compared to a net loss of $8.7 million for the three months ended June 30, 2022, resulting in a positive comparative quarter change of $5.8 million, or 67.3%. For the six months ended June 30, 2023, there was a net loss on loan servicing asset revaluation of $2.5 million compared to $10.2 million for the six months ended June 30, 2022, resulting in a positive change of $7.8 million, or 75.8%. The increase in the valuation of the servicing asset compared to the second quarter and first half of 2022 was principally the result of negative market trends in 2022 outpacing those experienced in 2023.

Net Gains on Sales of Loans: For the three months ended June 30, 2023, net gains on sales of loans increased $5.2 million, or 91.9%, compared to the three months ended June 30, 2022. The volume of guaranteed loans sold increased $176.3 million, or 256.1%, for the three months ended June 30, 2023 to $245.1 million from $68.8 million in the three months ended June 30, 2022. For the six months ended June 30, 2023, net gains on sales of loans decreased $5.6 million, or 21.2%, compared to the six months ended June 30, 2022. For the six months ended June 30, 2023, the volume of guaranteed loans sold increased $124.4 million, or 43.1%, to $412.9 million from $288.5 million for the six months ended June 30, 2022. The average net gain on loan sale premium decreased from 108% to 105% in the second quarters of 2022 and 2023, respectively, and decreased from 109% to 106% in the first halves of 2022 and 2023, respectively. The increase in net gains on sales of loans over the second quarter of 2022 was principally the result of higher loan sale volume while the decrease over the first half of 2022 was principally related to the effect of weaker premiums outpacing heightened levels of sales volume.

Net Gain (Loss) on Loans Accounted for Under the Fair Value Option: For the three months ended June 30, 2023, the Company had a net gain on loans accounted for under the fair value option of $1.7 million compared to a net loss of $4.5 million for the second quarter of 2022, a positive change of $6.2 million, or 138.7%. For the six months ended June 30, 2023, the Company had a net loss on loans accounted for under the fair value option of $2.8 million compared to a net loss of $3.9 million for the same period of 2022, a positive change of $1.1 million, or 29.0%. The carrying amount of loans accounted for under the fair value option at June 30, 2023 and 2022 was $441.8 million (all classified as held for investment) and $554.1 million ($23.5 million classified as held for sale and $530.6 million classified as held for investment), respectively, a decrease of $112.3 million, or 20.3%. The incremental net gain on loans accounted for under the fair value option compared to both prior periods was largely the result of moderating interest rate impacts in 2023 combined with a continued decline in the size of the underlying principal balance of the portfolio.

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Noninterest Expense

Noninterest expense comprises all operating costs of the Company, such as employee related costs, travel, professional services, advertising and marketing expenses, exclusive of interest and income tax expense.

The following table shows the components of noninterest expense and the related dollar and percentage changes for the periods presented.

	Three Months Ended June 30,				2023/2022 Increase (Decrease)
	2023		2022		Amount		Percent
Noninterest expense
Salaries and employee benefits	$	43,066	$	46,276	$	(3,210)	(6.9)	%
Non-employee expenses:
Travel expense	2,770		2,358		412		17.5
Professional services expense	1,996		3,988		(1,992)		(49.9)
Advertising and marketing expense	3,009		2,301		708		30.8
Occupancy expense	2,205		2,773		(568)		(20.5)
Technology expense	8,005		5,762		2,243		38.9
Equipment expense	4,023		3,784		239		6.3
Other loan origination and maintenance expense	3,442		3,022		420		13.9
Renewable energy tax credit investment impairment	—		50		(50)		(100.0)
FDIC insurance	5,061		2,164		2,897		133.9
Contributions and donations	—		5,515		(5,515)		(100.0)
Other expense	2,880		2,886		(6)		(0.2)
Total non-employee expenses	33,391		34,603		(1,212)		(3.5)
Total noninterest expense	$	76,457	$	80,879	$	(4,422)	(5.5)	%

	Six Months Ended June 30,				2023/2022 Increase (Decrease)
	2023		2022		Amount		Percent
Noninterest expense
Salaries and employee benefits	$	87,831	$	84,783	$	3,048	3.6	%
Non-employee expenses:
Travel expense	5,181		4,255		926		21.8
Professional services expense	2,923		6,779		(3,856)		(56.9)
Advertising and marketing expense	6,612		4,030		2,582		64.1
Occupancy expense	4,130		5,100		(970)		(19.0)
Technology expense	15,734		11,815		3,919		33.2
Equipment expense	7,841		7,600		241		3.2
Other loan origination and maintenance expense	7,369		6,135		1,234		20.1
Renewable energy tax credit investment impairment	69		50		19		38.0
FDIC insurance	8,464		4,136		4,328		104.6
Contributions and donations	—		6,238		(6,238)		(100.0)
Other expense	9,265		5,672		3,593		63.3
Total non-employee expenses	67,588		61,810		5,778		9.3
Total noninterest expense	$	155,419	$	146,593	$	8,826	6.0	%

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Total noninterest expense for the three and six months ended June 30, 2023, decreased $4.4 million, or 5.5%, and increased $8.8 million, or 6.0%, respectively, compared to the same periods in 2022. The changes in noninterest expense for the comparable three and six month period was largely driven by various components, as discussed below.

Salaries and employee benefits: Total personnel expense for the three and six months ended June 30, 2023 decreased by $3.2 million, or 6.9%, and increased $3.0 million, or 3.6%, respectively, compared to the same periods in 2022. The decrease in salaries and employee benefits over the second quarter of 2022 was largely the product of lower levels in bonus accruals while the increase over the first half of 2022 is principally related to continued investment in human resources to support strategic and growth initiatives. Total full-time equivalent employees increased from 891 at June 30, 2022, to 984 at June 30, 2023. Salaries and employee benefits expense included $6.3 million and $12.5 million of stock-based compensation for the three and six months ended June 30, 2023, respectively, compared to $5.1 million and $10.0 million for the three and six months ended June, 30, 2022, respectively. Expenses related to the employee stock purchase program, stock grants, stock option compensation and restricted stock expense are all considered stock-based compensation.

Professional services expense: For the three and six months ended June 30, 2023, professional services expense decreased $2.0 million, or 49.9%, and $3.9 million, or 56.9%, respectively, compared to the same periods in 2022. The decrease compared to the prior periods was due to lower levels of legal fees combined with an insurance recovery of $1.3 million in the first quarter of 2023 related to previously expensed legal fees.

Advertising and marketing expense: For the six months ended June 30, 2023, advertising and marketing expense increased $2.6 million, or 64.1%, compared to the same period in 2022. The increase over the first half of 2022 was largely driven by continued investment in the Company’s lending and deposit market growth.

Technology expense: For the three and six months ended June 30, 2023, technology expense increased $2.2 million, or 38.9%, and $3.9 million, or 33.2%, respectively, compared to the same periods in 2022. This increase was primarily related to enhanced investments in the Company’s technology resources.

FDIC insurance: For the three and six months ended June 30, 2023, FDIC insurance increased $2.9 million, or 133.9%, and $4.3 million, or 104.6%, respectively, compared to the same periods in 2022. This increase is largely the result of rate increases effective in 2023 combined with the ongoing growth of Live Oak Banking Company.

Contributions and donations: For the three and six months ended June 30, 2023, contributions and donations decreased $5.5 million, and $6.2 million, respectively, compared to the same periods in 2022. The decrease is principally related to a special charitable donation during the second quarter of 2022 of $5.0 million made in connection with the earlier discussed Finxact gain.

Other expense: For the six months ended June 30, 2023, other expense increased $3.6 million, or 63.3%, compared to the same period in 2022, largely related to $2.9 million in increased levels of reserves on unfunded commitments. This increase in the reserve for unfunded commitments was largely a result of refinements to the estimation assumptions in the first quarter of 2023.

Income Tax Expense

For the three months ended June 30, 2023, income tax expense was $1.4 million compared to $25.3 million for the second quarter of 2022, and the Company’s effective tax rates were 7.5% and 20.7%, respectively. For the six months ended June 30, 2023, income tax expense was $4.6 million compared to $33.7 million for the first half of 2022, and the Company’s effective tax rates were 20.6% and 20.4%, respectively. The lower level of income tax expense for the second quarter and the first half of 2023 as compared to the same periods in 2022 was principally the result of decreased pretax income combined with increased tax credits.

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Results of Segment Operations

The Company’s operations are managed along two primary operating segments Banking and Fintech. A description of each segment and the methodologies used to measure financial performance is described in Note 11. Segments in the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements. Net income (loss) by operating segment is presented below:

	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Banking	$	19,623	$	3,755	$	22,011	$	41,595
Fintech	(727)		94,683		(1,088)		92,934
Other	(1,352)		(1,399)		(2,981)		(2,981)
Consolidated net income	$	17,544	$	97,039	$	17,942	$	131,548

Banking

For the three and six months ended June 30, 2023, net income increased $15.9 million and decreased $19.6 million, respectively, compared to the same periods of 2022. Key factors influencing these changes are discussed below.

For the three and six months ended June 30, 2023, net interest income increased $4.1 million, or 5.1%, and $8.1 million, or 5.1%, respectively, compared to the same periods of 2022. See above section captioned “Net Interest Income and Margin” as it is principally related to the Banking segment.

The provision for loan and lease credit losses for the three and six months ended June 30, 2023, increased $7.8 million and $24.9 million, respectively, compared to the same periods of 2022. See the analysis of provision for loan and lease credit losses included in the above section captioned “Provision for Loan and Lease Credit Losses” as it is entirely related to the Banking segment.

For the three and six months ended June 30, 2023, noninterest income increased $16.3 million and $1.4 million, respectively, compared to the same periods of 2022. The increase for the three month comparative period was principally driven by lower losses related to the loan servicing asset revaluation, increased net gains on sales of loans and an incremental gain on loans accounted for under the fair value option. See the analysis of these categories of noninterest income included in the above section captioned “Noninterest Income” for additional discussion.

For the three and six months ended June 30, 2023, noninterest expense decreased $4.9 million, or 6.3%, and increased $8.2 million, or 5.9%, respectively, compared to same periods of 2022. See the analysis of these categories of noninterest expense included in the above section captioned “Noninterest Expense” for additional discussion.

For the three and six months ended June 30, 2023, income tax expense increased $1.7 million and decreased $4.1 million, respectively, compared to the same periods of 2022. The decrease compared to the six months ended June 30, 2022 is principally due to lower levels of pretax income.

Fintech

For the three and six months ended June 30, 2023, net income decreased by $95.4 million and $94.0 million, respectively, compared to same periods of 2022. The primary factor influencing this decrease compared to both prior periods is the $120.5 million Finxact gain included in equity method investment income in the second quarter of 2022. Partially offsetting the decrease over the first half of 2022 was a $2.7 million increase in management fee income earned by Canapi Advisors combined with lower levels of income tax expense as a result decreased pretax income in 2023.

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Discussion and Analysis of Financial Condition

June 30, 2023 vs. December 31, 2022

Total assets at June 30, 2023 were $10.82 billion, an increase of $963.7 million, or 9.8%, compared to total assets of $9.86 billion at December 31, 2022. The growth in total assets was principally driven by the following:

•Cash and cash equivalents, comprised of cash and due from banks and federal funds sold, combined with investment securities available-for-sale was $1.94 billion at June 30, 2023, an increase of $509.9 million, or 35.6%, compared to $1.43 billion at December 31, 2022. This increase reflects growing deposit levels combined with strategic maintenance of the Company's liquidity profile.

•Growth in total loans and leases held for investment and held for sale of $461.4 million resulting from strong origination activity in the first six months of 2023 and holding loans available for sale for longer periods of time before sale, as discussed more fully below. Total originations during the first half of 2023 were $1.89 billion.

Loans held for sale decreased $30.8 million, or 5.6%, during the first six months of 2023, from $554.6 million at December 31, 2022, to $523.8 million at June 30, 2023. The decrease in loans held for sale was principally due to the impact of market conditions in a rising rate environment which has influenced management's intent to hold a greater portion of loans as held for investment combined with higher levels of loan sales in the first half of 2023.

Loans and leases held for investment increased $492.2 million, or 6.7%, during the first six months of 2023, from $7.34 billion at December 31, 2022, to $7.84 billion at June 30, 2023. The increase was primarily the result of the above-mentioned loan originations in 2023 combined with increased levels of loans retained as held for investment.

Total deposits were $9.88 billion at June 30, 2023, an increase of $994.2 million, or 11.2%, from $8.88 billion at December 31, 2022. The increase in total deposits from the prior period was to support growth in the loan and lease portfolio combined with strong deposit inflows. At June 30, 2023, the Bank’s total uninsured deposits were approximately $1.4 billion, or 14.3%, of total deposits.

Borrowings decreased to $28.3 million at June 30, 2023, from $83.2 million at December 31, 2022. This decrease was principally due to paying off the Company’s Fed Funds line of credit in the first quarter of 2023. See Note 8. Borrowings in the accompanying Notes to Unaudited Condensed Consolidated Financial Statements for a discussion of current sources of available debt capacity.

Regulatory Impact of Asset Growth

General. In the first quarter of 2023, the Company and the Bank each first exceeded $10 billion in total assets. As of June 30, 2023, the Company and the Bank each had total assets of $10.82 billion and $10.72 billion, respectively. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and its implementing regulations impose various additional requirements on bank holding companies and banks with $10 billion or more in total consolidated assets. As a general matter, the Company and the Bank are not immediately subject to these additional requirements when they exceed $10 billion in assets; instead, the Company and the Bank will be subject to these various requirements over various dates, as described below.

Consumer Financial Laws. Under the Dodd-Frank Act, the Consumer Financial Protection Bureau (CFPB) has near-exclusive supervision authority, including examination authority, to assess compliance with federal consumer financial laws for a bank and its affiliates if the bank has total assets of more than $10 billion. This provision becomes applicable to a bank following the fourth consecutive quarter where the total assets of the bank, as reported in its quarterly Call Report, exceed $10 billion and afterwards remains applicable to the bank unless the bank has reported total assets of $10 billion or less in its quarterly Call Report for four consecutive quarters.

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Deposit Insurance Assessments. Also under the Dodd-Frank Act, the minimum ratio of net worth to insured deposits of the federal Deposit Insurance Fund administered by the FDIC was increased from 1.15 percent to 1.35 percent and the FDIC is required, in setting deposit insurance assessments, to offset the effect of the increase on institutions with assets of less than $10 billion, which results in institutions with assets greater than $10 billion paying higher assessments. In addition, following the fourth consecutive quarter where the total assets of a bank exceeds $10 billion, as reported in its quarterly Call Report, the FDIC utilizes a different method for determining deposit insurance assessments. This large bank method is based on a bank’s ability to withstand asset- and funding-related stress, its regulatory ratings, and potential losses to the FDIC in the event of the bank’s failure, subject to discretionary adjustments by the FDIC.

Volcker Rule. Under provisions of the Dodd-Frank Act referred to as the “Volcker Rule,” certain limitations are placed on the ability of insured depository institutions and their affiliates to engage in sponsoring, investing in and transacting with certain investment funds, known as “covered funds” under the rule. There are a number of exclusions from the definition of “covered funds,” including for investments in Small Business Investment Companies, or SBICs, and certain qualifying venture capital funds. The Volcker Rule also places restrictions on proprietary trading, which could impact certain hedging activities.

Limits on Interchange Fees. The Bank also may be affected by the Durbin Amendment to the Dodd-Frank Act regarding limits on debit card interchange fees. The Durbin Amendment gave the Federal Reserve Board the authority to establish rules regarding interchange fees charged for electronic debit transactions by a payment card issuer that, together with its affiliates, has assets of $10 billion or more, as of December 31 of the preceding calendar year, and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer. The Federal Reserve Board has adopted rules under this provision that limit the swipe fees that a debit card issuer can charge a merchant for a transaction to the sum of 21 cents and five basis points times the value of the transaction, plus up to one cent for fraud prevention costs.

Asset Quality

Management considers asset quality to be of primary importance. A formal loan review function, independent of loan origination, is used to identify and monitor problem loans. This function reports directly to the Audit & Risk Committee of the Board of Directors.

Nonperforming Assets

The Bank places loans and leases on nonaccrual status when they become 90 days past due as to principal or interest payments, or prior to that if management has determined based upon current information available to them that the timely collection of principal or interest is not probable. When a loan or lease is placed on nonaccrual status, any interest previously accrued as income but not actually collected is reversed and recorded as a reduction of loan or lease interest and fee income. Typically, collections of interest and principal received on a nonaccrual loan or lease are applied to the outstanding principal as determined at the time of collection of the loan or lease. In respect to the Company's adoption of ASU No. 2022-02 on January 1, 2023, as described more fully in Note 2 in the accompanying Unaudited Condensed Consolidated Financial Statements, the prior period discussed below has been adjusted to exclude previously disclosed troubled debt restructurings for comparative purposes.

Nonperforming assets, excluding loans measured at fair value, at June 30, 2023 were $111.2 million, which represented a $37.8 million, or 51.5%, increase from December 31, 2022. These nonperforming assets at June 30, 2023 were all nonaccrual loans and leases. At June 30, 2023, there were no foreclosed assets. Of the $111.2 million of nonperforming assets, $66.3 million carried a government guarantee, leaving an unguaranteed exposure of $44.9 million in total nonperforming assets at June 30, 2023. This represents an increase of $26.1 million, or 139.0%, from an unguaranteed exposure of $18.8 million at December 31, 2022.

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The following table provides information with respect to nonperforming assets, excluding loans measured at fair value, at the dates indicated.

	June 30, 2023 (1)			December 31, 2022 (1)
Nonaccrual loans and leases:
Total nonperforming loans and leases (all on nonaccrual)	$	111,221		$	73,392
Foreclosed assets	—			—
Total nonperforming assets	$	111,221		$	73,392
Allowance for credit losses on loans and leases	$	120,116		$	96,566
Total nonperforming loans and leases to total loans and leases held for investment	1.50		%	1.07		%
Total nonperforming loans and leases to total assets	1.07		%	0.78		%
Allowance for credit losses on loans and leases to loans and leases held for investment	1.62		%	1.41		%
Allowance for credit losses on loans and leases to total nonperforming loans and leases	108.00		%	131.58		%

(1)Excludes loans measured at fair value.

	June 30, 2023 (1)			December 31, 2022 (1)
Nonaccrual loans and leases guaranteed by U.S. government:
Total nonperforming loans and leases guaranteed by the U.S government (all on nonaccrual)	$	66,322		$	54,608
Foreclosed assets guaranteed by the U.S. government	—			—
Total nonperforming assets guaranteed by the U.S. government	$	66,322		$	54,608
Allowance for credit losses on loans and leases	$	120,116		$	96,566
Total nonperforming loans and leases not guaranteed by the U.S. government to total held for investment loans and leases	0.61		%	0.27		%
Total nonperforming loans and leases not guaranteed by the U.S. government to total assets	0.43		%	0.20		%
Allowance for credit losses on loans and leases to total nonperforming loans and leases not guaranteed by the U.S. government	267.52		%	514.09		%

(1)Excludes loans measured at fair value.

Total nonperforming assets, including loans measured at fair value, at June 30, 2023 were $168.8 million, which represented a $48.4 million, or 40.2%, increase from December 31, 2022. Of the $168.8 million of nonperforming assets, $113.2 million carried a government guarantee, leaving an unguaranteed exposure of $55.6 million in total nonperforming assets at June 30, 2023. This represents an increase of $29.5 million, or 113.4%, from an unguaranteed exposure of $26.0 million at December 31, 2022.

See the below discussion related to the change in potential problem and impaired loans and leases for management’s overall observations regarding growth in total nonperforming loans and leases.

As a percentage of the Bank’s total capital, nonperforming loans and leases, excluding loans measured at fair value, represented 12.8% at June 30, 2023, compared to 9.0% at December 31, 2022. Adjusting the ratio to include only the unguaranteed portion of nonperforming loans and leases at historical cost to reflect management’s belief that the greater magnitude of risk resides in this portion, the ratios at both June 30, 2023 and December 31, 2022 were 5.2% and 2.3%, respectively.

55

As of June 30, 2023, and December 31, 2022, potential problem (also referred to as criticized) and classified loans and leases, excluding loans measured at fair value, totaled $556.6 million and $424.7 million, respectively. The following is a discussion of these loans and leases. Risk Grades 5 through 8 represent the spectrum of criticized and classified loans and leases. For a complete description of the risk grading system, see Note 3. Loans and Leases Held for Investment and Credit Quality in the Company’s 2022 Form 10-K. At June 30, 2023, the portion of criticized and classified loans and leases guaranteed by the SBA or USDA totaled $227.1 million and total portfolio unguaranteed exposure risk was $329.5 million, or 7.0% of total held for investment unguaranteed exposure carried at historical cost. This compares to the December 31, 2022 portion of criticized and classified loans and leases guaranteed by the SBA or USDA which totaled $195.8 million and total portfolio unguaranteed exposure risk was $228.9 million, or 5.5% of total held for investment unguaranteed exposure carried at historical cost. As of June 30, 2023, loans and leases carried at historical cost within the following verticals comprise the largest portion of the total potential problem and classified loans and leases: Wine and Craft Beverage at 12.3%, Senior Housing at 12.2%, Sponsor Finance at 12.1% (principally related to Search Fund Lending), General Lending at 10.1%, Healthcare at 5.0%, Senior Care at 4.7%, Fitness Centers at 4.6%, Hotels at 4.6%, Venture Banking at 4.4% and Agriculture at 4.0%. As of December 31, 2022, loans and leases carried at historical cost within the following verticals comprise the largest portion of the total potential problem and classified loans and leases: Wine and Craft Beverage at 11.5%, General Lending at 10.3%, Senior Housing at 10.2%, Sponsor Finance at 7.8%, Healthcare at 6.4%, Hotels at 5.9%, Fitness Centers at 5.1%, Agriculture at 4.5% and Senior Care at 4.0%. Of the above listed verticals, Senior Housing, Sponsor Finance and Venture Banking are within the Company’s Specialty Lending division while Hotels are within the Energy & Infrastructure division, the remainder of the above listed verticals are within the Small Business Banking division. The majority of the $131.9 million increase in potential problem and classified loans and leases in the first six months of 2023 was comprised of several relationships that did not have a government guarantee. The Company believes that its underwriting and credit quality standards have remained high and continues to consider changing economic conditions in a rising interest rate environment.

Loans and leases that experience insignificant payment delays and payment shortfalls are generally not individually evaluated for the purpose of estimating the allowance for credit losses. The Bank generally considers an “insignificant period of time” from payment delays to be a period of 90 days or less. The Bank would consider a modification for a customer experiencing what is expected to be a short-term event that has temporarily impacted cash flow. This could be due, among other reasons, to illness, weather, impact from a one-time expense, slower than expected start-up, construction issues or other short-term issues. Credit personnel will review the request to determine if the customer is stressed and how the event has impacted the ability of the customer to repay the loan or lease long term. At June 30, 2023, the Company had a total of $21.7 million in loans modified in the first half of 2023 to borrowers experiencing financial difficulty, all of which remained current with $4.5 million on principal payment deferral.

Management endeavors to be proactive in its approach to identify and resolve problem loans and leases and is focused on working with the borrowers and guarantors of these loans and leases to provide loan and lease modifications when warranted. Management implements a proactive approach to identifying and classifying loans and leases as special mention (also referred to as criticized), Risk Grade 5. At June 30, 2023, and December 31, 2022, Risk Grade 5 loans and leases, excluding loans measured at fair value, totaled $404.3 million and $286.5 million, respectively, for a six month increase of $117.8 million. The increase in Risk Grade 5 loans and leases, exclusive of loans measured at fair value, during the first half of 2023 was principally confined to eight verticals: Sponsor Finance ($35.9 million or 30.4%, principally related to Search Fund Lending), Wine and Craft Beverage ($19.7 million or 16.7%), Venture Banking ($17.1 million or 14.5%), Bioenergy ($13.5 million or 11.4%), Senior Housing ($12.5 million or 10.6%), Conventional Financing ($10.3 million or 8.7%), General Lending ($6.4 million or 5.4%), and Senior Care ($6.1 million or 5.2%). Of the above listed verticals, Sponsor Finance, Senior Housing, Venture Banking and Conventional Financing are within the Company’s Specialty Lending division while Bioenergy is within the Energy & Infrastructure division, the remainder of the above listed verticals are within the Small Business Banking division.

At June 30, 2023, approximately 97.5% of loans and leases classified as Risk Grade 5 are performing with no relationships having payments past due more than 30 days. While the level of nonperforming assets fluctuates in response to changing economic and market conditions, in light of the relative size and composition of the loan and lease portfolio and management’s degree of success in resolving problem assets, management believes that a proactive approach to early identification and intervention is critical to successfully managing a small business loan portfolio. As government payment assistance began to expire toward the end of 2020, borrowers with continuing difficulties arising from the pandemic were provided additional relief through payment deferrals. At June 30, 2023, the Company had $9.5 million in unguaranteed loans on SBA payment assistance. Management monitors these borrowers closely and has observed financial conditions continuing to improve.

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Allowance for Credit Losses on Loans and Leases

The ACL of $96.6 million at December 31, 2022, increased by $23.6 million, or 24.4%, to $120.1 million at June 30, 2023. The ACL as a percentage of loans and leases held for investment at historical cost amounted to 1.4% and 1.6% at December 31, 2022 and June 30, 2023, respectively. The increase in the ACL during the first six months of 2023 was primarily the result of loan growth, combined with portfolio trends and changes in the macroeconomic outlook. See also the above section captioned “Provision for Loan and Lease Credit Losses” in “Results of Operations” for related information.

Actual past due held for investment loans and leases, inclusive of loans measured at fair value, have increased by $40.6 million since December 31, 2022. Total loans and leases 90 or more days past due increased $41.1 million, or 72.7%, compared to December 31, 2022. This increase was comprised of a $11.5 million increase in unguaranteed exposure combined with a $29.7 million increase in the guaranteed portion of past due loans compared to December 31, 2022. At June 30, 2023 and December 31, 2022, total held for investment unguaranteed loans and leases past due as a percentage of total held for investment unguaranteed loans and leases, inclusive of loans measured at fair value, was 0.9% and 0.7%, respectively. Total unguaranteed loans and leases past due were comprised of $35.8 million carried at historical cost, an increase of $14.6 million, and $11.8 million measured at fair value, an increase of $2.2 million, as of June 30, 2023 compared to December 31, 2022. Management continues to actively monitor and work to improve asset quality. Management believes the ACL of $120.1 million at June 30, 2023 is appropriate in light of the risk inherent in the loan and lease portfolio. Management’s judgments are based on numerous assumptions about current and expected events that it believes to be reasonable, but which may or may not be valid. Accordingly, no assurance can be given that management’s ongoing evaluation of the loan and lease portfolio in light of changing economic conditions and other relevant circumstances will not require significant future additions to the ACL, thus adversely affecting the Company’s operating results. Additional information on the ACL is presented in Note 5. Loans and Leases Held for Investment and Credit Quality of the Unaudited Condensed Consolidated Financial Statements in this report.

Liquidity Management

Liquidity management refers to the ability to meet day-to-day cash flow requirements based primarily on activity in loan and deposit accounts of the Company’s customers. Liquidity is immediately available from four major sources: (a) cash on hand and on deposit at other banks; (b) the outstanding balance of federal funds sold; (c) the market value of unpledged investment securities; and (d) availability under lines of credit. At June 30, 2023, the total amount of these four items was $4.59 billion, or 42.4% of total assets compared to 40.7% of total assets, at December 31, 2022.

Loans and other assets are funded by loan sales, wholesale deposits and core deposits. To date, an increasing retail deposit base and a stable amount of brokered deposits have been adequate to meet loan obligations, while maintaining the desired level of immediate liquidity. The Company maintains an investment securities portfolio that is available for both immediate and secondary contingent liquidity purposes, whether via pledging to the Federal Home Loan Bank, Federal Reserve Bank Term Funding Program or through liquidation. Additionally, the Company maintains a guaranteed loan portfolio that is also a contingent liquidity source, whether via pledging to the Federal Reserve Discount Window or through liquidation.

At June 30, 2023, none of the investment securities portfolio was pledged to secure public deposits or pledged to retail repurchase agreements, leaving $1.13 billion available to pledge as collateral.

Contractual Obligations

The Company has entered into significant fixed and determinable contractual obligations for future payments. Other than normal changes in the ordinary course of the Company’s operations, there have been no significant changes in the types of contractual obligations or amounts due since December 31, 2022. See the section titled “Liquidity Management” in Part II, Item 7 of the Company’s 2022 Form 10-K for additional discussion of contractual obligations.

Off-Balance Sheet Arrangements

In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with GAAP, are not recorded in the consolidated financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of commitments to extend credit and standby letters of credit. For more information, see Note 10. Commitments and Contingencies in the accompanying notes to Unaudited Condensed Consolidated Financial Statements.

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Asset/Liability Management and Interest Rate Sensitivity

One of the primary objectives of asset/liability management is to maximize the net interest margin while minimizing the earnings risk associated with changes in interest rates. One method used to manage interest rate sensitivity is to measure, over various time periods, the interest rate sensitivity positions, or gaps. As of June 30, 2023, the balance sheet’s total cumulative gap position was 5.0%. For further information, see Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The interest rate gap method, however, addresses only the magnitude of asset and liability repricing timing differences as of the report date and does not address earnings, market value, changes in account behaviors based on the interest rate environment, or growth. Therefore, management also uses an earnings simulation model to prepare, on a regular basis, earnings projections based on a range of instantaneous parallel interest rate shocks applied to a static balance sheet and non-parallel interest rate shocks applied to a dynamic balance sheet to measure interest rate risk. As of June 30, 2023, the Company’s interest rate risk profile under the instantaneous parallel interest rate shock scenarios applied to a static balance sheet is slightly asset-sensitive. For more information, see Item 3. Quantitative and Qualitative Disclosures About Market Risk.

An asset-sensitive position means that net interest income will generally move in the same direction as interest rates. For instance, if interest rates increase, net interest income can be expected to increase, and if interest rates decrease, net interest income can be expected to decrease. The Company attempts to mitigate interest rate risk by match funding assets and liabilities with similar rate instruments. Asset/liability sensitivity is primarily derived from the prime-based loans that adjust as the prime interest rate changes, rates on cash accounts that adjusts as the federal funds rate changes and the longer duration of indeterminate term deposits. Note that the Company regularly models various forecasted rate projections with non-parallel shifts that are reflective of potential current rate environment outcomes. Under these scenarios, the Company’s interest rate risk profile may increase in asset sensitivity, decrease in asset sensitivity, or depending on the scenario and timing of anticipated rate changes, may transition to a liability-sensitive interest rate risk profile. The Company believes that regular modeling of various interest rate outcomes allows it to assess and manage potential risks from various rate shifts.

Capital

The maintenance of appropriate levels of capital is a management priority and is monitored on a regular basis. The Company’s principal goals related to the maintenance of capital are the following: to provide adequate capital to support the Company’s risk profile consistent with the risk appetite approved by the Board of Directors; to provide financial flexibility to support future growth and client needs; to comply with relevant laws, regulations, and supervisory guidance; to achieve optimal ratings for the Company and its subsidiaries; and to provide a competitive return to shareholders. Management regularly monitors the capital position of the Company on both a consolidated and bank level basis. In this regard, management’s goal is to maintain capital at levels that are in excess of the regulatory “well capitalized” levels. Risk-based capital ratios, which include Tier 1 Capital, Total Capital and Common Equity Tier 1 Capital, are calculated based on regulatory guidance related to the measurement of capital and risk-weighted assets.

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Capital amounts and ratios as of June 30, 2023, and December 31, 2022, are presented in the table below.

	Actual				Minimum Capital Requirement				Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions (1)
	Amount		Ratio		Amount		Ratio		Amount		Ratio
Consolidated - June 30, 2023
Common Equity Tier 1 (to Risk-Weighted Assets)	$	911,721	11.55	%	$	355,139	4.50	%	N/A		N/A
Total Capital (to Risk-Weighted Assets)	1,010,695		12.81		631,358		8.00		N/A		N/A
Tier 1 Capital (to Risk-Weighted Assets)	911,721		11.55		473,519		6.00		N/A		N/A
Tier 1 Capital (to Average Assets)	911,721		8.46		430,986		4.00		N/A		N/A
Bank - June 30, 2023
Common Equity Tier 1 (to Risk-Weighted Assets)	$	770,449	10.14	%	$	342,051	4.50	%	$	494,074	6.50	%
Total Capital (to Risk-Weighted Assets)	865,832		11.39		608,091		8.00		760,113		10.00
Tier 1 Capital (to Risk-Weighted Assets)	770,449		10.14		456,068		6.00		608,091		8.00
Tier 1 Capital (to Average Assets)	770,449		7.23		426,493		4.00		533,116		5.00
Consolidated - December 31, 2022
Common Equity Tier 1 (to Risk-Weighted Assets)	$	888,235	12.47	%	$	320,446	4.50	%	N/A		N/A
Total Capital (to Risk-Weighted Assets)	977,360		13.73		569,681		8.00		N/A		N/A
Tier 1 Capital (to Risk-Weighted Assets)	888,235		12.47		427,261		6.00		N/A		N/A
Tier 1 Capital (to Average Assets)	888,235		9.26		383,499		4.00		N/A		N/A
Bank - December 31, 2022
Common Equity Tier 1 (to Risk-Weighted Assets)	$	730,092	10.70	%	$	307,179	4.50	%	$	443,703	6.50	%
Total Capital (to Risk-Weighted Assets)	815,577		11.95		546,096		8.00		682,620		10.00
Tier 1 Capital (to Risk-Weighted Assets)	730,092		10.70		409,572		6.00		546,096		8.00
Tier 1 Capital (to Average Assets)	730,092		7.70		379,396		4.00		474,245		5.00

(1)Prompt corrective action provisions are not applicable at the bank holding company level.

Critical Accounting Policies and Estimates

The preparation of consolidated financial statements in accordance with GAAP requires the Company to make estimates and judgments that affect reported amounts of assets, liabilities, income and expenses and related disclosure of contingent assets and liabilities. The Company bases estimates on historical experience and on various other assumptions that are believed to be reasonable under current circumstances, results of which form the basis for making judgments about the carrying value of certain assets and liabilities that are not readily available from other sources. Estimates are evaluated on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions.

Accounting policies, as described in detail in the Notes to the Company’s Unaudited Condensed Consolidated Financial Statements in this report and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, are an integral part of the Company’s consolidated financial statements. A thorough understanding of these accounting policies is essential when reviewing the Company’s reported results of operations and financial position. The Company’s most critical accounting policies and estimates are listed below. These estimates require the Company to make difficult, subjective or complex judgments about matters that are inherently uncertain.

•Allowance for credit losses;

•Valuation of loans accounted for under the fair value option;

•Valuation of servicing assets; and

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•Income taxes

Changes in these estimates, that are likely to occur from period to period, or the use of different estimates that the Company could have reasonably used in the current period, would have a material impact on the Company’s financial position, results of operations or liquidity.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest rate risk is a significant market risk and can result from timing and volume differences in the repricing of rate-sensitive assets and liabilities, widening or tightening of credit spreads, changes in the general level of market interest rates and changes in the shape and level of market yield curves. The Company manages the interest rate sensitivity of interest-bearing liabilities and interest-earning assets in an effort to minimize the adverse effects of changes in the interest rate environment. Management of interest rate risk is carried out primarily through strategies involving available-for-sale securities, loan and lease portfolio, and available funding sources.

The Company has an Asset/Liability Committee to support prudent oversight of interest rate risk management. The Asset/Liability Committee monitors the volume, maturities, pricing and mix of assets and funding sources with the objective of managing assets and funding sources to provide results that are consistent with liquidity, growth, risk limits and profitability goals. Adherence to relevant policies is monitored on an ongoing basis by the Asset/Liability Committee.

The Company has a total cumulative gap in interest-earning assets and interest-bearing liabilities of 5.0% as of June 30, 2023, indicating that, overall, over the expected life of the instruments, assets will reprice before liabilities.

The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest rate sensitive.” An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The Company analyzes interest rate sensitivity position to manage the risk associated with interest rate movements through the use of two simulation models: economic value of equity (“EVE”) and net interest income (“NII”) simulations. These simulations project both short-term and long-term interest rate risk under a variety of instantaneous parallel rate shocks applied to a static balance sheet. The EVE simulation provides a long-term view of interest rate risk because it analyzes all of the Company’s future cash flows. EVE is defined as the present value of the Company’s assets, less the present value of its liabilities, adjusted for any off-balance sheet items. The results show a theoretical change in the economic value of shareholders’ equity as interest rates change.

EVE and NII simulations are completed regularly and presented to the Asset/Liability Committee. The simulations provide an estimate of the impact of changes in interest rates on equity and net interest income under a range of assumptions. The numerous assumptions used in the simulation process are provided to the Asset/Liability Committee on at least an annual basis. Changes to these assumptions can significantly affect the results of the simulation. The simulation incorporates assumptions regarding the potential timing in the repricing of certain assets and liabilities when market rates change and the changes in spreads between different market rates. The simulation analysis incorporates management’s current assessment of the risk that pricing margins will change adversely over time due to competition or other factors.

Simulation analysis is only an estimate of interest rate risk exposure at a particular point in time. The Company regularly models various forecasted rate projections with non-parallel shifts that are reflective of potential current rate environment outcomes. Under these scenarios, the Company’s interest rate risk profile may increase in asset sensitivity, decrease in asset sensitivity, or depending on the scenario and timing of anticipated rate changes, may transition to a liability sensitive interest rate risk profile. The Company believes that regular modeling of various interest rate outcomes allows it to assess and manage potential risks from various rate shifts.

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The table below sets forth an approximation of the Company’s NII sensitivity exposure for the 12-month periods ending June 30, 2024 and 2025, and the Company’s EVE sensitivity at June 30, 2023. The simulation uses projected repricing of assets and liabilities at June 30, 2023, on the basis of contractual maturities, anticipated repayments and scheduled rate adjustments. Critical model assumptions such as loan and investment prepayment rates, deposit decay rates, changes in deposit pricing, both in amount and timing, relative to changes in market rates (commonly referred to as deposit betas and lags, respectively) and assumed replacement pricing can have a significant impact on interest income simulation. A static balance sheet is maintained to remove volume considerations and to place the focal point on the rate sensitivity of the Company’s balance sheet. While management believes such assumptions to be reasonable, actual future activity may differ from the results shown below as it will include growth considerations, non-parallel rate movements, and management actions to mitigate the impacts of changing interest rates on the balance sheet’s earnings profile.

	Estimated Increase/Decrease in Net Interest Income		Estimated Percentage Change in EVE
Basis Point ("bp") Change in Interest Rates	12 Months Ending June 30, 2024	12 Months Ending June 30, 2025	As of June 30, 2023
+400	1.0%	(4.0)%	(28.0)%
+300	0.9	(2.9)	(21.2)
+200	0.7	(1.8)	(14.2)
+100	0.3	(0.9)	(7.1)
-100	(0.9)	—	6.8
-200	(1.9)	(0.4)	13.5
-300	(3.0)	(0.9)	20.1

Rates are increased instantaneously at the beginning of the projection. The Company's asset/liability profile is slightly asset sensitive in year one, as the Company’s variable rate loan portfolio reprices the full amount of the assumed change in interest rates, while the retail savings and short-term retail certificates of deposits portfolio will reprice with an assumed beta. The Company is slightly liability sensitive in year two from a net interest income perspective as the company's interest rate increases on new and existing deposits are repricing more rapidly than the company's total loan and lease portfolio. Interest rates do not normally move all at once or evenly over time, but management believes that the analysis is useful to understanding the potential direction and magnitude of net interest income changes due to changing interest rates.

The EVE analysis shows that the Company would theoretically lose market value in a rising rate environment. The favorable EVE change resulting from the loan and lease portfolio in a rising rate analysis is more than offset by the devaluation of the interest-bearing liabilities. This is largely driven by the Company’s longer asset duration, primarily consisting of investments and loans, versus the shorter duration of its funding portfolio, primarily consisting of retail savings and short-term retail certificates of deposits. Increased fixed rate loan production since 2020, given the historical low market rate environment, has also been a significant driver in the model results.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

An evaluation of the Company’s disclosure controls and procedures (as defined in Rules 13(a)-15(e) and 15(d)-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), was carried out under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer as of June 30, 2023, the last day of the period covered by this Quarterly Report. The Company’s Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of June 30, 2023, in ensuring that the information required to be disclosed in the reports the Company files or submits under the Exchange Act is (i) accumulated and communicated to management (including the Company’s Chief Executive Officer and Chief Financial Officer) as appropriate to allow timely decisions regarding required disclosures, and (ii) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.

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Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended June 30, 2023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

In the ordinary course of operations, the Company is at times involved in legal proceedings. In the opinion of management, as of June 30, 2023, there are no material pending legal proceedings to which the Company or any of its subsidiaries is a party or of which any of their property is the subject.

Item 1A. Risk Factors

There have been no material changes in the Company’s risk factors from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, with the exception of the additional risk factor disclosed in the Company's Quarterly Report on Form 10-Q for the period ended March 31, 2023.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On May 17, 2022, the Board of Directors of the Company authorized the repurchase of up to $50,000,000 in shares of the Company’s voting common stock from time to time through December 31, 2023 (the “Repurchase Program”). The Repurchase Program enables the Company to acquire shares through open market purchases or privately negotiated transactions, including through a Rule 10b5-1 plan, at the discretion of management and on terms (including quantity, timing, and price) that management determines to be advisable. Actions in connection with the repurchase program will be subject to various factors, including the Company’s capital and liquidity positions, regulatory and accounting considerations, the Company’s financial and operational performance, alternative uses of capital, the trading price of the Company’s common stock, and market conditions. The repurchase program does not obligate the Company to acquire a specific dollar amount or number of shares and may be extended, modified, or discontinued at any time. As of June 30, 2023, the Company had not made any purchases of shares under the Repurchase Program.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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Item 6. Exhibits.

Exhibits to this report are listed in the Index to Exhibits section of this report.

INDEX TO EXHIBITS

Exhibit No.	Description of Exhibit
3.1	Amended and Restated Articles of Incorporation of Live Oak Bancshares, Inc. (incorporated by reference to Exhibit 3.1 of the registration statement on Form S-1, filed on June 19, 2015)
3.2	Amended Bylaws of Live Oak Bancshares, Inc. (incorporated by reference to Exhibit 3.2 of the amended registration statement on Form S-1, filed on July 13, 2015)
4.1	Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 of the registration statement on Form S-1, filed on June 19, 2015)
10.1	Form of 2023 RSU Award Agreement for non-employee directors* #
10.2.1	Amendment to Software Service Agreement dated June 5, 2023, between Live Oak Banking Company and nCino, Inc.*
10.2.2	Amendment to Software Service Agreement dated June 5, 2023, between Live Oak Banking Company and nCino, Inc.*
10.2.3	Amendment to Software Service Agreement dated June 8, 2023, between Live Oak Banking Company and nCino, Inc.*
10.2.4	Amendment to Software Service Agreement dated July 14, 2023, between Live Oak Banking Company and nCino, Inc.*
10.2.5	Amendment to Software Service Agreement dated July 21, 2023, between Live Oak Banking Company and nCino, Inc.*
31.1	Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2	Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
101	Interactive data files pursuant to Rule 405 of Regulation S-T, formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022; (ii) Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2023 and 2022; (iii) Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2023 and 2022; (iv) Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three and Six Months Ended June 30, 2023 and 2022; (v) Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2023 and 2022; and (vi) Notes to Unaudited Condensed Consolidated Financial Statements*
104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

*Indicates a document being filed with this Form 10-Q.

**Furnished herewith. This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that Section. Such exhibit shall not be deemed incorporated into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.

#    Denotes management contract or compensatory plan.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Live Oak Bancshares, Inc.
	(Registrant)
Date: August 2, 2023	By:	/s/ William C. Losch III
		William C. Losch III
		Chief Financial Officer

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