Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐¨ NO ☒ý

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	The NASDAQ Stock Market LLC

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 May ~~4, 2018,~~6, 2019, there were ~~35,360,011~~35,540,227 shares of the registrant’s voting common stock outstanding and 4,643,530 shares of the registrant’s non-voting common stock outstanding.

~~Table of Contents~~

Live Oak Bancshares, Inc. ~~and Subsidiaries~~

Form 10-Q

For the Quarterly Period Ended March 31, ~~2018~~

2019

TABLE OF CONTENTS

			Page
PART I. FINANCIAL INFORMATION
		~~Page~~
~~PART I. FINANCIAL INFORMATION~~
Item 1.		Financial Statements (Unaudited)		1
		Condensed Consolidated Balance Sheets as of March 31, ~~2018~~2019 and December 31, ~~2017~~2018		1
		Condensed Consolidated Statements of Income for the Three Months Ended March 31, ~~2018~~2019 and ~~2017~~2018		2
		Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, ~~2018~~2019 and ~~2017~~2018		3
		Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, ~~2018~~2019 and ~~2017~~2018		4
		Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, ~~2018~~2019 and ~~2017~~2018		5
		Notes to Unaudited Condensed Consolidated Financial Statements		7
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	41	42
Item 3.		Quantitative and Qualitative Disclosures about Market Risk	57	58
Item 4.		Controls and Procedures	57	58
		PART II. OTHER INFORMATION
Item 1.		Legal Proceedings	58	59
Item 1A.		Risk Factors	58	59
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	58	59
Item 3.		Defaults Upon Senior Securities	58	59
Item 4.		Mine Safety Disclosures	58	59
Item 5.		Other Information	58	59
Item 6.		Exhibits	58	60
	~~Signatures~~	59
	Index to Exhibits		60
		60Signatures		61

~~Table of Contents~~

PART I. ~~FINANCIAL~~FINANCIAL INFORMATION

Item 1. Financial Statements

Live Oak Bancshares, Inc.

Condensed Consolidated Balance Sheets

As of March 31, ~~2018~~2019 (unaudited) and December 31, 2017*

2018*

(Dollars in thousands)

	March 31, 2019			December 31, 2018
Assets
Cash and due from banks	$	221,159		$	316,823
Federal funds sold		64,708			—
Certificates of deposit with other banks		7,250			7,250
Investment securities available-for-sale		569,739			380,490
Loans held for sale		772,481			687,393
Loans and leases held for investment		2,002,124			1,843,419
Allowance for loan and lease losses		(35,111	)		(32,434	)
Net loans and leases		1,967,013			1,810,985
Premises and equipment, net		271,810			262,524
Foreclosed assets		1,374			1,094
Servicing assets		44,324			47,641
Operating lease right-of-use assets		2,136			—
Other assets		136,053			156,249
Total assets	$	4,058,047		$	3,670,449
Liabilities and Shareholders’ Equity
Liabilities
Deposits:
Noninterest-bearing	$	53,843		$	53,993
Interest-bearing		3,474,562			3,095,590
Total deposits		3,528,405			3,149,583
Short term borrowings		1,393			1,441
Long term borrowings		17			16
Operating lease liabilities		2,314			—
Other liabilities		25,538			25,849
Total liabilities		3,557,667			3,176,889
Shareholders’ equity
Preferred stock, no par value, 1,000,000 authorized, none issued or outstanding at March 31, 2019 and December 31, 2018		—			—
Class A common stock, no par value, 100,000,000 shares authorized, 35,531,549 and 35,512,262 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively		281,994			278,945
Class B common stock, no par value, 10,000,000 shares authorized, 4,643,530 shares issued and outstanding at March 31, 2019 and December 31, 2018		49,168			49,168
Retained earnings		168,225			167,124
Accumulated other comprehensive income (loss)		993			(1,677	)
Total shareholders’ equity		500,380			493,560
Total liabilities and shareholders’ equity	$	4,058,047		$	3,670,449

March 31,
2018 December 31,
2017*
Assets
Cash and due from banks $ 527,952
$ 295,271
Certificates of deposit with other banks 2,250
3,000
Investment securities available-for-sale 378,488
93,355
Loans held for sale 720,511
680,454
Loans and leases held for investment 1,442,077
1,343,973
Allowance for loan and lease losses (28,050 ) (24,190 )
Net loans and leases 1,414,027
1,319,783
Premises and equipment, net 216,831
178,790
Foreclosed assets 1,519
1,281
Servicing assets 53,120
52,298
Other assets 146,165
134,242
Total assets $ 3,460,863
$ 2,758,474
Liabilities and Shareholders’ Equity
Liabilities
Deposits:
Noninterest-bearing $ 48,755
$ 57,868
Interest-bearing 2,924,586
2,202,395
Total deposits 2,973,341
2,260,263
Long term borrowings 3,489
26,564
Other liabilities 35,197
34,714
Total liabilities 3,012,027
2,321,541
Shareholders’ equity
Preferred stock, no par value, 1,000,000 authorized, none issued or outstanding at March 31, 2018 and December 31, 2017 —
—
Class A common stock, no par value, 100,000,000 shares authorized, 35,330,618 and 35,252,053 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively 271,451
268,557
Class B common stock, no par value, 10,000,000 shares authorized, 4,643,530 shares issued and outstanding at March 31, 2018 and December 31, 2017 49,168
49,168
Retained earnings 131,739
120,241
Accumulated other comprehensive loss (3,522 ) (1,033 )
Total equity 448,836
436,933
Total liabilities and shareholders’ equity $ 3,460,863
$ 2,758,474

*Derived from audited consolidated financial statements.

See Notes to Unaudited Condensed Consolidated Financial Statements

~~Table of Contents~~

Live Oak Bancshares, Inc.

Condensed Consolidated Statements of Income

For the three months ended March 31, 2019 and 2018 ~~and 2017~~ (unaudited)

(Dollars in thousands, except per share data)

	For the Three Months Ended March 31,
	2019			2018
Interest income
Loans and fees on loans	$	44,966		$	32,691
Investment securities, taxable		3,317			1,117
Other interest earning assets		1,639			1,215
Total interest income		49,922			35,023
Interest expense
Deposits		19,317			10,418
Borrowings		—			129
Total interest expense		19,317			10,547
Net interest income		30,605			24,476
Provision for loan and lease losses		2,742			4,392
Net interest income after provision for loan and lease losses		27,863			20,084
Noninterest income
Loan servicing revenue		7,410			6,898
Loan servicing asset revaluation		(2,246	)		(5,088	)
Net gains on sales of loans		4,198			24,418
Gain on sale of investment securities available-for-sale		5			—
Lease income		2,325			1,608
Construction supervision fee income		779			779
Title insurance income		—			1,300
Other noninterest income		556			841
Total noninterest income		13,027			30,756
Noninterest expense
Salaries and employee benefits		21,855			20,209
Travel expense		1,200			1,843
Professional services expense		2,182			1,298
Advertising and marketing expense		1,364			1,662
Occupancy expense		1,609			1,857
Data processing expense		2,399			2,837
Equipment expense		3,325			3,077
Other loan origination and maintenance expense		1,639			1,329
FDIC insurance		635			572
Title insurance closing services expense		—			426
Other noninterest expense		1,993			2,962
Total noninterest expense		38,201			38,072
Income before taxes		2,689			12,768
Income tax expense		317			315
Net income	$	2,372		$	12,453
Basic earnings per share	$	0.06		$	0.31
Diluted earnings per share	$	0.06		$	0.30

Three Months Ended
March 31,
2018 2017
Interest income
Loans and fees on loans $ 32,691
$ 19,754
Investment securities, taxable 1,117
323
Other interest earning assets 1,215
342
Total interest income 35,023
20,419
Interest expense
Deposits 10,418
4,543
Borrowings 129
235
Total interest expense 10,547
4,778
Net interest income 24,476
15,641
Provision for loan and lease losses 4,392
1,499
Net interest income after provision for loan and lease losses 20,084
14,142
Noninterest income
Loan servicing revenue 6,898
5,923
Loan servicing asset revaluation (5,088 ) (2,009 )
Net gains on sales of loans 24,418
18,952
Lease income 1,608
—
Construction supervision fee income 779
429
Title insurance income 1,300
1,438
Other noninterest income 841
1,020
Total noninterest income 30,756
25,753
Noninterest expense
Salaries and employee benefits 20,209
18,682
Travel expense 1,843
1,598
Professional services expense 1,298
1,736
Advertising and marketing expense 1,662
1,485
Occupancy expense 1,857
1,195
Data processing expense 2,837
1,696
Equipment expense 3,077
1,074
Other loan origination and maintenance expense 1,329
1,005
FDIC insurance 572
726
Title insurance closing services expense 426
405
Other expense 2,962
3,383
Total noninterest expense 38,072
32,985
Income before taxes 12,768
6,910
Income tax expense 315
798
Net income $ 12,453
$ 6,112
Basic earnings per share $ 0.31
$ 0.18
Diluted earnings per share $ 0.30
$ 0.17

See Notes to Unaudited Condensed Consolidated Financial Statements

~~Table of Contents~~

Live Oak Bancshares, Inc.

Condensed Consolidated Statements of Comprehensive Income

For the three months ended March 31, 2019 and 2018 ~~and 2017~~ (unaudited)

(Dollars in thousands)

	Three Months Ended March 31,
	2019			2018
Net income	$	2,372		$	12,453
Other comprehensive income (loss) before tax:
Net unrealized gain (loss) on investment securities arising during the period		3,518			(2,955	)
Reclassification adjustment for gain on sale of securities available-for-sale included in net income		(5	)		—
Other comprehensive income (loss) before tax		3,513			(2,955	)
Income tax (expense) benefit		(843	)		710
Other comprehensive income (loss), net of tax		2,670			(2,245	)
Total comprehensive income	$	5,042		$	10,208

Three Months Ended
March 31,
2018 2017
Net income $ 12,453
$ 6,112
Other comprehensive loss before tax:
Net unrealized loss on investment securities arising during the period (2,955 ) (73 )
Reclassification adjustment for (gain) loss on sale of securities available-for-sale included in net income —
—
Other comprehensive loss before tax (2,955 ) (73 )
Income tax benefit 710
28
Other comprehensive loss, net of tax (2,245 ) (45 )
Total comprehensive income $ 10,208
$ 6,067

See Notes to Unaudited Condensed Consolidated Financial Statements

~~Table of Contents~~

Live Oak Bancshares, Inc.

Condensed Consolidated Statements of Changes in Shareholders’ Equity

For the three months ended March 31, 2019 and 2018 ~~and 2017~~ (unaudited)

(Dollars in thousands)

	Common stock										Accumulated other
	Shares							Retained			comprehensive			Total
	Class A		Class B		Amount			earnings			income (loss)			equity
Balance at December 31, 2017		35,252,053		4,643,530	$	317,725		$	120,241		$	(1,033	)	$	436,933
Net income		—		—		—			12,453			—			12,453
Other comprehensive loss		—		—		—			—			(2,245	)		(2,245	)
Issuance of restricted stock		17,289		—		—			—			—			—
Withholding cash issued in lieu of restricted stock issuance		—		—		(311	)		—			—			(311	)
Employee stock purchase program		7,022		—		165			—			—			165
Stock option exercises		54,254		—		691			—			—			691
Stock option based compensation expense		—		—		463			—			—			463
Restricted stock expense		—		—		1,886			—			—			1,886
Reclassification of accumulated other comprehensive income due to tax rate change		—		—		—			244			(244	)		—
Cash dividends ($0.03 per share)		—		—		—			(1,199	)		—			(1,199	)
Balance at March 31, 2018		35,330,618		4,643,530	$	320,619		$	131,739		$	(3,522	)	$	448,836
Balance at December 31, 2018		35,512,262		4,643,530	$	328,113		$	167,124		$	(1,677	)	$	493,560
Net income		—		—		—			2,372			—			2,372
Other comprehensive income		—		—		—			—			2,670			2,670
Issuance of restricted stock		2,140		—		—			—			—			—
Withholding cash issued in lieu of restricted stock issuance		—		—		(5	)		—			—			(5	)
Employee stock purchase program		14,059		—		182			—			—			182
Stock option exercises		3,088		—		14			—			—			14
Stock option based compensation expense		—		—		470			—			—			470
Restricted stock expense		—		—		2,388			—			—			2,388
Cumulative effect of accounting change for Accounting Standards Update 2016-02		—		—		—			(66	)		—			(66	)
Cash dividends ($0.03 per share)		—		—		—			(1,205	)		—			(1,205	)
Balance at March 31, 2019		35,531,549		4,643,530	$	331,162		$	168,225		$	993		$	500,380

Common stock
Retained
earnings

Accumulated
other
comprehensive
loss

Total
equity
Shares
Class A Class B Amount
Balance at December 31, 2016 29,530,072
4,723,530
$ 199,981
$ 23,518
$ (652 ) $ 222,847
Net income —
—
—
6,112
—
6,112
Other comprehensive loss —
—
—
—
(45 ) (45 )
Issuance of restricted stock 273,946
—
—
—
—
—
Withholding cash issued in lieu of restricted stock issuance —
—
(4,828 ) —
—
(4,828 )
Employee stock purchase program 12,411
—
241
—
—
241
Stock option exercises 33,136
—
186
—
—
186
Stock option based compensation expense —
—
456
—
—
456
Restricted stock expense —
—
1,347
—
—
1,347
Stock issued in acquisition of Reltco, Inc. 27,724
—
565
—
—
565
Dividends (distributions to shareholders) —
—
—
(692 ) —
(692 )
Balance at March 31, 2017 29,877,289
4,723,530
$ 197,948
$ 28,938
$ (697 ) $ 226,189
Balance at December 31, 2017 35,252,053
4,643,530
$ 317,725
$ 120,241
$ (1,033 ) $ 436,933
Net income —
—
—
12,453
—
12,453
Other comprehensive loss —
—
—
—
(2,245 ) (2,245 )
Issuance of restricted stock 17,289
—
—
—
—
—
Withholding cash issued in lieu of restricted stock issuance —
—
(311 ) —
—
(311 )
Employee stock purchase program 7,022
—
165
—
—
165
Stock option exercises 54,254
—
691
—
—
691
Stock option based compensation expense —
—
463
—
—
463
Restricted stock expense —
—
1,886
—
—
1,886
Reclassification of accumulated other comprehensive income due to tax rate change —
—
—
244
(244 ) —
Dividends (distributions to shareholders) —
—
—
(1,199 ) —
(1,199 )
Balance at March 31, 2018 35,330,618
4,643,530
$ 320,619
$ 131,739
$ (3,522 ) $ 448,836

See Notes to Unaudited Condensed Consolidated Financial Statements

~~Table of Contents~~

Live Oak Bancshares, Inc.

Condensed Consolidated Statements of Cash Flows

For the three months ended March 31, 2019 and 2018 ~~and 2017~~ (unaudited)

(Dollars in thousands)

	Three Months Ended March 31,
	2019			2018
Cash flows from operating activities
Net income	$	2,372		$	12,453
Adjustments to reconcile net income to net cash used by operating activities:
Depreciation and amortization		4,034			3,786
Provision for loan and lease losses		2,742			4,392
Amortization of premium on securities, net of accretion		105			153
(Accretion) amortization of discount on unguaranteed loans		(1,319	)		2,118
Deferred tax (benefit) expense		(632	)		316
Originations of loans held for sale		(206,440	)		(302,522	)
Proceeds from sales of loans held for sale		80,931			277,279
Net gains on sale of loans held for sale		(4,198	)		(24,418	)
Net decrease (increase) in servicing assets		3,317			(822	)
Net gain on disposal of long-lived asset		(357	)		—
Stock option based compensation expense		470			463
Restricted stock expense		2,388			1,886
Stock based compensation expense tax (shortfall) benefit		(8	)		14
Business combination contingent consideration fair value adjustment		—			(260	)
Changes in assets and liabilities:
Lease right-of-use assets and liabilities, net		114			—
Other assets		9,778			(12,065	)
Other liabilities		(605	)		1,123
Net cash used by operating activities		(107,308	)		(36,104	)
Cash flows from investing activities
Purchases of securities available-for-sale		(198,384	)		(293,046	)
Proceeds from sales, maturities, calls, and principal paydown of securities available-for-sale		12,543			4,805
Proceeds from SBA reimbursement/sale of foreclosed assets		393			—
Maturities of certificates of deposits with other banks		—			750
Loan and lease originations and principal collections, net		(113,539	)		(91,388	)
Proceeds from sale of long-lived asset		10,895			—
Purchases of premises and equipment, net		(13,315	)		(41,685	)
Net cash used by investing activities		(301,407	)		(420,564	)

Three Months Ended
March 31,
2018 2017
Cash flows from operating activities
Net income $ 12,453
$ 6,112
Adjustments to reconcile net income to net cash used by operating activities:
Depreciation and amortization 3,786
1,708
Provision for loan and lease losses 4,392
1,499
Amortization of premium on securities, net of accretion 153
110
Amortization of discount on unguaranteed loans, net 2,118
1,155
Deferred tax expense 316
2,046
Originations of loans held for sale (302,522 ) (329,990 )
Proceeds from sales of loans held for sale 277,279
227,667
Net gains on sale of loans held for sale (24,418 ) (18,952 )
Net increase in servicing assets (822 ) (1,590 )
Net loss on disposal of premises and equipment —
213
Stock option based compensation expense 463
456
Restricted stock expense 1,886
1,347
Stock based compensation expense excess tax benefits 14
874
Business combination contingent consideration fair value adjustment (260 ) 200
Changes in assets and liabilities:
Other assets (12,065 ) 474
Other liabilities 1,123
(1,026 )
Net cash used by operating activities (36,104 ) (107,697 )
Cash flows from investing activities
Purchases of securities available-for-sale (293,046 ) (19 )
Proceeds from sales, maturities, calls, and principal paydowns of securities available-for-sale 4,805
2,262
Business combination, net of cash acquired —
(7,583 )
Maturities of certificates of deposit with other banks 750
1,250
Loan and lease originations and principal collections, net (91,388 ) (91,378 )
Purchases of premises and equipment, net (41,685 ) (37,660 )
Net cash used by investing activities (420,564 ) (133,128 )

See Notes to Unaudited Condensed Consolidated Financial Statements

~~Table of Contents~~

Live Oak Bancshares, Inc.

Condensed Consolidated Statements of Cash Flows (Continued)

For the three months ended March 31, 2019 and 2018 ~~and 2017~~ (unaudited)

(Dollars in thousands)

	Three Months Ended March 31,
	2019			2018
Cash flows from financing activities
Net increase in deposits	$	378,822		$	713,078
Proceeds from long term borrowings		—			18
Repayment of long term borrowings		(1	)		(23,093	)
Repayment of short term borrowings		(48	)		—
Stock option exercises		14			691
Employee stock purchase program		182			165
Withholding cash issued in lieu of restricted stock		(5	)		(311	)
Shareholder dividend distributions		(1,205	)		(1,199	)
Net cash provided by financing activities		377,759			689,349
Net (decrease) increase in cash and cash equivalents		(30,956	)		232,681
Cash and cash equivalents, beginning		316,823			295,271
Cash and cash equivalents, ending	$	285,867		$	527,952

Supplemental disclosure of cash flow information
Interest paid	$	17,837		$	10,368
Income tax (received) paid		(13,654	)		251

Supplemental disclosures of noncash operating, investing, and financing activities
Unrealized holding gains (losses) on available-for-sale securities, net of taxes	$	2,670		$	(2,245	)
Transfers from loans to foreclosed real estate and other repossessions		707			238
Right-of-use assets obtained in exchange for lessee operating lease liabilities		2,241			—
Transfer of loans held for sale to loans and leases held for investment		50,055			11,713
Transfer of loans and leases held for investment to loans held for sale		8,845			6,771

Three Months Ended
March 31,
2018 2017
Cash flows from financing activities
Net increase in deposits 713,078
154,067
Proceeds from long term borrowings 18
—
Repayment of long term borrowings (23,093 ) (370 )
Proceeds from short term borrowings —
13,100
Stock option exercises 691
186
Employee stock purchase program 165
241
Withholding cash issued in lieu of restricted stock (311 ) (4,828 )
Shareholder dividend distributions (1,199 ) (692 )
Net cash provided by financing activities 689,349
161,704
Net increase (decrease) in cash and cash equivalents 232,681
(79,121 )
Cash and cash equivalents, beginning 295,271
238,008
Cash and cash equivalents, ending $ 527,952
$ 158,887

Supplemental disclosure of cash flow information
Interest paid $ 10,368
$ 4,836
Income tax paid 251
2,828

Supplemental disclosures of noncash operating, investing, and financing activities
Unrealized holding losses on available-for-sale securities, net of taxes $ (2,245 ) $ (45 )
Transfers from loans and leases to foreclosed real estate and other repossessions 238
58
Transfer of loans held for sale to loans and leases held for investment 11,713
3,656
Transfer of loans and leases held for investment to loans held for sale 6,771
1,642
Business combination:
Assets acquired (excluding goodwill) —
5,766
Liabilities assumed —
4,681
Purchase price —
8,250
Goodwill recorded —
7,165

See Notes to Unaudited Condensed Consolidated Financial Statements

~~Table of Contents~~

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1. Basis of Presentation

Nature of Operations

Live Oak Bancshares, Inc. (the “Company” or “LOB”) is a bank holding company headquartered in Wilmington, North Carolina incorporated under the laws of North Carolina in December 2008. The Company conducts business operations primarily through its commercial bank subsidiary, Live Oak Banking Company (the “Bank”). The Bank was organized and incorporated under the laws of the State of North Carolina on February 25, 2008 and commenced operations on May 12, 2008. The Bank specializes in providing lending services to small businesses ~~nationwide in targeted industries, which we refer to as verticals.~~nationwide. The Bank identifies and grows lending to credit-worthy borrowers both within ~~credit-worthy~~specific industries, also called verticals, through expertise within those industries, and more broadly to select borrowers outside of those industries. A significant portion of the loans originated by the Bank are guaranteed by the Small Business Administration (“SBA”) under the 7(a) Loan Program and ~~to a lesser extent by~~ the U.S. Department of Agriculture ("USDA") Rural Energy for America Program ("REAP") ~~and~~, Business & Industry ("B&I") and Water & Waste Disposal (“WEP”) loan programs. On July 28, 2015 the Company completed its initial public offering with a secondary offering completed in August of 2017.

In 2010, the Bank formed Live Oak Number One, Inc., a wholly-owned subsidiary, to hold properties foreclosed on by the Bank.

In addition to the Bank, the Company owns Live Oak Grove, LLC, opened in September 2015 for the purpose of providing Company employees and business visitors an on-site restaurant location; Government Loan Solutions, Inc. (“GLS”), a management and technology consulting firm that specializes in the settlement, accounting, and securitization processes for government guaranteed loans, including loans originated under the SBA 7(a) loan program and USDA-guaranteed loans; and 504 Fund Advisors, LLC (“504FA”), formed to serve as the investment adviser to the 504 Fund, a closed-end mutual fund organized to invest in SBA section 504 loans.

In August 2016, the Company formed ~~Canapi,~~Live Oak Ventures, Inc. (formerly known as “Canapi, Inc.”) for the purpose of investing in businesses that align with the Company's strategic initiative to be a leader in financial technology. ~~Canapi was formerly known as Live Oak Ventures, Inc.~~

In November 2016, the Company formed Live Oak Clean Energy Financing LLC (“LOCEF”) for the purpose of providing financing to entities for renewable energy applications.

During the three months ended March 31, 2019, LOCEF became a wholly-owned subsidiary of the Bank.

On February 1, 2017, the Company completed its acquisition of Reltco Inc. and National Assurance Title, Inc. (collectively referred to as "Reltco"), two nationwide title agencies under common control based in Tampa, Florida.

Effective August 1, 2018, Reltco was sold.

In June 2018, the Bank formed Live Oak Private Wealth, LLC for the purpose of providing high-net-worth individuals and families with strategic wealth and investment management services.

In September 2018, the Company formed Canapi Advisors, LLC for the purpose of providing investment advisory services to a series of new funds focused on providing venture capital to new and emerging financial services technology companies.

The Company ~~earns~~generates revenue primarily from net interest income and the origination and sale of ~~SBA and USDA-guaranteed~~government guaranteed loans. Income from the retention of loans ~~and net~~is comprised 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 ~~the sale~~sales of ~~loans, revenues on the servicing of sold loans and valuation of loan servicing rights.~~loans. Offsetting these revenues are the cost of funding sources, provision for loan and lease 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.

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 months ended March 31, ~~2018~~2019 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, ~~2018.~~2019. The consolidated balance sheet as of December 31, ~~2017~~2018 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, ~~2017,~~2018, filed with the Securities Exchange Commission on ~~March 8, 2018~~February 27, 2019 (SEC File No. 001-37497) (the ~~"2017~~"2018 Annual Report"). A summary description of the significant accounting policies followed by the Company is set forth in Note 1 of the Notes to Consolidated Financial Statements in the Company’s ~~2017~~2018 Annual Report. These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes in the Company's ~~2017~~2018 Annual Report.

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

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

~~Table of Contents~~

~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Consolidated Financial Statements~~

Business Segments

Management has determined that the Company has one significant operating segment, which is providing a lending platform for small businesses nationwide. In determining the appropriateness of segment definition, the Company considers the materiality of a potential segment, the components of the business about which financial information is available, and components for which management regularly evaluates relative to resource allocation and performance assessment.

~~Unconsolidated Joint Venture~~

On October 1, 2017, the Company closed the digital banking joint venture between Live Oak Banking Company and First Data Corporation ("First Data"). The new company, named Apiture, combines First Data's and the Bank's digital banking platforms, products, services, and certain human resources used in the creation and delivery of technology solutions for financial institutions. The contributed assets of both the Company and First Data are considered businesses in accordance with relevant accounting standards. At closing both the Bank and First Data received equal voting interests in Apiture in exchange for their respective contributions. As a term of the closing agreements, First Data is entitled to a preference in Apiture's cash earnings from the date of closing through December 31, 2017 and all of 2018, not to exceed $18.0 million and $18.9 million, respectively.

As a result of the above cash earnings preference, income (loss) is allocated utilizing the hypothetical liquidation at book value ("HLBV") method. Under the HLBV method, we allocate income or loss based on the change in each unitholders’ claim on the net assets of Apiture at period end, after adjusting for any distributions or contributions made during such period. As a result of the HLBV method there was no net income or loss attributed to the Company related its ownership interest in Apiture during the quarter ended March 31, 2018.

~~As of March 31, 2018 and December 31, 2017 the Company' had a $68.0 million equity method investment included in other assets on the consolidated balance sheet for this investment.~~

~~Derivative Financial Instruments~~

~~Interest Rate Futures Contracts~~

During the fourth quarter of 2016, the Company began using exchange-traded interest rate futures contracts to manage interest rate risk that may impact expected gains arising from future secondary market loan sales. Upon entering into a futures contract, the Company is required to pledge to the counterparty an amount of cash equal to a certain percentage of the contract amount, also known as an initial margin deposit. Subsequent payments, known as variation margin, are made or received by the Company each day to settle the daily fluctuations in the fair value of the underlying contract. Investments in these derivative contracts are subject to risks that can result in a loss of all or part of an investment. Credit risk is considered low because the counterparties are futures exchanges. The Company has not designated any derivative as a hedging instrument under applicable accounting guidance. Changes in fair value of the derivative contracts is recorded as a component of "net gains on sales of loans" on the consolidated statement of income. The fair value of the derivative contracts on the balance sheet date is zero due to the daily cash settlement of contracts.

~~Equity Warrant Assets~~

In connection with negotiated credit facilities and certain other services, the Company may obtain equity warrant assets giving the Company the right to acquire stock in private companies in certain verticals. These assets are held for prospective investment gains and are not used to hedge any economic risks. Further, the Company does not use other derivative instruments to hedge economic risks stemming from equity warrant assets.

Equity warrant assets in certain private client companies are recorded as derivatives when they contain net settlement terms and other qualifying criteria under Accounting Standards Codification 815. Equity warrant assets entitle the Company to purchase a specific number of shares of stock at a specific price within a specific time period, generally 10 years. Certain equity warrant assets contain contingent provisions, which adjust the underlying number of shares or purchase price upon the occurrence of certain future events to prevent dilution of the Company’s implied ownership represented by the warrants. Certain warrant agreements contain net share settlement provisions, which permit the receipt of, upon exercise, a share count equal to the intrinsic value of the warrant divided by the share price (otherwise known as a “cashless” exercise). These equity warrant assets are recorded at fair value and are classified as derivative assets, a component of other assets, on the consolidated balance sheet at the time they are obtained.

The grant date fair values of equity warrant assets classified as derivatives received in connection with the issuance of a credit facility are deemed to be loan fees and recognized as an adjustment of loan yield through loan interest income. Similar to other loan fees, the yield adjustment related to grant date fair value of warrants is recognized over the life of that credit facility.

~~Table of Contents~~

~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Consolidated Financial Statements~~

Any changes in fair value from the grant date fair value of equity warrant assets classified as derivatives will be recognized as increases or decreases to other assets on the consolidated balance sheet and as net gains or losses on derivative instruments, in other noninterest income, a component of consolidated net income. When a portfolio company is acquired, the Company may exercise these equity warrant assets for shares or cash.

~~The fair value of equity warrant assets classified as derivatives is reviewed quarterly using a Black-Scholes option pricing model.~~

For those equity warrant assets that do not contain net share settlement provisions, the Company considers these to be equity investments without readily determinable market values and records the asset at cost.

~~Revenue Recognition~~

On January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) No. 2014-09 “Revenue from Contracts with Customers” (Topic 606) and all subsequent ASUs that modified Topic 606. The implementation of the new standard did not have a material impact on the measurement or recognition of revenue and a cumulative effect adjustment to opening retained earnings was not necessary. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts were not adjusted and continue to be reported in accordance with the Company's historic accounting under Topic 605.

Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and lease financings or investment securities. In addition, certain noninterest income streams such as fees associated with servicing rights, financial guarantees, derivatives, title insurance, and equity and cost method investments are also not in scope of the new guidance. Therefore, the recognition of these revenue streams did not change upon adoption of Topic 606. Substantially all of the Company’s revenue is generated from contracts with customers. Noninterest revenue streams in-scope of Topic 606 are discussed below.

~~Other noninterest income~~

Other noninterest income consists of other recurring revenue streams from administration of trust assets held by the Company's trust department and from services provided by GLS to its clients for settlement, accounting, and valuation for government guaranteed loan sales and holdings. Trust account administration performance obligations are generally satisfied over time and fees are recognized monthly, based on the month-end market value of assets in fiduciary accounts and the applicable fee rate. Payment is generally received after month end through a direct charge to customers' accounts. The Company does not earn performance-based incentives from trust account administration services. GLS provides services when requested by clients. Each requested service represents a specific performance obligation with a transaction price outlined by GLS' fee schedule. Revenue is recognized as the requested services are completed and payment is generally received the following month.

~~Contract Balances~~

A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s noninterest revenue streams are largely based on transactional activity, or standard month-end revenue accruals such as trust administration fees based on month-end market values. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of March 31, 2018 and December 31, 2017, the Company did not have any significant contract balances.

~~Contract Acquisition Costs~~

In connection with the adoption of Topic 606, an entity is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, sales commission). The Company utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less. Upon adoption of Topic 606, the Company did not capitalize any contract acquisition cost.

Reclassifications

Certain reclassifications have been made to the prior period’s consolidated financial statements to place them on a comparable basis with the current year. Net income and shareholders’ equity previously reported were not affected by these reclassifications.

Accounting Change

On January 1, 2019, the Company adopted Accounting Standards Update ("ASU") No. 2016-02 “Leases (Topic 842),” (“ASU 2016-02”) and all subsequent ASUs that modified Topic 842. The Company elected to apply certain practical expedients provided under ASU 2016-02 whereby the Company will not reassess (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for any existing leases. The Company has also applied the practical expedient to use hindsight in determining the lease term and in assessing impairment of the right-of-use assets. The Company does not apply the recognition and measurement requirements to any short-term leases (as defined by ASU 2016-02). The Company accounts for lease and non-lease components separately because such amounts are readily determinable under the lease contracts. The Company utilized the modified-retrospective transition approach prescribed by ASU 2018-11, “Leases (Topic 842) Targeted Improvements” (“ASU 2018-11”). The implementation of the new standard resulted in the Company recording $2.2 million of operating lease right-of-use ("ROU") assets, $2.4 million of operating lease liabilities and a cumulative effect adjustment to opening retained earnings of $66 thousand. The Company also recorded $18 thousand of finance ROU assets and finance lease liabilities.

The Company determines if an arrangement is or contains a lease at inception. If it is determined to be or contain a lease, then the lease is classified as an operating or finance lease.

~~Table of Contents~~

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Right-of-use ("ROU") assets represent the Company's right to use an underlying asset for the lease term. Lease liabilities represent the Company's obligation to make lease payments arising from the lease. ROU assets and liabilities are measured on commencement date based on the present value of the lease payments over the lease term, discounted using the discount rate for the lease at commencement. The discount rate shall be the rate implicit in the lease, however, if that is not readily determinable, the Company will use its incremental borrowing rate. The ROU asset also includes any lease payments made before the commencement date and initial direct costs and excludes any lease incentives received. The lease terms may include options to extend or terminate the lease when it is reasonably certain that the option will be exercised. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

Operating leases are included in operating lease right-of-use assets and operating lease liabilities in the consolidated balance sheets. Finance leases are included in other assets and long term borrowings in the consolidated balance sheets. Lease expense for operating leases and finance leases is included in occupancy expense in the consolidated statements of income and interest expense for finance leases is included in other interest expense in the consolidated statements of income.

Note 2. Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). This standard is intended to clarify the principles for recognizing revenue and to develop a common revenue standard for GAAP. The Company's revenue is comprised of loan servicing revenue, net gains on sales of loans and net interest income on financial assets and financial liabilities, all of which are explicitly excluded from the scope of ASU 2014-09, and non-interest income. The Company's revenue streams included in non-interest income that are within the scope of the guidance are primarily related to sales of foreclosed assets, construction supervision fees, title insurance income and trust fiduciary fees. The Company adopted the standard in the first quarter of 2018 with no material impact on the consolidated financial statements. Refer to Note 1. Basis of Presentation for additional information.

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”). ASU 2016-01, among other things, (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (viii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale. The Company adopted the standard in the first quarter of 2018 with no material impact on the consolidated financial statements. In accordance with (iv) above, the Company measured the fair value of the loan and lease portfolio using an exit price notion. See Note 10. Fair Value of Financial Instruments for additional information.

In February 2016, the FASB issued ASU No. ~~2016-02, “Leases (Topic 842)” (“ASU 2016-02”).~~2016-02. The FASB issued this ASU to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet by lessees for those leases classified as operating leases under current GAAP and disclosing key information about leasing arrangements. The Company adopted these amendments ~~in this ASU are effective for the Company~~ on January 1, 2019. ~~The impact~~See Note 1. Basis of ~~this standard will depend on the Company's lease portfolio at the time of the adoption~~Presentation and ~~the Company is currently assessing the effect that the adoption of this standard will have on the consolidated financial statements.~~

Note 6. Leases for additional information.

In June 2016, the FASB issued ASU No. 2016-13, ~~“Measurement~~“Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). This new guidance replaces the incurred loss impairment methodology in current standards with an expected credit loss methodology and requires consideration of a broader range of information to determine credit loss estimates. ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 will be effective for the Company on January 1, 2020. The Company is currently evaluating the potential impact of ASU 2016-13 on the consolidated financial statements. In that regard, a cross-functional working group has been formed, under the direction of the Company's Chief Financial Officer and Chief Credit Officer. The working group is comprised of individuals from various functional areas including credit, risk management, finance and information technology, among others. ~~The Company is currently developing an implementation plan to include assessment of processes, portfolio segmentation,~~Implementation efforts continue with model development, ongoing system requirements evaluation and the identification of data and resource needs, among other things. The Company has also ~~selected~~engaged a third-party vendor solution to assist in the application of ~~the~~ ASU 2016-13. While the Company is currently unable to reasonably estimate the impact of adopting ASU 2016-13, the impact of adoption is expected to be significantly influenced by the composition, characteristics and quality of loan and securities portfolios as well as the prevailing economic conditions and forecasts as of the adoption date.

~~Table of Contents~~

~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Consolidated Financial Statements~~

In ~~January 2017,~~June 2018, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805) - Clarifying the Definition of a Business” (“ASU 2017-01”). ASU 2017-01 clarifies the definition and provides a more robust framework to use in determining when a set of assets and activities constitutes a business. ASU 2017-01 is intended to provide guidance when evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The Company adopted the standard in the first quarter of 2018 with no effect on the consolidated financial statements.

In February 2017, the FASB issued ASU No. 2017-05, “Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20) - Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets” (“ASU 2017-05”). ASU 2017-05 clarifies the scope of Subtopic 610-20 and adds guidance on nonfinancial asset derecognition as well as the accounting for partial sales of nonfinancial assets. The amendments conform the derecognition guidance on nonfinancial assets with the model for transactions in the new revenue standard. The Company adopted the standard in the first quarter of 2018 with no effect on the consolidated financial statements.

~~In May 2017, the FASB issued ASU No. 2017-09,~~2018-07, “Compensation - Stock Compensation (Topic 718) ~~- Scope of Modification~~Improvements to Nonemployee Share-Based Payment Accounting” (“ASU ~~2017-09”~~2018-07”). ASU ~~2017-09 clarifies when changes~~2018-07 amends Accounting Standard Codification 718 to ~~the terms or conditions of a~~largely align accounting for share-based payment ~~award should be accounted~~awards issued to employees and nonemployees. Under the new guidance, existing employee guidance will generally apply to nonemployee share-based transactions, except for ~~as a modification. This~~specific guidance ~~indicates modification accounting is required when~~on inputs into option pricing models and the ~~fair value, vesting conditions, or classification~~attribution of ~~the award changes.~~cost. The Company adopted the standard ~~in the first quarter of 2018~~on January 1, 2019 with no material effect on ~~the~~its consolidated financial statements.

In ~~February~~July 2018, the FASB issued ASU No. ~~2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”~~2018-10, “Codification Improvements to Topic 842, Leases” (“ASU ~~2018-02”~~2018-10”). ASU ~~2018-02 addresses the income tax accounting treatment~~2018-10 provides clarification on narrow aspects to Topic 842 and to correct unintended application of the ~~stranded tax effects within other comprehensive income.~~guidance. The Company adopted the amendments on January 1, 2019. See Note 1. Basis of Presentation and Note 6. Leases for additional information.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

In July 2018, the FASB issued ASU No. 2018-11 which provides an additional transition method to adopt ASU 2016-02. The transition method allows ~~for~~ an entity to ~~reclassify~~apply ASU 2016-02 at the ~~stranded tax effects resulting~~adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. An entity that elects this transition method must provide required disclosures under Topic 840 for all periods that are in accordance with Topic 840. ASU 2018-11 also provides lessors with a practical expedient to not separate non-lease components from lease components by class of underlying asset. The Company adopted the ~~Tax Cuts~~amendments on January 1, 2019. See Note 1. Basis of Presentation and ~~Jobs Act from accumulated other comprehensive income~~Note 6. Leases for additional information.

In March 2019, the FASB issued ASU 2019-01, “Leases (Topic 842): Codification Improvements” (“ASU 2019-01”). ASU 2019-01 provides updates to ~~retained earnings. ASU 2018-02 will be~~Topic 842 including: (i) guidance on how to determine fair value of leased items for lessors who are not dealers or manufacturers, (ii) cash flow presentation for lessors of sales-type and direct financing leases and (iii) clarifies that certain transition disclosures. The amendments are effective for the Company on January 1, 2019, with early adoption permitted. The Company early adopted ASU 2018-02 in the first quarter of 2018 and reclassified its stranded tax credit of $244 thousand within accumulated other comprehensive income to retained earnings at March 31, 2018.

In February 2018, the FASB issued 2018-03, “Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2018-03”). ASU 2018-03 amendments clarify certain aspects of the guidance issued in ASU 2016-01. The amendments are effective for the Company for fiscal year 2018 with adoption as of July 1, 2018. 2020. The Company does not expect these amendments to have a material effect on its consolidated financial statements.

In ~~March 2018,~~April 2019, the FASB issued ~~2018-05, “Income Taxes (Topic 740) - Amendments~~ASU No. 2019-04, “Codification Improvements to ~~SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin (SAB) No. 118”~~Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments” (“ASU ~~2018-05”~~2019-04”). ASU ~~2018-05 amends~~2019-04 provides clarification and minor improvements related to ASU 2016-01 “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” ASU 2016-13 “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” and ASU 2017-12 “Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting ~~Standard Codification 740 to include recent SEC guidance pursuant to~~for Hedging Activities.” The standard will be effective for the ~~issuance of SAB 118. These amendments address situations when a registrant~~Company on January 1, 2020 with early adoption permitted. The Company does not ~~have the necessary information available, prepared, or analyzed in reasonable detail~~expect this standard to ~~complete the accounting for certain income tax effects of the Tax Cuts and Jobs Act. The amendments were effective upon issuance and do not~~ have a material effect on ~~the Company's~~its consolidated financial statements.

~~Table of Contents~~

~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Consolidated Financial Statements~~

Note 3. Earnings Per Share

Basic and diluted earnings per share are computed based on the weighted average number of shares outstanding during each period. Diluted earnings per share reflects the potential dilution that could occur, upon the exercise of stock options or upon the vesting of restricted stock grants, any of which would result in the issuance of common stock that would then be shared in the net income of the Company.

	For the Three Months Ended March 31,
	2019		2018
Basic earnings per share:
Net income available to common shareholders	$	2,372	$	12,453
Weighted-average basic shares outstanding		40,160,118		39,926,781
Basic earnings per share	$	0.06	$	0.31
Diluted earnings per share:
Net income available to common shareholders, for diluted earnings per share	$	2,372	$	12,453
Total weighted-average basic shares outstanding		40,160,118		39,926,781
Add effect of dilutive stock options and restricted stock grants		761,705		1,473,149
Total weighted-average diluted shares outstanding		40,921,823		41,399,930
Diluted earnings per share	$	0.06	$	0.30
Anti-dilutive shares		1,597,589		—

Three Months Ended
March 31,
2018 2017
Basic earnings per share:
Net income available to common shareholders $ 12,453
$ 6,112
Weighted-average basic shares outstanding 39,926,781
34,466,904
Basic earnings per share $ 0.31
$ 0.18
Diluted earnings per share:
Net income available to common shareholders, for diluted earnings per share $ 12,453
$ 6,112
Total weighted-average basic shares outstanding 39,926,781
34,466,904
Add effect of dilutive stock options and restricted stock grants 1,473,149
1,180,014
Total weighted-average diluted shares outstanding 41,399,930
35,646,918
Diluted earnings per share $ 0.30
$ 0.17
Anti-dilutive shares —
1,068,595

~~Table of Contents~~

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 4. Investment Securities

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

March 31, 2019	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
US treasury securities	$	4,974	$	2	$	—	$	4,976
US government agencies		48,290		145		153		48,282
Mortgage-backed securities		506,634		3,193		1,874		507,953
Municipal bonds		8,535		—		7		8,528
Total	$	568,433	$	3,340	$	2,034	$	569,739

December 31, 2018
US treasury securities	$	4,969	$	—	$	3	$	4,966
US government agencies		31,121		48		225		30,944
Mortgage-backed securities		345,606		1,340		3,365		343,581
Municipal bond		1,000		—		1		999
Total	$	382,696	$	1,388	$	3,594	$	380,490

Amortized
Cost

Unrealized
Gains

Unrealized
Losses

Fair
Value
March 31, 2018
US government agencies $ 22,787
$ 1
$ 356
$ 22,432
Residential mortgage-backed securities 358,225
10
4,214
354,021
Mutual fund 2,111
—
76
2,035
Total $ 383,123
$ 11
$ 4,646
$ 378,488

December 31, 2017
US government agencies $ 22,778
$ 3
$ 157
$ 22,624
Residential mortgage-backed securities 70,167
1
1,472
68,696
Mutual fund 2,090
—
55
2,035
Total $ 95,035
$ 4
$ 1,684
$ 93,355

During the three months ended March 31, 2019, $900 thousand of one municipal bond was sold resulting in a net gain of $5 thousand. There were no sales of securities during the three months ended March 31, ~~2018 and 2017.~~

2018.

The following tables show gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position.

	Less Than 12 Months				12 Months or More				Total
March 31, 2019	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
US treasury securities	$	—	$	—	$	—	$	—	$	—	$	—
US government agencies		5,996		4		16,353		149		22,349		153
Mortgage-backed securities		19,905		91		109,048		1,783		128,953		1,874
Municipal bonds		93		7		—		—		93		7
Total	$	25,994	$	102	$	125,401	$	1,932	$	151,395	$	2,034

	Less Than 12 Months				12 Months or More				Total
December 31, 2018	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
US treasury securities	$	4,966	$	3	$	—	$	—	$	4,966	$	3
US government agencies		—		—		16,268		225		16,268		225
Mortgage-backed securities		164,836		1,177		51,371		2,188		216,207		3,365
Municipal bond		999		1		—		—		999		1
Total	$	170,801	$	1,181	$	67,639	$	2,413	$	238,440	$	3,594

Less Than 12 Months 12 Months or More Total
March 31, 2018
Fair
Value

Unrealized
Losses

Fair
Value

Unrealized
Losses

Fair
Value

Unrealized
Losses
US government agencies $ 14,661
$ 292
$ 6,455
$ 64
$ 21,116
$ 356
Residential mortgage-backed securities 224,157
2,456
37,901
1,758
262,058
4,214
Mutual fund —
—
2,035
76
2,035
76
Total $ 238,818
$ 2,748
$ 46,391
$ 1,898
$ 285,209
$ 4,646
Less Than 12 Months 12 Months or More Total
December 31, 2017
Fair
Value

Unrealized
Losses

Fair
Value

Unrealized
Losses

Fair
Value

Unrealized
Losses
US government agencies $ 14,842
$ 100
$ 6,465
$ 57
$ 21,307
$ 157
Residential mortgage-backed securities 23,481
439
40,648
1,033
64,129
1,472
Mutual fund —
—
2,035
55
2,035
55
Total $ 38,323
$ 539
$ 49,148
$ 1,145
$ 87,471
$ 1,684

At March 31, ~~2018,~~2019, there were ~~twenty-three residential~~forty-one mortgage-backed securities ~~three~~and six US government ~~agency securities and the 504 Fund mutual fund~~agencies in unrealized loss positions for greater than 12 months and ~~thirty-one residential~~eight mortgage-backed securities, ~~and five~~two US government ~~agency securities~~agencies and one municipal bond in unrealized loss positions for less than 12 months. Unrealized losses at December 31, ~~2017~~2018 were comprised of ~~twenty-three residential~~thirty-one mortgage-backed securities ~~three~~and six US government agencies ~~and the 504 mutual fund~~ in unrealized loss positions for greater than 12 months and ~~five~~twenty-five mortgage-backed securities, one US ~~government agency securities~~treasury security and ~~eight residential mortgage-backed securities~~one municipal bond in unrealized loss positions for less than 12 ~~months.~~

months.

These unrealized losses are primarily the result of volatility in the market and are related to market interest rates. Since none of the unrealized losses relate to marketability of the securities or the issuer’s ability to honor redemption obligations and the Company has the intent and ability to hold the securities for a sufficient period of time to recover unrealized losses, none of the securities are deemed to be other than temporarily impaired.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

All ~~residential~~ mortgage-backed securities in the Company’s portfolio at March 31, ~~2018~~2019 and December 31, ~~2017~~2018 were backed by U.S. government sponsored enterprises (“GSEs”).

~~Table of Contents~~

~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Consolidated Financial Statements~~

The following is a summary of investment securities by maturity:

	March 31, 2019
	Amortized cost		Fair value
US treasury securities
One to five years	$	4,974	$	4,976
Total		4,974		4,976
US government agencies
Within one year		3,978		3,957
One to five years		32,403		32,362
Five to ten years		11,909		11,963
Total		48,290		48,282
Mortgage-backed securities
One to five years		3,028		2,980
Five to ten years		144,888		145,144
After 10 years		358,718		359,829
Total		506,634		507,953
Municipal bonds
After 10 years		8,535		8,528
Total		8,535		8,528

Total	$	568,433	$	569,739

March 31, 2018
Available-for-Sale

Amortized
cost

Fair
value
US government agencies
Within one year $ 6,323
$ 6,290
One to five years 16,464
16,142
Total 22,787
22,432

Residential mortgage-backed securities
One to five years 4,691
4,526
Five to ten years 28,998
28,878
After 10 years 324,536
320,617
Total 358,225
354,021

Total $ 381,012
$ 376,453

The table above reflects contractual maturities. Actual results will differ as the loans underlying the ~~residential~~ mortgage-backed securities may repay sooner than scheduled. ~~This table excludes the 504 Fund mutual fund investment.~~

At March 31, ~~2018~~2019 and December 31, ~~2017,~~2018, an investment security with a fair market value of $100 thousand was pledged to the Ohio State Treasurer to allow the Company's trust department to conduct business in the state of ~~Ohio and~~Ohio. At December 31, 2018, investment securities with a fair market value of $2.5 million were pledged to the Company's trust department for uninsured trust assets held by the trust department.

~~Table of Contents~~

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 5. Loans and Leases Held for Investment and Allowance for Loan and Lease Losses

Loan and Lease Portfolio Segments

The following describes the risk characteristics relevant to each of the portfolio segments. Each loan and lease category is assigned a risk grade during the origination and closing process based on criteria described later in this section.

Commercial and Industrial

Commercial and industrial loans (C&I) receive similar underwriting treatment as commercial real estate loans in that the repayment source is analyzed to determine its ability to meet cash flow coverage requirements as set forth by Bank policies. Repayment of the Bank’s C&I loans generally comes from the generation of cash flow as the result of the borrower’s business operations. This business cycle itself brings a certain level of risk to the portfolio. In some instances, these loans may carry a higher degree of risk due to a variety of reasons – illiquid collateral, specialized equipment, highly depreciable assets, uncollectable accounts receivable, revolving balances, or simply being unsecured. As a result of these characteristics, the SBA guarantee on these loans is an important factor in mitigating risk.

Construction and Development

Construction and development loans are for the purpose of acquisition and development of land to be improved through the construction of commercial buildings. Such loans are usually paid off through the conversion to permanent financing for the long-term benefit of the borrower’s ongoing operations. At the completion of the project, if the loan is converted to permanent financing or if scheduled loan amortization begins, it is then reclassified to the “Commercial Real Estate” segment. Underwriting of construction and development loans typically includes analysis of not only the borrower’s financial condition and ability to meet the required debt obligations, but also the general market conditions associated with the area and type of project being funded.

Commercial Real Estate

Commercial real estate loans are extensions of credit secured by owner occupied and non-owner occupied collateral. Underwriting generally involves intensive analysis of the financial strength of the borrower and guarantor, liquidation value of the subject collateral, the associated unguaranteed exposure, and any available secondary sources of repayment, with the greatest emphasis given to a borrower’s capacity to meet cash flow coverage requirements as set forth by Bank policies. Such repayment of commercial real estate loans is commonly derived from the successful ongoing operations of the business occupying the property. These typically include small businesses and professional practices.

Commercial Land

Commercial land loans are extensions of credit secured by farmland. Such loans are often for land improvements related to agricultural endeavors that may include construction of new specialized facilities. These loans are usually repaid through the conversion to permanent financing, or if scheduled loans amortization begins, for the long-term benefit of the borrower’s ongoing operations. Underwriting generally involves intensive analysis of the financial strength of the borrower and guarantor, liquidation value of the subject collateral, the associated unguaranteed exposure, and any available secondary sources of repayment, with the greatest emphasis given to a borrower’s capacity to meet cash flow coverage requirements as set forth by Bank policies.

Each of the loan types referenced in the sections above is further segmented into verticals in which the Bank chooses to operate. The Bank chooses to finance businesses operating in specific industries because of certain similarities. The similarities range from historical default and loss characteristics to business operations. However, there are differences that create the necessity to underwrite these loans according to varying criteria and guidelines. When underwriting a loan, the Bank considers numerous factors such as cash flow coverage, the credit scores of the guarantors, revenue growth, practice ownership experience and debt service capacity. Minimum guidelines have been set with regard to these various factors and deviations from those guidelines require compensating strengths when considering a proposed loan.

~~Table of Contents~~

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Loans and leases consist of the following:

	March 31, 2019			December 31, 2018
Commercial & Industrial
Agriculture	$	5,813		$	6,400
Death Care Management		22,809			17,378
Healthcare		49,752			51,082
Independent Pharmacies		110,458			108,783
Registered Investment Advisors		95,292			94,338
Veterinary Industry		45,333			45,604
Other Industries		339,423			295,163
Total		668,880			618,748
Construction & Development
Agriculture		31,236			43,454
Death Care Management		10,153			9,874
Healthcare		80,476			81,619
Independent Pharmacies		1,156			2,149
Registered Investment Advisors		1,586			1,232
Veterinary Industry		18,149			14,094
Other Industries		123,668			96,482
Total		266,424			248,904
Commercial Real Estate
Agriculture		46,049			53,085
Death Care Management		87,651			71,344
Healthcare		215,093			188,531
Independent Pharmacies		27,190			20,597
Registered Investment Advisors		6,825			7,905
Veterinary Industry		138,129			136,721
Other Industries		297,867			260,847
Total		818,804			739,030
Commercial Land
Agriculture		255,201			243,798
Total		255,201			243,798
Total Loans		2,009,309			1,850,480
Net Deferred Costs		4,186			5,960
Discount on SBA 7(a) Unguaranteed		(11,371	)		(13,021	)
Loans, Net of Unearned	$	2,002,124		$	1,843,419

March 31,
2018 December 31,
2017
Commercial & Industrial
Agriculture $ 3,605
$ 3,274
Death Care Management 13,982
13,495
Healthcare 45,001
43,301
Independent Pharmacies 100,528
99,920
Registered Investment Advisors 96,573
93,770
Veterinary Industry 49,797
46,387
Other Industries 209,408
184,903
Total 518,894
485,050
Construction & Development
Agriculture 35,976
34,188
Death Care Management 6,713
6,119
Healthcare 56,801
49,770
Independent Pharmacies 1,754
1,496
Registered Investment Advisors 883
376
Veterinary Industry 14,001
13,184
Other Industries 68,615
58,120
Total 184,743
163,253
Commercial Real Estate
Agriculture 49,934
46,717
Death Care Management 69,057
67,381
Healthcare 137,163
126,631
Independent Pharmacies 17,830
19,028
Registered Investment Advisors 11,488
11,789
Veterinary Industry 119,948
113,932
Other Industries 156,220
134,172
Total 561,640
519,650
Commercial Land
Agriculture 182,499
178,897
Total 182,499
178,897
Total Loans and Leases¹
1,447,776
1,346,850
Net Deferred Costs 7,841
8,545
Discount on SBA 7(a) and USDA Unguaranteed²
(13,540 ) (11,422 )
Loans and Leases, Net of Unearned $ 1,442,077
$ 1,343,973

1
1	Total loans and leases include ~~$115.5~~$386.7 million and ~~$99.7~~$305.4 million of U.S. government guaranteed loans as of March 31, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively.

2
2	The Company measures the carrying value of the retained portion of loans sold at fair value under ASC Subtopic 825-10. The value of these retained loan balances is discounted based on the estimates derived from comparable unguaranteed loan sales.

~~Table of Contents~~

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Credit Risk Profile

The Bank uses internal loan and lease reviews to assess the performance of individual loans and leases by industry segment. An independent review of the loan and lease portfolio is performed annually by an external firm. The goal of the Bank’s annual review of select borrowers' financial performance is to validate the adequacy of the risk grade assigned.

The Bank uses a grading system to rank the quality of each loan and lease. The grade is periodically evaluated and adjusted as performance dictates. Loan and lease grades 1 through 4 are passing grades and grade 5 is special mention. Collectively, grades 6 through 8 represent classified loans and leases in the Bank’s portfolio. The following guidelines govern the assignment of these risk grades:

Exceptional (1 Rated): These loans and leases are of the highest quality, with strong, well-documented sources of repayment. Debt service coverage (“DSC”) is over ~~1.75X~~2.00X based on historical results. ~~Secondary source of repayment is strong, with a loan to value (“LTV”) of 65%~~ Borrower has ownership experience and has demonstrated excellent revenue growth and/or ~~less if secured solely by commercial real estate (“CRE”). Discounted collateral coverage from all sources should exceed 125%.~~profitability. Guarantors have credit scores above ~~740.~~

750 and have strong personal liquidity.

Quality (2 Rated): These loans and leases are of good quality, with good, well-documented sources of repayment. DSC is over ~~1.25X~~1.74X based on historical results. Borrower has ownership experience and has demonstrated very good revenue growth and/or ~~pro-forma results. Secondary source of repayment is good, with a LTV of 75% or less if secured solely by CRE. Discounted collateral coverage should exceed 100%.~~profitability. Guarantors have credit scores above ~~700.~~

724 and have good personal liquidity.

Acceptable (3 rated): These loans and leases are of acceptable quality, with acceptable sources of repayment. DSC of over ~~1.00X~~1.24X based on historical or pro-forma results. Companies that do not meet these credit metrics must be evaluated to determine if they should be graded below this level.

Acceptable (4 rated): These loans and leases are considered very weak pass. These loans and leases are riskier than a 3-rated credit, but due to various mitigating factors are not considered a Special mention or worse. The mitigating factors must clearly be identified to offset further downgrade. Examples of loans and leases that may be put in this category include start-up loans and leases and loans and leases with less than 1:1 cash flow coverage with other sources of repayment.

Special mention (5 rated): These loans and leases are considered as emerging problems, with potentially unsatisfactory characteristics. These loans and leases require greater management attention. A loan or lease may be put into this category if the Bank is unable to obtain financial reporting from a company to fully evaluate its position.

Substandard (6 rated): Loans and leases graded Substandard are inadequately protected by current sound net worth, paying capacity of the borrower, or pledged collateral. They typically have unsatisfactory characteristics causing more than acceptable levels of risk, and have one or more well-defined weaknesses that could jeopardize the repayment of the debt.

Doubtful (7 rated): Loans and leases graded Doubtful have inherent weaknesses that make collection or liquidation in full questionable. Loans and leases graded Doubtful must be placed on non-accrual status.

Loss (8 rated): Loss rated loans and leases are considered uncollectible and of such little value that their continuance as an active Bank asset is not warranted. The asset should be charged off, even though partial recovery may be possible in the future.

~~Table of Contents~~

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

The following tables summarize the risk grades of each category:

Risk Grades
1 - 4

Risk Grade
5

Risk Grades
6 - 8
Total
March 31, 2018
Commercial & Industrial
Agriculture $ 3,087
$ 518
$ —
$ 3,605
Death Care Management 13,776
199
7
13,982
Healthcare 37,724
3,168
4,109
45,001
Independent Pharmacies 87,434
4,152
8,942
100,528
Registered Investment Advisors 93,802
2,062
709
96,573
Veterinary Industry 45,361
1,505
2,931
49,797
Other Industries 195,634
13,774
—
209,408
Total 476,818
25,378
16,698
518,894
Construction & Development
Agriculture 30,527
5,449
—
35,976
Death Care Management 6,713
—
—
6,713
Healthcare 52,281
3,119
1,401
56,801
Independent Pharmacies 1,754
—
—
1,754
Registered Investment Advisors 883
—
—
883
Veterinary Industry 12,814
1,187
—
14,001
Other Industries 68,280
335
—
68,615
Total 173,252
10,090
1,401
184,743
Commercial Real Estate
Agriculture 49,934
—
—
49,934
Death Care Management 61,343
3,833
3,881
69,057
Healthcare 117,279
8,954
10,930
137,163
Independent Pharmacies 15,458
2,260
112
17,830
Registered Investment Advisors 11,352
136
—
11,488
Veterinary Industry 101,884
3,285
14,779
119,948
Other Industries 155,544
676
—
156,220
Total 512,794
19,144
29,702
561,640
Commercial Land
Agriculture 179,803
2,696
—
182,499
Total 179,803
2,696
—
182,499
Total¹
$ 1,342,667
$ 57,308
$ 47,801
$ 1,447,776

~~Table of Contents~~

	Risk Grades 1 - 4		Risk Grade 5		Risk Grades 6 - 8		Total¹
March 31, 2019
Commercial & Industrial
Agriculture	$	5,264	$	549	$	—	$	5,813
Death Care Management		21,149		1,655		5		22,809
Healthcare		38,008		2,473		9,271		49,752
Independent Pharmacies		96,556		6,541		7,361		110,458
Registered Investment Advisors		90,304		2,267		2,721		95,292
Veterinary Industry		41,671		1,339		2,323		45,333
Other Industries		316,476		16,236		6,711		339,423
Total		609,428		31,060		28,392		668,880
Construction & Development
Agriculture		31,236		—		—		31,236
Death Care Management		10,153		—		—		10,153
Healthcare		78,138		2,338		—		80,476
Independent Pharmacies		1,156		—		—		1,156
Registered Investment Advisors		1,586		—		—		1,586
Veterinary Industry		18,149		—		—		18,149
Other Industries		121,073		2,595		—		123,668
Total		261,491		4,933		—		266,424
Commercial Real Estate
Agriculture		45,016		1,033		—		46,049
Death Care Management		80,856		3,385		3,410		87,651
Healthcare		185,948		8,830		20,315		215,093
Independent Pharmacies		17,499		2,452		7,239		27,190
Registered Investment Advisors		6,704		121		—		6,825
Veterinary Industry		120,974		4,147		13,008		138,129
Other Industries		281,662		6,866		9,339		297,867
Total		738,659		26,834		53,311		818,804
Commercial Land
Agriculture		229,677		11,313		14,211		255,201
Total		229,677		11,313		14,211		255,201
Total	$	1,839,255	$	74,140	$	95,914	$	2,009,309

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

	Risk Grades 1 - 4		Risk Grade 5		Risk Grades 6 - 8		Total¹
December 31, 2018
Commercial & Industrial
Agriculture	$	6,187	$	213	$	—	$	6,400
Death Care Management		17,085		287		6		17,378
Healthcare		38,908		2,502		9,672		51,082
Independent Pharmacies		93,976		5,734		9,073		108,783
Registered Investment Advisors		88,614		2,381		3,343		94,338
Veterinary Industry		42,175		1,190		2,239		45,604
Other Industries		272,771		18,463		3,929		295,163
Total		559,716		30,770		28,262		618,748
Construction & Development
Agriculture		43,454		—		—		43,454
Death Care Management		9,874		—		—		9,874
Healthcare		79,814		1,805		—		81,619
Independent Pharmacies		2,149		—		—		2,149
Registered Investment Advisors		1,232		—		—		1,232
Veterinary Industry		14,094		—		—		14,094
Other Industries		96,482		—		—		96,482
Total		247,099		1,805		—		248,904
Commercial Real Estate
Agriculture		52,518		567		—		53,085
Death Care Management		64,487		3,711		3,146		71,344
Healthcare		161,026		7,696		19,809		188,531
Independent Pharmacies		12,509		2,495		5,593		20,597
Registered Investment Advisors		7,780		125		—		7,905
Veterinary Industry		117,879		4,205		14,637		136,721
Other Industries		255,651		5,196		—		260,847
Total		671,850		23,995		43,185		739,030
Commercial Land
Agriculture		223,826		8,914		11,058		243,798
Total		223,826		8,914		11,058		243,798
Total	$	1,702,491	$	65,484	$	82,505	$	1,850,480

Risk Grades
1 - 4

Risk Grade
5

Risk Grades
6 - 8
Total
December 31, 2017
Commercial & Industrial
Agriculture $ 3,052
$ 222
$ —
$ 3,274
Death Care Management 13,371
117
7
13,495
Healthcare 36,530
2,246
4,525
43,301
Independent Pharmacies 86,152
5,541
8,227
99,920
Registered Investment Advisors 90,911
2,134
725
93,770
Veterinary Industry 42,313
1,704
2,370
46,387
Other Industries 184,540
363
—
184,903
Total 456,869
12,327
15,854
485,050
Construction & Development
Agriculture 31,738
2,450
—
34,188
Death Care Management 6,119
—
—
6,119
Healthcare 47,813
699
1,258
49,770
Independent Pharmacies 1,496
—
—
1,496
Registered Investment Advisors 376
—
—
376
Veterinary Industry 13,184
—
—
13,184
Other Industries 58,120
—
—
58,120
Total 158,846
3,149
1,258
163,253
Commercial Real Estate
Agriculture 46,717
—
—
46,717
Death Care Management 60,671
3,881
2,829
67,381
Healthcare 112,321
9,992
4,318
126,631
Independent Pharmacies 15,641
1,825
1,562
19,028
Registered Investment Advisors 11,649
140
—
11,789
Veterinary Industry 97,065
2,948
13,919
113,932
Other Industries 133,493
679
—
134,172
Total 477,557
19,465
22,628
519,650
Commercial Land
Agriculture 176,811
2,086
—
178,897
Total 176,811
2,086
—
178,897
Total¹
$ 1,270,083
$ 37,027
$ 39,740
$ 1,346,850

Total loans and leases include ~~$115.5~~$386.7 million of U.S. government guaranteed loans as of March 31, ~~2018,~~2019, segregated by risk grade as follows: Risk Grades 1 – 4 = ~~$69.1~~$303.7 million, Risk Grade 5 = ~~$13.3~~$15.9 million, Risk Grades 6 – 8 = ~~$33.1~~$67.1 million. As of December 31, ~~2017,~~2018, total loans and leases include ~~$99.7~~$305.4 million of U.S. government guaranteed loans, segregated by risk grade as follows: Risk Grades 1 – 4 = ~~$65.0~~$236.1 million, Risk Grade 5 = ~~$6.7~~$10.1 million, Risk Grades 6 – 8 = ~~$28.0~~$59.2 million.

~~Table of Contents~~

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Past Due Loans and Leases

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. Loans and leases less than 30 days past due and accruing are included within current loans and leases shown below. The following tables show an age analysis of past due loans and leases as of the dates presented.

Less Than 30
Days Past
Due & Not
Accruing

30-89 Days
Past Due
& Accruing

30-89 Days
Past Due &
Not Accruing

Greater
Than 90
Days Past
Due
Total Not
Accruing
& Past Due Current Total Loans and Leases 90
Days or More
Past Due &
Still Accruing
March 31, 2018
Commercial & Industrial
Agriculture $ —
$ —
$ —
$ —
$ —
$ 3,605
$ 3,605
$ —
Death Care Management —
—
—
—
—
13,982
13,982
—
Healthcare 222
154
453
2,735
3,564
41,437
45,001
—
Independent Pharmacies 100
—
499
8,018
8,617
91,911
100,528
—
Registered Investment Advisors —
—
—
—
—
96,573
96,573
—
Veterinary Industry 209
128
491
1,072
1,900
47,897
49,797
—
Other Industries —
—
—
—
—
209,408
209,408
—
Total 531
282
1,443
11,825
14,081
504,813
518,894
—
Construction & Development
Agriculture —
—
2,451
—
2,451
33,525
35,976
—
Death Care Management —
—
—
—
—
6,713
6,713
—
Healthcare —
—
—
—
—
56,801
56,801
—
Independent Pharmacies —
—
—
—
—
1,754
1,754
—
Registered Investment Advisors —
—
—
—
—
883
883
—
Veterinary Industry —
—
—
—
—
14,001
14,001
—
Other Industries —
—
—
—
—
68,615
68,615
—
Total —
—
2,451
—
2,451
182,292
184,743
—
Commercial Real Estate
Agriculture —
643
—
—
643
49,291
49,934
—
Death Care Management 162
—
—
1,369
1,531
67,526
69,057
—
Healthcare 1,816
2,530
5,982
1,549
11,877
125,286
137,163
—
Independent Pharmacies —
—
—
112
112
17,718
17,830
—
Registered Investment Advisors —
—
—
—
—
11,488
11,488
—
Veterinary Industry 2,935
3,370
955
5,646
12,906
107,042
119,948
—
Other Industries —
—
—
—
—
156,220
156,220
—
Total 4,913
6,543
6,937
8,676
27,069
534,571
561,640
—
Commercial Land
Agriculture —
—
—
—
—
182,499
182,499
—
Total —
—
—
—
—
182,499
182,499
—
Total¹
$ 5,444
$ 6,825
$ 10,831
$ 20,501
$ 43,601
$ 1,404,175
$ 1,447,776
$ —

~~Table of Contents~~

	Less Than 30 Days Past Due & Not Accruing		30-89 Days Past Due & Accruing		30-89 Days Past Due & Not Accruing		Greater Than 90 Days Past Due		Total Not Accruing & Past Due Loans		Current Loans		Total Loans		Loans 90 Days or More Past Due & Still Accruing
March 31, 2019
Commercial & Industrial
Agriculture	$	—	$	260	$	—	$	—	$	260	$	5,553	$	5,813	$	—
Death Care Management		—		—		—		—		—		22,809		22,809		—
Healthcare		933		61		919		5,981		7,894		41,858		49,752		—
Independent Pharmacies		—		—		639		6,722		7,361		103,097		110,458		—
Registered Investment Advisors		1,226		70		—		1,223		2,519		92,773		95,292		—
Veterinary Industry		—		—		574		1,032		1,606		43,727		45,333		—
Other Industries		4,137		781		716		1,094		6,728		332,695		339,423		—
Total		6,296		1,172		2,848		16,052		26,368		642,512		668,880		—
Construction & Development
Agriculture		—		—		—		—		—		31,236		31,236		—
Death Care Management		—		—		—		—		—		10,153		10,153		—
Healthcare		—		—		—		—		—		80,476		80,476		—
Independent Pharmacies		—		—		—		—		—		1,156		1,156		—
Registered Investment Advisors		—		—		—		—		—		1,586		1,586		—
Veterinary Industry		—		—		—		—		—		18,149		18,149		—
Other Industries		—		—		—		—		—		123,668		123,668		—
Total		—		—		—		—		—		266,424		266,424		—
Commercial Real Estate
Agriculture		—		567		—		—		567		45,482		46,049		—
Death Care Management		540		—		—		2,736		3,276		84,375		87,651		—
Healthcare		41		1,034		—		7,362		8,437		206,656		215,093		—
Independent Pharmacies		—		—		—		5,901		5,901		21,289		27,190		—
Registered Investment Advisors		—		—		—		—		—		6,825		6,825		—
Veterinary Industry		1,596		3,740		2,835		3,701		11,872		126,257		138,129		—
Other Industries		—		—		—		6,573		6,573		291,294		297,867		—
Total		2,177		5,341		2,835		26,273		36,626		782,178		818,804		—
Commercial Land
Agriculture		9,430		—		—		4,781		14,211		240,990		255,201		—
Total		9,430		—		—		4,781		14,211		240,990		255,201		—
Total¹	$	17,903	$	6,513	$	5,683	$	47,106	$	77,205	$	1,932,104	$	2,009,309	$	—

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

	Less Than 30 Days Past Due & Not Accruing		30-89 Days Past Due & Accruing		30-89 Days Past Due & Not Accruing		Greater Than 90 Days Past Due		Total Not Accruing & Past��Due Loans		Current Loans		Total Loans		Loans 90 Days or More Past Due & Still Accruing
December 31, 2018
Commercial & Industrial
Agriculture	$	—	$	—	$	—	$	—	$	—	$	6,400	$	6,400	$	—
Death Care Management		—		—		—		—		—		17,378		17,378		—
Healthcare		41		1,027		665		6,821		8,554		42,528		51,082		—
Independent Pharmacies		1,399		29		—		7,570		8,998		99,785		108,783		—
Registered Investment Advisors		—		232		320		2,741		3,293		91,045		94,338		—
Veterinary Industry		—		—		600		906		1,506		44,098		45,604		—
Other Industries		2,669		166		—		504		3,339		291,824		295,163		—
Total		4,109		1,454		1,585		18,542		25,690		593,058		618,748		—
Construction & Development
Agriculture		—		—		—		—		—		43,454		43,454		—
Death Care Management		—		—		—		—		—		9,874		9,874		—
Healthcare		—		—		—		—		—		81,619		81,619		—
Independent Pharmacies		—		—		—		—		—		2,149		2,149		—
Registered Investment Advisors		—		—		—		—		—		1,232		1,232		—
Veterinary Industry		—		—		—		—		—		14,094		14,094		—
Other Industries		—		—		—		—		—		96,482		96,482		—
Total		—		—		—		—		—		248,904		248,904		—
Commercial Real Estate
Agriculture		—		—		—		—		—		53,085		53,085		—
Death Care Management		248		—		—		2,762		3,010		68,334		71,344		—
Healthcare		42		1,668		—		7,417		9,127		179,404		188,531		—
Independent Pharmacies		—		3,400		—		2,193		5,593		15,004		20,597		—
Registered Investment Advisors		—		—		—		—		—		7,905		7,905		—
Veterinary Industry		1,644		3,757		2,899		5,191		13,491		123,230		136,721		—
Other Industries		—		10,743		—		—		10,743		250,104		260,847		—
Total		1,934		19,568		2,899		17,563		41,964		697,066		739,030		—
Commercial Land
Agriculture		6,277		—		—		4,781		11,058		232,740		243,798		—
Total		6,277		—		—		4,781		11,058		232,740		243,798		—
Total¹	$	12,320	$	21,022	$	4,484	$	40,886	$	78,712	$	1,771,768	$	1,850,480	$	—

Less Than
30 Days Past
Due & Not
Accruing

30-89 Days
Past Due
& Accruing

30-89 Days
Past Due &
Not Accruing

Greater
Than 90
Days
Past Due
Total Not
Accruing
& Past Due Current Total Loans and Leases 90
Days or More
Past Due &
Still Accruing
December 31, 2017
Commercial & Industrial
Agriculture $ —
$ —
$ —
$ —
$ —
$ 3,274
$ 3,274
$ —
Death Care Management —
—
—
—
—
13,495
13,495
—
Healthcare 788
131
14
3,004
3,937
39,364
43,301
—
Independent Pharmacies 236
2,930
1,349
3,376
7,891
92,029
99,920
—
Registered Investment Advisors —
321
—
—
321
93,449
93,770
—
Veterinary Industry 212
594
508
797
2,111
44,276
46,387
—
Other Industries —
—
—
—
—
184,903
184,903
—
Total 1,236
3,976
1,871
7,177
14,260
470,790
485,050
—
Construction & Development
Agriculture —
—
—
—
—
34,188
34,188
—
Death Care Management —
—
—
—
—
6,119
6,119
—
Healthcare —
—
—
—
—
49,770
49,770
—
Independent Pharmacies —
—
—
—
—
1,496
1,496
—
Registered Investment Advisors —
—
—
—
—
376
376
—
Veterinary Industry —
—
—
—
—
13,184
13,184
—
Other Industries —
—
—
—
—
58,120
58,120
—
Total —
—
—
—
—
163,253
163,253
—
Commercial Real Estate
Agriculture —
—
—
—
—
46,717
46,717
—
Death Care Management —
—
168
1,391
1,559
65,822
67,381
—
Healthcare 40
54
1,916
1,550
3,560
123,071
126,631
—
Independent Pharmacies —
—
—
1,562
1,562
17,466
19,028
—
Registered Investment Advisors —
—
—
—
—
11,789
11,789
—
Veterinary Industry 1,804
3,226
—
4,765
9,795
104,137
113,932
—
Other Industries —
—
—
—
—
134,172
134,172
—
Total 1,844
3,280
2,084
9,268
16,476
503,174
519,650
—
Commercial Land
Agriculture —
—
—
—
—
178,897
178,897
—
Total —
—
—
—
—
178,897
178,897
—
Total¹
$ 3,080
$ 7,256
$ 3,955
$ 16,445
$ 30,736
$ 1,316,114
$ 1,346,850
$ —

Total loans and leases include ~~$115.5~~$386.7 million of U.S. government guaranteed loans as of March 31, ~~2018,~~2019, of which ~~$18.1~~$36.5 million is greater than 90 days past due, ~~$11.2~~$6.5 million is 30-89 days past due and ~~$86.2~~$343.7 million is included in current loans and leases as presented above. As of December 31, ~~2017,~~2018, total loans and leases include ~~$99.7~~$305.4 million of U.S. government guaranteed loans, of which ~~$15.0~~$33.4 million is greater than 90 days past due, ~~$7.4~~$9.0 million is 30-89 days past due and ~~$77.3~~$263.0 million is included in current loans and leases as presented above.

~~Table of Contents~~

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Nonaccrual Loans and Leases

Loans and leases that become 90 days delinquent, or in cases where there is evidence that the borrower’s ability to make the required payments is impaired, are placed in nonaccrual status and interest accrual is discontinued. If interest on nonaccrual loans and leases had been accrued in accordance with the original terms, interest income would have increased by approximately ~~$457 thousand~~$1.1 million and ~~$280~~$457 thousand for the three months ended March 31, ~~2018~~2019 and ~~2017,~~2018, respectively. All nonaccrual loans and leases are included in the held for investment portfolio.

Nonaccrual loans and leases as of March 31, ~~2018~~2019 and December 31, ~~2017~~2018 are as follows:

March 31, 2019	Loan Balance		Guaranteed Balance		Unguaranteed Exposure
Commercial & Industrial
Healthcare	$	7,833	$	6,620	$	1,213
Independent Pharmacies		7,361		6,227		1,134
Registered Investment Advisors		2,449		1,837		612
Veterinary Industry		1,606		1,486		120
Other Industries		5,947		3,824		2,123
Total		25,196		19,994		5,202
Commercial Real Estate
Death Care Management		3,276		2,537		739
Healthcare		7,403		4,922		2,481
Independent Pharmacies		5,901		5,145		756
Veterinary Industry		8,132		6,883		1,249
Other Industries		6,573		3,750		2,823
Total		31,285		23,237		8,048
Commercial Land
Agriculture		14,211		7,276		6,935
Total		14,211		7,276		6,935
Total	$	70,692	$	50,507	$	20,185

December 31, 2018	Loan Balance		Guaranteed Balance		Unguaranteed Exposure
Commercial & Industrial
Healthcare	$	7,527	$	6,517	$	1,010
Independent Pharmacies		8,969		7,896		1,073
Registered Investment Advisors		3,061		2,427		634
Veterinary Industry		1,506		1,361		145
Other Industries		3,173		2,147		1,026
Total		24,236		20,348		3,888
Commercial Real Estate
Death Care Management		3,010		2,260		750
Healthcare		7,459		4,963		2,496
Independent Pharmacies		2,193		1,863		330
Veterinary Industry		9,734		8,271		1,463
Total		22,396		17,357		5,039
Commercial Land
Agriculture		11,058		5,497		5,561
Total		11,058		5,497		5,561
Total	$	57,690	$	43,202	$	14,488

March 31, 2018 Loan and Lease Balance
Guaranteed
Balance

Unguaranteed
Exposure
Commercial & Industrial
Healthcare $ 3,410
$ 2,954
$ 456
Independent Pharmacies 8,617
7,290
1,327
Veterinary Industry 1,772
1,733
39
Total 13,799
11,977
1,822
Construction & Development
Agriculture 2,451
1,838
613
Total 2,451
1,838
613
Commercial Real Estate

Death Care Management 1,531
1,219
312
Healthcare 9,347
6,357
2,990
Independent Pharmacies 112
—
112
Veterinary Industry 9,536
7,999
1,537
Total 20,526
15,575
4,951
Total $ 36,776
$ 29,390
$ 7,386

December 31, 2017 Loan and Lease Balance
Guaranteed
Balance

Unguaranteed
Exposure
Commercial & Industrial
Healthcare $ 3,806
$ 3,235
$ 571
Independent Pharmacies 4,961
3,906
1,055
Veterinary Industry 1,517
1,478
39
Total 10,284
8,619
1,665
Commercial Real Estate
Death Care Management 1,559
1,237
322
Healthcare 3,506
2,719
787
Independent Pharmacies 1,562
1,562
—
Veterinary Industry 6,569
5,733
836
Total 13,196
11,251
1,945
Total $ 23,480
$ 19,870
$ 3,610

~~Table of Contents~~

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Allowance for Loan and Lease Loss Methodology

The methodology and the estimation process for calculating the Allowance for Loan and Lease Losses (“ALLL”) is described below:

Estimated credit losses should meet the criteria for accrual of a loss contingency, i.e., a provision to the ALLL, set forth in GAAP. The Company’s methodology for determining the ALLL is based on the requirements of GAAP, the Interagency Policy Statement on the Allowance for Loan and Lease Losses and other regulatory and accounting pronouncements. The ALLL is determined by the sum of three separate components: (i) the impaired loan and lease component, which addresses specific reserves for impaired loans and leases; (ii) the general reserve component, which addresses reserves for pools of homogeneous loans and leases; and (iii) an unallocated reserve component (if any) based on management’s judgment and experience. The loan and lease pools and impaired loans and leases are mutually exclusive; any loan or lease that is impaired is excluded from its homogenous pool for purposes of that pool’s reserve calculation, regardless of the level of impairment.

The ALLL policy for pooled loans and leases is governed in accordance with banking regulatory guidance for homogenous pools of non-impaired loans and leases that have similar risk characteristics. The Company follows a consistent and structured approach for assessing the need for reserves within each individual loan and lease pool.

Loans and leases are considered impaired when, based on current information and events, it is probable that the creditor will be unable to collect all interest and principal payments due according to the originally contracted, or reasonably modified, terms of the loan or lease agreement. The Company has determined that loans and leases that meet the criteria defined below must be reviewed quarterly to determine if they are impaired.

All commercial loans and leases classified substandard or worse.

Any other delinquent loan or lease that is in a nonaccrual status, or any loan or lease that is delinquent 90 days or more ~~than 89 days~~ and still accruing interest.

Any loan or lease which has been modified such that it meets the definition of a Troubled Debt Restructuring (TDR).

The Company’s policy for impaired loan and lease accounting subjects all loans and leases to impairment recognition; however, loan and lease relationships with unguaranteed credit exposure of less than $100,000 are generally not evaluated on an individual basis for impairment and instead are evaluated collectively using a methodology based on historical specific reserves on similar sized loans and leases. Any loan or lease not meeting the above criteria and determined to be impaired is subjected to an impairment analysis, which is a calculation of the probable loss on the loan or lease. This portion is the loan's or lease’s “impairment,” and is established as a specific reserve against the loan or lease, or charged against the ALLL.

Individual specific reserve amounts imply probability of loss and may not be carried in the reserve indefinitely. When the amount of the actual loss becomes reasonably quantifiable, the amount of the loss is charged off against the ALLL, whether or not all liquidation and recovery efforts have been completed. If the total amount of the individual specific reserve that will eventually be charged off cannot yet be sufficiently quantified but some portion of the impairment can be viewed as a confirmed loss, then the confirmed loss portion should be charged off against the ALLL and the individual specific reserve reduced by a corresponding amount.

For impaired loans or leases, the reserve amount is calculated on a loan or lease-specific basis. The Company utilizes two methods of analyzing impaired loans and leases not guaranteed by the SBA:

The Fair Market Value of Collateral method utilizes the value at which the collateral could be sold considering the appraised value, appraisal discount rate, prior liens and selling costs. The amount of the reserve is the deficit of the estimated collateral value compared to the loan or lease balance.

The Present Value of Future Cash Flows method takes into account the amount and timing of cash flows and the effective interest rate used to discount the cash flows.

~~Table of Contents~~

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

The following table details activity in the allowance for loan and lease losses by portfolio segment allowance for the periods presented:

Three months ended:	Construction & Development		Commercial Real Estate			Commercial & Industrial			Commercial Land			Total
March 31, 2019
Beginning Balance	$	2,042	$	11,044		$	14,562		$	4,786		$	32,434
Charge offs		—		—			(222	)		—			(222	)
Recoveries		—		10			142			5			157
Provision		194		(431	)		2,061			918			2,742
Ending Balance	$	2,236	$	10,623		$	16,543		$	5,709		$	35,111

March 31, 2018
Beginning Balance	$	2,030	$	9,180		$	10,751		$	2,229		$	24,190
Charge offs		—		—			(672	)		—			(672	)
Recoveries		—		4			136			—			140
Provision		398		2,060			1,986			(52	)		4,392
Ending Balance	$	2,428	$	11,244		$	12,201		$	2,177		$	28,050

Three months ended
Construction &
Development

Commercial
Real Estate

Commercial
& Industrial

Commercial
Land
Total
March 31, 2018
Beginning Balance $ 2,030
$ 9,180
$ 10,751
$ 2,229
$ 24,190
Charge offs —
—
(672 ) —
(672 )
Recoveries —
4
136
—
140
Provision 398
2,060
1,986
(52 ) 4,392
Ending Balance $ 2,428
$ 11,244
$ 12,201
$ 2,177
$ 28,050
March 31, 2017
Beginning Balance $ 1,693
$ 5,897
$ 8,413
$ 2,206
$ 18,209
Charge offs —
(268 ) (1,233 ) (35 ) (1,536 )
Recoveries —
9
14
—
23
Provision 191
588
652
68
1,499
Ending Balance $ 1,884
$ 6,226
$ 7,846
$ 2,239
$ 18,195

The following tables detail the recorded allowance for loan and lease losses and the investment in loans and leases related to each portfolio segment, disaggregated on the basis of impairment evaluation methodology:

March 31, 2019	Construction & Development		Commercial Real Estate		Commercial & Industrial		Commercial Land		Total
Allowance for loan and lease losses:
Loans and leases individually evaluated for impairment	$	—	$	2,566	$	3,750	$	4,843	$	11,159
Loans and leases collectively evaluated for impairment		2,236		8,057		12,793		866		23,952
Total allowance for loan and lease losses	$	2,236	$	10,623	$	16,543	$	5,709	$	35,111
Loans and leases receivable¹:
Loans and leases individually evaluated for impairment	$	—	$	56,287	$	28,842	$	35,656	$	120,785
Loans and leases collectively evaluated for impairment		266,424		762,517		640,038		219,545		1,888,524
Total loans and leases receivable	$	266,424	$	818,804	$	668,880	$	255,201	$	2,009,309

December 31, 2018	Construction & Development		Commercial Real Estate		Commercial & Industrial		Commercial Land		Total
Allowance for loan and lease losses:
Loans and leases individually evaluated for impairment	$	118	$	2,424	$	2,598	$	3,951	$	9,091
Loans and leases collectively evaluated for impairment		1,924		8,620		11,964		835		23,343
Total allowance for loan and lease losses	$	2,042	$	11,044	$	14,562	$	4,786	$	32,434
Loans and leases receivable¹:
Loans and leases individually evaluated for impairment	$	5,027	$	46,731	$	28,659	$	21,997	$	102,414
Loans and leases collectively evaluated for impairment		243,877		692,299		590,089		221,801		1,748,066
Total loans and leases receivable	$	248,904	$	739,030	$	618,748	$	243,798	$	1,850,480

March 31, 2018
Construction &
Development

Commercial
Real Estate

Commercial
& Industrial

Commercial
Land
Total
Allowance for Loan and Lease Losses:
Loans and leases individually evaluated for impairment $ 205
$ 2,847
$ 1,617
$ —
$ 4,669
Loans and leases collectively evaluated for impairment²
2,223
8,397
10,584
2,177
23,381
Total allowance for loan and lease losses $ 2,428
$ 11,244
$ 12,201
$ 2,177
$ 28,050
Loans and leases receivable¹:

Loans and leases individually evaluated for impairment $ 4,435
$ 24,434
$ 6,820
$ —
$ 35,689
Loans and leases collectively evaluated for impairment²
180,308
537,206
512,074
182,499
1,412,087
Total loans and leases receivable $ 184,743
$ 561,640
$ 518,894
$ 182,499
$ 1,447,776

December 31, 2017
Construction &
Development

Commercial
Real Estate

Commercial
& Industrial

Commercial
Land
Total
Allowance for Loan and Lease Losses:
Loans and leases individually evaluated for impairment $ 157
$ 1,502
$ 1,126
$ —
$ 2,785
Loans and leases collectively evaluated for impairment²
1,873
7,678
9,625
2,229
21,405
Total allowance for loan and lease losses $ 2,030
$ 9,180
$ 10,751
$ 2,229
$ 24,190
Loans and leases receivable¹:

Loans and leases individually evaluated for impairment $ 1,237
$ 17,105
$ 8,672
$ —
$ 27,014
Loans and leases collectively evaluated for impairment²
162,016
502,545
476,378
178,897
1,319,836
Total loans and leases receivable $ 163,253
$ 519,650
$ 485,050
$ 178,897
$ 1,346,850

~~Table of Contents~~

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

1
1	Loans and leases receivable includes ~~$115.5~~$386.7 million of U.S. government guaranteed loans as of March 31, ~~2018,~~2019, of which ~~$35.4~~$82.6 million are impaired. As of December 31, ~~2017,~~2018, loans and leases receivable includes ~~$99.7~~$305.4 million of U.S. government guaranteed loans, of which ~~$28.1~~$72.4 million are considered impaired.

Included in loans and leases collectively evaluated for impairment are impaired loans and leases with individual unguaranteed exposure of less than $100 thousand. As of March 31, 2018, these balances totaled $16.6 million, of which $14.8 million are guaranteed by the U.S. government and $1.8 million are unguaranteed. As of December 31, 2017, these balances totaled $14.8 million, of which $13.2 million are guaranteed by the U.S. government and $1.6 million are unguaranteed.~~The allowance for loan and lease losses associated with these loans and leases totaled $332 thousand and $279 thousand as of March 31, 2018 and December 31, 2017, respectively.~~

~~Table of Contents~~

~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Consolidated Financial Statements~~

Loans and leases classified as impaired as of the dates presented are summarized in the following tables.

March 31, 2019	Recorded Investment		Guaranteed Balance		Unguaranteed Exposure
Commercial & Industrial
Agriculture	$	7	$	—	$	7
Death Care Management		5		—		5
Healthcare		9,409		6,620		2,789
Independent Pharmacies		7,647		6,227		1,420
Registered Investment Advisors		2,729		1,838		891
Veterinary Industry		2,392		1,922		470
Other Industries		6,653		3,980		2,673
Total		28,842		20,587		8,255
Commercial Real Estate
Death Care Management		3,405		2,537		868
Healthcare		22,176		14,466		7,710
Independent Pharmacies		7,244		6,149		1,095
Veterinary Industry		14,078		10,206		3,872
Other Industries		9,384		5,824		3,560
Total		56,287		39,182		17,105
Commercial Land
Agriculture		35,656		22,808		12,848
Total		35,656		22,808		12,848
Total	$	120,785	$	82,577	$	38,208

March 31, 2018
Recorded
Investment

Guaranteed
Balance

Unguaranteed
Exposure
Commercial & Industrial
Death Care Management $ 7
$ —
$ 7
Healthcare 4,139
2,954
1,185
Independent Pharmacies 9,241
7,533
1,708
Registered Investment Advisors 717
—
717
Veterinary Industry 3,095
2,232
863
Total 17,199
12,719
4,480
Construction & Development
Agriculture 2,445
1,838
607
Healthcare 1,990
1,510
480
Total 4,435
3,348
1,087
Commercial Real Estate
Death Care Management 3,901
2,305
1,596
Healthcare 10,907
6,604
4,303
Independent Pharmacies —
—
—
Veterinary Industry 15,895
10,466
5,429
Total 30,703
19,375
11,328
Total $ 52,337
$ 35,442
$ 16,895

December 31, 2017
Recorded
Investment

Guaranteed
Balance

Unguaranteed
Exposure
Commercial & Industrial
Death Care Management $ 7
$ —
$ 7
Healthcare 4,551
3,235
1,316
Independent Pharmacies 8,571
6,356
2,215
Registered Investment Advisors 733
—
733
Veterinary Industry 2,762
2,001
761
Total 16,624
11,592
5,032
Construction & Development
Healthcare 1,237
944
293
Total 1,237
944
293
Commercial Real Estate
Death Care Management 2,831
1,237
1,594
Healthcare 4,315
2,967
1,348
Independent Pharmacies 1,562
1,562
—
Veterinary Industry 15,266
9,768
5,498
Total 23,974
15,534
8,440
Commercial Land
Agriculture —
—
—
Total —
—
—
Total $ 41,835
$ 28,070
$ 13,765

~~Table of Contents~~

December 31, 2018	Recorded Investment		Guaranteed Balance		Unguaranteed Exposure
Commercial & Industrial
Agriculture	$	7	$	—	$	7
Death Care Management		6		—		6
Healthcare		9,668		7,229		2,439
Independent Pharmacies		9,356		7,896		1,460
Registered Investment Advisors		3,347		2,427		920
Veterinary Industry		2,326		1,819		507
Other Industries		3,949		2,304		1,645
Total		28,659		21,675		6,984
Construction & Development
Agriculture		5,027		3,704		1,323
Total		5,027		3,704		1,323
Commercial Real Estate
Agriculture		1,798		1,299		499
Death Care Management		3,143		2,261		882
Healthcare		20,442		14,559		5,883
Independent Pharmacies		5,633		4,079		1,554
Veterinary Industry		15,715		11,613		4,102
Total		46,731		33,811		12,920
Commercial Land
Agriculture		21,997		13,177		8,820
Total		21,997		13,177		8,820
Total	$	102,414	$	72,367	$	30,047

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

The following table presents evaluated balances of loans and leases classified as impaired at the dates presented that carried an associated reserve as compared to those with no reserve. The recorded investment includes accrued interest and net deferred loan and lease fees or costs.

March 31, 2018
Recorded Investment

With a
Recorded
Allowance

With No
Recorded
Allowance
Total
Unpaid
Principal
Balance

Related
Allowance
Recorded
Commercial & Industrial
Death Care Management $ 7
$ —
$ 7
$ 7
$ 1
Healthcare 3,387
752
4,139
4,702
186
Independent Pharmacies 8,933
308
9,241
10,370
902
Registered Investment Advisors 717
—
717
709
480
Veterinary Industry 3,095
—
3,095
3,437
248
Total 16,139
1,060
17,199
19,225
1,817
Construction & Development
Agriculture 2,445
—
2,445
2,450
13
Healthcare 1,990
—
1,990
2,013
192
Total 4,435
—
4,435
4,463
205
Commercial Real Estate
Death Care Management 3,451
450
3,901
4,016
330
Healthcare 10,532
375
10,907
10,944
1,460
Independent Pharmacies —
—
—
483
—
Veterinary Industry 14,363
1,532
15,895
17,215
1,189
Total 28,346
2,357
30,703
32,658
2,979
Total Impaired Loans and Leases $ 48,920
$ 3,417
$ 52,337
$ 56,346
$ 5,001

~~Table of Contents~~

	March 31, 2019
	Recorded Investment
	With a Recorded Allowance		With No Recorded Allowance		Total		Unpaid Principal Balance		Related Allowance Recorded
Commercial & Industrial
Agriculture	$	7	$	—	$	7	$	6	$	7
Death Care Management		—		5		5		5		—
Healthcare		9,199		210		9,409		10,016		915
Independent Pharmacies		7,362		285		7,647		8,226		583
Registered Investment Advisors		2,729		—		2,729		2,721		747
Veterinary Industry		2,335		57		2,392		2,582		61
Other Industries		6,653		—		6,653		6,858		1,437
Total		28,285		557		28,842		30,414		3,750
Commercial Real Estate
Death Care Management		3,127		278		3,405		3,545		30
Healthcare		20,071		2,105		22,176		22,186		1,217
Independent Pharmacies		7,244		—		7,244		7,529		44
Veterinary Industry		13,970		108		14,078		14,937		887
Other Industries		9,384		—		9,384		9,339		388
Total		53,796		2,491		56,287		57,536		2,566
Commercial Land
Agriculture		35,656		—		35,656		35,770		4,843
Total		35,656		—		35,656		35,770		4,843
Total Impaired Loans and Leases	$	117,737	$	3,048	$	120,785	$	123,720	$	11,159

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

	December 31, 2018
	Recorded Investment
	With a Recorded Allowance		With No Recorded Allowance		Total		Unpaid Principal Balance		Related Allowance Recorded
Commercial & Industrial
Agriculture	$	—	$	7	$	7	$	6	$	—
Death Care Management		—		6		6		6		—
Healthcare		9,604		64		9,668		10,432		827
Independent Pharmacies		9,032		324		9,356		10,564		478
Registered Investment Advisors		3,347		—		3,347		3,839		811
Veterinary Industry		2,160		166		2,326		2,593		65
Other Industries		3,496		453		3,949		4,097		417
Total		27,639		1,020		28,659		31,537		2,598
Construction & Development
Agriculture		5,027		—		5,027		4,939		118
Total		5,027		—		5,027		4,939		118
Commercial Real Estate
Agriculture		1,798		—		1,798		1,732		93
Death Care Management		2,859		284		3,143		3,281		30
Healthcare		20,211		231		20,442		20,461		1,145
Independent Pharmacies		5,184		449		5,633		5,884		220
Veterinary Industry		15,606		109		15,715		16,677		936
Total		45,658		1,073		46,731		48,035		2,424
Commercial Land
Agriculture		21,997		—		21,997		22,147		3,951
Total		21,997		—		21,997		22,147		3,951
Total Impaired Loans and Leases	$	100,321	$	2,093	$	102,414	$	106,658	$	9,091

December 31, 2017
Recorded Investment

With a
Recorded
Allowance

With No
Recorded
Allowance
Total
Unpaid
Principal
Balance

Related
Allowance
Recorded
Commercial & Industrial
Death Care Management $ —
$ 7
$ 7
$ 7
$ —
Healthcare 3,521
1,030
4,551
5,643
165
Independent Pharmacies 8,154
417
8,571
9,078
521
Registered Investment Advisors 662
71
733
725
504
Veterinary Industry 2,505
257
2,762
3,113
182
Total 14,842
1,782
16,624
18,566
1,372
Construction & Development
Healthcare 1,237
—
1,237
1,258
157
Total 1,237
—
1,237
1,258
157
Commercial Real Estate
Death Care Management 2,221
610
2,831
2,964
260
Healthcare 3,717
598
4,315
4,332
192
Independent Pharmacies 1,562
—
1,562
1,933
8
Veterinary Industry 13,711
1,555
15,266
16,584
1,075
Total 21,211
2,763
23,974
25,813
1,535
Commercial Land
Agriculture —
—
—
58
—
Total —
—
—
58
—
Total Impaired Loans and Leases $ 37,290
$ 4,545
$ 41,835
$ 45,695
$ 3,064

~~Table of Contents~~

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

The following table presents the average recorded investment of impaired loans and leases for each period presented and interest income recognized during the period in which the loans and leases were considered impaired.

	Three Months Ended March 31,2019				Three Months Ended March 31,2018
	Average Balance		Interest Income Recognized		Average Balance		Interest Income Recognized
Commercial & Industrial
Agriculture	$	6	$	—	$	—	$	—
Death Care Management		6		—		7		—
Healthcare		9,424		31		4,263		12
Independent Pharmacies		7,296		10		9,717		20
Registered Investment Advisors		2,762		5		720		12
Veterinary Industry		2,424		14		3,138		20
Other Industries		6,449		17		—		—
Total		28,367		77		17,845		64
Construction & Development
Agriculture		—		—		2,457		5
Healthcare		—		—		1,976		23
Total		—		—		4,433		28
Commercial Real Estate
Death Care Management		3,428		2		3,903		37
Healthcare		22,303		228		11,057		16
Independent Pharmacies		6,128		42		1,080		—
Veterinary Industry		14,791		101		16,108		137
Other Industries		9,359		9		—		—
Total		56,009		382		32,148		190
Commercial Land
Agriculture		35,601		238		—		—
Total		35,601		238		—		—
Total	$	119,977	$	697	$	54,426	$	282

Three months ended
March 31, 2018 Three months ended
March 31, 2017
Average
Balance Interest
Income
Recognized Average
Balance Interest
Income
Recognized
Commercial & Industrial
Death Care Management $ 7
$ —
$ 112
$ 2
Healthcare 4,263
12
7,583
20
Independent Pharmacies 9,717
20
5,690
13
Registered Investment Advisors 720
12
790
12
Veterinary Industry 3,138
20
2,394
9
Total 17,845
64
16,569
56
Construction & Development
Agriculture 2,457
5
—
—
Healthcare 1,976
23
—
—
Veterinary Industry —
—
1,961
9
Total 4,433
28
1,961
9
Commercial Real Estate
Death Care Management 3,903
37
2,544
6
Healthcare 11,057
16
987
12
Independent Pharmacies 1,080
—
1,076
—
Veterinary Industry 16,108
137
14,171
88
Total 32,148
190
18,778
106
Commercial Land
Agriculture —
—
219
—
Total —
—
219
—
Total $ 54,426
$ 282
$ 37,527
$ 171

~~During~~

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

The following tables represent the three months ended March 31, 2018, there was one construction and development healthcare loan modified to extend the interest only period. The TDR had a pre-modification and post-modification recorded investmenttypes of ~~$612 thousand. There~~TDRs that were ~~no TDRs modified~~made during the ~~three months ended March 31, 2017.~~periods presented:

	Three months ended March 31, 2019						Three months ended March 31, 2018
	All Restructurings						All Restructurings
	Number of Loans		Pre- modification Recorded Investment		Post- modification Recorded Investment		Number of Loans		Pre- modification Recorded Investment		Post- modification Recorded Investment
Interest Only
Construction and Development
Healthcare		—	$	—	$	—		1	$	612	$	612
Total Interest Only		—		—		—		1		612		612
Extended Amortization
Commercial Land
Agriculture		1		3,489		3,489		—		—		—
Total Extend Amortization		1		3,489		3,489		—		—		—
Payment Deferral
Commercial & Industrial
Healthcare		1		144		144		—		—		—
Commercial Real Estate
Healthcare		1		1,853		1,853		—		—		—
Total Payment Deferral		2		1,997		1,997		—		—		—
Total		3	$	5,486	$	5,486		1	$	612	$	612

Concessions made to improve a loan and lease’s performance have varying degrees of success. No TDRs that were modified within the twelve months ended March 31, 2019 and 2018 subsequently defaulted during the three months ended March 31, ~~2018.~~

~~During the three months ended March 31, 2017, one TDR that was modified within the twelve months ended March 31, 2017 subsequently defaulted. This TDR was a commercial~~2019 and ~~industrial healthcare loan that was previously modified for payment deferral. The recorded investment for this TDR at March 31, 2017 was $107 thousand.~~2018.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 6. Leases

Lessor Equipment Leasing

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

~~Table of Contents~~

~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Consolidated Financial Statements~~

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 ~~4-6~~3-7 years which is consistent with the useful life of the equipment with no residual value. The gross lease payments receivable and the net investment included in accounts receivable for such leases are as follows:

	March 31, 2019			December 31, 2018
Gross direct finance lease payments receivable	$	14,944		$	12,541
Less – unearned interest		(3,097	)		(2,635	)
Net investment in direct financing leases	$	11,847		$	9,906

As of
March 31, 2018 December 31, 2017
Gross direct finance lease payments receivable $ 3,692
$ 2,399
Less – unearned interest (589 ) (373 )
Net investment in direct financing leases $ 3,103
$ 2,026

Future minimum lease payments under finance leases are as follows:

As of March 31, 2019
2019	$	2,087
2020		2,801
2021		2,750
2022		2,484
2023		1,987
Thereafter		2,835
Total	$	14,944

As of March 31, 2018 Amount
2018 $ 552
2019 764
2020 754
2021 678
2022 518
Thereafter 426
Total $ 3,692

Interest income of $234 thousand and $47 thousand was recognized in the three months ended March 31, ~~2018.~~

2019 and 2018, respectively.

Operating Leases

The term of each operating lease is generally 10 to 15 years. The Company retains ownership of the equipment and associated tax benefits such as investment tax credits and accelerated depreciation. At the end of the lease term, the lessee has the option to renew the lease for two additional terms or purchase the equipment at the then current fair market value.

Rental revenue from operating leases is recognized over 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 ~~40%~~50%, however, they are subject to periodic evaluation. Changes in useful lives or residual values will impact depreciation expense and any gain or loss from the sale of used equipment. The estimated useful lives and residual values of the Company's leasing equipment are based on industry disposal experience and the Company's expectations for future sale prices.

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

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

As of March 31, 2019 and December 31, 2018, the Company had a net investment of ~~$124.6~~$149.8 million and $148.8 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 ~~$128.5~~$162.5 million and $159.2 million and accumulated depreciation was ~~$3.9~~$12.7 million and $10.4 million as of March 31, ~~2018.~~2019 and December 31, 2018, respectively. Depreciation expense recognized on these assets for the three months ended March 31, 2019 and 2018 was $2.4 million, and $1.7 ~~million.~~

~~Table~~million, respectively.

Lease income of ~~Contents~~

~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Consolidated Financial Statements~~

$2.3 million and $1.6 million was recognized in the three months ended March 31, 2019 and 2018, respectively.

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

As of March 31, 2019	Amount
2019	$	6,924
2020		8,880
2021		8,930
2022		8,924
2023		8,955
Thereafter		48,278
Total	$	90,891

Lessee Lease Arrangements

The Company has operating leases for real property, land, copiers and other equipment. These leases have remaining lease terms of 1 year to 27 years, some of which include options to extend the leases for up to 20 years, and some of which include options to terminate the leases. The Company has concluded that it is reasonably certain it will exercise the options to extend for only one lease, which was therefore recognized as part of the ROU asset and lease liability.

The Company has a finance lease for fitness equipment and it has a remaining lease term of approximately 3.7 years. There are no options to extend or terminate this lease.

The components of lease expense are as follows:

	Three Months Ended March 31, 2019
Operating lease cost	$	157
Short-term lease cost		209
Finance lease cost:
Amortization of right-of-use assets		1
Interest expense on lease liabilities		—
Sublease income		(9	)
Total net lease cost	$	358

Supplemental disclosure for the consolidated balance sheet related to finance leases is as follows:

	March 31, 2019
Finance lease right-of-use asset	$	17
Finance lease liability		17

As of March 31, 2018 Amount
2018 $ 8,283
2019 6,953
2020 7,002
2021 7,053
2022 7,096
Thereafter 46,798
Total $ 83,185

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

The weighted average remaining lease term and weighted average discount rate for leases are as follows:

	As of March 31, 2019
Weighted average remaining lease term (years)
Operating leases		14.88
Finance lease		3.67
Weighted average discount rate
Operating leases		3.47	%
Finance lease		3.10	%

A maturity analysis of operating and finance lease liabilities is as follows:

As of March 31, 2019	Operating Leases			Finance Leases
2019	$	514		$	4
2020		504			5
2021		297			5
2022		275			4
2023		143			—
Thereafter		1,285			—
Total lease payments		3,018			18
Less: imputed interest		(704	)		(1	)
Total lease liabilities	$	2,314		$	17

Note 7. Servicing Assets

Loans serviced for others are not included in the accompanying balance sheet. The unpaid principal balances of loans serviced for others requiring recognition of a servicing asset were ~~$2.55~~$2.51 billion and ~~$2.44~~$2.63 billion at March 31, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively. The unpaid principal balance for all loans serviced for others was ~~$2.64~~$3.13 billion and ~~$2.54~~$3.22 billion at March 31, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively.

The following summarizes the activity pertaining to servicing rights:

	For the Three Months Ended March 31,
	2019			2018
Balance at beginning of period	$	47,641		$	52,298
Additions, net		723			4,874
Fair value changes:
Due to changes in valuation inputs or assumptions		(524	)		(819	)
Decay due to increases in principal paydowns or runoff		(3,516	)		(3,233	)
Balance at end of period	$	44,324		$	53,120

Three Months Ended
March 31,
2018 2017
Balance at beginning of period $ 52,298
$ 51,994
Additions, net 4,874
3,382
Fair value changes:
Due to changes in valuation inputs or assumptions (819 ) 766
Decay due to increases in principal paydowns or runoff (3,233 ) (2,558 )
Balance at end of period $ 53,120
$ 53,584

The fair value of servicing rights was determined using a weighted average discount ~~rates ranging from 0.0% to 15.3%~~rate of 14.7% on March 31, ~~2018~~2019 and ~~8.6% to 13.4%~~13.2% on March 31, ~~2017.~~2018. The fair value of servicing rights was determined using a weighted average prepayment ~~speeds ranging from 0.0% to 19.9%~~speed of 13.1% on March 31, ~~2018~~2019 and ~~2.8% to 9.9%~~9.0% on March 31, ~~2017,~~2018, depending on the stratification of the specific right. Changes to fair value are reported in loan servicing asset revaluation within the consolidated statements of income.

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

~~Table of Contents~~

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 8. Borrowings

Total outstanding short and long term borrowings consisted of the following:

	March 31, 2019		December 31, 2018
Short term borrowings
On September 18, 2014, the Company entered into a note payable revolving line of credit of $8.1 million with an unaffiliated commercial bank. On April 18, 2017, the Company renewed and increased the revolving line of credit to $25 million. The note is unsecured and accrues interest at Prime minus 0.50% for a term of 24 months. Payments are interest only with all principal and accrued interest due on April 30, 2019. The terms of this loan require the Company to maintain minimum capital, liquidity and Texas ratios. This line of credit was paid in full on August 25, 2017, and there is $25 million of available credit at March 31, 2019.	$	—	$	—
On February 23, 2015, the Company transferred two related party loans to an unaffiliated commercial bank in exchange for $4.7 million. The exchange price equated to the unpaid principal balance plus accrued but uncollected interest at the time of transfer. The terms of the transfer agreement with the unaffiliated commercial bank identified the transaction as a secured borrowing for accounting purposes. One of the loans with an outstanding balance of $1.3 million was paid in full on August 17, 2018. Interest accrues at prime plus 1% with monthly principal and interest payments over a term of 60 months. The interest rate at March 31, 2019 is 6.50%. The maturity date is October 5, 2019. The pledged collateral is classified in other assets with a fair value of $1.4 million at March 31, 2019. The underlying loan carries a risk grade of 3 and is current with no delinquency.		1,393		1,441
On October 20, 2017, the Company entered into a revolving line of credit of $20 million with an unaffiliated commercial bank. On October 2, 2018, the Company renewed the revolving $20 million line of credit. The note is unsecured and accrues interest at LIBOR plus 1.750% for a term of 12 months. Payments are interest only with all principal and accrued interest due on October 18, 2019. The terms of this loan require the Company to maintain minimum capital and debt service coverage ratios. No advances have been made to this line of credit and there is $20 million of available credit at March 31, 2019.		—		—
Total short term borrowings	$	1,393	$	1,441

	March 31, 2019		December 31, 2018
Long term borrowings
In October 2017, the Company entered into a capital lease of $19 thousand with an unaffiliated equipment lease company, secured by fitness equipment which is included in other assets on the consolidated balance sheet. Payments are principal and interest due monthly starting December 15, 2017 over a term of 60 months. At the end of the lease term there is a $1.00 bargain purchase option. As of January 1, 2019, this borrowing was revised in accordance with ASU 2016-02.	$	17	$	16
Total long term borrowings	$	17	$	16



	~~March 31,~~ ~~2018~~		~~December 31,~~ ~~2017~~
~~Short term borrowings~~
On October 20, 2017, the Company entered into a revolving line of credit of $20 million with an unaffiliated commercial bank. The note is unsecured and accrues interest at LIBOR plus 1.750% for a term of 12 months. Payments are interest only with all principal and accrued interest due on October 19, 2018. The terms of this loan require the Company to maintain minimum capital and debt service coverage ratios. No advances have been made to this line of credit and there is $20 million of available credit remaining at March 31, 2018.	$	—	$	—
~~Total short term borrowings~~	$	—	$	—

March 31,
2018 December 31,
2017
Long term borrowings
On September 11, 2014, the Company financed the construction of an additional building located on the Company’s Tiburon Drive main campus with a $24 million construction line of credit with an unaffiliated commercial bank, secured by both properties at its Tiburon Drive main facility location. Payments were interest only through September 11, 2016 at a fixed rate of 3.95% for a term of 84 months. Monthly principal and interest payments of $146 thousand began in October 2016 with all principal and accrued interest due on September 11, 2021. This note was repaid in full on January 31, 2018. $ —
$ 22,990
On February 23, 2015, the Company transferred two related party loans to an unaffiliated commercial bank in exchange for $4.7 million. The exchange price equated to the unpaid principal balance plus accrued but uncollected interest at the time of transfer. The terms of the transfer agreement with the unaffiliated commercial bank identified the transaction as a secured borrowing for accounting purposes. Interest accrues at prime plus 1% with monthly principal and interest payments over a term of 60 months. The interest rate at March 31, 2018 is 5.50%. The maturity date is October 5, 2019. The pledged collateral is classified in other assets with a fair value of $3.5 million at March 31, 2018. Underlying loans carry a risk grade of 3 and are current with no delinquencies. 3,471
3,574
On September 18, 2014, the Company entered into a note payable revolving line of credit of $8.1 million with an unaffiliated commercial bank. On April 18, 2017, the Company renewed and increased the revolving line of credit to $25 million. The note is unsecured and accrues interest at Prime minus 0.50% for a term of 24 months. Payments are interest only with all principal and accrued interest due on April 30, 2019. The terms of this loan require the Company to maintain minimum capital, liquidity and Texas ratios. This line of credit was paid in full on August 25, 2017, and there is $25 million of available credit remaining at March 31, 2018. —
—
In October 2017, the Company entered into a capital lease of $19 thousand with an unaffiliated equipment lease company, secured by fitness equipment which is included in premises and equipment on the consolidated balance sheet. Payments are principal and interest due monthly starting December 15, 2018 over a term of 60 months. At the end of the lease term there is a $1.00 bargain purchase option. 18
—
Total long term borrowings $ 3,489
$ 26,564

The Company may purchase federal funds through unsecured federal funds lines of credit with various correspondent banks, which totaled ~~$67.5 million and $47.5~~$72.5 million as of March 31, ~~2018~~2019 and December 31, ~~2017, respectively.~~2018. These lines are intended for short-term borrowings and are subject to restrictions limiting the frequency and terms of advances. These lines of credit are payable on demand and bear interest based upon the daily federal funds rate. The Company had no outstanding balances on the lines of credit as of March 31, ~~2018~~2019 and December 31, ~~2017.~~2018.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

The Company has entered into a repurchase agreement with a third party for $5$5.0 million as of March 31, ~~2018~~2019 and December 31, ~~2017.~~2018. At the time the Company enters into a transaction with the third party, the Company must transfer securities or other assets against the funds received. The terms of the agreement are set at market conditions at the time the Company enters into such transaction. The Company had no outstanding balance on the repurchase agreement as of March 31, ~~2018~~2019 and December 31, ~~2017.~~

~~Table~~2018.

On June 18, 2018, the Company entered into a borrowing agreement with the Federal Home Loan Bank of ~~Contents~~

~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Consolidated Financial Statements~~

Atlanta. These borrowings must be secured with eligible collateral approved by the Federal Home Loan Bank of Atlanta. At March 31, 2019 and December 31, 2018, the Company had approximately $903.9 million and $849.1 million, respectively, in borrowing capacity available under these agreements. There is no collateral pledged and no advances outstanding as of March 31, 2019 and December 31, 2018.

The Company may borrow funds through the Federal Reserve Bank’s discount window. These borrowings are secured by a blanket floating lien on qualifying loans with a balance of ~~$363.6~~$405.1 million and ~~$348.5~~$395.2 million as of March 31, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively. At March 31, ~~2018~~2019 and December 31, ~~2017,~~2018, the Company had approximately ~~$199.2~~$231.7 million and ~~$189.1~~$218.0 million, respectively, in borrowing capacity available under these arrangements with no outstanding balance as of March 31, ~~2018~~2019 and December 31, ~~2017.~~

2018.

Note 9. Income Taxes

The Company's effective tax rate is lower than the U.S. statutory rate primarily because of the anticipated effect of investment tax credits during ~~2018.~~2019. The Company's effective tax rate in the future will depend on the actual investment tax credits earned as a part of its financing renewable energy applications.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 10. 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.

Financial Instruments Measured at Fair Value

The following sections provide a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the fair value hierarchy:

Investment securities: Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, discounted cash flow or at net asset value per share. Level 2 securities would include U.S. government agency securities, mortgage-backed securities, obligations of states and political subdivisions and certain corporate, asset backed mutual fund and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy.

Impaired loans: Impairment of a loan is based on the fair value of the collateral of the loan for collateral-dependent loans. Fair value of the loan’s collateral, when the loan is dependent on collateral, is determined by appraisals or independent valuation which is then adjusted for the cost related to liquidation of the collateral. For non-collateral dependent loans, impairment is determined by the present value of expected future cash flows. Impaired loans classified as Level 3 are based on management’s judgment and estimation.

Servicing assets: Servicing rights do not trade in an active, open market with readily observable prices. While sales of servicing rights do occur, the precise terms and conditions typically are not readily available. Accordingly, the Company estimates the fair value of servicing rights using discounted cash flow models incorporating numerous assumptions from the perspective of a market participant including servicing income, servicing costs, market discount rates and prepayment speeds. Due to the nature of the valuation inputs, servicing rights are classified within Level 3 of the valuation hierarchy.

Foreclosed assets: Foreclosed real estate is adjusted to fair value less selling costs upon transfer of the loans to foreclosed real estate. Subsequently, foreclosed real estate is carried at the lower of carrying value or fair value less selling costs. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. Given the lack of observable market prices for identical properties and market discounts applied to appraised values, the Company generally classifies foreclosed assets as nonrecurring Level 3.

Mutual fund: The following mutual fund is registered with the Securities and Exchange Commission as a closed-end, non-diversified management investment company and operates as an interval fund. The fund primarily invests in the unguaranteed portion of SBA504 First Lien Loans secured by owner-occupied commercial real estate. This investment is valued using quoted prices in markets that are not active and is classified as Level 2 within the valuation hierarchy.

~~Table of Contents~~

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Equity warrant assets: Fair value measurements of equity warrant assets of private companies are priced based on a Black-Scholes option pricing model to estimate the asset value by using stated strike prices, option expiration dates, risk-free interest rates and option volatility assumptions. Option volatility assumptions used in the Black-Scholes model are based on public companies that operate in similar industries as the companies in our private company portfolio. Option expiration dates are modified to account for estimates to actual life relative to stated expiration. Values are further adjusted for a general lack of liquidity due to the private nature of the associated underlying company. The Company classifies equity warrant assets within Level 3 of the valuation hierarchy.

~~Contingent consideration liability:~~ Contingent consideration associated with the acquisition of Reltco will be adjusted to fair value quarterly until settled. The assumptions used to measure fair value are based on internal metrics that are unobservable and therefore the contingent consideration liability is classified within Level 3 of the valuation hierarchy.

Recurring Fair Value

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

March 31, 2019	Total		Level 1		Level 2		Level 3
Investment securities available-for-sale
US treasury securities	$	4,976	$	—	$	4,976	$	—
US government agencies		48,282		—		48,282		—
Mortgage-backed securities		507,953		—		507,953		—
Municipal bonds¹		8,528		—		8,435		93
Servicing assets²		44,324		—		—		44,324
Mutual fund		2,141		—		2,141		—
Equity warrant assets³		782		—		—		782
Total assets at fair value	$	616,986	$	—	$	571,787	$	45,199

December 31, 2018	Total		Level 1		Level 2		Level 3
Investment securities available-for-sale
US treasury securities	$	4,966	$	—	$	4,966	$	—
US government agencies		30,944		—		30,944		—
Mortgage-backed securities		343,581		—		343,581		—
Municipal bond¹		999		—		—		999
Servicing assets²		47,641		—		—		47,641
Mutual fund		2,099		—		2,099		—
Equity warrant assets³		527		—		—		527
Total assets at fair value	$	430,757	$	—	$	381,590	$	49,167

March 31, 2018 Total Level 1 Level 2 Level 3
Investment securities available-for-sale
US government agencies $ 22,432
$ —
$ 22,432
$ —
Residential mortgage-backed securities 354,021
—
354,021
—
Mutual fund 2,035
—
2,035
—
Servicing assets¹
53,120
—
—
53,120
Equity warrant assets 400
—
—
400
Total assets at fair value $ 432,008
$ —
$ 378,488
$ 53,520

Contingent consideration liability²
$ 1,640
$ —
$ —
$ 1,640
Total liabilities at fair value $ 1,640
$ —
$ —
$ 1,640

December 31, 2017 Total Level 1 Level 2 Level 3
Investment securities available-for-sale
US government agencies $ 22,624
$ —
$ 22,624
$ —
Residential mortgage-backed securities 68,696
—
68,696
—
Mutual fund 2,035
—
2,035
—
Servicing assets¹
52,298
—
—
52,298
Total assets at fair value $ 145,653
$ —
$ 93,355
$ 52,298

Contingent consideration liability²
$ 1,900
$ —
$ —
$ 1,900
Total liabilities at fair value $ 1,900
$ —
$ —
$ 1,900

1	During the three months ended March 31, 2019, the Company sold $900 thousand of a municipal bond to a third party and recorded a fair value adjustment of $7 thousand.

1 2	See Note 7 for a rollforward of recurring Level 3 fair values for servicing ~~assets and various assumptions used in~~assets.

3	During the ~~fair value measurement.~~

~~Activity for~~three months ended March 31, 2019, the ~~contingent consideration liability during~~Company recorded net gains on derivative instruments of $255 thousand. During the three months ended March 31, 2018, ~~consisted of~~the Company entered into equity warrant assets with a ~~$260 thousand negative~~ fair value ~~adjustment. During~~of $400 thousand at the ~~three months ended March 31, 2017, $4.3 million~~time of ~~contingent consideration was recorded upon the acquisition of Reltco as well as a $200 thousand positive fair value adjustment.~~issuance.

~~Table of Contents~~

~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Consolidated Financial Statements~~

Non-recurring Fair Value

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

March 31, 2019	Total		Level 1		Level 2		Level 3
Impaired loans	$	106,578	$	—	$	—	$	106,578
Foreclosed assets		1,374		—		—		1,374
Total assets at fair value	$	107,952	$	—	$	—	$	107,952

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 2018	Total		Level 1		Level 2		Level 3
Impaired loans	$	91,230	$	—	$	—	$	91,230
Foreclosed assets		1,094		—		—		1,094
Total assets at fair value	$	92,324	$	—	$	—	$	92,324

March 31, 2018 Total Level 1 Level 2 Level 3
Impaired loans and leases $ 44,089
$ —
$ —
$ 44,089
Foreclosed assets 1,519
—
—
1,519
Total assets at fair value $ 45,608
$ —
$ —
$ 45,608

December 31, 2017 Total Level 1 Level 2 Level 3
Impaired loans and leases $ 34,493
$ —
$ —
$ 34,493
Foreclosed assets 1,281
—
—
1,281
Total assets at fair value $ 35,774
$ —
$ —
$ 35,774

Level 3 Analysis

For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of March 31, ~~2018~~2019 and December 31, ~~2017~~2018 the significant unobservable inputs used in the fair value measurements were as follows:

March 31, ~~2018~~2019

Level 3 Assets with Significant Unobservable Inputs	Fair Value		Valuation Technique	Significant Unobservable Inputs	Range
Municipal bond	$	93	Discounted expected cash flows	Discount rate Prepayment speed	4.95% 5.00%
Impaired loans	$	106,578	Discounted appraisals Discounted expected cash flows	Appraisal adjustments ⁽¹⁾ Interest rate & repayment term	10% to 63% Weighted average discount rate 6.81%
Foreclosed assets	$	1,374	Discounted appraisals	Appraisal adjustments ⁽¹⁾	9% to 37%
Equity warrant assets	$	782	Monte Carlo simulation	Volatility Risk-free interest rate Marketability discount Remaining life	20.60% 2.69% 20.00% 8 - 10 years

Level 3 Assets with Significant
Unobservable Inputs
Fair Value Valuation Technique
Significant
Unobservable
Inputs
Range
Impaired loans and leases $ 44,089
Discounted appraisals
Discounted expected cash flows
Appraisal adjustments (1)
Interest rate & repayment term
10% to 58% Weighted average discount rate 6.51%
Foreclosed assets $ 1,519
Discounted appraisals
Appraisal adjustments (1)
10% to 37%
Equity warrant assets $ 400

Black-Scholes option pricing model

Volatility
Risk-free interest rate
Marketability discount
Remaining life
19.53%
2.74%
20%
10 years
Contingent consideration liability $ 1,640
Monte Carlo simulation Volatility
Risk-free rate of return
Dividend yield
Remaining life 25.00%
2.09%
0.43%
2.75 years

December 31, ~~2017~~2018

Level 3 Assets with Significant Unobservable Inputs	Fair Value		Valuation Technique	Significant Unobservable Inputs	Range
Municipal bond	$	999	Discounted expected cash flows	Discount rate Prepayment speed	5.14% 5.00%
Impaired loans	$	91,230	Discounted appraisals Discounted expected cash flows	Appraisal adjustments ⁽¹⁾ Interest rate & repayment term	8% to 48% Weighted average discount rate 6.58%
Foreclosed assets	$	1,094	Discounted appraisals	Appraisal adjustments⁽¹⁾	9% to 37%
Equity warrant assets	$	527	Monte Carlo simulation	Volatility Risk-free interest rate Marketability discount Remaining life	20.40% 2.69% 20.00% 9 - 10 years

Level 3 Assets with Significant
Unobservable Inputs
Fair Value Valuation Technique
Significant
Unobservable
Inputs
Range
Impaired loans and leases $ 34,493
Discounted appraisals
Discounted expected cash flows
Appraisal adjustments (1)
Interest rate & repayment term
10% to 25% Weighted average discount rate 6.26%
Foreclosed assets $ 1,281
Discounted appraisals
Appraisal adjustments (1)
10% to 37%
Contingent consideration liability $ 1,900
Monte Carlo simulation Volatility
Risk-free rate of return
Dividend yield
Remaining life 25.00%
1.43%
0.51%
3.00 years

(1)
~~(1)~~	Appraisals may be adjusted by management for customized discounting criteria, estimated sales costs, and proprietary qualitative adjustments.

~~Table of Contents~~

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Estimated Fair Value of Other Financial Instruments

GAAP also requires disclosure of the fair value of financial instruments carried at book value on the consolidated balance sheet.

The carrying amounts and estimated fair values of the Company’s financial instruments are as follows:

March 31, 2019	Carrying Amount		Quoted Price In Active Markets for Identical Assets /Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value
Financial assets
Cash and due from banks	$	221,159	$	221,159	$	—	$	—	$	221,159
Federal funds sold		64,708		64,708		—		—		64,708
Certificates of deposit with other banks		7,250		7,498		—		—		7,498
Investment securities, available-for-sale		569,739		—		569,646		93		569,739
Loans held for sale		772,481		—		—		784,811		784,811
Loans and leases, net of allowance for loan and lease losses		1,967,013		—		—		1,963,786		1,963,786
Servicing assets		44,324		—		—		44,324		44,324
Accrued interest receivable		18,792		18,792		—		—		18,792
Mutual fund		2,141		—		2,141		—		2,141
Equity warrant assets		782		—		—		782		782
Financial liabilities
Deposits		3,528,405		—		3,511,520		—		3,511,520
Accrued interest payable		2,341		2,341		—		—		2,341
Short term borrowings		1,393		—		—		1,397		1,397
Long term borrowings		17		—		—		17		17

December 31, 2018	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	$	316,823	$	316,823	$	—	$	—	$	316,823
Certificates of deposit with other banks		7,250		7,442		—		—		7,442
Investment securities, available-for-sale		380,490		—		379,491		999		380,490
Loans held for sale		687,393		—		—		695,154		695,154
Loans and leases, net of allowance for loan and lease losses		1,810,985		—		—		1,807,528		1,807,528
Servicing assets		47,641		—		—		47,641		47,641
Accrued interest receivable		15,895		15,895		—		—		15,895
Mutual fund		2,099		—		2,099		—		2,099
Equity warrant assets		527		—		—		527		527
Financial liabilities
Deposits		3,149,583		—		3,117,941		—		3,117,941
Accrued interest payable		861		861		—		—		861
Short term borrowings		1,441		—		—		1,441		1,441
Long term borrowings		16		—		—		16		16

March 31, 2018
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 $ 527,952
$ 527,952
$ —
$ —
$ 527,952
Certificates of deposit with other banks 2,250
2,239
—
—
2,239
Investment securities, available-for-sale 378,488
—
378,488
—
378,488
Loans held for sale⁽¹⁾
720,511
—
—
738,041
738,041
Loans and leases, net of allowance for loan and lease losses⁽¹⁾
1,414,027
—
—
1,408,836
1,408,836
Servicing assets 53,120
—
—
53,120
53,120
Accrued interest receivable 11,971
11,971
—
—
11,971
Financial liabilities
Deposits 2,973,341
—
2,922,279
—
2,922,279
Accrued interest payable 546
546
—
—
546
Long term borrowings 3,489
—
—
3,515
3,515

December 31, 2017
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 $ 295,271
$ 295,271
$ —
$ —
$ 295,271
Certificates of deposit with other banks 3,000
2,993
—
—
2,993
Investment securities, available-for-sale 93,355
—
93,355
—
93,355
Loans held for sale ⁽¹⁾
680,454
—
—
706,972
706,972
Loans and leases, net of allowance for loan and lease losses⁽¹⁾
1,319,783
—
—
1,319,615
1,319,615
Servicing assets 52,298
—
—
52,298
52,298
Accrued interest receivable 10,160
10,160
—
—
10,160
Financial liabilities
Deposits 2,260,263
—
2,232,370
—
2,232,370
Accrued interest payable 367
367
—
—
367
Long term borrowings 26,564
—
—
27,390
27,390


~~(1)~~	In accordance with the adoption of ASU 2016-01, as of March 31, 2018, the fair value of loans and leases were measured using an exit price notion. As of December 31, 2017, the fair value of loans and leases were measured using an entry price notion.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 11. 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.

~~Table of Contents~~

~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited 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:

	March 31, 2019		December 31, 2018
Commitments to extend credit	$	1,428,502	$	1,435,024
Standby letters of credit		2,322		2,150
Airplane purchase agreement commitments		10,450		10,450
Total unfunded off-balance-sheet credit risk	$	1,441,274	$	1,447,624

March 31,
2018 December 31,
2017
Commitments to extend credit $ 1,448,428
$ 1,701,137
Standby letters of credit 1,905
2,298
Solar purchase commitments 67,900
106,921
Airplane purchase agreement commitments 25,450
25,450
Total unfunded off-balance-sheet credit risk $ 1,543,683
$ 1,835,806

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the party. Collateral held varies, but may include accounts receivable, inventory, property and equipment, residential real estate and income-producing commercial properties. In 2012, the Company began issuing commitment letters after approval of the loan by the Credit Department. Commitment letters generally expire ninety days after issuance.

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

~~Solar purchase commitments are to purchase solar assets to fulfill leasing obligations.~~

As of March 31, ~~2018~~2019 and December 31, ~~2017,~~2018, the Company had unfunded commitments to provide capital contributions for ~~on-balance sheet~~on-balance-sheet investments in the amount of ~~$3.3~~$2.2 million and ~~$3.5~~$2.8 million, respectively.

Concentrations of Credit Risk

Although the Company is not subject to any geographic concentrations, a substantial amount of the Company’s loans, leases, and commitments to extend credit have been granted to customers in the agriculture, healthcare and veterinary verticals. The concentrations of credit by type of loan are set forth in Note 5. The distribution of commitments to extend credit approximates the distribution of loans outstanding. The Company does not have a significant number of credits to any single borrower or group of related borrowers whereby their retained unguaranteed exposure exceeds $7.5 million, except for ~~eight~~13 relationships that have a retained unguaranteed exposure of ~~$96.7~~$150.7 million of which ~~$81.7~~$108.0 million of the unguaranteed exposure has been disbursed.

Additionally, the Company has future minimum lease payments due under non-cancelable operating leases totaling ~~$83.2~~$90.9 million, of which ~~$63.2~~$66.1 million is due from four relationships.

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

~~Table of Contents~~

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 12. Stock Plans

On March 20, 2015, the Company adopted the 2015 Omnibus Stock Incentive Plan which replaced the previously existing Amended Incentive Stock Option Plan and Nonstatutory Stock Option Plan. Subsequently on May 24, 2016, the 2015 Omnibus Stock Incentive Plan was amended to authorize awards covering a maximum of 7,000,000 common voting shares and has an expiration date of March 20, 2025. On May 15, 2018, the Amended and Restated 2015 Omnibus Stock Incentive Plan was amended to authorize awards covering a maximum of 8,750,000 common voting shares. Options or restricted shares granted under the Amended and Restated 2015 Omnibus Stock Incentive Plan (the "Plan") expire no more than 10 years from the date of grant. Exercise prices under the Plan are set by the Board of Directors at the date of grant, but shall not be less than 100% of fair market value of the related stock at the date of the grant. Options ~~or restricted shares~~ vest over a minimum of three years from the date of the grant.

Restricted stock grants vest in equal installments ranging from immediate vesting to over a seven year period from the date of the grant.

Stock Options

Compensation cost relating to share-based payment transactions are recognized in the financial statements with measurement based upon the fair value of the equity or liability instruments issued. For the three months ended March 31, ~~2018~~2019 and ~~2017,~~2018, the Company recognized ~~$433~~$438 thousand and ~~$414~~$433 thousand in compensation expense for stock options, respectively.

Stock option activity under the Plan during the three month periods ended March 31, ~~2018~~2019 and ~~2017~~2018, is summarized below.

	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at December 31, 2018		2,656,855	$	11.27
Exercised		3,088		4.40
Forfeited		12,108		9.56
Granted		—		—
Outstanding at March 31, 2019		2,641,659	$	11.29	5.75 years	$	11,412,834
Exercisable at March 31, 2019		965,122	$	10.17	5.51 years	$	5,077,915

	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Terms	Aggregate Intrinsic Value
Outstanding at December 31, 2017		3,058,459	$	11.30
Exercised		54,254		12.74
Forfeited		57,629		14.94
Granted		—		—
Outstanding at March 31, 2018		2,946,576	$	11.20	6.77 years	$	48,921,416
Exercisable at March 31, 2018		806,424	$	9.36	6.48 years	$	14,872,227

Shares
Weighted
Average
Exercise Price

Weighted
Average
Remaining
Contractual
Term

Aggregate
Intrinsic
Value
Outstanding at December 31, 2017 3,058,459
$ 11.30

Exercised 54,254
12.74

Forfeited 57,629
14.94

Granted —
—

Outstanding at March 31, 2018 2,946,576
$ 11.20
6.77 years $ 48,921,416
Exercisable at March 31, 2018 806,424
$ 9.36
6.48 years $ 14,872,227

Shares
Weighted
Average
Exercise Price

Weighted
Average
Remaining
Contractual
Term

Aggregate
Intrinsic
Value
Outstanding at December 31, 2016 3,478,208
$ 11.51

Exercised 33,136
5.61

Forfeited 149,530
13.96

Granted —
—

Outstanding at March 31, 2017 3,295,542
$ 11.46
7.81 years $ 33,586,061
Exercisable at March 31, 2017 604,054
$ 8.95
7.41 years $ 7,669,515

~~Table of Contents~~

~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Consolidated Financial Statements~~

The following is a summary of non-vested stock option activity for the Company for the three months ended March 31, ~~2018~~2019 and ~~2017.~~2018.

	Shares			Weighted Average Grant Date Fair Value
Non-vested at December 31, 2018		1,839,830		$	4.60
Granted		—			—
Vested		(151,185	)		1.99
Forfeited		(12,108	)		9.56
Non-vested at March 31, 2019		1,676,537		$	11.93

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

	Shares			Weighted Average Grant Date Fair Value
Non-vested at December 31, 2017		2,364,999		$	4.65
Granted		—			—
Vested		(167,218	)		2.86
Forfeited		(57,629	)		7.07
Non-vested at March 31, 2018		2,140,152		$	4.83

Shares
Weighted
Average
Grant Date
Fair Value
Non-vested at December 31, 2017 2,364,999
$ 4.65
Granted —
—
Vested (167,218 ) 2.86
Forfeited (57,629 ) 7.07
Non-vested at March 31, 2018 2,140,152
4.83

Shares
Weighted
Average
Grant Date
Fair Value
Non-vested at December 31, 2016 3,016,100
$ 4.78
Granted —
—
Vested (175,082 ) 1.65
Forfeited (149,530 ) 5.94
Non-vested at March 31, 2017 2,691,488
4.92

The total intrinsic value of options exercised at March 31, 2019 and 2018, was $32 thousand and ~~2017 was~~ $768 thousand, ~~and $508 thousand,~~ respectively.

At March 31, ~~2018,~~2019, unrecognized compensation costs relating to stock options amounted to ~~$8.0~~$5.5 million which will be recognized over a weighted average period of ~~2.65~~3.3 years.

The weighted average fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The expected volatility is based on historical volatility. The risk-free interest rates for periods within the contractual life of the awards are based on the U.S. Treasury yield curve in effect at the time of the grant. The expected life is based on historical exercise experience. The dividend yield assumption is based on the Company’s history and expectation of dividend payouts. There were no stock options granted during the three months ended March 31, ~~2018 or 2017.~~

2019 and 2018.

Restricted Stock

Restricted stock awards are authorized in the form of restricted stock awards or units ("RSU"s) and restricted stock awards or units with a market price condition ("Market RSU"s).

RSUs have a restriction based on the passage of time and may also have a restriction based on a non-market-related performance criteria. The fair value of the RSUs is based on the closing price on the date of the grant.

Market RSUs also have a restriction based on the passage of time and non-market-related performance criteria, but also have a restriction based on market price criteria related to the Company’s share price closing at or above a specified price ranging from $34.00 to ~~$38.00~~$55.00 per share for at least twenty (20) consecutive trading days at any time prior to expiration date. The amount of Market RSUs earned will not exceed 100% of the Market RSUs awarded. The fair value of the Market RSUs and the implied service period is calculated using the Monte Carlo simulation method.

~~Table of Contents~~

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

RSU stock activity under the Plan during the first three months of ~~2018~~2019 is summarized below.

	Shares			Weighted Average Grant Date Fair Value
Non-vested at December 31, 2018		388,187		$	23.85
Granted		34,417			15.43
Vested		(3,443	)		25.73
Forfeited		(2,574	)		25.44
Non-vested at March 31, 2019		416,587		$	23.13

Shares
Weighted
Average Grant
Date Fair Value
Non-vested at December 31, 2017 181,814
$ 20.03
Granted 52,627
26.15
Vested (28,884 ) 24.58
Forfeited (1,010 ) 18.51
Non-vested at March 31, 2018 204,547
20.97

For the three months ended March 31, ~~2018~~2019 and ~~2017,~~2018, the Company recognized ~~$915~~$537 thousand and ~~$159~~$915 thousand in compensation expense for RSUs, respectively.

At March 31, ~~2018,~~2019, unrecognized compensation costs relating to RSUs amounted to ~~$3.6~~$8.2 million which will be recognized over a weighted average period of ~~4.70~~5.0 years.

Market RSU stock activity under the Plan during the first three months of ~~2018~~2019 is summarized below.

	Shares			Weighted Average Grant Date Fair Value
Non-vested at December 31, 2018		2,709,202		$	9.87
Granted		500,000			4.22
Vested		—			—
Forfeited		(9,847	)		9.67
Non-vested at March 31, 2019		3,199,355		$	7.12

Shares
Weighted
Average Grant
Date Fair Value
Non-vested at December 31, 2017 2,532,808
$ 8.78
Granted —
—
Vested —
—
Forfeited (104,218 ) 9.07
Non-vested at March 31, 2018 2,428,590
8.77

The compensation expense for Market RSUs is measured based on their grant date fair value as calculated using the Monte Carlo simulation and is recognized on a straight-line basis over the average vesting period. The Monte Carlo simulation used 100,000 simulation paths to assess the expected date of achieving the market price criteria.

Related to the 500,000 Market RSUs granted on February 11, 2019, the share price simulation was based on the Cox, Ross & Rubinstein option pricing methodology for a period of 10.0 years. The implied term of the restricted stock ranges from 2.60 years to 3.20 years. The Monte Carlo Simulation used various assumptions that included a risk free rate of return of 2.62%, expected volatility of 37.6% and a dividend yield of 0.78%.

On February 11, 2019, 75,000 Market RSUs granted on May 14, 2018 to one employee were modified to lengthen the vesting term from 7 to 10 years and change the target stock price from $48.00 to a range of $35.00 to $48.00 per share for at least twenty (20) consecutive trading days. Additionally, 410,000 Market RSUs granted on August 10, 2018 to eleven employees were modified to lengthen the vesting term from 7 to 10 years and change the amount of Market RSUs that vest at various target stock prices to 20% per tier. As a result of modification, the Company recognized additional compensation expense of $68 thousand for the three months ended March 31, 2019.

For the three months ended March 31, ~~2018~~2019 and ~~2017,~~2018, the Company recognized $1.9 million and $972 thousand ~~and $1.2 million~~ in compensation expense for Market RSUs, respectively.

At March 31, ~~2018,~~2019, unrecognized compensation costs relating to Market RSUs amounted to ~~$14.1~~$17.4 million which will be recognized over a weighted average period of ~~2.76~~2.4 years.

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Employee Stock Purchase Plan

The Company adopted an Employee Stock Purchase Plan on October 8, 2014. On May 24, 2016, the plan was amended and the Amended and Restated Employee Stock Purchase Plan (the "ESPP") became effective within the meaning of Section 423 of the Internal Revenue Code of 1986, as amended. Under the ESPP, eligible employees are able to purchase available shares with post-tax dollars as of the grant date. In order for employees to be eligible to participate in the ESPP they must be employed or on an authorized leave of absence from the Company or any subsidiary immediately prior to the grant date. ESPP stock purchases cannot exceed $25 thousand in fair market value per employee per calendar year. Options to purchase shares under the ESPP are granted at a 15% discount to fair market value. ~~Expense recognized in relation to the ESPP for~~For the three months ended March 31, 2019 and 2018, the Company recognized $32 thousand and ~~2017 was~~ $29 thousand, ~~and $43 thousand,~~ respectively.

~~Table of Contents~~

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. (the “Company” or “LOB”). This discussion should be read in conjunction with the 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, ~~2017~~2018 (the ~~"2017~~"2018 Annual Report"). 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 Company’s financial condition, results of operations, plans, objectives, future performance or business. 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 quarterly report on Form 10-Q. 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 quarterly report on Form 10-Q 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;

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, including a failure in or a breach of the Company’s operational or security systems or those of its ~~third party~~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;

~~Table of Contents~~

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;

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;

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;

other risk factors listed from time to time in reports that the Company files with the SEC, including in the Company’s ~~2017~~2018 Annual Report; and

the success at managing the risks involved in the foregoing.

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 have been presented in thousands, except percentage, time period, stock option, share and per share data or where otherwise indicated.

Nature of Operations

LOB is a bank holding company headquartered in Wilmington, North Carolina incorporated under the laws of North Carolina in December 2008. The Company conducts business operations primarily through its commercial bank subsidiary, Live Oak Banking Company (the “Bank”). The Bank was incorporated in February 2008 as a North Carolina-chartered commercial bank. The Bank specializes in providing lending services to small businesses ~~nationwide in targeted industries.~~nationwide. The Bank identifies and grows within selected industry sectors, or verticals, by leveraging expertise within those industries, and more broadly to select borrowers outside of those industries. A significant portion of the loans originated by the Bank are guaranteed by the SBA under ~~its~~the 7(a) ~~program. In 2010,~~Loan Program and the ~~Bank formed Live Oak Number One, Inc., a wholly-owned subsidiary, to hold properties foreclosed on by the Bank.~~U.S. Department of Agriculture ("USDA") Rural Energy for America Program ("REAP") and Business & Industry ("B&I") and Water & Waste Disposal (“WEP”) loan programs.

Effective July 29, 2016, the Company elected to become a “financial holding company” within the meaning of the Bank Holding Company Act. A financial holding company, and the nonbank companies under its control, are permitted to engage in activities considered financial in nature or incidental to financial activities. For the Company to become and remain eligible for financial holding company status, it and the Bank must meet certain criteria, including capital, management and Community Reinvestment Act (“CRA”) requirements. The failure to meet such criteria could, depending on which requirements were not met, result in the Company facing restrictions on new financial activities or acquisitions or being required to discontinue existing activities that are not otherwise permissible for bank holding companies.

During the fourth quarter of 2018, the Company began implementing a strategic decision to retain a larger portion of its loans eligible for sale on its balance sheet. Management believes this decision will reduce future earnings volatility and maximize long-term profitability. This strategic change had immediate impacts through the reclassification of $80.3 million in guaranteed loans from held-for-sale to held-for-investment status. Other effects of this change began to be reflected in the financial statements in the fourth quarter of 2018 and first quarter of 2019 with significantly fewer loans sold during the respective quarters and the consequential effect of increased net interest income.

In 2018, the Bank formed Live Oak Private Wealth, LLC, a registered investment advisor that provides high-net-worth individuals and families with strategic wealth and investment management services and formed Canapi Advisors, LLC for the purpose of providing investment advisory services to a series of new funds focused on providing venture capital to new and emerging financial services technology companies.In 2017, the Bank entered into a joint venture, Apiture LLC (“Apiture”), with First Data Corporation for the purpose of creating next generation technology for financial institutions. In ~~addition to the Bank,~~August 2018, the Company ~~owns~~exited the title insurance business by financing the sale of its entire ownership interest in Reltco, Inc. and National Assurance Title, Inc. ~~(collectively referred to as (“Reltco”) which were~~for $3.0 million. This divestiture was driven by lower expectations of future profitability for this business. The title insurance business was acquired ~~on February 1, 2017;~~ in 2017. In 2016, the Company formed Live Oak Clean Energy Financing LLC ~~formed in November 2016,~~(“LOCEF”), for the purpose of providing financing to entities for renewable energy ~~applications; Canapi,~~applications. During the three months ended March 31, 2019, LOCEF became a subsidiary of the Bank. In addition to the Bank, the Company owns Live Oak Ventures, Inc. (formerly known as ~~“Live Oak Ventures,~~"Canapi, Inc.”"), formed in August 2016 for the purpose of investing in businesses that align with the Company's strategic initiative to be a leader in financial technology; Live Oak Grove, LLC, ~~opened~~formed in ~~September~~February 2015 for the purpose of providing Company employees and business visitors an on-site restaurant location; Government Loan Solutions, Inc. (“GLS”), a management and technology consulting firm that specializes in the settlement, accounting, and securitization processes for government guaranteed loans, including loans originated under the SBA 7(a) loan program and ~~U.S. Department of Agriculture ("USDA")-guaranteed~~USDA-guaranteed loans; and 504 Fund Advisors, LLC (“504FA”), ~~which was~~ formed to serve as the investment advisor to The 504 Fund, a closed-end mutual fund organized to invest in SBA section 504 loans.

~~Table of Contents~~

The Company generates revenue primarily from net interest income and the origination and sale of ~~SBA-guaranteed~~government guaranteed loans. Income from the retention of loans ~~and USDA guaranteed Rural Energy for America Program ("REAP") and Business & Industry ("B&I") loans and net~~is comprised of interest income. Income from the sale of loans is comprised of loan servicing revenue and revaluation of related servicing assets ~~and~~along with net gains on sales of loans. Offsetting these revenues are the cost of funding sources, provision for loan and lease 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.

~~On July 23, 2015 the Company closed on its initial public offering with a secondary offering completed in August of 2017.~~

Business Outlook

Below is a discussion of management’s current expectations regarding company performance over the near-term based on market conditions, the regulatory environment and business strategies as of the time the Company filed this Report. Actual outcomes and results may differ materially from what is expressed or forecasted in these forward-looking statements. See “Important Note Regarding Forward-Looking Statements” in this Report for more information on forward-looking statements.

~~The Company expects~~

We believe our strategic decision to retain a larger portion of loans eligible for sale on our balance sheet will reduce future earnings volatility and maximize long-term profitability. Notwithstanding this decision, we anticipate that gains on the sale of loans will comprise a diminishing component of our revenue in 2019. Management anticipates that the Company's held-for-sale and held-for-investment loan ~~and lease portfolio to~~portfolios will continue to grow as a result of ongoing origination volumes and higher levels of loan retention intended to ~~maintain an effective tax rate~~promote long-term recurring revenue and profitability, including the continued pursuit of potential opportunities in ~~the very low single digit range for the full year~~conventional lending outside of ~~2018.~~

SBA or other government guarantee programs.

~~Table of Contents~~

Results of Operations

Performance Summary

Three months ended March 31, ~~2018~~2019 compared with three months ended March 31, ~~2017~~

2018

For the three months ended March 31, ~~2018,~~2019, the Company reported net income of $2.4 million, or $0.06 per diluted share, as compared to $12.5 million, or $0.30 per diluted share, ~~as compared to $6.1 million, or $0.17 per diluted share,~~ for the ~~three months ended March 31, 2017.~~first quarter of 2018. This ~~increase~~decrease in net income is primarily due to the following items:

~~Increased net interest income of $8.8 million, or 56.5%, predominately driven by significant growth~~

The Company’s strategic shift in the ~~combined held for sale and held for investment loan and lease portfolios;~~

~~Increased~~latter part of 2018 to hold substantially more of its eligible-for-sale production on balance sheet to maximize long-term profitability resulted in lower net income in the near-term by decreasing net gains on sales of loans ~~of $5.5~~by $20.2 million, or ~~28.8%, as a result~~82.8%. The volume of ~~increased~~guaranteed loan sales ~~combined with improving premiums;~~in the first quarter of 2019 declined to $62.9 million compared to $247.2 million in the first quarter of 2018;

Title insurance income decreased $1.3 million due to the Company’s sale of its title insurance business in August of 2018;

Salaries and

~~Revenues of~~ employee benefits increased $1.6 million, ~~from lease activities that began~~or 8.1%, primarily in support of the ~~second quarter of 2017.~~Company’s ongoing growth initiatives; and

~~Partially~~

The primary factors partially offsetting the above ~~factors were increases~~decrease in net income were:

Increase in net interest income of $6.1 million, or 25.0%, predominately driven by the above referenced strategic growth in loan and lease portfolios combined with higher investment security holdings and interest rates rising;

A decrease in the ~~various cost factors as follows: $2.9 million in the~~ provision ~~expense~~ for loan and lease losses ~~$3.0~~of $1.7 million, or 37.6%, largely the result of growth in the first quarter being comprised principally of guaranteed loans combined with decreased levels of net charge-offs; and

Net negative loan servicing ~~asset~~ revaluation ~~loss, $1.5~~decreased by $2.8 million, ~~in salaries and employee benefits, $1.1 million in data processing expense, and $2.0 million in equipment expense.~~or 55.9%, principally due to improving secondary market premiums.

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 it incurs on 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. 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.” Without a branch network, the Bank generates 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 March 31, ~~2018~~2019 compared with three months ended March 31, ~~2017~~

2018

For the three months ended March 31, ~~2018,~~2019, net interest income increased ~~$8.8~~$6.1 million, or ~~56.5%~~25.0%, to ~~$24.5~~$30.6 million compared to ~~$15.6~~$24.5 million for the three months ended March 31, ~~2017.~~2018. This increase was principally due to the significant growth in ~~average interest earning assets~~the combined held for sale and held for investment loan and lease portfolios along with higher investment security holdings reflecting the Company's ongoing initiative to ~~a lesser extent by higher yields on these assets which outpaced~~grow recurring revenue sources and deploy liquidity while improving the ~~growth and change in the cost of interest bearing liabilities.~~asset-liability repricing mix. Average interest earning assets increased by ~~$984.9~~$744.9 million, or ~~58.4%~~27.9%, to $3.42 billion for the three months ended March 31, 2019, compared to $2.67 billion for the three months ended March 31, 2018, ~~compared to $1.69 billion for the three months ended March 31, 2017,~~ while the yield on average interest earning assets increased ~~forty-one~~sixty-one basis points to ~~5.32%~~5.93%. The cost of funds on interest bearing liabilities for the three months ended March 31, ~~2018~~2019 increased ~~forty-six~~sixty-eight basis points to ~~1.70%~~2.38%, and the average balance of interest bearing liabilities increased by ~~$957.2~~$776.1 million, or ~~61.3%~~30.8%, over the same period in ~~2017.~~2018. As indicated in the rate/volume table below, the increase in interest ~~bearing liabilities~~earning assets and corresponding yields outpaced the higher volume and increased cost of ~~funds was outpaced by the positive effects of the increased volume of~~ interest ~~earning assets along with an improving yield,~~bearing liabilities, resulting in increased interest income of ~~$14.6~~$14.9 million and increased interest expense of ~~$5.8~~$8.8 million for the three months ended March 31, ~~2018~~2019 compared to the three months ended March 31, ~~2017.~~2018. For the three months ended March 31, 2018 compared to the three months ended March 31, ~~2017,~~2019, net interest margin declined from ~~3.76%~~3.72% to ~~3.72%~~3.63%, respectively, principally due to the narrowing of the interest rate spread during the quarter. This ~~short-term~~ compression of the spread was largely the result of ~~strategic liquidity initiatives which were accomplished during~~ the ~~first quarter~~increasing rates of ~~2018.~~

interest bearing deposits outpacing the increase of loan yields.

~~Table of Contents~~

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 March 31,
	2019								2018
	Average Balance			Interest		Average Yield/Rate			Average Balance			Interest		Average Yield/Rate
Interest earning assets:
Federal funds sold and interest earning balances in other banks	$	283,364		$	1,639		2.35	%	$	354,028		$	1,215		1.39	%
Investment securities		461,339			3,317		2.92			181,900			1,117		2.49
Loans held for sale		749,700			12,583		6.81			727,696			11,046		6.16
Loans and leases held for investment⁽¹⁾		1,922,280			32,383		6.83			1,408,112			21,645		6.23
Total interest earning assets		3,416,683			49,922		5.93			2,671,736			35,023		5.32
Less: Allowance for loan and lease losses		(32,464	)							(24,219	)
Non-interest earning assets		476,232								396,920
Total assets	$	3,860,451							$	3,044,437
Interest bearing liabilities:
Interest bearing checking	$	169		$	—		—	%	$	43,597		$	103		0.96	%
Savings		927,579			4,786		2.09			822,266			3,118		1.54
Money market accounts		83,298			108		0.53			168,954			521		1.25
Certificates of deposit		2,282,709			14,423		2.56			1,473,054			6,676		1.84
Total deposits		3,293,755			19,317		2.38			2,507,871			10,418		1.68
Other borrowings		1,464			—		—			11,228			129		4.66
Total interest bearing liabilities		3,295,219			19,317		2.38			2,519,099			10,547		1.70
Non-interest bearing deposits		46,822								56,596
Non-interest bearing liabilities		14,449								19,022
Shareholders' equity		503,961								449,720
Total liabilities and shareholders' equity	$	3,860,451							$	3,044,437
Net interest income and interest rate spread				$	30,605		3.55	%				$	24,476		3.62	%
Net interest margin							3.63	%							3.72	%
Ratio of average interest-earning assets to average interest-bearing liabilities							103.69	%							106.06	%

Three months ended March 31,
2018 2017
Average Balance Interest Average Yield/Rate Average Balance Interest Average Yield/Rate
Interest earning assets:
Interest earning balances in other banks $ 354,028
$ 1,215
1.39 % $ 194,176
$ 342
0.71 %
Investment securities 181,900
1,117
2.49
71,075
323
1.84
Loans held for sale 727,696
11,046
6.16
466,567
6,521
5.67
Loans and leases held for investment ⁽¹⁾
1,408,112
21,645
6.23
955,021
13,233
5.62
Total interest earning assets 2,671,736
35,023
5.32
1,686,839
20,419
4.91
Less: allowance for loan and lease losses (24,219 ) (18,199 )
Non-interest earning assets 396,920
167,644

Total assets $ 3,044,437
$ 1,836,284

Interest bearing liabilities:
Interest bearing checking $ 43,597
$ 103
0.96 % $ 44,351
$ 65
0.59 %
Savings 822,266
3,118
1.54
—
—
—
Money market accounts 168,954
521
1.25
479,545
948
0.80
Certificates of deposit 1,473,054
6,676
1.84
1,009,915
3,530
1.42
Total deposits 2,507,871
10,418
1.68
1,533,811
4,543
1.20
Other borrowings 11,228
129
4.66
28,068
235
3.40
Total interest bearing liabilities 2,519,099
10,547
1.70
1,561,879
4,778
1.24
Non-interest bearing deposits 56,596
28,686

Non-interest bearing liabilities 19,022
22,042

Shareholders' equity 449,720
223,677

Total liabilities and shareholders' equity $ 3,044,437
$ 1,836,284

Net interest income and interest rate spread $ 24,476
3.62 %
$ 15,641
3.67 %

Net interest margin 3.72
3.76

Ratio of average interest-earning assets to average interest-bearing liabilities 106.06 % 108.00 %

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

~~Table of Contents~~

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 March 31,
	2019 vs. 2018
	Increase (Decrease) Due to
	Rate			Volume			Total
Interest income:
Federal funds sold and interest earning balances in other banks	$	750		$	(326	)	$	424
Investment securities		337			1,863			2,200
Loans held for sale		1,185			352			1,537
Loans and leases held for investment		2,455			8,283			10,738
Total interest income		4,727			10,172			14,899
Interest expense:
Interest bearing checking		(52	)		(51	)		(103	)
Savings		1,197			471			1,668
Money market accounts		(225	)		(188	)		(413	)
Certificates of deposit		3,354			4,393			7,747
Other borrowings		(73	)		(56	)		(129	)
Total interest expense		4,201			4,569			8,770
Net interest income	$	526		$	5,603		$	6,129

Three months ended March 31,
2018 vs. 2017
Increase (Decrease) Due to
Rate Volume Total
Interest income:
Interest earning balances in other banks $ 458
$ 415
$ 873
Investment securities 202
592
794
Loans held for sale 718
3,807
4,525
Loans and leases held for investment 1,791
6,621
8,412
Total interest income 3,169
11,435
14,604
Interest expense:
Interest bearing checking 39
(1 ) 38
Savings —
3,118
3,118
Money market accounts 359
(786 ) (427 )
Certificates of deposit 1,287
1,859
3,146
Other borrowings 61
(167 ) (106 )
Total interest expense 1,746
4,023
5,769
Net interest income $ 1,423
$ 7,412
$ 8,835

Provision for Loan and Lease Losses

The provision for loan and lease losses represents the amount necessary to be charged against the current period’s earnings to maintain the allowance for loan and lease losses at a level that is appropriate in relation to the estimated losses inherent in the loan and lease portfolio. A number of factors are considered in determining the required level of loan and lease loss reserves and the provision required to achieve the appropriate reserve level, including loan and lease growth, credit risk rating trends, nonperforming loan and lease levels, delinquencies, loan and lease portfolio concentrations and economic and market trends.

Losses inherent in loan relationships are mitigated if a portion of the loan is guaranteed by the SBA or USDA. A typical SBA 7(a) loan carries a 75% guarantee while USDA guarantees range from 60% to 80% depending on loan size, which ~~reduces~~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.

~~The~~

For the first quarter of 2019 the provision for loan and lease losses ~~for the first quarter of 2018~~ was ~~$4.4~~$2.7 million compared to ~~$1.5~~$4.4 million for the same period in ~~2017, an increase~~2018, a decrease of ~~$2.9~~$1.7 million, or ~~193.0%, largely driven by overall~~37.6%. The decrease in the provision for loan and lease losses compared to the prior year quarter was primarily largely the result of first quarter growth ~~and~~being comprised principally of guaranteed loans ~~classified as Risk Grade 5~~ combined with ~~higher specific reserve requirements.~~

decreased levels of net charge-offs.

Loans and leases held for investment ~~of $1.44~~were $2.00 billion as of March 31, ~~2018 increased~~2019, increasing by ~~$442.8~~$560.0 million, or ~~44.3%~~38.8%, compared to March 31, ~~2017.~~2018. This growth was fueled by strong loan origination volumes ~~combined with continued disbursements for~~and the above referenced strategic shift to retain substantially more loans inon the ~~construction portfolio and related~~ balance ~~sheet retention over the past year.~~sheet.

Net charge-offs were ~~$532~~$65 thousand, or ~~0.15%~~0.01% of average quarterly loans and leases held for investment on an annualized basis, for the three months ended March 31, ~~2018,~~2019, compared to ~~net charge-offs of $1.5 million,~~$532 thousand, or ~~0.63%~~0.15%, for the three months ended March 31, ~~2017.~~2018. Net charge-offs are a key element of historical experience in the Company's estimation of the allowance for loan and lease losses.

In addition, at March 31, ~~2018,~~2019, nonperforming loans and leases not guaranteed by the SBA totaled ~~$7.4~~$20.2 million, which was ~~0.51%~~1.01% of the held-for-investment loan and lease portfolio compared to ~~$3.6~~$7.4 million, or ~~0.36%~~0.51% of loans and leases held for investment at March 31, ~~2017.~~

~~Table of Contents~~

2018.

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. 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. Noninterest income also commonly includes lease income, construction supervision fee income and in prior periods title insurance income. Other less common elements of noninterest income include nonrecurring 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 March 31,						2019/2018 Increase (Decrease)
	2019			2018			Amount			Percent
Noninterest income
Loan servicing revenue	$	7,410		$	6,898		$	512			7.42	%
Loan servicing asset revaluation		(2,246	)		(5,088	)		2,842			55.86
Net gains on sales of loans		4,198			24,418			(20,220	)		(82.81	)
Gain on sale of investment securities available-for-sale		5			—			5			100.00
Lease income		2,325			1,608			717			44.59
Construction supervision fee income		779			779		—				—
Title insurance income		—			1,300			(1,300	)		(100.00	)
Other noninterest income		556			841			(285	)		(33.89	)
Total noninterest income	$	13,027		$	30,756		$	(17,729	)		(57.64	)%

Three Months Ended
March 31, Increase (Decrease)
2018 2017 Amount Percent
Noninterest income
Loan servicing revenue $ 6,898
$ 5,923
$ 975
16.46 %
Loan servicing asset revaluation (5,088 ) (2,009 ) (3,079 ) (153.26 )
Net gains on sales of loans 24,418
18,952
5,466
28.84
Lease income 1,608
—
1,608
100.00
Construction supervision fee income 779
429
350
81.59
Title insurance income 1,300
1,438
(138 ) (9.60 )
Other noninterest income 841
1,020
(179 ) (17.55 )
Total noninterest income $ 30,756
$ 25,753
$ 5,003
19.43 %

For the three months ended March 31, ~~2018,~~2019, noninterest income ~~increased~~decreased by ~~$5.0~~$17.7 million, or ~~19.4%~~57.6%, compared to the three months ended March 31, ~~2017.~~2018. The ~~increase~~decrease from the prior year is primarily the result of the aforementioned strategic decision to sell fewer loans, resulting in net gains on sales of loans ~~increasing $5.5~~declining to $4.2 million in the first quarter of 2019 compared to $24.4 million in the first quarter of 2018, ~~compared to $19.0~~a reduction of $20.2 million, in the first quarter of 2017, as a function of higher volume of guaranteed loans sales coupled with an improvement in the average net gain on sale of guaranteed loans. Lease income of $1.6 million related to renewable energy initiatives and increased loan servicing revenues of $975 thousand arising from growth in the serviced loan portfolio also contributed to higher levels of noninterest income in the first quarter of 2018. Partially offsettingor 82.8%.

Also impacting the overall ~~increase~~decrease in noninterest income was a ~~higher~~decline in title insurance income of $1.3 million due to the sale of the title insurance business in third quarter of 2018.

Partially offsetting the overall decrease in noninterest income was a $2.8 million, or 55.9%, decrease in the net negative loan servicing revaluation ~~adjustment~~principally due to improving secondary market premiums, combined with increased lease income from solar panels of ~~$3.1 million.~~$717 thousand, or 44.6%, related to growth in operating lease originations.

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 March, 31				For Years ended December 31,
	2019		2018		2018		2017		2016		2015
Amount of loans originated	$	390,851	$	397,559	$	1,765,680	$	1,934,238	$	1,537,010	$	1,158,640
Guaranteed portions of loans sold		62,940		247,243		945,178		787,926		761,933		640,886
Outstanding balance of guaranteed loans sold⁽¹⁾		2,952,774		2,812,108		3,045,460		2,680,641		2,278,618		1,779,989

Three months ended March 31, For years ended December 31,
2018 2017 2017 2016 2015 2014
Amount of loans and leases originated $ 397,559
$ 468,663
$ 1,934,238
$ 1,537,010
$ 1,158,640
$ 848,090
Guaranteed portions of loans sold 247,243
208,715
787,926
761,933
640,886
433,912
Outstanding balance of guaranteed loans sold ⁽¹⁾
2,812,108
2,410,791
2,680,641
2,278,618
1,779,989
1,302,828

(1)
~~(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.

~~Table of Contents~~

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

Loan Servicing Revenue: While portions of the loans that the Bank originates are sold and generate gain on sale revenue, servicing rights for all loans that the Bank originates, including loans sold, are retained by the Bank. In exchange for continuing to service loans that are sold, the Bank receives fee income represented in loan servicing revenue equivalent to one percent of the outstanding balance of SBA loans sold and 0.40% of the outstanding balance of USDA loans sold. In addition, the cost of servicing sold loans is approximately 0.40% of the balance of the loans sold, which is included in the loan servicing revaluation computations. Unrecognized servicing revenue is reflected in a servicing asset recorded on the consolidated balance sheet. Revenues associated with the servicing of loans are recognized over the expected life of the loan through the consolidated income statement, and the servicing asset is reduced as this revenue is recognized. For the three months ended March 31, ~~2018,~~2019, loan servicing revenue increased ~~$975~~$512 thousand or ~~16.5%~~7.4%, ~~to $6.9 million~~ as compared to the three months ended March 31, ~~2017,~~2018, as a result of an increase in the average outstanding balance of guaranteed loans sold. At March 31, ~~2018,~~2019, the outstanding balance of government guaranteed loans sold in the secondary market was $2.95 billion compared to $2.81 ~~billion. At~~billion at March 31, ~~2017, the outstanding balance of SBA guaranteed loans sold was $2.41 billion.~~2018.

Loan Servicing Revaluation: The Company revalues its serviced loan portfolio at least quarterly. The revaluation considers the amortization of the portfolio, current market conditions for loan sale premiums, and current prepayment speeds. For the three months ended March 31, ~~2018,~~2019, there was a net negative loan servicing revaluation adjustment of ~~$5.1~~$2.2 million compared to a net negative ~~revaluation~~ adjustment of ~~$2.0~~$5.1 million for the three months ended March 31, ~~2017.~~2018. The ~~higher negative loan servicing revaluation~~lower amount for the first quarter of ~~2018~~2019 as compared to the first quarter of ~~2017~~2018 was ~~principally driven by amortization~~primarily a result of ~~the serviced portfolio during that period.~~improving secondary market premiums.

Net Gains on Sale of Loans: For the three months ended March 31, ~~2018,~~2019, net gains on sales of loans ~~increased $5.5~~decreased $20.2 million, or ~~28.8%~~82.8%, compared to the three months ended March 31, ~~2017.~~2018. For the three months ended March 31, ~~2018,~~2019, the volume of guaranteed loans sold ~~increased $38.5~~decreased $184.3 million, or ~~18.5%~~74.5%, to ~~$247.2~~$62.9 million from ~~$208.7~~$247.2 million for the three months ended March 31, ~~2017.~~2018. The volume-driven decrease in the year-over-year net gain on loan sale comparison was further magnified by lower average premiums paid in the secondary market in the first quarter of 2019 compared with the first quarter of 2018. Excluding fair value fluctuations in exchange traded-interest rate lock commitments, the average net gain on sale of loans for the three months ended March 31, ~~2018~~2019 was ~~higher~~lower at ~~$99~~$89 thousand ~~of revenue~~ for each $1 million in loans sold, compared to ~~$91~~$99 thousand ~~of revenue for each $1 million in loans sold~~ for the three months ended March 31, ~~2017.~~2018, respectively.

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 March 31,				2019/2018 Increase (Decrease)
	2019		2018		Amount			Percent
Noninterest expense
Salaries and employee benefits	$	21,855	$	20,209	$	1,646			8.14	%
Non-staff expenses:
Travel expense		1,200		1,843		(643	)		(34.89	)
Professional services expense		2,182		1,298		884			68.10
Advertising and marketing expense		1,364		1,662		(298	)		(17.93	)
Occupancy expense		1,609		1,857		(248	)		(13.35	)
Data processing expense		2,399		2,837		(438	)		(15.44	)
Equipment expense		3,325		3,077		248			8.06
Other loan origination and maintenance expense		1,639		1,329		310			23.33
FDIC insurance		635		572		63			11.01
Title insurance closing services expense		—		426		(426	)		(100.00	)
Other expense		1,993		2,962		(969	)		(32.71	)
Total non-staff expenses		16,346		17,863		(1,517	)		(8.49	)
Total noninterest expense	$	38,201	$	38,072	$	129			0.34	%

Three Months Ended
March 31, Increase (Decrease)
2018 2017 Amount Percent
Noninterest expense
Salaries and employee benefits $ 20,209
$ 18,682
$ 1,527
8.17 %
Non-staff expenses:
Travel expense 1,843
1,598
245
15.33
Professional services expense 1,298
1,736
(438 ) (25.23 )
Advertising and marketing expense 1,662
1,485
177
11.92
Occupancy expense 1,857
1,195
662
55.40
Data processing expense 2,837
1,696
1,141
67.28
Equipment expense 3,077
1,074
2,003
186.50
Other loan origination and maintenance expense 1,329
1,005
324
32.24
FDIC insurance 572
726
(154 ) (21.21 )
Title insurance closing services expense 426
405
21
5.19
Other expense 2,962
3,383
(421 ) (12.44 )
Total non-staff expenses 17,863
14,303
3,560
24.89
Total noninterest expense $ 38,072
$ 32,985
$ 5,087
15.42 %

~~Table of Contents~~

Total noninterest expense for the three months ended March 31, ~~2018~~2019 increased ~~$5.1 million,~~$129 thousand, or ~~15.4%~~0.3%, compared to the same period in ~~2017. The~~2018. This small increase in noninterest expense was principally comprised of increased personnel ~~occupancy, data processing and equipment expense driven by the significant growth of~~to support the Company's ~~core business.~~growth initiatives and professional services principally related to the formation of venture funds underlying its recently formed Canapi Advisors subsidiary. Changes in various components of noninterest expense are discussed below.

Salaries and employee benefits: Total personnel expense for the three months ended March 31, ~~2018~~2019 increased by ~~$1.5~~$1.6 million, or ~~8.2%~~8.1%, compared to the same period in ~~2017. Primary drivers for this increase was the incremental personnel costs arising from the acquisition of a nationwide title insurance business on February 1, 2017 combined with~~2018 primarily due to the continued investment in human capital to support the growing loan and lease production from new and existing verticals. The increase in personnel expense was mitigated by the Company’s exit from the title insurance business during the third quarter of 2018, which reduced the full-time equivalent employee count by 33. Total full-time equivalent employees ~~increased~~decreased from ~~476 at March 31, 2017 to~~ 517 at March 31, ~~2018.~~2018 to 507 at March 31, 2019. Salaries and employee benefits expense included ~~$2.3 million and $1.8~~$2.9 million of stock-based compensation expense in the three months ended March 31, ~~2018~~2019 and ~~2017, respectively.~~$2.3 million for the three months ended March 31, 2018. Expenses related to the employee stock purchase program, stock grants, stock option compensation and restricted stock expense are all considered stock-based compensation.

Of the total stock-based compensation included in salaries and employee benefits, $352 thousand ~~and $346 thousand~~ for both the first ~~quarters~~quarter of ~~2018~~2019 and ~~2017, respectively,~~2018 was related to restricted stock unit ("RSU") awards for key employee retention with an effective grant date of May 24, 2016.

~~Occupancy~~

Professional services expense: For the three months ended March 31, ~~2018,~~2019, total ~~occupancy processing~~professional services expense increased ~~$662~~$884 thousand, or ~~55.4%~~68.1%, compared to the same period in ~~2017.~~2018. This increase was driven by ~~continued investment~~legal fees incurred in ~~facilities and infrastructure to support~~ the ~~Company's growth initiatives.~~Company’s formation of venture funds associated with its Canapi Advisors subsidiary.

~~Data processing~~

Other expense: For the three months ended March 31, ~~2018, total data processing~~2019, other expense ~~increased $1.1 million,~~decreased $969 thousand, or ~~67.3%~~32.7%, compared to the same period in ~~2017. Largely influencing this increase in data processing~~2018. This decrease was ~~the contribution~~primarily a product of ~~software development resources to Apiture which transferred the recognition of~~reduced costs ~~associated with the Company’s technology development from salaries and employee benefits to data processing.~~

~~Equipment expense:~~ For the three months ended March 31, 2018, the total costs associated with equipment increased $2.0 million, or 186.5%, compared to the same period in 2017. A major factor behind this increase was the higher level of depreciation related to ~~solar panels acquired to meet leasing commitments.~~operation of the title insurance business which was subsequently sold in the third quarter of 2018 combined with lower levels of charitable contributions in the first quarter of 2019.

Income Tax Expense

The effective tax rate for the three months ended March 31, ~~2018~~2019 was ~~2.5%~~11.8% compared to the effective rate of ~~11.5%~~2.5% for the ~~three months ended March 31, 2017.~~same period in 2018. The Company’s effective tax rate ~~principally reflected~~is predominantly driven by the ~~generation~~leasing of renewable energy assets which generate investment tax ~~credits by the solar panel leasing activity under the Company’s strategic initiatives in the renewable energy sector.~~credits.

Discussion and Analysis of Financial Condition

March 31, ~~2018~~2019 vs. December 31, ~~2017~~

2018

Total assets at March 31, ~~2018~~2019 were ~~$3.46~~$4.06 billion, an increase of ~~$702.4~~$387.6 million, or ~~25.5%~~10.6%, compared to total assets of ~~$2.76~~$3.67 billion at December 31, ~~2017.~~2018. The growth in total assets was principally driven by the following:

Increased ~~cash and due from banks due largely to the~~investment securities available-for-sale which was driven by significant growth from deposit gathering campaigns ~~to strengthen the liquidity profile generating $713.1~~that generated $378.8 million in new ~~deposits;~~deposits to enhance contingency funding sources and asset-liability pricing mix; and

~~Increased~~

Growth in loans and leases held for sale and held for investment ~~in securities available-for-sale~~ of ~~$285.1~~$243.8 million ~~which was driven by~~resulting from strong first quarter originations and higher levels of balances being retained to support the Company's strategic plan to ~~enhance contingency funding sources;~~hold more loans.

~~Growth~~

Cash and cash equivalents, comprised of cash and due from banks and federal funds sold, was $285.9 million at March 31, 2019, a decrease of $31.0 million, or 9.8%, compared to $316.8 million at December 31, 2018. This decrease reflects the Company’s maximization of returns on liquid assets by deployment of funds into higher-yielding available-for-sale securities.

Total investment securities increased $189.2 million during the first quarter of 2019, from $380.5 million at December 31, 2018, to $569.7 million at March 31, 2019, an increase of 49.7%. The Company increased its investment securities position during the first quarter of 2019 as part of the its strategy to improve the returns of an enhanced liquidity profile and improve asset-liability repricing mix. At March 31, 2019, the investment portfolio was comprised of U.S. treasury, U.S. government agency, mortgage-backed securities and municipal bonds.

Loans held for sale increased $85.1 million, or 12.4%, during the first three months of 2019, from $687.4 million at December 31, 2018, to $772.5 million at March 31, 2019. This increase reflected the impact of a significantly lower volume of loan sales with strong origination activity during the quarter.

Loans and leases held for investment increased $158.7 million, or 8.6%, during the first three months of 2019, from $1.84 billion at December 31, 2018, to $2.00 billion at March 31, 2019. The increase was primarily the result of $390.9 million in loan and lease ~~originations~~origination activities during the first quarter of 2019 combined with ~~longer retention times~~the earlier mentioned strategic shift to retain higher levels of loans ~~held for sale, comprised largely of loans intentionally held for longer periods and those in newer verticals which require a period of loan advances to become fully funded prior to being sold; and~~

~~Increased premises~~on the balance sheet.

Premises and equipment, ~~related~~net, increased $9.3 million, or 3.5%, during the first three months of 2019 which was primarily ~~to expansion~~driven by construction of new facilities and infrastructure to accommodate Company growth and the addition of solar panels to meet leasing commitments.

~~Cash and cash equivalents were $528.0 million at March 31, 2018, an increase of $232.7~~

Servicing assets decreased $3.3 million, or ~~78.8%, compared to $295.3 million at December 31, 2017. This increase primarily reflected the results of a successful deposit gathering campaigns.~~

Total investment securities increased $285.1 million during the first three months of 2018, from $93.4 million at December 31, 2017, to $378.5 million at March 31, 2018, an increase of 305.4%. The Company purchased $293.0 million in residential mortgage-backed securities during the first quarter of 2018 as part of the aforementioned strategic plan to enhance contingent funding sources. The investment portfolio is comprised of U.S. government agency securities, residential mortgage-backed securities and a mutual fund.

~~Table of Contents~~

~~Loans held for sale increased $40.1 million, or 5.9%~~7.0%, during the first three months of ~~2017,~~2019 due to the reduced level of loan sales during the quarter combined with amortization of the outstanding balance of guaranteed loans sold. At March 31, 2019, the outstanding balance of government guaranteed loans sold in the secondary market was $2.95 billion compared to $3.05 billion at December 31, 2018.

Operating leases right-of-use assets and operating lease liabilities were additions to the balance sheet pursuant to the adoption of the new lease standard (ASU No. 2016-02) effective January 1, 2019. These balance sheet accounts reflect the Company’s rights and obligations created by almost all leases in which it is a lessee with remaining terms of more than 12 months. See Note 1. Basis of Presentation and Note 6. Leases for more information on the adoption of this new standard.

Other assets decreased $20.2 million, or 12.9% from ~~$680.5~~$156.2 million at December 31, ~~2017,~~2018 to ~~$720.5~~$136.1 million at March 31, ~~2017. The increase~~2019. This decrease was ~~primarily~~principally the result of ~~loan origination activities~~a reduction in taxes receivable of $14.6 million, largely comprised of a recent tax refund, and the sale of corporate aircraft carried at $10.5 million which was classified as held-for-sale during the fourth quarter ~~and the strategy to enhance interest income by increasing the retention time~~ of ~~guaranteed loans along with growth in certain loans that take time to fully fund.~~

~~Loans and leases held for investment increased $98.1~~2018.

Total deposits were $3.53 billion at March 31, 2019, an increase of $378.8 million, or ~~7.3%~~12.0%, ~~during the first three months of 2018,~~ from ~~$1.34~~$3.15 billion at December 31, ~~2017, to $1.44 billion at March 31,~~ 2018. The increase was primarily the result of continued loan and lease growth from origination activities during the first quarter of 2018 combined with greater retention of loans on the consolidated balance sheet.

Premises and equipment, net increased $38.0 million, or 21.3%, during the first three months of 2018. This increase was primarily driven by construction of new facilities to accommodate Company growth and the addition of solar panels to meet leasing commitments.

Servicing assets increased $822 thousand, or 1.6%, during the first three months of 2018, from $52.3 million at December 31, 2017, to $53.1 million at March 31, 2018. The increase in servicing assets is primarily the result of loan sales outpacing the amortization of the existing serviced portfolio.

Other assets increased $11.9 million, or 8.9%, during the first three months of 2018, from $134.2 million at December 31, 2017 to $146.2 million at March 31, 2018. The increase in other assets was primarily comprised of $1.2 million in SBA related receivables, $3.4 million in guarantee fees receivable and a $3.0 million cost method investment by Canapi in a financial services startup.

~~Total deposits were $2.97 billion at March 31, 2018, an increase of $713.1 million, or 31.5%, from $2.26 billion at December 31, 2017.~~ The increase in deposits was driven by the combined success of deposit gathering campaigns to support the growth in loan and lease originations and ~~strategic liquidity~~balance sheet management initiatives.

Long term borrowings decreased $23.1 million, or 86.9%, during the first three months of 2018, from $26.6 million at December 31, 2017 to $3.5 million at March 31, 2018. The decrease in long term borrowings was primarily the result of debt reduction following a successful capital raise in the third quarter of 2017.

Shareholders’ equity at March 31, ~~2018~~2019 was ~~$448.8~~$500.4 million as compared to ~~$436.9~~$493.6 million at December 31, ~~2017.~~2018. The book value per share was ~~$11.23~~$12.45 at March 31, ~~2018~~2019 compared to ~~$10.95~~$12.29 at December 31, ~~2017.~~2018. Average equity to average assets was ~~14.8%~~13.1% for the three months ended March 31, ~~2018~~2019 compared to ~~13.5%~~13.8% for the full year ended December 31, ~~2017.~~2018. The increase in shareholders’ equity was principally the result of net income to common shareholders for the three months ended March 31, ~~2018~~2019 of ~~$12.5~~$2.4 million combined with other comprehensive income of $2.7 million and stock-based compensation expense of ~~$2.3~~$2.9 million, partially offset by ~~other comprehensive losses of $2.2 million and~~ $1.2 million in dividends.

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 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 is placed on nonaccrual status, any interest previously accrued as income but not actually collected is reversed and recorded as a reduction of loan interest and fee income. Typically, collections of interest and principal received on a nonaccrual loan are applied to the outstanding principal as determined at the time of collection of the loan.

Troubled debt restructurings occur when, because of economic or legal reasons pertaining to the debtor’s financial difficulties, debtors are granted concessions that would not otherwise be considered. Such concessions would include, but are not limited to, the transfer of assets or the issuance of equity interests by the debtor to satisfy all or part of the debt, modification of the terms of debt or the substitution or addition of debtor(s).

~~Table of Contents~~

The following table provides information with respect to nonperforming assets and troubled debt restructurings at the dates indicated.

	March 31, 2019			December 31, 2018
Nonaccrual loans:
Total nonperforming loans (all on nonaccrual)	$	70,692		$	57,690
Total accruing loans past due 90 days or more		—			—
Foreclosed assets		1,374			1,094
Total troubled debt restructurings		33,110			27,495
Less nonaccrual troubled debt restructurings		(6,370	)		(6,494	)
Total performing troubled debt restructurings		26,740			21,001
Total nonperforming assets and troubled debt restructurings	$	98,806		$	79,785
Total nonperforming loans to total loans held for investment		3.53	%		3.13	%
Total nonperforming loans to total assets		1.74	%		1.57	%
Total nonperforming assets and troubled debt restructurings to total assets		2.43	%		2.17	%

	March 31, 2019			December 31, 2018
Nonaccrual loans guaranteed by U.S. government:
Total nonperforming loans guaranteed by the SBA (all on nonaccrual)	$	50,507		$	43,202
Total accruing loans past due 90 days or more guaranteed by the SBA		—			—
Foreclosed assets guaranteed by the SBA		1,204			946
Total troubled debt restructurings guaranteed by the SBA		22,499			19,780
Less nonaccrual troubled debt restructurings guaranteed by the SBA		(5,576	)		(5,684	)
Total performing troubled debt restructurings guaranteed by SBA		16,923			14,096
Total nonperforming assets and troubled debt restructurings guaranteed by the SBA	$	68,634		$	58,244
Total nonperforming loans not guaranteed by the SBA to total held for investment loans		1.01	%		0.79	%
Total nonperforming loans not guaranteed by the SBA to total assets		0.50	%		0.39	%
Total nonperforming assets and troubled debt restructurings not guaranteed by the SBA to total assets		0.74	%		0.59	%

March 31, 2018 December 31, 2017
Nonperforming assets:
Total nonperforming loans (all on nonaccrual) $ 36,776
$ 23,480
Total accruing loans past due 90 days or more —
—
Foreclosed assets 1,519
1,281
Total troubled debt restructurings 11,516
10,223
Less nonaccrual troubled debt restructurings (9,069 ) (8,129 )
Total performing troubled debt restructurings 2,447
2,094
Total nonperforming assets and troubled debt restructurings $ 40,742
$ 26,855
Total nonperforming loans to total loans and leases held for investment 2.55 % 1.75 %
Total nonperforming loans to total assets 1.06 % 0.85 %
Total nonperforming assets and troubled debt restructurings to total assets 1.18 % 0.97 %

March 31, 2018 December 31, 2017
Nonperforming assets guaranteed by U.S. government:
Total nonperforming loans guaranteed by the SBA (all on nonaccrual) $ 29,390
$ 19,870
Total accruing loans past due 90 days or more guaranteed by the SBA —
—
Foreclosed assets guaranteed by the SBA 1,418
1,191
Total troubled debt restructurings guaranteed by the SBA 8,374
7,178
Less nonaccrual troubled debt restructurings guaranteed by the SBA (7,849 ) (7,099 )
Total performing troubled debt restructurings guaranteed by SBA 525
79
Total nonperforming assets and troubled debt restructurings guaranteed by the SBA $ 31,333
$ 21,140
Total nonperforming loans not guaranteed by the SBA to total held for investment loans and leases 0.51 % 0.27 %
Total nonperforming loans not guaranteed by the SBA to total assets 0.21 % 0.13 %
Total nonperforming assets and troubled debt restructurings not guaranteed by the SBA to total assets 0.27 % 0.21 %

Total nonperforming assets and troubled debt restructurings at March 31, ~~2018~~2019 were ~~$40.7~~$98.8 million, which represented a ~~$13.9~~$19.0 million, or ~~51.7%~~23.8%, increase from December 31, ~~2017.~~2018. Total nonperforming assets at March 31, ~~2018~~2019 were comprised of ~~$36.8~~$70.7 million in nonaccrual loans and ~~$1.5~~$1.4 million in foreclosed assets. Of the ~~$40.7~~$98.8 million of nonperforming assets and troubled debt restructurings ("TDRs"), ~~$31.3~~$68.6 million carried an SBA guarantee, leaving an unguaranteed exposure of ~~$9.4~~$30.2 million in total nonperforming assets and TDRs at March 31, 2019. This represents an increase of $8.6 million, or 40.1%, from an unguaranteed exposure of $21.5 million at December 31, 2018. The ~~unguaranteed exposure~~vast majority of this increase in ~~total~~ nonperforming assets and TDRs ~~at December 31, 2017 was $5.7 million. Unguaranteed exposure relating~~arose from our mature verticals. See the below discussion related to ~~nonperforming assets~~the change in potential problem and ~~TDRs at March 31, 2018 increased by $3.7 million, or 64.6%, compared to December 31, 2017.~~

impaired loans for management’s overall observations regarding growth in this area.

As a percentage of the Bank’s total capital, nonperforming loans represented ~~10.4%~~15.6% at March 31, ~~2018,~~2019, compared to ~~nonperforming loans of 7.8% of the Bank’s total capital~~14.8% at December 31, ~~2017.~~2018. Adjusting the ratio to include only the unguaranteed portion of nonperforming loans to reflect management’s belief that the greater magnitude of risk resides in this portion, the ratios at March 31, ~~2018~~2019 and December 31, ~~2017~~2018 were ~~2.1%~~4.4% and ~~1.2%~~3.7%, respectively.

~~Table of Contents~~

As of March 31, ~~2018~~2019, and December 31, ~~2017,~~2018, potential problem and impaired loans and leases totaled ~~$105.1~~$170.1 million and ~~$76.8~~$148.0 million, respectively. Risk Grades 5 through 8 represent the spectrum of criticized and impaired loans and leases. At March 31, ~~2018,~~2019, the portion of criticized loans and leases guaranteed by the SBA ofor USDA totaled ~~$46.4~~$82.9 million resulting in unguaranteed exposure risk of ~~$58.7~~$87.1 million, or ~~4.4%~~5.4% of total held for investment unguaranteed exposure. This compares to the December 31, ~~2017~~2018 portion of criticized loans and leases guaranteed by the SBA or USDA which totaled ~~$34.7~~$69.3 million resulting in unguaranteed exposure risk of ~~$42.1~~$78.7 million, or ~~3.4%~~5.1% of total held for investment unguaranteed exposure. As of March 31, ~~2018~~2019, loans and leases in Healthcare, ~~Veterinary~~Other Industries, Agriculture and Independent Pharmacies ~~industry~~ verticals comprise the largest portion of the total potential problem and impaired loans at ~~30.1%~~25.4%, ~~22.5%~~24.5%, 15.9% and ~~14.7%~~13.9%, respectively. With 24.5% of total potential problem and impaired loans and leases in the Other Industries, 9.1% was related to Wine and Craft Beverage and 8.0% was related to Hotel industries. As of December 31, ~~2017~~2018, loansand leases in the Healthcare, Other Industries, Independent Pharmacies and Veterinary ~~industries~~Industry verticals comprise the largest portion of the total potential problem and impaired loans and leases at ~~30.0%~~28.0%, 18.6%, 15.5% and ~~27.3%~~15.0%, respectively. With 18.6% of total potential problem and impaired loans and leases in the Other Industries, 8.7% was related to Government Contractors and 6.8% was related to Wine and Craft Beverage industries. No systemic issues were identified in the first ~~quarter~~three months of 2019. The increase in potential problem and impaired loans and leases, which were comprised of a relatively small number of borrowers, was largely concentrated in our ~~most~~more mature verticals. Furthermore, the Company believes that its underwriting and credit quality standards have improved as the business has matured.

The Bank does not classify loans and leases that experience insignificant payment delays and payment shortfalls as impaired. The Bank 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. In all cases, credit 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. To date, the only types of ~~short term~~short-term modifications the Bank has given are payment deferral and interest only extensions. The Bank does not typically alter the rate or lengthen the amortization of the note due to insignificant payment delays. Short term modifications are not classified as TDRs, because they do not meet the definition set by the applicable accounting standards and the Federal Deposit Insurance Corporation.

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 ~~criticized,~~special mention, Risk Grade 5. For example, at March 31, ~~2018~~2019, and December 31, ~~2017,~~2018, Risk Grade 5 loans and leases totaled ~~$57.3~~$74.1 million and ~~$37.0~~$65.5 million, respectively. The increase in Risk Grade 5 loans ~~from December 31, 2017 to March 31, 2018~~during the first three months of 2019 was principally confined to nine relationships across three verticals; ~~Government Contracting~~Wine and Craft Beverage ($~~12.8~~3.5 million or ~~63.0%~~40.1% of increase), Agriculture ($~~3.9~~3.2 million or ~~19.3%~~37.0% of increase) and Healthcare ($~~2.3~~1.6 million or ~~11.4%~~18.9% of increase). The large increase in Risk Grade 5 loans from December 31, 2017 to March 31, 2018 related to Government Contracting was the result of applying the Company's current risk rating methodology, which is not designed for the asset-based, collateral intensive, highly monitored loans being generated by this vertical. As a result, applying these loansIn addition, enhancements made to the ~~current~~equipment leasing risk grading methodology resulted in ~~more severe risk grades than would be expected with~~several Self Storage equipment leases being downgraded to Risk Grade 5. These increases were somewhat offset by a ~~more refined model tailored for this new type of credit being extended. Credit management is revising the current~~decrease in Government Contracting ($4.6 million). The increase in risk grade methodology so that it appropriately measures risk for asset-based credits. This revised methodology will be formalized during the second quarter of 2018. Credit management fully expects many of the Government Contracting loans will have improved risk grades once the enhanced risk grading methodology is applied, however as an abundance of caution the risk grade results of the current model were reported and reserved for at March 31, 2018. The first quarter 2018 increase in Risk Grade 5 loans ~~related to Agriculture and Healthcare~~in 2019 was due to the ~~ongoing~~continued maturity of ~~larger existing~~these verticals. At March 31, ~~2018,~~2019, approximately ~~90.9%~~96.9% of loans classified as Risk Grade 5 are performing with no current payments past ~~due.~~due more than 30 days. While the level of nonperforming assets fluctuates in response to changing economic and market conditions, 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.

Allowance for Loan and Lease Losses

The allowance for loan and lease losses (“ALLL”), a material estimate which could change significantly in the near-term in the event of rapidly deteriorating credit quality, is established through a provision for loan and lease losses charged to earnings to account for losses that are inherent in the loan and lease portfolio and estimated to occur, and is maintained at a level that management considers appropriate to absorb potential losses in the portfolio. Loan and lease losses are charged against the ALLL when management believes that the ~~collectibility~~collectability of the principal loan and lease balance is unlikely. Subsequent recoveries, if any, are credited to the ALLL when received.

Judgment in determining the adequacy of the ALLL is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available and as situations and information change.

The ALLL is evaluated on a quarterly basis by management and takes into consideration such factors as changes in the nature and volume of the loan and lease portfolio, overall portfolio quality, review of specific problem loans and leases and current economic conditions and trends that may affect the borrower’s ability to repay.

~~Table of Contents~~

Estimated credit losses should meet the criteria for accrual of a loss contingency, i.e., a provision to the ALLL, set forth in accounting principles generally accepted in the United States of America (“GAAP”). Methodology for determining the ALLL is generally based on GAAP, the Interagency Policy Statement on the Allowance for Loan and Lease Losses and other regulatory and accounting pronouncements. The ALLL is determined by the sum of three separate components: (i) the impaired loan or lease component, which addresses specific reserves for impaired loans or leases; (ii) the general reserve component, which addresses reserves for pools of homogeneous loans and leases; and (iii) an unallocated reserve component (if any) based on management’s judgment and experience. The loan and lease pools and impaired loans and leases are mutually exclusive; any loan or lease that is impaired should be excluded from its homogeneous pool for purposes of that pool’s reserve calculation, regardless of the level of impairment.

The ALLL of ~~$24.2~~$32.4 million at December 31, ~~2017~~2018 increased by ~~$3.9~~$2.7 million, or ~~16.0%~~8.3%, to ~~$28.1~~$35.1 million at March 31, ~~2018.~~2019. The ALLL, as a percentage of loans and leases held for investment, amounted to ~~2.0%~~1.8% at both March 31, ~~2018~~2019 and ~~1.8% at~~ December 31, ~~2017.~~2018. The increase in the allowance for loan and lease losses was largely attributable to continued growth in the loan and lease portfolio, with the magnitude somewhat softened by the greater levels of guaranteed loan production combined with decreased levels of charge-offs in the first quarter, as addressed more fully in the Provision for Loan and Lease Losses section of Results of Operations. General reserves as a percentage of non-impaired loans amounted to ~~1.66%~~1.27% at March 31, ~~2018~~2019 and ~~1.62%~~1.34% at December 31, ~~2017.~~2018. See the aforementioned Provision for Loan and Lease Losses section ~~of this section~~ for a discussion of the Company's charge-off experience.

Actual past due held for investment loans and leases have decreased by $7.1 million since December 31, ~~2017~~2018. Of this decrease, $7.9 million was related to a single loan which was temporarily past due at year end and returned to current status early in the first quarter of 2019. Excluding this single loan, total past dues increased $810 thousand since December 31, 2018. Total loans 90 or more days past due increased $6.2 million, or 15.2%, compared to December 31, 2018, with $3.1 million of that increase being comprised of unguaranteed loans and leases. At March 31, 2019 and December 31, 2018, total held for investment unguaranteed loans and leases past due as ~~management~~a percentage of total held for investment unguaranteed loans and leases was 1.01% and 1.56%, respectively. The overall decrease in past dues during the first three months of 2019 is principally a result of the above single loan incident with elements influencing the otherwise increase in past dues reflected in the earlier discussed growth in classified and special mention loans during the same period. Management continues to actively monitor and work to improve asset quality. Management believes the ALLL of ~~$24.2~~$35.1 million at March 31, ~~2018~~2019 is appropriate in light of the risk inherent in the loan and lease portfolio. Management’s judgments are based on numerous assumptions about current events that it believes to be reasonable, but which may or may not be valid. Thus, there can be no assurance that loan and lease losses in future periods will not exceed the current ALLL or that future increases in the ALLL will not be required. 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 ALLL, thus adversely affecting the Company’s operating results. Additional information on the ALLL is presented in Note 75 - Loans and Leases Held for Investment and Allowance for Loan and Lease Losses of the Notes to 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 March 31, ~~2018,~~2019, the total amount of these four items was $1.22 billion, or ~~35.3%~~30.0% of total assets, an increase of ~~$548.7~~$174.4 million from ~~$674.2 million,~~$1.04 billion, or ~~24.4%~~28.4% of total assets, at December 31, ~~2017.~~

2018.

Loans and other assets are funded by loan sales, wholesale deposits and core deposits. To date, an increasing retail deposit base and an increased ~~amount of long-term brokered deposits~~long term wholesale deposit base have been adequate to meet loan obligations, while maintaining the desired level of immediate liquidity. Additionally, anthe investment securities portfolio is available for both immediate and secondary liquidity purposes.

At March 31, ~~2018,~~2019, none of the investment securities portfolio was pledged to secure public deposits or pledged to retail repurchase agreements, while $100 thousand was pledged for trust activities in the State of Ohio, ~~and $2.5 million was pledged for uninsured trust assets,~~ leaving ~~$375.9~~$569.6 million available as lendable collateral.

~~Table of Contents~~

Contractual Obligations

The following table presents the Company’s significant fixed and determinable contractual obligations by payment date as of March 31, ~~2018.~~2019. The payment amounts represent those amounts contractually due to the recipient. The table excludes liabilities recorded where management cannot reasonably estimate the timing of any payments that may be required in connection with these liabilities.

	Payments Due by Period
	Total		Less than One Year		One to Three Years		Three to Five Years		More than Five Years
Contractual Obligations
Deposits without stated maturity	$	1,118,043	$	1,118,043	$	—	$	—	$	—
Time deposits		2,410,362		1,772,792		500,144		72,652		64,774
Short term borrowings		1,393		1,393		—		—		—
Long term borrowings		17		5		9		3		—
Operating lease obligations		2,075		875		742		361		97
Total	$	3,531,890	$	2,893,108	$	500,895	$	73,016	$	64,871

Payments Due by Period
Total
Less than
One
Year

One to
Three
Years

Three to
Five
Years

More
Than Five
Years
Contractual Obligations
Deposits without stated maturity $ 1,209,919
$ 1,209,919
$ —
$ —
$ —
Time deposits 1,763,422
1,066,053
532,596
88,601
76,172
Long term borrowings 3,489
4
3,478
7
—
Operating lease obligations¹
2,710
1,009
1,050
481
170
Total $ 2,979,540
$ 2,276,985
$ 537,124
$ 89,089
$ 76,342

1
1	The following obligations only include base rent and does not include any additional payments such as taxes, insurance, maintenance and repairs or common area maintenance.

As of March 31, ~~2018~~2019, and December 31, ~~2017,~~2018, the Company had unfunded commitments to provide capital contributions for on-balance sheet investments in the amount of ~~$3.3~~$2.2 million and ~~$3.5~~$2.8 million, respectively.

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. This method, however, addresses only the magnitude of asset and liability repricing timing differences as of the report date and does not address earnings, or market ~~value.~~value nor growth. Therefore, management uses an earnings simulation model to prepare, on a regular basis, earnings projections based on a range of interest rate scenarios to more accurately measure interest rate risk.

The balance sheet is asset-sensitive with a total cumulative gap position of ~~2.2%~~2.1% at March 31, ~~2018.~~2019. The ~~addition of long-term wholesale deposits during~~asset sensitivity is relatively stable from the ~~quarter decreased the asset-liability sensitivity of the Company in the current period.~~prior quarter. 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 ~~with the majority of~~by match funding assets and liabilities ~~being short-term, adjustable~~with similar rate instruments. The quarterly revaluation adjustment to the servicing asset, however, adjusts in an opposite direction to interest rate changes. Asset/liability sensitivity is primarily derived from the prime-based loans that adjust as the prime interest rate changes and the longer duration of indeterminate term deposits.

~~Table of Contents~~

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 to provide adequate capital to support the Company’s risk profile consistent with the risk appetite approved by the Board of Directors; provide financial flexibility to support future growth and client needs; comply with relevant laws, regulations, and supervisory guidance; achieve optimal credit ratings for the Company and its subsidiaries; and 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.

The Basel III Capital Rules, a comprehensive capital framework for U.S. banking organizations, became effective for the Company and Bank on January 1, 2015 (subject to a phase-in period for certain provisions). Quantitative measures established by the Basel III Capital Rules to ensure capital adequacy require the maintenance of minimum amounts and ratios (set forth in the table below) of Common Equity Tier 1 capital, Tier 1 capital and Total capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to adjusted quarterly average assets (as defined).

When fully phased in on January 1, 2019, the Basel III Capital Rules will require the Company and Bank to maintain (i) a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of at least 4.5%, plus a 2.5% "capital conservation buffer" (which is added to the 4.5% Common Equity Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of at least 7.0% upon full implementation), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation), (iii) a minimum ratio of Total capital (that is, Tier 1 plus Tier 2) to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation) and (iv) a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average quarterly assets.

The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and will be phased in over a three-year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019). Banking institutions with a ratio of Common Equity Tier 1 capital to risk-weighted assets below the effective minimum (4.5% plus the capital conservation buffer) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.

~~Table of Contents~~

Capital amounts and ratios as of March 31, ~~2018~~2019 and December 31, ~~2017,~~2018, 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 - March 31, 2019
Common Equity Tier 1 (to Risk-Weighted Assets)	$	473,279		16.68	%	$	127,661		4.50	%	N/A		N/A
Total Capital (to Risk-Weighted Assets)	$	508,390		17.92	%	$	226,953		8.00	%	N/A		N/A
Tier 1 Capital (to Risk-Weighted Assets)	$	473,279		16.68	%	$	170,215		6.00	%	N/A		N/A
Tier 1 Capital (to Average Assets)	$	473,279		12.34	%	$	153,455		4.00	%	N/A		N/A
Bank - March 31, 2019
Common Equity Tier 1 (to Risk-Weighted Assets)	$	419,153		14.89	%	$	126,674		4.50	%	$	182,973		6.50	%
Total Capital (to Risk-Weighted Assets)	$	454,264		16.14	%	$	225,198		8.00	%	$	281,497		10.00	%
Tier 1 Capital (to Risk-Weighted Assets)	$	419,153		14.89	%	$	168,898		6.00	%	$	225,198		8.00	%
Tier 1 Capital (to Average Assets)	$	419,153		11.02	%	$	152,127		4.00	%	$	190,159		5.00	%
Consolidated - December 31, 2018
Common Equity Tier 1 (to Risk-Weighted Assets)	$	467,033		17.10	%	$	122,937		4.50	%	N/A		N/A
Total Capital (to Risk-Weighted Assets)	$	499,467		18.28	%	$	218,555		8.00	%	N/A		N/A
Tier 1 Capital (to Risk-Weighted Assets)	$	467,033		17.10	%	$	163,917		6.00	%	N/A		N/A
Tier 1 Capital (to Average Assets)	$	467,033		13.40	%	$	139,453		4.00	%	N/A		N/A
Bank - December 31, 2018
Common Equity Tier 1 (to Risk-Weighted Assets)	$	385,030		14.35	%	$	120,706		4.50	%	$	174,353		6.50	%
Total Capital (to Risk-Weighted Assets)	$	417,609		15.57	%	$	214,588		8.00	%	$	268,235		10.00	%
Tier 1 Capital (to Risk-Weighted Assets)	$	385,030		14.35	%	$	160,941		6.00	%	$	214,588		8.00	%
Tier 1 Capital (to Average Assets)	$	385,030		11.22	%	$	137,304		4.00	%	$	171,630		5.00	%

Actual
Minimum
Capital
Requirement

Minimum
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions ⁽¹⁾
Amount Ratio Amount Ratio Amount Ratio
Consolidated - March 31, 2018
Common Equity Tier 1 (to Risk-Weighted Assets) $ 401,239
16.36 % $ 110,340
4.50 % N/A
N/A
Total Capital (to Risk-Weighted Assets) $ 429,290
17.51 % $ 196,160
8.00 % N/A
N/A
Tier 1 Capital (to Risk-Weighted Assets) $ 401,239
16.36 % $ 147,120
6.00 % N/A
N/A
Tier 1 Capital (to Average Assets) $ 401,239
13.32 % $ 120,490
4.00 % N/A
N/A
Bank - March 31, 2018
Common Equity Tier 1 (to Risk-Weighted Assets) $ 326,445
13.49 % $ 108,902
4.50 % $ 157,303
6.50 %
Total Capital (to Risk-Weighted Assets) $ 354,743
14.66 % $ 193,603
8.00 % $ 242,004
10.00 %
Tier 1 Capital (to Risk-Weighted Assets) $ 326,445
13.49 % $ 145,203
6.00 % $ 193,603
8.00 %
Tier 1 Capital (to Average Assets) $ 326,445
11.14 % $ 117,205
4.00 % $ 146,507
5.00 %
Consolidated - December 31, 2017
Common Equity Tier 1 (to Risk-Weighted Assets) $ 390,816
17.81 % $ 98,764
4.50 % N/A
N/A
Total Capital (to Risk-Weighted Assets) $ 415,006
18.91 % $ 175,580
8.00 % N/A
N/A
Tier 1 Capital (to Risk-Weighted Assets) $ 390,816
17.81 % $ 131,685
6.00 % N/A
N/A
Tier 1 Capital (to Average Assets) $ 390,816
15.50 % $ 100,828
4.00 % N/A
N/A
Bank - December 31, 2017
Common Equity Tier 1 (to Risk-Weighted Assets) $ 277,943
12.89 % $ 97,060
4.50 % $ 140,197
6.50 %
Total Capital (to Risk-Weighted Assets) $ 302,385
14.02 % $ 172,551
8.00 % $ 215,688
10.00 %
Tier 1 Capital (to Risk-Weighted Assets) $ 277,943
12.89 % $ 129,413
6.00 % $ 172,551
8.00 %
Tier 1 Capital (to Average Assets) $ 277,943
11.36 % $ 97,864
4.00 % $ 122,330
5.00 %

(1)
~~(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, 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. Management believes that the critical accounting policies and estimates listed below require the Company to make difficult, subjective or complex judgments about matters that are inherently uncertain.

Determination of the allowance for loan and lease losses;

•

Valuation of servicing assets;

Income taxes;

Restricted stock unit awards with market price conditions;

Valuation of foreclosed assets;

Business combination and goodwill; and

~~Table of Contents~~

Unconsolidated joint ventures.

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

Management considers interest rate risk the most significant market risk. Interest rate risk is the exposure to adverse changes in net interest income due to changes in interest rates. Consistency of net interest income is largely dependent upon the effective management of interest rate risk.

The Company’s Asset/Liability Management Committee (“ALCO”), which includes senior management representatives and reports to the Board of Directors, monitors and manages interest rate risk. See “Asset/Liability Management and Interest Rate Sensitivity” in Item 2 of this Form 10-Q for further discussion.

The objective of asset/liability management is the maximization of net interest income within the Company’s risk guidelines. This objective is accomplished through management of the balance sheet composition, maturities, liquidity, and interest rate risk exposures arising from changing economic conditions, interest rates and customer preferences.

To identify and manage its interest rate risk, the Company employs an earnings simulation model to analyze net interest income sensitivity to changing interest rates. The model is based on contractual cash flows and repricing characteristics and incorporates market-based assumptions regarding the effect of changing interest rates on the prepayment rates of certain assets and liabilities. The model also includes management projections for activity levels in each of the product lines offered by the Bank. Assumptions are inherently uncertain, and the measurement of net interest income or the impact of rate fluctuations on net interest income cannot be precisely predicted. Actual results may differ materially from simulated results due to timing, magnitude, and frequency of interest rate changes as well as changes in market conditions and management strategies.

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 March 31, ~~2018,~~2019, 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 March 31, ~~2018~~2019 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.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the three months ended March 31, ~~2018~~2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

~~Table of Contents~~

PART II. ~~OTHER~~OTHER INFORMATION

Item 1. Legal Proceedings

In the ordinary course of operations, the Company is party to various legal proceedings. The Company is not involved in, nor has it terminated during the three months ended March 31, ~~2018,~~2019, any pending legal proceedings other than nonmaterial proceedings occurring in the ordinary course of business.

Item 1A. Risk Factors

There have been no material changes to the risk factors that have been previously disclosed in the Company’s ~~2017~~2018 Annual Report filed with the SEC.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

~~None.~~

Item 6. ~~Exhibits~~

Exhibits.

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

~~Table of Contents~~

~~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: May 7, 2018~~	~~By:~~	/s~~/ S. Brett Caines~~
		~~S. Brett Caines~~
		~~Chief Financial Officer~~

~~Table of Contents~~

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 ~~June 19,~~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)
4.2			Registration and Other Rights Agreement between Live Oak Bancshares, Inc. and Wellington purchasers (incorporated by reference to Exhibit 4.2 of the registration statement on Form S-1, filed on June 19, 2015)
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: (i) Condensed Consolidated Balance Sheets as of March 31, ~~2018~~2019 and December 31, ~~2017;~~2018; (ii) Condensed Consolidated Statements of Income for the Three Months Ended March 31, ~~2018~~2019 and ~~2017;~~2018; (iii) Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, ~~2018~~2019 and ~~2017;~~2018; (iv) Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, ~~2018~~2019 and ~~2017;~~2018; (v) Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, ~~2018~~2019 and ~~2017;~~2018; and (vi) Notes to Unaudited Condensed Consolidated Financial Statements*

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

* 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.

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: May 7, 2019	By:	/s/ S. Brett Caines
		S. Brett Caines
		Chief Financial Officer

North Carolina	26-4596286

~~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)



Large accelerated filer	¨ ☒	Accelerated filer	x ☐

Non-accelerated filer	¨ ~~(Do not check if smaller reporting company)~~ ☐	Smaller reporting company	¨ ☐

		Emerging growth company	x ☐


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


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



	March 31, 2018			December 31, 2017*
Assets
Cash and due from banks	$	527,952		$	295,271
Certificates of deposit with other banks	2,250			3,000
Investment securities available-for-sale	378,488			93,355
Loans held for sale	720,511			680,454
Loans and leases held for investment	1,442,077			1,343,973
Allowance for loan and lease losses	(28,050		)	(24,190		)
Net loans and leases	1,414,027			1,319,783
Premises and equipment, net	216,831			178,790
Foreclosed assets	1,519			1,281
Servicing assets	53,120			52,298
Other assets	146,165			134,242
Total assets	$	3,460,863		$	2,758,474
Liabilities and Shareholders’ Equity
Liabilities
Deposits:
Noninterest-bearing	$	48,755		$	57,868
Interest-bearing	2,924,586			2,202,395
Total deposits	2,973,341			2,260,263
Long term borrowings	3,489			26,564
Other liabilities	35,197			34,714
Total liabilities	3,012,027			2,321,541
Shareholders’ equity
Preferred stock, no par value, 1,000,000 authorized, none issued or outstanding at March 31, 2018 and December 31, 2017	—			—
Class A common stock, no par value, 100,000,000 shares authorized, 35,330,618 and 35,252,053 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively	271,451			268,557
Class B common stock, no par value, 10,000,000 shares authorized, 4,643,530 shares issued and outstanding at March 31, 2018 and December 31, 2017	49,168			49,168
Retained earnings	131,739			120,241
Accumulated other comprehensive loss	(3,522		)	(1,033		)
Total equity	448,836			436,933
Total liabilities and shareholders’ equity	$	3,460,863		$	2,758,474



	Common stock					Retained earnings			Accumulated other comprehensive loss			Total equity
	Shares
	Class A	Class B	Amount
Balance at December 31, 2016	29,530,072	4,723,530	$	199,981		$	23,518		$	(652	)	$	222,847
Net income	—	—	—			6,112			—			6,112
Other comprehensive loss	—	—	—			—			(45		)	(45		)
Issuance of restricted stock	273,946	—	—			—			—			—
Withholding cash issued in lieu of restricted stock issuance	—	—	(4,828		)	—			—			(4,828		)
Employee stock purchase program	12,411	—	241			—			—			241
Stock option exercises	33,136	—	186			—			—			186
Stock option based compensation expense	—	—	456			—			—			456
Restricted stock expense	—	—	1,347			—			—			1,347
Stock issued in acquisition of Reltco, Inc.	27,724	—	565			—			—			565
Dividends (distributions to shareholders)	—	—	—			(692		)	—			(692		)
Balance at March 31, 2017	29,877,289	4,723,530	$	197,948		$	28,938		$	(697	)	$	226,189
Balance at December 31, 2017	35,252,053	4,643,530	$	317,725		$	120,241		$	(1,033	)	$	436,933
Net income	—	—	—			12,453			—			12,453
Other comprehensive loss	—	—	—			—			(2,245		)	(2,245		)
Issuance of restricted stock	17,289	—	—			—			—			—
Withholding cash issued in lieu of restricted stock issuance	—	—	(311		)	—			—			(311		)
Employee stock purchase program	7,022	—	165			—			—			165
Stock option exercises	54,254	—	691			—			—			691
Stock option based compensation expense	—	—	463			—			—			463
Restricted stock expense	—	—	1,886			—			—			1,886
Reclassification of accumulated other comprehensive income due to tax rate change	—	—	—			244			(244		)	—
Dividends (distributions to shareholders)	—	—	—			(1,199		)	—			(1,199		)
Balance at March 31, 2018	35,330,618	4,643,530	$	320,619		$	131,739		$	(3,522	)	$	448,836



	March 31, 2018
	Available-for-Sale
	Amortized cost		Fair value
US government agencies
Within one year	$	6,323	$	6,290
One to five years	16,464		16,142
Total	22,787		22,432

Residential mortgage-backed securities
One to five years	4,691		4,526
Five to ten years	28,998		28,878
After 10 years	324,536		320,617
Total	358,225		354,021

Total	$	381,012	$	376,453



	March 31, 2018			December 31, 2017
Commercial & Industrial
Agriculture	$	3,605		$	3,274
Death Care Management	13,982			13,495
Healthcare	45,001			43,301
Independent Pharmacies	100,528			99,920
Registered Investment Advisors	96,573			93,770
Veterinary Industry	49,797			46,387
Other Industries	209,408			184,903
Total	518,894			485,050
Construction & Development
Agriculture	35,976			34,188
Death Care Management	6,713			6,119
Healthcare	56,801			49,770
Independent Pharmacies	1,754			1,496
Registered Investment Advisors	883			376
Veterinary Industry	14,001			13,184
Other Industries	68,615			58,120
Total	184,743			163,253
Commercial Real Estate
Agriculture	49,934			46,717
Death Care Management	69,057			67,381
Healthcare	137,163			126,631
Independent Pharmacies	17,830			19,028
Registered Investment Advisors	11,488			11,789
Veterinary Industry	119,948			113,932
Other Industries	156,220			134,172
Total	561,640			519,650
Commercial Land
Agriculture	182,499			178,897
Total	182,499			178,897
Total Loans and Leases¹	1,447,776			1,346,850
Net Deferred Costs	7,841			8,545
Discount on SBA 7(a) and USDA Unguaranteed²	(13,540		)	(11,422		)
Loans and Leases, Net of Unearned	$	1,442,077		$	1,343,973



	Risk Grades 1 - 4		Risk Grade 5		Risk Grades 6 - 8		Total
March 31, 2018
Commercial & Industrial
Agriculture	$	3,087	$	518	$	—	$	3,605
Death Care Management	13,776		199		7		13,982
Healthcare	37,724		3,168		4,109		45,001
Independent Pharmacies	87,434		4,152		8,942		100,528
Registered Investment Advisors	93,802		2,062		709		96,573
Veterinary Industry	45,361		1,505		2,931		49,797
Other Industries	195,634		13,774		—		209,408
Total	476,818		25,378		16,698		518,894
Construction & Development
Agriculture	30,527		5,449		—		35,976
Death Care Management	6,713		—		—		6,713
Healthcare	52,281		3,119		1,401		56,801
Independent Pharmacies	1,754		—		—		1,754
Registered Investment Advisors	883		—		—		883
Veterinary Industry	12,814		1,187		—		14,001
Other Industries	68,280		335		—		68,615
Total	173,252		10,090		1,401		184,743
Commercial Real Estate
Agriculture	49,934		—		—		49,934
Death Care Management	61,343		3,833		3,881		69,057
Healthcare	117,279		8,954		10,930		137,163
Independent Pharmacies	15,458		2,260		112		17,830
Registered Investment Advisors	11,352		136		—		11,488
Veterinary Industry	101,884		3,285		14,779		119,948
Other Industries	155,544		676		—		156,220
Total	512,794		19,144		29,702		561,640
Commercial Land
Agriculture	179,803		2,696		—		182,499
Total	179,803		2,696		—		182,499
Total¹	$	1,342,667	$	57,308	$	47,801	$	1,447,776



March 31, 2018	Loan and Lease Balance		Guaranteed Balance		Unguaranteed Exposure
Commercial & Industrial
Healthcare	$	3,410	$	2,954	$	456
Independent Pharmacies	8,617		7,290		1,327
Veterinary Industry	1,772		1,733		39
Total	13,799		11,977		1,822
Construction & Development
Agriculture	2,451		1,838		613
Total	2,451		1,838		613
Commercial Real Estate
Death Care Management	1,531		1,219		312
Healthcare	9,347		6,357		2,990
Independent Pharmacies	112		—		112
Veterinary Industry	9,536		7,999		1,537
Total	20,526		15,575		4,951
Total	$	36,776	$	29,390	$	7,386



December 31, 2017	Loan and Lease Balance		Guaranteed Balance		Unguaranteed Exposure
Commercial & Industrial
Healthcare	$	3,806	$	3,235	$	571
Independent Pharmacies	4,961		3,906		1,055
Veterinary Industry	1,517		1,478		39
Total	10,284		8,619		1,665
Commercial Real Estate
Death Care Management	1,559		1,237		322
Healthcare	3,506		2,719		787
Independent Pharmacies	1,562		1,562		—
Veterinary Industry	6,569		5,733		836
Total	13,196		11,251		1,945
Total	$	23,480	$	19,870	$	3,610



Three months ended	Construction & Development		Commercial Real Estate			Commercial & Industrial			Commercial Land			Total
March 31, 2018
Beginning Balance	$	2,030	$	9,180		$	10,751		$	2,229		$	24,190
Charge offs	—		—			(672		)	—			(672		)
Recoveries	—		4			136			—			140
Provision	398		2,060			1,986			(52		)	4,392
Ending Balance	$	2,428	$	11,244		$	12,201		$	2,177		$	28,050
March 31, 2017
Beginning Balance	$	1,693	$	5,897		$	8,413		$	2,206		$	18,209
Charge offs	—		(268		)	(1,233		)	(35		)	(1,536		)
Recoveries	—		9			14			—			23
Provision	191		588			652			68			1,499
Ending Balance	$	1,884	$	6,226		$	7,846		$	2,239		$	18,195



	Three months ended March 31, 2018				Three months ended March 31, 2017
	Average Balance		Interest Income Recognized		Average Balance		Interest Income Recognized
Commercial & Industrial
Death Care Management	$	7	$	—	$	112	$	2
Healthcare	4,263		12		7,583		20
Independent Pharmacies	9,717		20		5,690		13
Registered Investment Advisors	720		12		790		12
Veterinary Industry	3,138		20		2,394		9
Total	17,845		64		16,569		56
Construction & Development
Agriculture	2,457		5		—		—
Healthcare	1,976		23		—		—
Veterinary Industry	—		—		1,961		9
Total	4,433		28		1,961		9
Commercial Real Estate
Death Care Management	3,903		37		2,544		6
Healthcare	11,057		16		987		12
Independent Pharmacies	1,080		—		1,076		—
Veterinary Industry	16,108		137		14,171		88
Total	32,148		190		18,778		106
Commercial Land
Agriculture	—		—		219		—
Total	—		—		219		—
Total	$	54,426	$	282	$	37,527	$	171



	As of
	March 31, 2018			December 31, 2017
Gross direct finance lease payments receivable	$	3,692		$	2,399
Less – unearned interest	(589		)	(373		)
Net investment in direct financing leases	$	3,103		$	2,026



As of March 31, 2018	Amount
2018	$	552
2019	764
2020	754
2021	678
2022	518
Thereafter	426
Total	$	3,692



	Shares		Weighted Average Grant Date Fair Value
Non-vested at December 31, 2016	3,016,100		$	4.78
Granted	—		—
Vested	(175,082	)	1.65
Forfeited	(149,530	)	5.94
Non-vested at March 31, 2017	2,691,488		4.92



	Three months ended March 31,
	2018 vs. 2017
	Increase (Decrease) Due to
	Rate		Volume			Total
Interest income:
Interest earning balances in other banks	$	458	$	415		$	873
Investment securities	202		592			794
Loans held for sale	718		3,807			4,525
Loans and leases held for investment	1,791		6,621			8,412
Total interest income	3,169		11,435			14,604
Interest expense:
Interest bearing checking	39		(1		)	38
Savings	—		3,118			3,118
Money market accounts	359		(786		)	(427		)
Certificates of deposit	1,287		1,859			3,146
Other borrowings	61		(167		)	(106		)
Total interest expense	1,746		4,023			5,769
Net interest income	$	1,423	$	7,412		$	8,835



	Three Months Ended March 31,						Increase (Decrease)
	2018			2017			Amount			Percent
Noninterest income
Loan servicing revenue	$	6,898		$	5,923		$	975		16.46	%
Loan servicing asset revaluation	(5,088		)	(2,009		)	(3,079		)	(153.26	)
Net gains on sales of loans	24,418			18,952			5,466			28.84
Lease income	1,608			—			1,608			100.00
Construction supervision fee income	779			429			350			81.59
Title insurance income	1,300			1,438			(138		)	(9.60	)
Other noninterest income	841			1,020			(179		)	(17.55	)
Total noninterest income	$	30,756		$	25,753		$	5,003		19.43	%



	March 31, 2018			December 31, 2017
Nonperforming assets:
Total nonperforming loans (all on nonaccrual)	$	36,776		$	23,480
Total accruing loans past due 90 days or more	—			—
Foreclosed assets	1,519			1,281
Total troubled debt restructurings	11,516			10,223
Less nonaccrual troubled debt restructurings	(9,069		)	(8,129		)
Total performing troubled debt restructurings	2,447			2,094
Total nonperforming assets and troubled debt restructurings	$	40,742		$	26,855
Total nonperforming loans to total loans and leases held for investment	2.55		%	1.75		%
Total nonperforming loans to total assets	1.06		%	0.85		%
Total nonperforming assets and troubled debt restructurings to total assets	1.18		%	0.97		%



	March 31, 2018			December 31, 2017
Nonperforming assets guaranteed by U.S. government:
Total nonperforming loans guaranteed by the SBA (all on nonaccrual)	$	29,390		$	19,870
Total accruing loans past due 90 days or more guaranteed by the SBA	—			—
Foreclosed assets guaranteed by the SBA	1,418			1,191
Total troubled debt restructurings guaranteed by the SBA	8,374			7,178
Less nonaccrual troubled debt restructurings guaranteed by the SBA	(7,849		)	(7,099		)
Total performing troubled debt restructurings guaranteed by SBA	525			79
Total nonperforming assets and troubled debt restructurings guaranteed by the SBA	$	31,333		$	21,140
Total nonperforming loans not guaranteed by the SBA to total held for investment loans and leases	0.51		%	0.27		%
Total nonperforming loans not guaranteed by the SBA to total assets	0.21		%	0.13		%
Total nonperforming assets and troubled debt restructurings not guaranteed by the SBA to total assets	0.27		%	0.21		%



	Payments Due by Period
	Total		Less than One Year		One to Three Years		Three to Five Years		More Than Five Years
Contractual Obligations
Deposits without stated maturity	$	1,209,919	$	1,209,919	$	—	$	—	$	—
Time deposits	1,763,422		1,066,053		532,596		88,601		76,172
Long term borrowings	3,489		4		3,478		7		—
Operating lease obligations¹	2,710		1,009		1,050		481		170
Total	$	2,979,540	$	2,276,985	$	537,124	$	89,089	$	76,342



	Actual				Minimum Capital Requirement				Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions ⁽¹⁾
	Amount		Ratio		Amount		Ratio		Amount		Ratio
Consolidated - March 31, 2018
Common Equity Tier 1 (to Risk-Weighted Assets)	$	401,239	16.36	%	$	110,340	4.50	%	N/A		N/A
Total Capital (to Risk-Weighted Assets)	$	429,290	17.51	%	$	196,160	8.00	%	N/A		N/A
Tier 1 Capital (to Risk-Weighted Assets)	$	401,239	16.36	%	$	147,120	6.00	%	N/A		N/A
Tier 1 Capital (to Average Assets)	$	401,239	13.32	%	$	120,490	4.00	%	N/A		N/A
Bank - March 31, 2018
Common Equity Tier 1 (to Risk-Weighted Assets)	$	326,445	13.49	%	$	108,902	4.50	%	$	157,303	6.50	%
Total Capital (to Risk-Weighted Assets)	$	354,743	14.66	%	$	193,603	8.00	%	$	242,004	10.00	%
Tier 1 Capital (to Risk-Weighted Assets)	$	326,445	13.49	%	$	145,203	6.00	%	$	193,603	8.00	%
Tier 1 Capital (to Average Assets)	$	326,445	11.14	%	$	117,205	4.00	%	$	146,507	5.00	%
Consolidated - December 31, 2017
Common Equity Tier 1 (to Risk-Weighted Assets)	$	390,816	17.81	%	$	98,764	4.50	%	N/A		N/A
Total Capital (to Risk-Weighted Assets)	$	415,006	18.91	%	$	175,580	8.00	%	N/A		N/A
Tier 1 Capital (to Risk-Weighted Assets)	$	390,816	17.81	%	$	131,685	6.00	%	N/A		N/A
Tier 1 Capital (to Average Assets)	$	390,816	15.50	%	$	100,828	4.00	%	N/A		N/A
Bank - December 31, 2017
Common Equity Tier 1 (to Risk-Weighted Assets)	$	277,943	12.89	%	$	97,060	4.50	%	$	140,197	6.50	%
Total Capital (to Risk-Weighted Assets)	$	302,385	14.02	%	$	172,551	8.00	%	$	215,688	10.00	%
Tier 1 Capital (to Risk-Weighted Assets)	$	277,943	12.89	%	$	129,413	6.00	%	$	172,551	8.00	%
Tier 1 Capital (to Average Assets)	$	277,943	11.36	%	$	97,864	4.00	%	$	122,330	5.00	%