UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended ~~September 30, 2022~~March 31, 2023


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

For the transition period from ________ to ________.

Commission file number: 001-37497

LIVE OAK BANCSHARES, INC.

(Exact name of registrant as specified in its charter)


North Carolina			26-4596286
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

1741 Tiburon Drive Wilmington, North Carolina			28403
(Address of principal executive offices)			(Zip Code)

(910) 790-5867


(Registrant’s telephone number, including area code)

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


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

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

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

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


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

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

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

~~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 ~~November 1, 2022,~~May 2, 2023, there were ~~43,984,400~~44,313,687 shares of the registrant’s voting common stock outstanding.

Table of Contents

Live Oak Bancshares, Inc.

Form 10-Q

For the Quarterly Period Ended ~~September 30, 2022~~March 31, 2023

TABLE OF CONTENTS


		Page
	PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022	1
	Condensed Consolidated Statements of Income for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~	2
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~	3
	Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~	4
	Condensed Consolidated Statements of Cash Flows for the ~~Nine~~Three Months Ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~	65
	Notes to Unaudited Condensed Consolidated Financial Statements	87
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3834
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	6052
Item 4.	Controls and Procedures	6153
	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	6355
Item 1A.	Risk Factors	6355
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	6355
Item 3.	Defaults Upon Senior Securities	6355
Item 4.	Mine Safety Disclosures	6355
Item 5.	Other Information	6355
Item 6.	Exhibits	6456
	Index to Exhibits	6456
	Signatures	6557

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Live Oak Bancshares, Inc.

Condensed Consolidated Balance Sheets

As of ~~September 30, 2022~~March 31, 2023 (unaudited) and December 31, 2021*2022*

(Dollars in thousands)


		September 30, 2022		December 31, 2021			March 31, 2023		December 31, 2022
Assets	Assets					Assets
Cash and due from banks	Cash and due from banks	$	335,046	$	187,203	Cash and due from banks	$	463,186	$	280,239
Federal funds sold	Federal funds sold	68,324		16,547		Federal funds sold	—		136,397
Certificates of deposit with other banks	Certificates of deposit with other banks	4,250		4,750		Certificates of deposit with other banks	4,000		4,000
Investment securities available-for-sale	Investment securities available-for-sale	1,005,372		906,052		Investment securities available-for-sale	1,149,691		1,014,719
Loans held for sale (includes $25,310 measured at fair value at December 31, 2021)		537,649		1,116,519
Loans and leases held for investment (includes $512,183 and $645,201 measured at fair value, respectively)		6,853,382		5,521,262
Loans held for sale						Loans held for sale	533,292		554,610
Loans and leases held for investment (includes $466,950 and $494,458 measured at fair value, respectively)						Loans and leases held for investment (includes $466,950 and $494,458 measured at fair value, respectively)	7,686,987		7,344,178
Allowance for credit losses on loans and leases	Allowance for credit losses on loans and leases	(78,291)		(63,584)		Allowance for credit losses on loans and leases	(108,242)		(96,566)
Net loans and leases	Net loans and leases	6,775,091		5,457,678		Net loans and leases	7,578,745		7,247,612
Premises and equipment, net	Premises and equipment, net	260,285		240,196		Premises and equipment, net	268,138		263,290
Foreclosed assets		1,178		620

Servicing assets	Servicing assets	29,081		33,574		Servicing assets	29,357		26,323
Other assets	Other assets	298,374		250,254		Other assets	337,888		328,308
Total assets	Total assets	$	9,314,650	$	8,213,393	Total assets	$	10,364,297	$	9,855,498
Liabilities and Shareholders’ Equity	Liabilities and Shareholders’ Equity					Liabilities and Shareholders’ Equity
Liabilities	Liabilities					Liabilities
Deposits:	Deposits:					Deposits:
Noninterest-bearing	Noninterest-bearing	$	170,336	$	89,279	Noninterest-bearing	$	176,439	$	194,100
Interest-bearing	Interest-bearing	8,234,573		7,022,765		Interest-bearing	9,245,555		8,690,828
Total deposits	Total deposits	8,404,909		7,112,044		Total deposits	9,421,994		8,884,928
Borrowings	Borrowings	35,616		318,289		Borrowings	30,767		83,203
Other liabilities	Other liabilities	71,957		67,927		Other liabilities	88,729		76,334
Total liabilities	Total liabilities	8,512,482		7,498,260		Total liabilities	9,541,490		9,044,465
Shareholders’ equity	Shareholders’ equity					Shareholders’ equity
Preferred stock, no par value, 1,000,000 shares authorized, none issued or outstanding at September 30, 2022 and December 31, 2021		—		—
Class A common stock, no par value, 100,000,000 shares authorized, 43,981,350 and 43,494,046 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively		325,632		310,970
Class B common stock, no par value, 10,000,000 shares authorized, none issued or outstanding at September 30, 2022 and 125,024 shares issued and outstanding at December 31, 2021		—		1,324
Preferred stock, no par value, 1,000,000 shares authorized, none issued or outstanding at March 31, 2023 and December 31, 2022						Preferred stock, no par value, 1,000,000 shares authorized, none issued or outstanding at March 31, 2023 and December 31, 2022	—		—
Class A common stock, no par value, 100,000,000 shares authorized, 44,290,840 and 44,061,244 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively						Class A common stock, no par value, 100,000,000 shares authorized, 44,290,840 and 44,061,244 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively	334,672		330,854
Class B common stock, no par value, 10,000,000 shares authorized, none issued or outstanding at March 31, 2023 and December 31, 2022						Class B common stock, no par value, 10,000,000 shares authorized, none issued or outstanding at March 31, 2023 and December 31, 2022	—		—
Retained earnings	Retained earnings	571,778		400,893		Retained earnings	572,530		572,497
Accumulated other comprehensive (loss) income		(95,242)		1,946
Accumulated other comprehensive loss						Accumulated other comprehensive loss	(84,395)		(92,318)
Total shareholders’ equity	Total shareholders’ equity	802,168		715,133		Total shareholders’ equity	822,807		811,033
Total liabilities and shareholders’ equity	Total liabilities and shareholders’ equity	$	9,314,650	$	8,213,393	Total liabilities and shareholders’ equity	$	10,364,297	$	9,855,498

*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 ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ (unaudited)

(Dollars in thousands, except per share data)


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2022		2021		2022		2021			2023		2022
Interest income	Interest income									Interest income
Loans and fees on loans	Loans and fees on loans	$	107,880	$	89,388	$	291,235	$	259,161	Loans and fees on loans	$	139,052	$	89,198
Investment securities, taxable	Investment securities, taxable	5,506		3,174		12,951		9,078		Investment securities, taxable	7,547		3,399
Other interest earning assets	Other interest earning assets	2,448		224		3,677		771		Other interest earning assets	4,817		185
Total interest income	Total interest income	115,834		92,786		307,863		269,010		Total interest income	151,416		92,782
Interest expense	Interest expense									Interest expense
Deposits	Deposits	31,553		14,159		64,678		45,923		Deposits	67,595		14,348
Borrowings	Borrowings	395		892		1,586		3,940		Borrowings	1,804		655
Total interest expense	Total interest expense	31,948		15,051		66,264		49,863		Total interest expense	69,399		15,003
Net interest income	Net interest income	83,886		77,735		241,599		219,147		Net interest income	82,017		77,779
Provision for loan and lease credit losses	Provision for loan and lease credit losses	14,169		4,319		21,272		11,292		Provision for loan and lease credit losses	19,021		1,836
Net interest income after provision for loan and lease credit losses	Net interest income after provision for loan and lease credit losses	69,717		73,416		220,327		207,855		Net interest income after provision for loan and lease credit losses	62,996		75,943
Noninterest income	Noninterest income									Noninterest income
Loan servicing revenue	Loan servicing revenue	6,230		6,278		19,063		18,930		Loan servicing revenue	6,380		6,356
Loan servicing asset revaluation	Loan servicing asset revaluation	(1,324)		(5,878)		(11,561)		(7,566)		Loan servicing asset revaluation	356		(1,569)
Net gains on sales of loans	Net gains on sales of loans	9,275		18,860		35,882		47,023		Net gains on sales of loans	10,175		20,977
Net gain (loss) on loans accounted for under the fair value option		4,420		(1,030)		475		4,323
Net (loss) gain on loans accounted for under the fair value option										Net (loss) gain on loans accounted for under the fair value option	(4,529)		516
Equity method investments income (loss)	Equity method investments income (loss)	29,136		(1,250)		146,068		(4,685)		Equity method investments income (loss)	(2,952)		(2,124)
Equity security investments gains (losses), net	Equity security investments gains (losses), net	876		176		2,487		44,534		Equity security investments gains (losses), net	77		(44)
Lease income	Lease income	2,516		2,527		7,529		7,742		Lease income	2,535		2,503
Management fee income	Management fee income	2,844		1,489		6,890		4,896		Management fee income	3,472		1,488
Other noninterest income	Other noninterest income	3,751		4,104		12,088		11,247		Other noninterest income	4,065		4,565
Total noninterest income	Total noninterest income	57,724		25,276		218,921		126,444		Total noninterest income	19,579		32,668
Noninterest expense	Noninterest expense									Noninterest expense
Salaries and employee benefits	Salaries and employee benefits	43,479		28,202		128,262		92,468		Salaries and employee benefits	44,765		38,507
Travel expense	Travel expense	2,372		1,819		6,627		4,027		Travel expense	2,411		1,897
Professional services expense	Professional services expense	2,505		4,251		9,284		11,411		Professional services expense	927		2,791
Advertising and marketing expense	Advertising and marketing expense	2,621		1,631		6,651		3,158		Advertising and marketing expense	3,603		1,729
Occupancy expense	Occupancy expense	2,519		2,042		7,619		6,378		Occupancy expense	1,925		2,327
Technology expense	Technology expense	7,770		6,150		19,585		16,159		Technology expense	7,729		6,053
Equipment expense	Equipment expense	3,761		3,706		11,361		11,128		Equipment expense	3,818		3,816
Other loan origination and maintenance expense	Other loan origination and maintenance expense	3,376		3,489		9,511		10,123		Other loan origination and maintenance expense	3,927		3,113
Renewable energy tax credit investment impairment	Renewable energy tax credit investment impairment	7,721		60		7,771		3,187		Renewable energy tax credit investment impairment	69		—
FDIC insurance	FDIC insurance	2,697		1,670		6,833		5,139		FDIC insurance	3,403		1,972
Contributions and donations	Contributions and donations	191		523		6,429		2,003		Contributions and donations	56		723
Other expense	Other expense	4,036		1,916		9,708		6,108		Other expense	6,329		2,786
Total noninterest expense	Total noninterest expense	83,048		55,459		229,641		171,289		Total noninterest expense	78,962		65,714
Income before taxes	Income before taxes	44,393		43,233		209,607		163,010		Income before taxes	3,613		42,897
Income tax expense	Income tax expense	1,525		9,394		35,191		26,162		Income tax expense	3,215		8,388
Net income	Net income	$	42,868	$	33,839	$	174,416	$	136,848	Net income	$	398	$	34,509
Basic earnings per share	Basic earnings per share	$	0.97	$	0.78	$	3.98	$	3.18	Basic earnings per share	$	0.01	$	0.79
Diluted earnings per share	Diluted earnings per share	$	0.96	$	0.76	$	3.88	$	3.05	Diluted earnings per share	$	0.01	$	0.76

See Notes to Unaudited Condensed Consolidated Financial Statements

Table of Contents

Live Oak Bancshares, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ (unaudited)

(Dollars in thousands)

Three Months Ended
September 30, Nine Months Ended
September 30,
2022 2021 2022 2021
Net income $ 42,868 $ 33,839 $ 174,416 $ 136,848
Other comprehensive loss before tax:
Net unrealized loss on investment securities available-for-sale during the period (47,318) (6,656) (127,879) (17,687)
Reclassification adjustment for gain on sale of securities available-for-sale included in net income — — — —
Other comprehensive loss before tax (47,318) (6,656) (127,879) (17,687)
Income tax benefit 11,359 1,598 30,691 4,245
Other comprehensive loss, net of tax (35,959) (5,058) (97,188) (13,442)
Total comprehensive income $ 6,909 $ 28,781 $ 77,228 $ 123,406


	Three Months Ended March 31,
	2023		2022
Net income	$	398	$	34,509
Other comprehensive income (loss) before tax:
Net unrealized gain (loss) on investment securities available-for-sale during the period	10,432		(50,594)
Reclassification adjustment for gain on sale of securities available-for-sale included in net income	—		—
Other comprehensive income (loss) before tax	10,432		(50,594)
Income tax (expense) benefit	(2,509)		12,142
Other comprehensive income (loss), net of tax	7,923		(38,452)
Total comprehensive income (loss)	$	8,321	$	(3,943)

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 ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ (unaudited)

(Dollars in thousands)


		Three Months Ended																	Three Months Ended
		Common stock					Retained earnings			Accumulated other comprehensive income (loss)				Total equity					Common stock															Retained earnings						Accumulated other comprehensive income (loss)			Total equity
		Shares		Amount									Shares												Amount
		Class A	Class B			Retained earnings			Accumulated other comprehensive income (loss)				Class A							Class B								Retained earnings		Accumulated other comprehensive income (loss)
Balance at June 30, 2022		43,854,011	—							$	320,924						$	530,021		$	(59,283)		$	791,662
Balance at December 31, 2022												Balance at December 31, 2022	44,061,244						—						$	330,854						$	572,497		$	(92,318)		$	811,033
Net income																	Net income		—						—				—					398						—			398
Other comprehensive income																	Other comprehensive income		—						—				—					—						7,923			7,923
Issuance of restricted stock																	Issuance of restricted stock		162,874						—				—					—						—			—
Tax withholding related to vesting of restricted stock and other																	Tax withholding related to vesting of restricted stock and other		—						—				(3,353)					—						—			(3,353)
Employee stock purchase program																	Employee stock purchase program		31,059						—				631					—						—			631
Stock option exercises																	Stock option exercises		35,663						—				367					—						—			367
Stock option based compensation expense																	Stock option based compensation expense		—						—				133					—						—			133
Restricted stock compensation expense																	Restricted stock compensation expense		—						—				6,040					—						—			6,040
Adoption of ASU 2022-02																	Adoption of ASU 2022-02		—						—				—					676						—			676
Transfer from retained earnings to other assets for pro rata portion of equity method investee stock compensation expense																	Transfer from retained earnings to other assets for pro rata portion of equity method investee stock compensation expense		—						—				—					286						—			286
Cash dividends ($0.03 per share)																	Cash dividends ($0.03 per share)		—						—				—					(1,327)						—			(1,327)
Balance at March 31, 2023																	Balance at March 31, 2023		44,290,840						—				$	334,672				$	572,530					$	(84,395)		$	822,807

Balance at December 31, 2021																	Balance at December 31, 2021		43,494,046						125,024				$	312,294				$	400,893					$	1,946		$	715,133
Net income	Net income	—	—	—						42,868						—						42,868			Net income		—				—						—					34,509			—	34,509
Other comprehensive loss	Other comprehensive loss	—	—	—			—			(35,959)				(35,959)			Other comprehensive loss		—						—				—					—						(38,452)			(38,452)
Issuance of restricted stock	Issuance of restricted stock	59,603	—	—			—			—				—			Issuance of restricted stock		95,537						—				—					—						—			—
Tax withholding related to vesting of restricted stock and other	Tax withholding related to vesting of restricted stock and other	—	—	(1,362)			—			—				(1,362)			Tax withholding related to vesting of restricted stock and other		—						—				(2,894)					—						—			(2,894)
Employee stock purchase program	Employee stock purchase program	18,264	—	532			—			—				532			Employee stock purchase program		11,119						—				534					—						—			534
Stock option exercises	Stock option exercises	49,472	—	497			—			—				497			Stock option exercises		61,934						—				719					—						—			719
Stock option compensation expense		—	—	261			—			—				261
Stock option based compensation expense																	Stock option based compensation expense		—						—				391					—						—			391
Restricted stock compensation expense	Restricted stock compensation expense	—	—	4,780			—			—				4,780			Restricted stock compensation expense		—						—				4,563					—						—			4,563
Non-voting common stock converted to voting common stock in private sale																	Non-voting common stock converted to voting common stock in private sale		125,024						(125,024)				—					—						—			—
Transfer from retained earnings to other assets for pro rata portion of equity method investee stock compensation expense	Transfer from retained earnings to other assets for pro rata portion of equity method investee stock compensation expense	—	—	—			208			—				208			Transfer from retained earnings to other assets for pro rata portion of equity method investee stock compensation expense		—						—				—					136						—			136
Cash dividends ($0.03 per share)	Cash dividends ($0.03 per share)	—	—	—			(1,319)			—				(1,319)			Cash dividends ($0.03 per share)		—						—				—					(1,312)						—			(1,312)
Balance at September 30, 2022		43,981,350	—	$	325,632		$	571,778		$	(95,242)			$	802,168

Balance at June 30, 2021		42,754,133	510,327	$	305,213		$	339,011		$	13,123			$	657,347
Net income		—	—	—			33,839			—				33,839
Other comprehensive loss		—	—	—			—			(5,058)				(5,058)
Issuance of restricted stock		16,819	—	—			—			—				—
Tax withholding related to vesting of restricted stock and other		—	—	(504)			—			—				(504)
Employee stock purchase program		7,988	—	374			—			—				374
Stock option exercises		91,747	—	693			—			—				693
Stock option compensation expense		—	—	384			—			—				384
Restricted stock compensation expense		—	—	3,329			—			—				3,329
Transfer from retained earnings to other assets for pro rata portion of equity method investee stock compensation expense		—	—	—			320			—				320
Cash dividends ($0.03 per share)		—	—	—			(1,301)			—				(1,301)
Balance at September 30, 2021		42,870,687	510,327	$	309,489		$	371,869		$	8,065			$	689,423
Balance at March 31, 2022																	Balance at March 31, 2022		43,787,660						—				$	315,607				$	434,226					$	(36,506)		$	713,327

See Notes to Unaudited Condensed Consolidated Financial Statements

~~Table of Contents~~

~~Live Oak Bancshares, Inc.~~

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

~~For the three and nine months ended September 30, 2022 and 2021 (unaudited)~~

~~(Dollars in thousands)~~

Nine Months Ended
Common stock Retained
earnings
Accumulated
other
comprehensive
income (loss)
Total
equity
Shares Amount
Class A Class B
Balance at December 31, 2021 43,494,046 125,024 $ 312,294 $ 400,893 $ 1,946 $ 715,133
Net income — — — 174,416 — 174,416
Other comprehensive loss — — — — (97,188) (97,188)
Issuance of restricted stock 172,296 — — — — —
Tax withholding related to vesting of restricted stock and other — — (4,453) — — (4,453)
Employee stock purchase program 29,383 — 1,066 — — 1,066
Stock option exercises 160,601 — 1,650 — — 1,650
Stock option compensation expense — — 886 — — 886
Restricted stock compensation expense — — 14,189 — — 14,189
Non-voting common stock converted to voting common stock in private sale 125,024 (125,024) — — — —
Transfer from retained earnings to other assets for pro rata portion of equity method investee stock compensation expense — — — 415 — 415
Cash dividends ($0.09 per share) — — — (3,946) — (3,946)
Balance at September 30, 2022 43,981,350 — $ 325,632 $ 571,778 $ (95,242) $ 802,168
Balance at December 31, 2020 41,344,689 1,107,757 $ 310,619 $ 235,724 $ 21,507 $ 567,850
Net income — — — 136,848 — 136,848
Other comprehensive loss — — — — (13,442) (13,442)
Issuance of restricted stock 433,642 — — — — —
Tax withholding related to vesting of restricted stock and other — — (17,504) — — (17,504)
Employee stock purchase program 13,674 — 670 — — 670
Stock option exercises 481,252 — 2,857 — — 2,857
Stock option compensation expense — — 1,081 — — 1,081
Restricted stock compensation expense — — 11,766 — — 11,766
Non-voting common stock converted to voting common stock in private sale 597,430 (597,430) — — — —
Transfer from retained earnings to other assets for pro rata portion of equity method investee stock compensation expense — — — 3,177 — 3,177
Cash dividends ($0.09 per share) — — — (3,880) — (3,880)
Balance at September 30, 2021 42,870,687 510,327 $ 309,489 $ 371,869 $ 8,065 $ 689,423

~~See Notes to Unaudited Condensed Consolidated Financial Statements~~

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Live Oak Bancshares, Inc.

Condensed Consolidated Statements of Cash Flows

For the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ (unaudited)

(Dollars in thousands)


		Nine Months Ended September 30,					Three Months Ended March 31,
		2022		2021			2023		2022
Cash flows from operating activities	Cash flows from operating activities					Cash flows from operating activities
Net income	Net income	$	174,416	$	136,848	Net income	$	398	$	34,509
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:						Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	Depreciation and amortization	15,626		15,894		Depreciation and amortization	5,193		5,405
Provision for loan and lease credit losses	Provision for loan and lease credit losses	21,272		11,292		Provision for loan and lease credit losses	19,021		1,836
Amortization of premium on securities, net of accretion	Amortization of premium on securities, net of accretion	3,019		5,005		Amortization of premium on securities, net of accretion	171		1,421
Deferred tax expense		17,258		9,493
Deferred tax (benefit) expense						Deferred tax (benefit) expense	(5,541)		6,775
Originations of loans held for sale	Originations of loans held for sale	(787,633)		(1,062,694)		Originations of loans held for sale	(191,466)		(222,557)
Proceeds from sales of loans held for sale	Proceeds from sales of loans held for sale	796,286		794,892		Proceeds from sales of loans held for sale	317,579		349,364
Net gains on sale of loans held for sale	Net gains on sale of loans held for sale	(35,882)		(47,023)		Net gains on sale of loans held for sale	(10,175)		(20,977)
Net loss (gain) on sale of foreclosed assets		49		(798)
Net gain on loans accounted for under fair value option		(475)		(4,323)
Net decrease (increase) in servicing assets		4,493		(50)
Net gain on disposal of long-lived asset		—		(114)
Net loss (gain) on disposal of property and equipment		31		(48)
Impairment on premises and equipment, net		—		904
Net loss on sale of foreclosed assets						Net loss on sale of foreclosed assets	—		17
Net loss (gain) on loans accounted for under fair value option						Net loss (gain) on loans accounted for under fair value option	4,529		(516)
Net increase in servicing assets						Net increase in servicing assets	(3,034)		(2,712)

Net loss on disposal of property and equipment						Net loss on disposal of property and equipment	402		—

Equity method investments (income) loss	Equity method investments (income) loss	(146,068)		4,685		Equity method investments (income) loss	2,952		2,124
Equity security investments (gains) losses, net	Equity security investments (gains) losses, net	(2,487)		(44,534)		Equity security investments (gains) losses, net	(77)		44
Renewable energy tax credit investment impairment	Renewable energy tax credit investment impairment	7,771		3,187		Renewable energy tax credit investment impairment	69		—
Stock option compensation expense	Stock option compensation expense	886		1,081		Stock option compensation expense	133		391
Restricted stock compensation expense	Restricted stock compensation expense	14,189		11,766		Restricted stock compensation expense	6,040		4,563
Stock based compensation excess tax benefit		876		8,882
Stock based compensation excess tax (shortfall) benefit						Stock based compensation excess tax (shortfall) benefit	(411)		1,119
Lease right-of-use assets and liabilities, net	Lease right-of-use assets and liabilities, net	252		(3)		Lease right-of-use assets and liabilities, net	(17)		(12)
Changes in assets and liabilities:	Changes in assets and liabilities:					Changes in assets and liabilities:
Other assets	Other assets	12,377		19,171		Other assets	6,593		(3,095)
Other liabilities	Other liabilities	2,072		2,279		Other liabilities	6,097		(1,260)
Net cash provided (used) by operating activities		98,328		(134,208)
Net cash provided by operating activities						Net cash provided by operating activities	158,456		156,439
Cash flows from investing activities	Cash flows from investing activities					Cash flows from investing activities
Purchases of investment securities available-for-sale	Purchases of investment securities available-for-sale	(360,058)		(317,711)		Purchases of investment securities available-for-sale	(146,030)		(37,837)
Proceeds from sales, maturities, calls, and principal paydown of investment securities available-for-sale		129,840		183,740
Proceeds from maturities, calls, and principal paydown of investment securities available-for-sale						Proceeds from maturities, calls, and principal paydown of investment securities available-for-sale	21,319		47,297
Proceeds from SBA reimbursement/sale of foreclosed assets, net	Proceeds from SBA reimbursement/sale of foreclosed assets, net	432		6,542		Proceeds from SBA reimbursement/sale of foreclosed assets, net	—		333
Maturities of certificates of deposits with other banks	Maturities of certificates of deposits with other banks	500		500		Maturities of certificates of deposits with other banks	—		500
Loan and lease originations and principal collections, net	Loan and lease originations and principal collections, net	(746,991)		167,475		Loan and lease originations and principal collections, net	(455,742)		(243,463)
Proceeds from sale of long-lived asset		—		8,988
Purchases of equity security investments	Purchases of equity security investments	(9,213)		(226)		Purchases of equity security investments	(875)		—
Purchases of equity method investments	Purchases of equity method investments	(30,178)		(14,669)		Purchases of equity method investments	(1,121)		—
Proceeds from sale of equity security investment		369		15,000
Proceeds from sale of equity method investments		147,713		—

Purchases of premises and equipment, net	Purchases of premises and equipment, net	(35,631)		(1,580)		Purchases of premises and equipment, net	(10,405)		(20,036)
Net cash (used) provided by investing activities		$	(903,217)	$	48,059
Net cash used by investing activities						Net cash used by investing activities	$	(592,854)	$	(253,206)

See Notes to Unaudited Condensed Consolidated Financial Statements

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Live Oak Bancshares, Inc.

Condensed Consolidated Statements of Cash Flows (Continued)

For the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ (unaudited)

(Dollars in thousands)


		Nine Months Ended September 30,					Three Months Ended March 31,
		2022		2021			2023		2022
Cash flows from financing activities	Cash flows from financing activities					Cash flows from financing activities
Net increase in deposits	Net increase in deposits	$	1,292,865	$	1,103,785	Net increase in deposits	$	537,066	$	525,119
Proceeds from borrowings	Proceeds from borrowings	12,074		594,820		Proceeds from borrowings	2,156,020		12,026
Repayment of borrowings	Repayment of borrowings	(294,747)		(1,565,885)		Repayment of borrowings	(2,208,456)		(133,404)
Stock option exercises	Stock option exercises	1,650		2,857		Stock option exercises	367		719
Employee stock purchase program	Employee stock purchase program	1,066		670		Employee stock purchase program	631		534
Withholding cash issued in lieu of restricted stock and other	Withholding cash issued in lieu of restricted stock and other	(4,453)		(17,504)		Withholding cash issued in lieu of restricted stock and other	(3,353)		(2,894)
Shareholder dividend distributions	Shareholder dividend distributions	(3,946)		(3,880)		Shareholder dividend distributions	(1,327)		(1,312)
Net cash provided by financing activities	Net cash provided by financing activities	1,004,509		114,863		Net cash provided by financing activities	480,948		400,788
Net increase in cash and cash equivalents	Net increase in cash and cash equivalents	199,620		28,714		Net increase in cash and cash equivalents	46,550		304,021
Cash and cash equivalents, beginning	Cash and cash equivalents, beginning	203,750		318,320		Cash and cash equivalents, beginning	416,636		203,750
Cash and cash equivalents, ending	Cash and cash equivalents, ending	$	403,370	$	347,034	Cash and cash equivalents, ending	$	463,186	$	507,771

Supplemental disclosures of cash flow information	Supplemental disclosures of cash flow information					Supplemental disclosures of cash flow information
Interest paid	Interest paid	$	66,975	$	51,846	Interest paid	$	69,027	$	15,263
Income tax paid, net	Income tax paid, net	17,128		16,546		Income tax paid, net	182		8

Supplemental disclosures of noncash operating, investing, and financing activities	Supplemental disclosures of noncash operating, investing, and financing activities					Supplemental disclosures of noncash operating, investing, and financing activities
Unrealized holding losses on investment securities available-for-sale, net of taxes		$	(97,188)	$	(13,442)
Unrealized holding gains (losses) on investment securities available-for-sale, net of taxes						Unrealized holding gains (losses) on investment securities available-for-sale, net of taxes	$	7,923	$	(38,452)
Transfers from loans and leases to foreclosed real estate and other repossessions or SBA receivable	Transfers from loans and leases to foreclosed real estate and other repossessions or SBA receivable	14,880		10,782		Transfers from loans and leases to foreclosed real estate and other repossessions or SBA receivable	7,115		6,692
Net transfers between foreclosed real estate and SBA receivable	Net transfers between foreclosed real estate and SBA receivable	139		(1,643)		Net transfers between foreclosed real estate and SBA receivable	—		72
Transfer of loans held for sale to loans and leases held for investment	Transfer of loans held for sale to loans and leases held for investment	843,639		617,475		Transfer of loans held for sale to loans and leases held for investment	35,742		70,649
Transfer of loans and leases held for investment to loans held for sale	Transfer of loans and leases held for investment to loans held for sale	356,429		247,680		Transfer of loans and leases held for investment to loans held for sale	139,883		110,452
Transfer from retained earnings to other assets for pro rata portion of equity method investee stock compensation expense	Transfer from retained earnings to other assets for pro rata portion of equity method investee stock compensation expense	415		3,177		Transfer from retained earnings to other assets for pro rata portion of equity method investee stock compensation expense	286		136
Recording of secured borrowing		—		3,993

Equity method investment commitments	Equity method investment commitments	14,732		—		Equity method investment commitments	7,721		10,971
Equity security investment commitments	Equity security investment commitments	394		2,250		Equity security investment commitments	500		500

See Notes to Unaudited Condensed Consolidated Financial Statements

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Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1. Basis of Presentation

Nature of Operations

Live Oak Bancshares, Inc. (collectively with its subsidiaries including Live Oak Banking Company, the “Company”) is a bank holding company headquartered in Wilmington, North Carolina incorporated under the laws of the State of North Carolina in December 2008. The Company conducts business operations primarily through its commercial bank subsidiary, Live Oak Banking Company (the “Bank”). The Bank was organized and incorporated under the laws of the State of North Carolina on February 25, 2008 and commenced operations on May 12, 2008. The Bank specializes in lending and deposit related services to small businesses nationwide. The Bank identifies and extends lending to credit-worthy borrowers both within specific industries, also called verticals, through expertise within those industries, and more broadly to select borrowers outside of those industries. A significant portion of the loans originated by the Bank are guaranteed by the Small Business Administration (“SBA”) under the 7(a) Loan Program and the U.S. Department of Agriculture’s (“USDA”) Rural Energy for America Program ("REAP"), Water and Environmental Program (“WEP”) ~~and~~, Business & Industry (“B&I”) and Community Facilities loan programs.

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

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

GLS is a management and technology consulting firm that advises and offers solutions and services to participants in the government guaranteed lending sector. GLS primarily provides services in connection with the settlement, accounting, and securitization processes for government guaranteed loans, including loans originated under the SBA 7(a) loan programs and USDA guaranteed loans. The Grove provides Company employees and business visitors an on-site restaurant location. Live Oak Ventures’ purpose is investing in businesses that align with the Company's strategic initiative to be a leader in financial technology. Canapi Advisors provides investment advisory services to a series of funds focused on providing venture capital to new and emerging financial technology companies.

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

The Company generates revenue primarily from net interest income and secondarily through the origination and sale of government guaranteed loans. Income from the retention of loans is comprised principally of interest income. Income from the sale of loans is comprised of ~~net gains on sales of loans along with~~ loan servicing revenue and revaluation of related servicing ~~assets.~~rights along with net gains on sales of loans. Offsetting these revenues are the cost of funding sources, provision for loan and lease credit losses, any costs related to foreclosed assets and other operating costs such as salaries and employee benefits, travel, professional services, advertising and marketing and tax expense. The Company also ~~generates~~has less routinely generated gains and losses arising from its financial technology investments predominantly in its fintech segment.

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Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

General

In the opinion of management, all adjustments necessary for a fair presentation of the financial position and results of operations for the periods presented have been included, and all intercompany transactions have been eliminated in consolidation. Results of operations for the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, ~~2022.~~2023. The ~~Unaudited~~ Condensed Consolidated Balance Sheet as of December 31, ~~2021~~2022 has been derived from the audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, ~~2021,~~2022, filed with the Securities Exchange Commission (“SEC”) on February ~~24, 2022~~23, 2023 (SEC File No. 001-37497) (the “~~2021~~2022 Form 10-K”). A summary description of the significant accounting policies followed by the Company is set forth in Note 1 of the Notes to Consolidated Financial Statements in the Company’s ~~2021~~2022 Form 10-K. These Unaudited Interim Condensed Consolidated Financial Statements should be read in conjunction with the audited consolidated financial statements and footnotes in the Company's ~~2021~~2022 Form 10-K.

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

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

Business Segments

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

Changes in Accounting Estimates

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

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

These refinements represent changes in accounting estimates under Financial Accounting Standards Board ~~(“FASB”~~(“FASB”) Accounting Standards Codification ~~(“ASC”~~(“ASC”) ~~280,~~250, ~~Segment Reporting~~Accounting Changes and Error Corrections., with prospective application beginning in the period of change.

Reclassifications

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

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Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 2. Recent Accounting Pronouncements

In March 2020, the FASB issued Accounting Standards Update (“ASU”) No. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”). ASU 2020-04 provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. ~~The~~With the amendments, ~~are effective for and~~the ASU can be adopted by the Company as of March 12, 2020, through December 31, ~~2022.~~2024. In December 2022, ASU 2022-06 “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848” was issued deferring the sunset date of Topic 848. The Company does not ~~expect this standard~~believe these standards will have a material impact on its consolidated financial statements. To address the discontinuance of LIBOR, the Company has stopped originating variable LIBOR-based loans effective December 31, 2021 and has started to negotiate loans using the preferred replacement index, the Secured Overnight Financing Rate (“SOFR”) or a relevant duration U.S. Treasury rate. For currently outstanding LIBOR-based loans, the timing and manner in which each customer’s contract transitions from LIBOR to another rate will vary on a case-by-case basis. The Company expects to complete all transitions by the second quarter of 2023 or at the next repricing date if later in 2023.

~~Table of Contents~~

~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

In March 2022, the FASB issued ASU No. 2022-02 “Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings (“TDRs”) and Vintage Disclosures” (“ASU 2022-02”). ASU 2022-02 eliminates the accounting guidance for TDRs by creditors in ASC 310-40, Receivables – Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings when a borrower is experiencing financial difficulty. Additionally, for public business entities, ASU 2022-02 requires that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of ASC 326-20, Financial Instruments – Credit Losses – Measured at Amortized Cost. The ~~amendments in this~~Company adopted the standard ~~will be effective for the Company~~ on January 1, ~~2023. The Company does not believe this standard will have~~2023 using the modified retrospective method resulting in a ~~material impact on its consolidated financial statements.~~net increase to retained earnings of $676 thousand.

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

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

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Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 3. Earnings Per Share

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


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2022		2021		2022		2021			2023		2022
Basic earnings per share:	Basic earnings per share:									Basic earnings per share:
Net income	Net income	$	42,868	$	33,839	$	174,416	$	136,848	Net income	$	398	$	34,509
Weighted-average basic shares outstanding	Weighted-average basic shares outstanding	43,914,920		43,329,889		43,814,648		43,061,642		Weighted-average basic shares outstanding	44,157,156		43,701,943
Basic earnings per share	Basic earnings per share	$	0.97	$	0.78	$	3.98	$	3.18	Basic earnings per share	$	0.01	$	0.79
Diluted earnings per share:	Diluted earnings per share:									Diluted earnings per share:
Net income, for diluted earnings per share	Net income, for diluted earnings per share	$	42,868	$	33,839	$	174,416	$	136,848	Net income, for diluted earnings per share	$	398	$	34,509
Total weighted-average basic shares outstanding	Total weighted-average basic shares outstanding	43,914,920		43,329,889		43,814,648		43,061,642		Total weighted-average basic shares outstanding	44,157,156		43,701,943
Add effect of dilutive stock options and restricted stock grants	Add effect of dilutive stock options and restricted stock grants	882,189		1,710,801		1,128,784		1,874,372		Add effect of dilutive stock options and restricted stock grants	807,460		1,525,593
Total weighted-average diluted shares outstanding	Total weighted-average diluted shares outstanding	44,797,109		45,040,690		44,943,432		44,936,014		Total weighted-average diluted shares outstanding	44,964,616		45,227,536
Diluted earnings per share	Diluted earnings per share	$	0.96	$	0.76	$	3.88	$	3.05	Diluted earnings per share	$	0.01	$	0.76
Anti-dilutive stock options and restricted shares	Anti-dilutive stock options and restricted shares	1,335,254		207,811		1,335,254		207,811		Anti-dilutive stock options and restricted shares	1,436,771		172,631

~~Table of Contents~~

~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

Note 4. Securities

Available-for-Sale

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


September 30, 2022		Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
March 31, 2023										March 31, 2023	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
US government agencies	US government agencies	$	20,447	$	—	$	398	$	20,049	US government agencies	$	25,554	$	17	$	324	$	25,247
Mortgage-backed securities	Mortgage-backed securities	1,106,515		240		124,914		981,841		Mortgage-backed securities	1,231,458		750		111,314		1,120,894
Municipal bonds	Municipal bonds	3,229		—		247		2,982		Municipal bonds	3,218		—		148		3,070
Other debt securities	Other debt securities	500		—		—		500		Other debt securities	500		—		20		480
Total	Total	$	1,130,691	$	240	$	125,559	$	1,005,372	Total	$	1,260,730	$	767	$	111,806	$	1,149,691

December 31, 2021
December 31, 2022										December 31, 2022
US government agencies	US government agencies	$	10,444	$	193	$	—	$	10,637	US government agencies	$	16,080	$	—	$	412	$	15,668
Mortgage-backed securities	Mortgage-backed securities	887,302		14,246		12,209		889,339		Mortgage-backed securities	1,116,387		270		121,083		995,574
Municipal bonds	Municipal bonds	3,246		333		3		3,576		Municipal bonds	3,223		—		246		2,977
Other debt securities	Other debt securities	2,500		—		—		2,500		Other debt securities	500		—		—		500
Total	Total	$	903,492	$	14,772	$	12,212	$	906,052	Total	$	1,136,190	$	270	$	121,741	$	1,014,719

During the three months ended ~~September 30, 2022, two mortgage-backed~~March 31, 2023, no securities ~~totaling $3.8 million~~ were sold or settled. During the three months ended ~~September 30, 2021, two~~March 31, 2022, nine mortgage-backed securities totaling ~~$6.2 million were settled.~~

During the nine months ended September 30, 2022, twenty mortgage-backed securities totaling $36.5 million were settled. During the nine months ended September 30, 2021, one US government agency matured at $5.0 million and eight mortgage-backed securities totaling $23.1$13.9 million were settled.

Accrued interest receivable on available-for-sale securities totaled $3.4 million and $2.9 million ~~and $1.9 million~~ at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively, and is included in other assets in the accompanying Unaudited Condensed Consolidated Balance Sheets.

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Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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


		Less Than 12 Months				12 Months or More				Total					Less Than 12 Months				12 Months or More				Total
September 30, 2022		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
March 31, 2023														March 31, 2023	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
US government agencies	US government agencies	$	20,049	$	398	$	—	$	—	$	20,049	$	398	US government agencies	$	12,399	$	206	$	2,833	$	118	$	15,232	$	324
Mortgage-backed securities	Mortgage-backed securities	623,625		52,828		332,084		72,086		955,709		124,914		Mortgage-backed securities	450,480		15,117		599,171		96,197		1,049,651		111,314
Municipal bonds	Municipal bonds	2,889		242		93		5		2,982		247		Municipal bonds	2,987		133		83		15		3,070		148
Other debt securities														Other debt securities	480		20		—		—		480		20
Total	Total	$	646,563	$	53,468	$	332,177	$	72,091	$	978,740	$	125,559	Total	$	466,346	$	15,476	$	602,087	$	96,330	$	1,068,433	$	111,806

Less Than 12 Months 12 Months or More Total
December 31, 2021
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Mortgage-backed securities $ 479,322 $ 8,503 $ 110,633 $ 3,706 $ 589,955 $ 12,209
Municipal bonds — — 96 3 96 3
Total $ 479,322 $ 8,503 $ 110,729 $ 3,709 $ 590,051 $ 12,212

~~Table of Contents~~

~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~


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

Management evaluates available-for-sale debt securities to determine whether the unrealized loss is due to credit-related factors or non-credit-related factors. The evaluation considers the extent to which the security’s fair value is less than cost, the financial condition and near-term prospects of the issuer, and intent and ability of the Company to retain its investment in the security for a period of time sufficient to allow for any anticipated recovery in fair value.

At ~~September 30, 2022,~~March 31, 2023, there were ~~one hundred twenty-eight~~279 mortgage-backed securities, one US government agency security and one municipal bond in unrealized loss positions for greater than 12 months. There were ~~six~~154 mortgage-backed securities, four US government agency securities, ~~two hundred eighty-three mortgage-backed securities,~~one municipal bond and one ~~municipal bond~~other debt security in unrealized loss positions for less than 12 months. Unrealized losses at December 31, ~~2021~~2022 were comprised of ~~thirty-one~~185 mortgage-backed securities and one municipal bond in unrealized loss positions for greater than 12 months and ~~one hundred forty-two~~236 mortgage-backed securities, five US government agency securities and one municipal bond in unrealized loss positions for less than 12 months.

These unrealized losses are primarily the result of non-credit-related volatility in the market and market interest rates. Since none of the unrealized losses relate to marketability of the securities or the issuers' ability to honor redemption obligations and the Company has the intent and ability to hold the securities for a sufficient period of time to recover unrealized losses, none of the losses have been recognized in the Company’s Unaudited Condensed Consolidated Statements of Income.

All mortgage-backed securities in the Company’s portfolio at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 were backed by U.S. government sponsored enterprises (“GSEs”).

Table of Contents

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

The following is a summary of investment securities by maturity:


		September 30, 2022					March 31, 2023
		Available-for-Sale					Available-for-Sale
		Amortized cost		Fair value			Amortized Cost		Fair Value
US government agencies	US government agencies					US government agencies
Within one year	Within one year	$	7,502	$	7,494	Within one year	$	5,000	$	5,000
One to five years	One to five years	12,945		12,555		One to five years	17,948		17,665
Five to ten years						Five to ten years	2,606		2,582
Total	Total	20,447		20,049		Total	25,554		25,247
Mortgage-backed securities	Mortgage-backed securities					Mortgage-backed securities
One to five years	One to five years	154,971		145,228		One to five years	153,608		148,399
Five to ten years	Five to ten years	208,714		181,882		Five to ten years	286,784		258,033
After 10 years	After 10 years	742,830		654,731		After 10 years	791,066		714,462
Total	Total	1,106,515		981,841		Total	1,231,458		1,120,894
Municipal bonds	Municipal bonds					Municipal bonds

After 10 years	After 10 years	3,229		2,982		After 10 years	3,218		3,070
Total	Total	3,229		2,982		Total	3,218		3,070
Other debt securities	Other debt securities					Other debt securities
Within one year	Within one year	500		500		Within one year	500		480

Total	Total	500		500		Total	500		480

Total	Total	$	1,130,691	$	1,005,372	Total	$	1,260,730	$	1,149,691

Mortgage-backed securities are included in maturity categories based on their contractual maturity date. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.

There were no securities pledged at ~~September 30, 2022~~March 31, 2023 or December 31, ~~2021.~~2022.

Table of Contents

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Other

Other investments, largely comprised of non-marketable equity investments, are generally accounted for under the equity method or equity security accounting and are included in other assets in the accompanying Unaudited Condensed Consolidated Balance Sheets. The below tables provide additional information related to investments accounted for under these two methods.

Equity Method Accounting

The carrying amount and ownership percentage of each equity investment over which the Company has significant influence at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 is reflected in the following table:


		September 30, 2022				December 31, 2021					March 31, 2023				December 31, 2022
		Amount		Ownership %		Amount		Ownership %			Amount		Ownership %		Amount		Ownership %
Apiture, Inc.	Apiture, Inc.	$	61,806	40.3	%	$	52,323	39.1	%	Apiture, Inc.	$	59,179	40.3	%	$	60,320	40.3	%
Canapi Ventures SBIC Fund, LP (1) (5)	Canapi Ventures SBIC Fund, LP (1) (5)	19,261		2.9	%	19,431		2.9	%	Canapi Ventures SBIC Fund, LP (1) (5)	18,386		2.9	%	19,246		2.9	%
Canapi Ventures Fund, LP (2) (5)	Canapi Ventures Fund, LP (2) (5)	2,388		1.5	%	2,402		1.5	%	Canapi Ventures Fund, LP (2) (5)	2,292		1.5	%	2,382		1.5	%
Canapi Ventures Fund II, LP (3) (5)	Canapi Ventures Fund II, LP (3) (5)	7,451		1.6	%	—		N/A		Canapi Ventures Fund II, LP (3) (5)	7,371		1.6	%	7,412		1.6	%
Canapi Ventures SBIC Fund II, LP (4) (5)	Canapi Ventures SBIC Fund II, LP (4) (5)	8,000		3.7	%	—		N/A		Canapi Ventures SBIC Fund II, LP (4) (5)	7,907		2.9	%	7,981		3.7	%
Other Fintech investments in private companies (6)	Other Fintech investments in private companies (6)	240		Various		5,330		Various		Other Fintech investments in private companies (6)	236		4.3	%	241		4.3	%
Other (7)	Other (7)	12,873		Various		4,664		Various		Other (7)	20,720		Various		12,476		Various
Total	Total	$	112,019			$	84,150			Total	$	116,091			$	110,058


(1)			Includes unfunded commitments of $5.5 million ~~and $6.8 million~~ as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021, respectively.~~2022.


(2)			Includes unfunded commitments of ~~$632 thousand and $770~~$617 thousand as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021, respectively.~~2022.


(3)			Includes unfunded commitments of ~~$6.8~~$6.9 million as of ~~September 30, 2022. There were no unfunded commitments as of~~March 31, 2023 and December 31, ~~2021.~~2022.


(4)			Includes unfunded commitments of ~~$7.9~~$7.6 million and $7.5 million as of ~~September 30, 2022. There were no unfunded commitments as of~~March 31, 2023 and December 31, ~~2021.~~2022, respectively.


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


(6)			As of ~~September 30,~~March 31, 2023 and December 31, 2022, Other Fintech investments include Kwipped, Inc. ~~On August 31, 2022, the Company sold its~~The investment in Payrailz, LLC, resulting in a pre-tax gain of $28.4 million, and on April 1, 2022 the Company sold its investment in Finxact, Inc. resulting in a pre-tax gain of $120.5 million. As of December 31, 2021 Other Fintech investments include Finxact, Inc., Payrailz, LLC and Kwipped, Inc. Investees areis accounted for under the equity method due to the Company's ability to exercise significant influence through executive management's board involvement.
(7)			As of March 31, 2023, Other ~~includes affordable~~investments include low income housing ~~and~~tax credit (“LIHTC”) in Estrella Landing Apartments LLC (“Estrella Landing”), in which the company holds a 99.9% limited member interest. Also included in Other investments are solar income tax credit ~~projects.~~investments in Green Sun Tenant LLC (“Green Sun”), SVA 2021-2 TE Holdco LLC (“Sun Vest”) and EG5 CSPI Holding LLC (“HEP”), which the Company holds a 99.0% limited member interest in all investments. Also included are Cape Fear Collective Impact Opportunity 1 LLC (“Cape Fear Collective”) and Cape Fear Collective Impact Opportunity 2 LLC (“Cape Fear Collective 2”), which the Company holds 99.0% and 32.3% limited member interests, respectively. As of March 31, 2023, there were unfunded commitments of $7.7 million and $2.6 million for Estrella Landing and HEP, respectively. The Company also has an unrecorded commitment related to a solar income tax credit investment for $18.1 million. As of December 31, 2022, Other investments include Green Sun, Sun Vest and HEP, which the Company holds a 99.0% limited member interest in all investments. Also included within Other investments are Cape Fear Collective and Cape Fear Collective 2, which the Company holds 99.0% and 32.3% limited member interests, respectively. As of December 31, 2022 an unfunded commitment of $2.6 million was recorded as a liability for HEP. Managing control of the LIHTC, Solar ITC investments & Cape Fear Collective investments resides with the managing members.

Table of Contents

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Equity Security Accounting

The carrying amount of the Company’s investments in non-marketable equity securities with no readily determinable fair value and amounts recognized in earnings on a cumulative basis as of ~~September 30, 2022~~March 31, 2023 and as of and for the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ is reflected in the following table:


				As of and for the nine month period ended							As of and for the three month period ended
		Cumulative Adjustments		September 30, 2022		September 30, 2021			Cumulative Adjustments		March 31, 2023		March 31, 2022
Carrying value (1)	Carrying value (1)			$	76,438	$	62,341	Carrying value (1)			$	77,585	$	64,728
Carrying value adjustments:	Carrying value adjustments:							Carrying value adjustments:
Impairment	Impairment	$	—	—		—		Impairment	$	—	—		—
Upward changes for observable prices (2)	Upward changes for observable prices (2)	50,492		2,022		30,197		Upward changes for observable prices (2)	50,492		—		—
Downward changes for observable prices	Downward changes for observable prices	(86)		—		—		Downward changes for observable prices	(86)		—		—
Net upward change	Net upward change	$	50,406	$	2,022	$	30,197	Net upward change	$	50,406	$	—	$	—


(1)			Includes ~~$3.1~~$3.3 million and ~~$2.6~~$3.2 million in unfunded commitments as of ~~September 30,~~March 31, 2023, and March 31, 2022, ~~and September 30, 2021,~~ respectively.


(2)			Cumulative adjustments excludes $13.9 million in realized gains for sale of an investment in the second quarter of 2021.

For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022, the Company recognized unrealized gains (losses) on all equity securities held at the reporting date of ~~$493~~$16 thousand and ~~$1.9 million,~~$(62) thousand, respectively. ~~For~~

Variable Interest Entities

Variable interests are defined as contractual ownership or other interests in an entity that change with fluctuations in the ~~three~~fair value of an entity's net asset value (a “VIE”). The primary beneficiary consolidates the VIE. The primary beneficiary is defined as the enterprise that has both the power to direct the activities of the VIE that most significantly impact the entity's economic performance and ~~nine months ended September 30, 2021,~~the obligation to absorb losses or the right to receive benefits that could be significant to the VIE.

Solar Renewable Energy Tax Credit Investments

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

Affordable Housing

The Company has an equity ~~securities held at~~investment in a limited liability company ("LIHTC") that qualifies as an affordable housing project, managed by an unrelated general partner. The Company accounts for the ~~reporting date~~investment under the proportional amortization method. Under this method an entity amortizes the initial cost of ~~$12 thousand~~the investment in proportion to the tax credits and ~~$44.0 million, respectively.~~other tax benefits received and recognizes the net investment performance as a component of income tax expense. The Company also has an equity interest in two limited liability companies that invest in the acquisition, rehabilitation, or new construction of local qualified housing projects which are accounted for as equity method investments.

Table of Contents

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Canapi Funds

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

Non-marketable and Other Equity Investments

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

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

The Company’s investment in the unconsolidated VIEs are carried in other assets and the Company’s unfunded capital and other commitments related to the unconsolidated VIEs are carried in other liabilities on the unaudited condensed consolidated balance sheets.

The Company’s maximum exposure to loss from unconsolidated VIEs includes the investment recorded on the Company’s unaudited condensed consolidated balance sheets, net of any impairment recognized, and previously recorded tax credits which remain subject to recapture by taxing authorities based on compliance features required to be met at the project level. While the Company believes the potential for losses from this investment is remote, the maximum exposure for solar tax credit investments was determined by assuming a scenario where related tax credits were recaptured.

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


March 31, 2023	Investment Carrying Amount		Maximum Exposure to Loss		Liability Recognized		Classification
Solar tax credit investments	$	4,758	$	19,882	$	2,641	Other assets & other liabilities (1)
Affordable housing	15,961		15,961		7,721		Other assets & other liabilities (2)
Canapi Funds	35,956		35,956		20,576		Other assets & other liabilities
Non-marketable and other equity investments	9,022		9,022		3,308		Other assets & other liabilities

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


(1)			Maximum exposure to loss represents $4.8 million of current investments and a scenario in which $19.9 million in related tax credits are recaptured.

Table of Contents

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements


(2)			Maximum exposure to loss represents $16.0 million of investments. As there are no tax credits allocated in the current year, there is no increase to the maximum exposure to loss related to recaptured tax credits on the $8.8 million LIHTC investment.


(3)			Maximum exposure to loss represents $5.2 million of current investments and a scenario in which $24.3 million in related tax credits are recaptured.

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

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


		Current or Less than 30 Days Past Due		30-89 Days Past Due		90 Days or More Past Due		Total Past Due		Total Carried at Amortized Cost		Loans Accounted for Under the Fair Value Option1		Total Loans and Leases			Current or Less than 30 Days Past Due		30-89 Days Past Due		90 Days or More Past Due		Total Past Due		Total Carried at Amortized Cost		Loans Accounted for Under the Fair Value Option(1)		Total Loans and Leases
September 30, 2022
March 31, 2023																March 31, 2023
Commercial & Industrial	Commercial & Industrial															Commercial & Industrial
Small Business Banking	Small Business Banking	$	1,660,870	$	5,643	$	16,643	$	22,286	$	1,683,156	$	194,709	$	1,877,865	Small Business Banking	$	1,789,517	$	10,307	$	18,187	$	28,494	$	1,818,011	$	169,820	$	1,987,831
Specialty Lending	Specialty Lending	1,256,847		3,089		166		3,255		1,260,102		76,483		1,336,585		Specialty Lending	1,163,485		1,020		4,757		5,777		1,169,262		26,935		1,196,197
Energy & Infrastructure																Energy & Infrastructure	421,948		3,880		3,082		6,962		428,910		47,987		476,897
Paycheck Protection Program	Paycheck Protection Program	24,367		—		—		—		24,367		—		24,367		Paycheck Protection Program	10,783		—		—		—		10,783		—		10,783
Total	Total	2,942,084		8,732		16,809		25,541		2,967,625		271,192		3,238,817		Total	3,385,733		15,207		26,026		41,233		3,426,966		244,742		3,671,708
Construction & Development	Construction & Development															Construction & Development
Small Business Banking	Small Business Banking	453,015		—		23		23		453,038		—		453,038		Small Business Banking	490,781		2,271		—		2,271		493,052		—		493,052
Specialty Lending	Specialty Lending	127,001		—		—		—		127,001		—		127,001		Specialty Lending	114,892		—		—		—		114,892		—		114,892
Energy & Infrastructure																Energy & Infrastructure	13,618		—		—		—		13,618		—		13,618
Total	Total	580,016		—		23		23		580,039		—		580,039		Total	619,291		2,271		—		2,271		621,562		—		621,562
Commercial Real Estate	Commercial Real Estate															Commercial Real Estate
Small Business Banking	Small Business Banking	1,993,613		10,292		2,547		12,839		2,006,452		180,249		2,186,701		Small Business Banking	2,192,053		7,606		20,589		28,195		2,220,248		157,185		2,377,433
Specialty Lending	Specialty Lending	390,299		—		—		—		390,299		17,326		407,625		Specialty Lending	356,774		—		—		—		356,774		2,269		359,043
Energy & Infrastructure																Energy & Infrastructure	130,574		—		3,072		3,072		133,646		21,337		154,983
Total	Total	2,383,912		10,292		2,547		12,839		2,396,751		197,575		2,594,326		Total	2,679,401		7,606		23,661		31,267		2,710,668		180,791		2,891,459
Commercial Land	Commercial Land															Commercial Land
Small Business Banking	Small Business Banking	402,545		—		1,917		1,917		404,462		43,416		447,878		Small Business Banking	467,890		—		1,917		1,917		469,807		41,417		511,224
Total	Total	402,545		—		1,917		1,917		404,462		43,416		447,878		Total	467,890		—		1,917		1,917		469,807		41,417		511,224
Total	Total	$	6,308,557	$	19,024	$	21,296	$	40,320	$	6,348,877	$	512,183	$	6,861,060	Total	$	7,152,315	$	25,084	$	51,604	$	76,688	$	7,229,003	$	466,950	$	7,695,953
Net deferred fees	Net deferred fees													(7,678)		Net deferred fees													(8,966)
Loans and Leases, Net	Loans and Leases, Net													$	6,853,382	Loans and Leases, Net													$	7,686,987

Guaranteed Balance	Guaranteed Balance	$	2,561,284	$	15,496	$	18,199	$	33,695	$	2,594,979	$	55,376	$	2,650,355	Guaranteed Balance	$	2,703,028	$	16,343	$	39,169	$	55,512	$	2,758,540	$	73,567	$	2,832,107
% Guaranteed	% Guaranteed	40.6%		81.5%		85.5%		83.6%		40.9%		10.8%		38.6%		% Guaranteed	37.8%		65.2%		75.9%		72.4%		38.2%		15.8%		36.8%

1516

Table of Contents

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements


		Current or Less than 30 Days Past Due		30-89 Days Past Due		90 Days or More Past Due		Total Past Due		Total Carried at Amortized Cost		Loans Accounted for Under the Fair Value Option1		Total Loans and Leases			Current or Less than 30 Days Past Due		30-89 Days Past Due		90 Days or More Past Due		Total Past Due		Total Carried at Amortized Cost		Loans Accounted for Under the Fair Value Option(1)		Total Loans and Leases
December 31, 2021
December 31, 2022																December 31, 2022
Commercial & Industrial	Commercial & Industrial															Commercial & Industrial
Small Business Banking	Small Business Banking	$	1,103,915	$	13,171	$	7,320	$	20,491	$	1,124,406	$	248,806	$	1,373,212	Small Business Banking	$	1,719,165	$	21,589	$	16,221	$	37,810	$	1,756,975	$	182,348	$	1,939,323
Specialty Lending	Specialty Lending	875,367		—		—		—		875,367		64,525		939,892		Specialty Lending	1,022,615		398		266		664		1,023,279		29,084		1,052,363
Energy & Infrastructure																Energy & Infrastructure	420,447		—		3,082		3,082		423,529		50,094		473,623
Paycheck Protection Program	Paycheck Protection Program	266,893		68		1,414		1,482		268,375		—		268,375		Paycheck Protection Program	13,134		—		—		—		13,134		—		13,134
Total	Total	2,246,175		13,239		8,734		21,973		2,268,148		313,331		2,581,479		Total	3,175,361		21,987		19,569		41,556		3,216,917		261,526		3,478,443
Construction & Development	Construction & Development															Construction & Development
Small Business Banking	Small Business Banking	275,786		—		1,366		1,366		277,152		—		277,152		Small Business Banking	471,243		1,500		—		1,500		472,743		—		472,743
Specialty Lending	Specialty Lending	82,014		—		—		—		82,014		—		82,014		Specialty Lending	104,069		—		—		—		104,069		—		104,069
Energy & Infrastructure																Energy & Infrastructure	13,753		—		—		—		13,753		—		13,753
Total	Total	357,800		—		1,366		1,366		359,166		—		359,166		Total	589,065		1,500		—		1,500		590,565		—		590,565
Commercial Real Estate	Commercial Real Estate															Commercial Real Estate
Small Business Banking	Small Business Banking	1,577,765		5,802		10,761		16,563		1,594,328		250,856		1,845,184		Small Business Banking	2,137,028		12,082		5,771		17,853		2,154,881		166,595		2,321,476
Specialty Lending	Specialty Lending	285,373		—		2,315		2,315		287,688		19,481		307,169		Specialty Lending	319,419		—		—		—		319,419		2,050		321,469
Energy & Infrastructure																Energy & Infrastructure	136,706		—		3,072		3,072		139,778		22,123		161,901
Total	Total	1,863,138		5,802		13,076		18,878		1,882,016		270,337		2,152,353		Total	2,593,153		12,082		8,843		20,925		2,614,078		190,768		2,804,846
Commercial Land	Commercial Land															Commercial Land
Small Business Banking	Small Business Banking	362,881		7,399		2,055		9,454		372,335		61,533		433,868		Small Business Banking	429,014		1,663		1,917		3,580		432,594		42,164		474,758
Total	Total	362,881		7,399		2,055		9,454		372,335		61,533		433,868		Total	429,014		1,663		1,917		3,580		432,594		42,164		474,758
Total	Total	$	4,829,994	$	26,440	$	25,231	$	51,671	$	4,881,665	$	645,201	$	5,526,866	Total	$	6,786,593	$	37,232	$	30,329	$	67,561	$	6,854,154	$	494,458	$	7,348,612
Net deferred fees	Net deferred fees													(5,604)		Net deferred fees													(4,434)
Loans and Leases, Net	Loans and Leases, Net													$	5,521,262	Loans and Leases, Net													$	7,344,178

Guaranteed Balance	Guaranteed Balance	$	2,037,509	$	18,421	$	16,440	$	34,861	$	2,072,370	$	77,722	$	2,150,092	Guaranteed Balance	$	2,657,770	$	20,199	$	26,026	$	46,225	$	2,703,995	$	67,268	$	2,771,263
% Guaranteed	% Guaranteed	42.2%		69.7%		65.2%		67.5%		42.5%		12.0%		38.9%		% Guaranteed	39.2%		54.3%		85.8%		68.4%		39.5%		13.6%		37.7%

(1)Retained portions of government guaranteed loans sold prior to January 1, ~~2020~~2021 are carried at fair value under FASB ASC Subtopic 825-10, Financial Instruments: Overall. See Note 9. Fair Value of Financial Instruments for additional information.

1617

Table of Contents

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Credit Quality Indicators

The following tables present asset quality indicators by portfolio class and origination year. See Note 3. Loans and Leases Held for Investment and Credit Quality in the Company’s ~~2021~~2022 Form 10-K for additional discussion around the asset quality indicators that the Company uses to manage and monitor credit risk.

Term Loans and Leases Amortized Cost Basis by Origination Year
2022 2021 2020 2019 2018 Prior Revolving Loans
Amortized Cost Basis Revolving Loans
Converted to Term
Total1
September 30, 2022
Small Business Banking
Risk Grades 1 - 4 $ 976,643 $ 1,334,130 $ 862,157 $ 516,864 $ 257,295 $ 254,670 $ 67,534 $ 1,155 $ 4,270,448
Risk Grade 5 5,923 11,725 38,072 40,760 36,927 44,322 4,040 — 181,769
Risk Grades 6 - 8 1,018 2,700 16,548 29,655 12,717 30,019 1,912 322 94,891
Total 983,584 1,348,555 916,777 587,279 306,939 329,011 73,486 1,477 4,547,108
Specialty Lending
Risk Grades 1 - 4 533,884 611,814 217,430 71,633 30,467 28,464 174,482 6,509 1,674,683
Risk Grade 5 — 10,094 28,792 22,034 9,309 5,479 2,196 248 78,152
Risk Grades 6 - 8 — 8,076 3,127 2,989 10,099 — 276 — 24,567
Total 533,884 629,984 249,349 96,656 49,875 33,943 176,954 6,757 1,777,402
Paycheck Protection Program
Risk Grades 1 - 4 — 15,468 8,899 — — — — — 24,367
Total — 15,468 8,899 — — — — — 24,367
Total $ 1,517,468 $ 1,994,007 $ 1,175,025 $ 683,935 $ 356,814 $ 362,954 $ 250,440 $ 8,234 $ 6,348,877

2021 2020 2019 2018 2017 Prior Revolving Loans
Amortized Cost Basis Revolving Loans
Converted to Term
Total1
December 31, 2021
Small Business Banking
Risk Grades 1 - 4 $ 1,051,775 $ 853,250 $ 522,407 $ 285,397 $ 188,858 $ 116,645 $ 46,356 $ 1,771 $ 3,066,459
Risk Grade 5 7,838 19,651 65,715 60,615 37,661 13,933 5,066 195 210,674
Risk Grades 6 - 8 2,517 8,667 27,696 14,545 14,193 21,239 1,457 774 91,088
Total 1,062,130 881,568 615,818 360,557 240,712 151,817 52,879 2,740 3,368,221
Specialty Lending
Risk Grades 1 - 4 644,851 238,409 73,978 42,452 38,703 — 133,889 1,816 1,174,098
Risk Grade 5 2,250 17,677 5,497 10,415 17,104 — 2,953 848 56,744
Risk Grades 6 - 8 — 17 3,166 8,654 — 2,315 75 14,227
Total 647,101 256,103 82,641 61,521 55,807 2,315 136,917 2,664 1,245,069
Paycheck Protection Program
Risk Grades 1 - 4 204,803 63,572 — — — — — — 268,375
Total 204,803 63,572 — — — — — — 268,375
Total $ 1,914,034 $ 1,201,243 $ 698,459 $ 422,078 $ 296,519 $ 154,132 $ 189,796 $ 5,404 $ 4,881,665


~~(1)~~			~~Excludes $512.2 million and $645.2 million of loans accounted for under the fair value option as of September 30, 2022 and December 31, 2021, respectively.~~


	Term Loans and Leases Amortized Cost Basis by Origination Year
	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term		Total(1)
March 31, 2023
Small Business Banking
Risk Grades 1 - 4	$	257,416	$	1,445,051	$	1,365,169	$	770,548	$	416,518	$	387,877	$	60,243	$	3,642	$	4,706,464
Risk Grade 5	1,590		29,486		22,580		36,894		38,434		49,296		15,360		1,090		194,730
Risk Grades 6 - 8	—		6,497		8,004		19,603		23,794		40,603		1,423		—		99,924
Total	259,006		1,481,034		1,395,753		827,045		478,746		477,776		77,026		4,732		5,001,118
Specialty Lending
Risk Grades 1 - 4	190,959		612,051		358,803		128,285		21,907		6,888		159,105		7,590		1,485,588
Risk Grade 5	—		31,853		54,804		17,331		13,437		4,255		13,692		5,000		140,372
Risk Grades 6 - 8	—		—		7,479		1,328		5,319		166		676		—		14,968
Total	190,959		643,904		421,086		146,944		40,663		11,309		173,473		12,590		1,640,928
Energy & Infrastructure
Risk Grades 1-4	34,168		173,313		169,219		39,425		50,932		42,243		12,646		—		521,946
Risk Grade 5	—		4,024		1,291		13,517		7,123		9,791		—		—		35,746
Risk Grades 6 - 8	—		—		6,463		3,572		—		8,447		—		—		18,482
Total	34,168		177,337		176,973		56,514		58,055		60,481		12,646		—		576,174
Paycheck Protection Program
Risk Grades 1 - 4	—		—		5,851		4,932		—		—		—		—		10,783
Total	—		—		5,851		4,932		—		—		—		—		10,783
Total	$	484,133	$	2,302,275	$	1,999,663	$	1,035,435	$	577,464	$	549,566	$	263,145	$	17,322	$	7,229,003

Current Period Gross Charge-offs
Small Business Banking	$	—	$	459	$	197	$	72	$	70	$	415	$	50	$	—	$	1,263
Specialty Lending	—		—		4,315		514		—		—		600		—		5,429
Total	$	—	$	459	$	4,512	$	586	$	70	$	415	$	650	$	—	$	6,692

1718

Table of Contents

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements


	Term Loans and Leases Amortized Cost Basis by Origination Year
	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term		Total(1)
December 31, 2022
Small Business Banking
Risk Grades 1 - 4	$	1,427,182	$	1,400,726	$	795,647	$	426,401	$	217,893	$	204,933	$	65,455	$	1,738	$	4,539,975
Risk Grade 5	15,942		17,745		40,202		45,712		26,124		27,212		13,210		204		186,351
Risk Grades 6 - 8	1,806		4,277		17,845		23,470		14,094		27,215		1,638		522		90,867
Total	1,444,930		1,422,748		853,694		495,583		258,111		259,360		80,303		2,464		4,817,193
Specialty Lending
Risk Grades 1 - 4	635,079		355,785		144,545		25,849		6,574		788		153,062		31,504		1,353,186
Risk Grade 5	7,341		33,272		12,329		10,201		4,399		—		6,619		248		74,409
Risk Grades 6 - 8	—		11,433		416		5,577		166		—		1,343		237		19,172
Total	642,420		400,490		157,290		41,627		11,139		788		161,024		31,989		1,446,767
Energy & Infrastructure
Risk Grades 1 - 4	199,338		176,855		39,600		51,190		23,374		19,694		12,751		351		523,153
Risk Grade 5	4,024		4,409		500		6,976		4,706		5,142		—		—		25,757
Risk Grades 6 - 8	—		3,082		16,589		—		8,479		—		—		—		28,150
Total	203,362		184,346		56,689		58,166		36,559		24,836		12,751		351		577,060
Paycheck Protection Program
Risk Grades 1 - 4	—		7,421		5,713		—		—		—		—		—		13,134
Total	—		7,421		5,713		—		—		—		—		—		13,134
Total	$	2,290,712	$	2,015,005	$	1,073,386	$	595,376	$	305,809	$	284,984	$	254,078	$	34,804	$	6,854,154


(1)			Excludes $467.0 million and $494.5 million of loans accounted for under the fair value option as of March 31, 2023 and December 31, 2022, respectively.

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


September 30, 2022		Loan and Lease Balance1		Guaranteed Balance		Unguaranteed Balance		% Guaranteed
March 31, 2023										March 31, 2023	Loan and Lease Balance(1)		Guaranteed Balance		Unguaranteed Balance		% Guaranteed
Risk Grades 1 - 4	Risk Grades 1 - 4	$	5,969,498	$	2,403,183	$	3,566,315	40.3	%	Risk Grades 1 - 4	$	6,724,781	$	2,540,259	$	4,184,522	37.8	%
Risk Grade 5	Risk Grade 5	259,921		112,819		147,102		43.4		Risk Grade 5	370,848		126,323		244,525		34.1
Risk Grades 6 - 8	Risk Grades 6 - 8	119,458		78,978		40,480		66.1		Risk Grades 6 - 8	133,374		91,958		41,416		68.9
Total	Total	$	6,348,877	$	2,594,980	$	3,753,897	40.9	%	Total	$	7,229,003	$	2,758,540	$	4,470,463	38.2	%


December 31, 2021		Loan and Lease Balance1		Guaranteed Balance		Unguaranteed Balance		% Guaranteed
December 31, 2022										December 31, 2022	Loan and Lease Balance(1)		Guaranteed Balance		Unguaranteed Balance		% Guaranteed
Risk Grades 1 - 4	Risk Grades 1 - 4	$	4,508,932	$	1,875,152	$	2,633,780	41.6	%	Risk Grades 1 - 4	$	6,429,448	$	2,508,229	$	3,921,219	39.0	%
Risk Grade 5	Risk Grade 5	267,418		134,221		133,197		50.2		Risk Grade 5	286,517		115,573		170,944		40.3
Risk Grades 6 - 8	Risk Grades 6 - 8	105,315		62,997		42,318		59.8		Risk Grades 6 - 8	138,189		80,193		57,996		58.0
Total	Total	$	4,881,665	$	2,072,370	$	2,809,295	42.5	%	Total	$	6,854,154	$	2,703,995	$	4,150,159	39.5	%


(1)			Excludes ~~$512.2~~$467.0 million and ~~$645.2~~$494.5 million of loans accounted for under the fair value option as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively.

Table of Contents

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Nonaccrual Loans and Leases

As of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 there were no loans greater than 90 days past due and still accruing. There was no interest income recognized on nonaccrual loans and leases during the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 and ~~2021.~~2022. Nonaccrual loans and leases are generally included in the held for investment portfolio. Accrued interest receivable on loans totaled ~~$36.1~~$49.9 million and ~~$31.0~~$46.5 million at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022, respectively, and is included in other assets in the accompanying Unaudited Condensed Consolidated Balance Sheets.

Nonaccrual loans and leases held for investment as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 are as follows:


September 30, 2022		Loan and Lease Balance1		Guaranteed Balance		Unguaranteed Balance		Unguaranteed Exposure with No ACL
March 31, 2023										March 31, 2023	Loan and Lease Balance(1)		Guaranteed Balance		Unguaranteed Balance		Unguaranteed Exposure with No ACL
Commercial & Industrial	Commercial & Industrial									Commercial & Industrial
Small Business Banking	Small Business Banking	$	21,313	$	18,397	$	2,916	$	407	Small Business Banking	$	28,681	$	24,187	$	4,494	$	407
Specialty Lending	Specialty Lending	266		266		—		—		Specialty Lending	7,982		5,094		2,888		—
Energy & Infrastructure										Energy & Infrastructure	3,082		2,794		288		288
Total										Total	39,745		32,075		7,670		695

Total		21,579		18,663		2,916		407
Construction & Development
Small Business Banking		23		—		23		—
Total		23		—		23		—

Commercial Real Estate	Commercial Real Estate									Commercial Real Estate
Small Business Banking	Small Business Banking	33,375		23,148		10,227		8,600		Small Business Banking	36,177		23,367		12,810		6,403

Energy & Infrastructure										Energy & Infrastructure	3,072		2,799		273		—
Total	Total	33,375		23,148		10,227		8,600		Total	39,249		26,166		13,083		6,403
Commercial Land	Commercial Land									Commercial Land
Small Business Banking	Small Business Banking	5,087		3,919		1,168		196		Small Business Banking	6,704		5,455		1,249		196
Total	Total	5,087		3,919		1,168		196		Total	6,704		5,455		1,249		196
Total	Total	$	60,064	$	45,730	$	14,334	$	9,203	Total	$	85,698	$	63,696	$	22,002	$	7,294

~~Table of Contents~~

~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~


December 31, 2021		Loan and Lease Balance1		Guaranteed Balance		Unguaranteed Balance		Unguaranteed Exposure with No ACL
December 31, 2022										December 31, 2022	Loan and Lease Balance(1)		Guaranteed Balance		Unguaranteed Balance		Unguaranteed Exposure with No ACL
Commercial & Industrial	Commercial & Industrial									Commercial & Industrial
Small Business Banking	Small Business Banking	$	16,911	$	13,981	$	2,930	$	—	Small Business Banking	$	22,321	$	19,302	$	3,019	$	407
Payroll Protection Program		1,482		1,482		—		—
Total		18,393		15,463		2,930		—
Construction & Development
Small Business Banking		3,884		1,201		2,683		—
Specialty Lending										Specialty Lending	3,647		384		3,263		—
Energy & Infrastructure										Energy & Infrastructure	3,082		2,794		288		288
Total	Total	3,884		1,201		2,683		—		Total	29,050		22,480		6,570		695
Commercial Real Estate	Commercial Real Estate									Commercial Real Estate
Small Business Banking	Small Business Banking	12,410		5,226		7,184		5,169		Small Business Banking	34,520		23,830		10,690		3,611
Specialty Lending		2,315		507		1,808		1,808
Energy & Infrastructure										Energy & Infrastructure	3,072		2,799		273		—
Total	Total	14,725		5,733		8,992		6,977		Total	37,592		26,629		10,963		3,611
Commercial Land	Commercial Land									Commercial Land
Small Business Banking	Small Business Banking	5,531		4,148		1,383		—		Small Business Banking	6,750		5,499		1,251		196
Total	Total	5,531		4,148		1,383		—		Total	6,750		5,499		1,251		196
Total	Total	$	42,533	$	26,545	$	15,988	$	6,977	Total	$	73,392	$	54,608	$	18,784	$	4,502

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

Table of Contents

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

The following table presents the amortized cost basis of collateral-dependent loans and leases, which are individually evaluated to determine expected credit losses, as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021:~~2022:


		Total Collateral Dependent Loans						Unguaranteed Portion									Total Collateral Dependent Loans						Unguaranteed Portion
September 30, 2022		Real Estate		Business Assets		Other		Real Estate		Business Assets		Other		Allowance for Credit Losses
March 31, 2023																March 31, 2023	Real Estate		Business Assets		Other		Real Estate		Business Assets		Other		Allowance for Credit Losses
Commercial & Industrial	Commercial & Industrial															Commercial & Industrial
Small Business Banking	Small Business Banking	$	2,730	$	9,227	$	25	$	414	$	300	$	25	$	132	Small Business Banking	$	7,731	$	1,126	$	—	$	1,704	$	295	$	—	$	1,257
Total		2,730		9,227		25		414		300		25		132
Construction & Development
Small Business Banking		6		—		—		6		—		—		6
Energy & Infrastructure																Energy & Infrastructure	3,022		—		—		227		—		—		—
Total	Total	6		—		—		6		—		—		6		Total	10,753		1,126		—		1,931		295		—		1,257
Commercial Real Estate	Commercial Real Estate															Commercial Real Estate
Small Business Banking	Small Business Banking	5,832		2,210		39		1,019		134		9		73		Small Business Banking	17,036		2,079		—		8,191		417		—		173
Total	Total	5,832		2,210		39		1,019		134		9		73		Total	17,036		2,079		—		8,191		417		—		173
Commercial Land	Commercial Land															Commercial Land
Small Business Banking	Small Business Banking	1,923		—		—		382		—		—		51		Small Business Banking	1,743		—		—		202		—		—		—
Total	Total	1,923		—		—		382		—		—		51		Total	1,743		—		—		202		—		—		—
Total	Total	$	10,491	$	11,437	$	64	$	1,821	$	434	$	34	$	262	Total	$	29,532	$	3,205	$	—	$	10,324	$	712	$	—	$	1,430


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

1921

Table of Contents

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Total Collateral Dependent Loans Unguaranteed Portion
December 31, 2021 Real Estate Business Assets Other Real Estate Business Assets Other Allowance for Credit Losses
Commercial & Industrial
Small Business Banking $ 698 $ 7,475 $ — $ 152 $ 449 $ — $ 235
Total 698 7,475 — 152 449 — 235
Construction & Development
Specialty Lending 3,858 — — 2,657 — — 57
Total 3,858 — — 2,657 — — 57
Commercial Real Estate
Small Business Banking 5,172 700 64 4,038 14 13 65
Specialty Lending 512 — — 6 — — —
Total 5,684 700 64 4,044 14 13 65
Commercial Land
Small Business Banking 5,541 — — 1,393 — — 601
Total 5,541 — — 1,393 — — 601
Total $ 15,781 $ 8,175 $ 64 $ 8,246 $ 463 $ 13 $ 958

Allowance for Credit Losses - Loans and Leases

See Note 1. Organization and Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements in the Company’s ~~2021~~2022 Form 10-K for a description of the methodologies used to estimate the ~~allowance for credit losses (“ACL”).~~ACL.

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

Three Months Ended Commercial
& Industrial Construction &
Development Commercial
Real Estate Commercial
Land Total
September 30, 2022
Beginning Balance $ 41,178 $ 3,504 $ 17,840 $ 3,341 $ 65,863
Charge offs (1,528) — (945) — (2,473)
Recoveries 240 — 481 11 732
Provision 9,023 1,982 3,155 9 14,169
Ending Balance $ 48,913 $ 5,486 $ 20,531 $ 3,361 $ 78,291
September 30, 2021
Beginning Balance $ 27,439 $ 6,232 $ 22,162 $ 2,014 $ 57,847
Charge offs (2,535) — — — (2,535)
Recoveries 12 — 38 — 50
Provision 3,883 (1,941) 2,392 (15) 4,319
Ending Balance $ 28,799 $ 4,291 $ 24,592 $ 1,999 $ 59,681

~~Table of Contents~~

~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~


Nine Months Ended		Commercial & Industrial		Construction & Development		Commercial Real Estate		Commercial Land		Total
September 30, 2022
Three Months Ended												Three Months Ended	Commercial & Industrial		Construction & Development		Commercial Real Estate		Commercial Land		Total
March 31, 2023												March 31, 2023
Beginning Balance												Beginning Balance	$	64,995	$	5,101	$	22,901	$	3,569	$	96,566
Adoption of ASU 2022-02												Adoption of ASU 2022-02	(25)		(166)		(83)		(402)		(676)
Charge offs												Charge offs	(6,278)		—		(414)		—		(6,692)
Recoveries												Recoveries	23		—		—		—		23
Provision												Provision	13,343		2,019		2,658		1,001		19,021
Ending Balance												Ending Balance	$	72,058	$	6,954	$	25,062	$	4,168	$	108,242
March 31, 2022												March 31, 2022
Beginning Balance	Beginning Balance	$	37,770	$	3,435	$	19,068	$	3,311	$	63,584	Beginning Balance	$	37,770	$	3,435	$	19,068	$	3,311	$	63,584
Charge offs	Charge offs	(6,163)		—		(1,378)		(652)		(8,193)		Charge offs	(2,823)		—		—		(334)		(3,157)
Recoveries	Recoveries	420		—		1,197		11		1,628		Recoveries	145		—		650		—		795
Provision	Provision	16,886		2,051		1,644		691		21,272		Provision	(930)		667		1,896		203		1,836
Ending Balance	Ending Balance	$	48,913	$	5,486	$	20,531	$	3,361	$	78,291	Ending Balance	$	34,162	$	4,102	$	21,614	$	3,180	$	63,058
September 30, 2021
Beginning Balance		$	26,941	$	5,663	$	18,148	$	1,554	$	52,306
Charge offs		(2,912)		(262)		(2,691)		(12)		(5,877)
Recoveries		158		—		1,802		—		1,960
Provision		4,612		(1,110)		7,333		457		11,292
Ending Balance		$	28,799	$	4,291	$	24,592	$	1,999	$	59,681

During the three ~~and nine~~ months ended ~~September 30, 2022,~~March 31, 2023, the ACL increased ~~primarily~~ as a result of continued loan growth, ~~charge-off experience impacts, a transfer of $729.5 million in loans carried at amortized cost, including $694.0 million in guaranteed loans, from held for sale to held for investment~~combined with portfolio trends and changes in the macroeconomic outlook. Additionally, certain assumptions were refined, drawing more heavily on internal data, in the calculations of PD, LGD, and prepayment rates. These refinements increased the ACL by $1.5 million. Loss rates are adjusted for twelve month forecasted unemployment followed by a twelve-month straight-line reversion period.

During the three ~~and nine~~ month ~~periods~~period ended ~~September 30, 2021, increases to~~March 31, 2022, the ACL ~~were~~decreased primarily ~~related to loan growth which has outpaced~~as a result of the ~~improvement~~charge-off of one large relationship as well as continued improvements in forecasted unemployment and default expectations. These decreases were offset by overall loan growth. Loss rates ~~and other conditions related to the COVID-19 pandemic. Unemployment rates were forecasted~~are adjusted for twelve ~~months~~month forecasted unemployment followed by a twelve-month straight-line reversion period. Additionally, the provision expense was impacted by net charge-offs during the ~~periods.~~period.

Loan Modifications for Borrowers Experiencing Financial Difficulty

~~Table~~The Company may agree to modify the contractual terms of ~~Contents~~

~~Live Oak Bancshares, Inc.~~

~~Notes~~a loan to ~~Unaudited Condensed Consolidated Financial Statements~~

~~Troubled Debt Restructurings~~a borrower experiencing financial difficulty as a part of ongoing loss mitigation strategies. These modifications may result in an interest rate reduction, term extension, an other-than-insignificant payment delay, or a combination thereof. The Company typically does not offer principal forgiveness.

The following tables ~~present~~summarize the ~~types~~amortized cost basis of loans that were modified ~~as troubled debt restructurings (“TDRs”):~~

Three Months Ended September 30, 2022
Interest Only Payment Deferral Extend Amortization
Other(1)
Total TDRs(2)
Number of
Loans Recorded investment at
period end Number of
Loans Recorded investment at
period end Number of
Loans Recorded investment at
period end Number of
Loans Recorded investment at
period end Number of
Loans Recorded investment at
period end
Commercial & Industrial
Small Business Banking — $ — 3 $ 7,074 1 $ 146 — $ — 4 $ 7,220
Total — — 3 7,074 1 146 — — 4 7,220
Construction & Development
Small Business Banking — — — — — — 2 2,518 2 2,518
Total — — — — — — 2 2,518 2 2,518
Total — $ — 3 $ 7,074 1 $ 146 2 $ 2,518 6 $ 9,738
during the period presented.

~~(1)Includes two Small Business Banking loans with extended amortization and interest only.~~


Three Months Ended March 31, 2023	Other-Than-Insignificant Payment Delay		Term Extension		Interest Rate Reduction		% of Total Class of Financing Receivable
Small Business Banking	$	—	$	—	$	3,436	0.07	%
Specialty Lending	4,183		—		—		0.25
Energy & Infrastructure	—		13,517		—		2.35
Total	$	4,183	$	13,517	$	3,436	2.67	%

~~(2)~~
~~Excludes loans accounted for under~~

As of March 31, 2023, the ~~fair value option. See Note 9. Fair Value of Financial Instruments for~~Company had no commitments to lend additional ~~information.~~

Nine Months Ended September 30, 2022
Interest Only Payment Deferral Extend Amortization
Other(1)
Total TDRs(2)
Number of
Loans Recorded investment at
period end Number of
Loans Recorded investment at
period end Number of
Loans Recorded investment at
period end Number of
Loans Recorded investment at
period end Number of
Loans Recorded investment at
period end
Commercial & Industrial
Small Business Banking — $ — 6 $ 10,192 3 $ 1,674 1 $ 527 10 $ 12,393
Specialty Lending — — 1 734 — — — — 1 734
Total — — 7 10,926 3 1,674 1 527 11 13,127
Commercial Real Estate
Small Business Banking — — — — 1 4,847 — — 1 4,847
Total — — — — 1 4,847 — — 1 4,847
Construction & Development
Small Business Banking — — — — — — 2 2,518 2 2,518
Total — — — — — — 2 2,518 2 2,518
Total — $ — 7 $ 10,926 4 $ 6,521 3 $ 3,045 14 $ 20,492
funds to borrowers included in the previous table.

~~(1)Includes one Small Business Banking loan with extended amortization and a rate concession, two Small Business Banking loans with extended amortization and interest only.~~

~~(2)Excludes loans accounted for under the fair value option. See Note 9. Fair Value of Financial Instruments for additional information.~~

Table of Contents

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Three Months Ended September 30, 2021
Interest Only Payment Deferral Extend Amortization Other
Total TDRs(1)
Number of
Loans Recorded investment at
period end Number of
Loans Recorded investment at
period end Number of
Loans Recorded investment at
period end Number of
Loans Recorded investment at
period end Number of
Loans Recorded investment at
period end
Commercial Real Estate
Small Business Banking — $ — 1 $ 2,830 — $ — — $ — 1 $ 2,830
Total — — 1 2,830 — — — — 1 2,830
Total — $ — 1 $ 2,830 — $ — — $ — 1 $ 2,830
The following table presents an aging analysis of loans that were modified on or after January 1, 2023, the date the Company adopted ASU 2022-02, through March 31, 2023.


	Current		30-89 Days Past Due		90 Days or More Past Due		Total Past Due
Small Business Banking	$	3,436	$	—	$	—	$	—
Specialty Lending	4,183		—		—		—
Energy & Infrastructure	13,517		—		—		—
Total	$	21,136	$	—	$	—	$	—

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


	Three Months Ended March 31, 2023
	Weighted Average Interest Rate Reduction		Weighted Average Term Extension (in Months)
Small Business Banking	1.45	%	0

Energy & Infrastructure	—		12
Total	1.45	%	12

There were no loans that were modified on or after January 1, 2023, the date the Company adopted ASU 2022-02, through March 31, 2023 that subsequently defaulted during the period presented.

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

Troubled Debt Restructurings

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


	Three Months Ended March 31, 2022
	Interest Only			Payment Deferral			Extend Amortization			Other			Total TDRs(1)
	Number of Loans	Recorded investment at period end		Number of Loans	Recorded investment at period end		Number of Loans	Recorded investment at period end		Number of Loans	Recorded investment at period end		Number of Loans	Recorded investment at period end
Commercial & Industrial
Small Business Banking	—	$	—	2	$	1,015	1	$	350	3	$	3,809	6	$	5,174
Total	—	—		2	1,015		1	350		3	3,809		6	5,174
Commercial Real Estate
Small Business Banking	—	—		—	—		—	—		1	4,847		1	4,847
Total	—	—		—	—		—	—		1	4,847		1	4,847
Total	—	$	—	2	$	1,015	1	$	350	4	$	8,656	7	$	10,021

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

Nine Months Ended September 30, 2021
Interest Only Payment Deferral Extend Amortization
Other(1)
Total TDRs(2)
Number of
Loans Recorded investment at
period end Number of
Loans Recorded investment at
period end Number of
Loans Recorded investment at
period end Number of
Loans Recorded investment at
period end Number of
Loans Recorded investment at
period end
Commercial & Industrial
Small Business Banking — $ — 3 $ 6,097 — $ — — $ — 3 $ 6,097
Total — — 3 6,097 — — — — 3 6,097
Commercial Real Estate
Small Business Banking — — 5 6,613 — — 1 3,124 6 9,737
Total — — 5 6,613 — — 1 3,124 6 9,737
Total — $ — 8 $ 12,710 — $ — 1 $ 3,124 9 $ 15,834

~~(1)Includes one Small Business Banking loan with extended amortization and a rate concession.~~

~~(2)Excludes loans accounted for under the fair value option. See Note 9. Fair Value of Financial Instruments for additional information.~~

Restructurings made to improve a loan’s performance have varying degrees of success. ~~The following tables present~~There were no TDRs that were modified within the twelve months ended ~~September 30,~~March 31, 2022 that subsequently defaulted during the ~~period:~~

Three Months Ended September 30, 2022
Interest Only Payment Deferral Extend Amortization Other
Total TDRs(1)
Number of
Loans Recorded investment at
period end Number of
Loans Recorded investment at
period end Number of
Loans Recorded investment at
period end Number of
Loans Recorded investment at
period end Number of
Loans Recorded investment at
period end
Commercial & Industrial
Small Business Banking — $ — — $ — 1 $ 146 — $ — 1 $ 146
Total — $ — — $ — 1 $ 146 — $ — 1 $ 146

~~(1)Excludes loans accounted for under the fair value option. See Note 9. Fair Value of Financial Instruments for additional information.~~three months ended March 31, 2022.

Table of Contents

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2022
Interest Only Payment Deferral Extend Amortization Other
Total TDRs(1)
Number of
Loans Recorded investment at
period end Number of
Loans Recorded investment at
period end Number of
Loans Recorded investment at
period end Number of
Loans Recorded investment at
period end Number of
Loans Recorded investment at
period end
Commercial & Industrial
Small Business Banking — $ — 2 $ 2,737 2 $ 496 — $ — 4 $ 3,233
Total — $ — 2 $ 2,737 2 $ 496 — $ — 4 $ 3,233

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

~~No TDRs that were modified within the twelve months ended September 30, 2021 subsequently defaulted during the three months ended September 30, 2021.~~

~~The following table presents~~ ~~TDRs that were modified within the twelve months ended~~ ~~September 30, 2021~~ ~~that subsequently defaulted~~ ~~during the period:~~

Nine Months Ended September 30, 2021
Interest Only Payment Deferral Extend Amortization Other
Total TDRs(1)
Number of
Loans Recorded investment at
period end Number of
Loans Recorded investment at
period end Number of
Loans Recorded investment at
period end Number of
Loans Recorded investment at
period end Number of
Loans Recorded investment at
period end
Commercial Real Estate
Small Business Banking — $ — 1 $ 50 — $ — — $ — 1 $ 50
Total — $ — 1 $ 50 — $ — — $ — 1 $ 50

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

Note 6. Leases

Lessor Equipment Leasing

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

~~Table of Contents~~

~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Condensed 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 3 to 7 years which is consistent with the useful life of the equipment with no residual value. The net investment in direct finance leases included in loans and leases held for investment are as follows:


		September 30, 2022		December 31, 2021			March 31, 2023		December 31, 2022
Gross direct finance lease payments receivable	Gross direct finance lease payments receivable	$	4,872	$	7,333	Gross direct finance lease payments receivable	$	3,760	$	4,284
Less – unearned interest	Less – unearned interest	(565)		(998)		Less – unearned interest	(402)		(479)
Net investment in direct financing leases	Net investment in direct financing leases	$	4,307	$	6,335	Net investment in direct financing leases	$	3,358	$	3,805

Future minimum lease payments under finance leases are as follows:


As of September 30, 2022		Amount
2022		$	446
As of March 31, 2023				As of March 31, 2023	Amount
2023	2023	1,945		2023	$	1,301
2024	2024	1,374		2024	1,352
2025	2025	990		2025	990
2026	2026	117		2026	117
Total	Total	$	4,872	Total	$	3,760

Interest income of ~~$101~~$73 thousand and ~~$159~~$115 thousand was recognized in the three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021, respectively. Interest income of $309 thousand and $517 thousand was recognized in the nine months ended September 30, 2022 and 2021,~~ respectively.

Operating Leases

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

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

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

Table of Contents

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

As of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, the Company had a net investment of ~~$116.6~~$111.8 million and ~~$123.9~~$114.2 million, respectively, in assets included in premises and equipment that are subject to operating leases. Of the net investment, the gross balance of the assets was $163.4 million as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 and accumulated depreciation was ~~$46.8~~$51.6 million and ~~$39.5~~$49.2 million as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively. Depreciation expense recognized on these assets for the three months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ was $2.4 ~~million. Depreciation expense recognized on these assets for the nine months ended September 30, 2022 and 2021 was $7.3 million.~~million, respectively.

Lease income of $2.4 million was recognized in the three months ended ~~September 30, 2022~~March 31, 2023 and ~~2021. Lease income of $7.1 million and $7.2 million was recognized in the nine months ended September 30, 2022 and 2021, respectively.~~

~~Table of Contents~~

~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

2022.

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


As of September 30, 2022		Amount
2022		$	1,960
As of March 31, 2023				As of March 31, 2023	Amount
2023	2023	9,075		2023	$	6,914
2024	2024	8,808		2024	8,808
2025	2025	8,935		2025	8,935
2026	2026	8,923		2026	8,923
2027				2027	8,690
Thereafter	Thereafter	22,253		Thereafter	13,563
Total	Total	$	59,954	Total	$	55,833

Note 7. Servicing Assets

Loans serviced for others are not included in the accompanying Unaudited Condensed Consolidated Balance Sheets. The unpaid principal balance of loans serviced for others requiring recognition of a servicing asset was ~~$2.22~~$2.26 billion and ~~$2.29~~$2.67 billion at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively. The unpaid principal balance for all loans serviced for others was ~~$3.35~~$3.62 billion and ~~$3.30~~$3.48 billion at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively.

The following summarizes the activity pertaining to servicing rights:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2022		2021		2022		2021			2023		2022
Balance at beginning of period	Balance at beginning of period	$	28,661	$	36,966	$	33,574	$	33,918	Balance at beginning of period	$	26,323	$	33,574
Additions, net	Additions, net	1,744		2,880		7,068		7,616		Additions, net	2,678		4,281
Fair value changes:	Fair value changes:									Fair value changes:
Due to changes in valuation inputs or assumptions	Due to changes in valuation inputs or assumptions	992		(2,768)		(3,056)		119		Due to changes in valuation inputs or assumptions	2,624		1,388
Decay due to increases in principal paydowns or runoff	Decay due to increases in principal paydowns or runoff	(2,316)		(3,110)		(8,505)		(7,685)		Decay due to increases in principal paydowns or runoff	(2,268)		(2,957)
Balance at end of period	Balance at end of period	$	29,081	$	33,968	$	29,081	$	33,968	Balance at end of period	$	29,357	$	36,286

The fair value of servicing rights was determined using a weighted average discount rate of ~~15.1%~~17.7% on ~~September 30, 2022~~March 31, 2023 and ~~12.3%~~11.7% on ~~September 30, 2021.~~March 31, 2022. The fair value of servicing rights was determined using a weighted average prepayment speed of 15.3% on March 31, 2023 and 16.1% on ~~September 30,~~March 31, 2022, ~~and 16.7% on September 30, 2021,~~ with the actual rate depending on the stratification of the specific right. Changes to fair value are reported in loan servicing asset revaluation within the Unaudited Condensed Consolidated Statements of Income.

The fair value of servicing rights is highly sensitive to changes in underlying assumptions. Changes in prepayment speed assumptions typically have the most significant impact on the fair value of servicing rights. Generally, as interest rates rise on variable rate loans, loan prepayments increase due to an increase in refinance activity, which results in a decrease in the fair value of servicing assets, however, weakening economic conditions or significant declines in interest rates can also increase loan prepayment activity. Measurement of fair value is limited to the conditions existing and the assumptions used as of a particular point in time, and those assumptions may not be appropriate if they are applied at a different time.

2625

Table of Contents

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 8. Borrowings

Total outstanding borrowings consisted of the following:


		September 30, 2022		December 31, 2021			March 31, 2023		December 31, 2022
Borrowings	Borrowings					Borrowings
In March 2021, the Company entered into a 60-month term loan agreement of $50.0 million with a third party correspondent bank. The loan accrues interest at a fixed rate of 2.95% with a monthly payment sufficient to fully amortize the loan, with all remaining unpaid principal and interest due at maturity on March 30, 2026. The Company paid the Lender a non-refundable $325 thousand loan origination fee upon signing of the Note that is presented as a direct deduction from the carrying amount of the loan and will be amortized into interest expense over the life of the loan.	In March 2021, the Company entered into a 60-month term loan agreement of $50.0 million with a third party correspondent bank. The loan accrues interest at a fixed rate of 2.95% with a monthly payment sufficient to fully amortize the loan, with all remaining unpaid principal and interest due at maturity on March 30, 2026. The Company paid the Lender a non-refundable $325 thousand loan origination fee upon signing of the Note that is presented as a direct deduction from the carrying amount of the loan and will be amortized into interest expense over the life of the loan.	$	35,615	$	42,734	In March 2021, the Company entered into a 60-month term loan agreement of $50.0 million with a third party correspondent bank. The loan accrues interest at a fixed rate of 2.95% with a monthly payment sufficient to fully amortize the loan, with all remaining unpaid principal and interest due at maturity on March 30, 2026. The Company paid the Lender a non-refundable $325 thousand loan origination fee upon signing of the Note that is presented as a direct deduction from the carrying amount of the loan and will be amortized into interest expense over the life of the loan.	$	30,767	$	33,203
In April 2020, the Company entered into the Federal Reserve Bank's Paycheck Protection Program Liquidity Facility ("PPPLF"). Under the PPPLF, advances must be secured by pledges of loans to small businesses originated by the Company under the U.S. Small Business Administration's 7(a) loan program titled the Paycheck Protection Program. The PPPLF accrues interest at 35 basis points and matures at various dates equal to the maturity date of the PPPLF collateral pledged to secure the advance, ranging from February 9, 2026 to April 14, 2026, and will be accelerated on and to the extent of any 7(a) loan forgiveness reimbursement by the SBA for any PPPLF collateral or the date of purchase by the SBA from the borrower of any PPPLF collateral. On the maturity date of each advance, the Company shall repay the advance plus accrued interest. The remaining $18.5 million borrowing was paid in full at September 30, 2022.		—		267,550
In September 2020, the Company renewed a $50.0 million revolving line of credit originally issued in 2017 with a third party correspondent bank. Subsequently on October 20, 2021, the Company renewed and increased the revolving line of credit from $50.0 million to $100.0 million and increased the term from 12 months to 36 months. The line of credit is unsecured and accrues interest at 30-day SOFR plus 1.25%, with an interest rate cap of 4.25% and an interest rate floor of 2.75%. The terms of this loan require the Company to maintain minimum capital and debt service coverage ratios. The Company paid the Lender a non-refundable $750 thousand loan origination fee upon signing of the Note that will be amortized into interest expense over the life of the loan. In September 2022, the Company extended the maturity for an additional 12 months, and paid the Lender an additional $250 thousand loan origination fee that will be amortized into interest expense over the life of the loan. Payments are interest only with all principal and accrued interest due at maturity on October 10, 2025. The Company took an advance of $8.0 million on December 20, 2021 and $12.0 million on March 16, 2022. The Company paid down this balance in full on May 20, 2022 and there is $100.0 million of available credit remaining at September 30, 2022.		—		8,000
Other short term debt (1)		1		5
On December 30, 2022, the Company made an advance of $50.0 million on an overnight Fed Funds line of credit that is unsecured with a variable interest rate of 4.65%. The Company paid down the balance in full on January 3, 2023 and there is $100.0 million of available credit remaining at March 31, 2023.						On December 30, 2022, the Company made an advance of $50.0 million on an overnight Fed Funds line of credit that is unsecured with a variable interest rate of 4.65%. The Company paid down the balance in full on January 3, 2023 and there is $100.0 million of available credit remaining at March 31, 2023.	—		50,000
Total borrowings	Total borrowings	$	35,616	$	318,289	Total borrowings	$	30,767	$	83,203

~~(1)Includes finance leases.~~

~~The Company may purchase federal funds~~As of March 31, 2023 and December 31, 2022, the Company’s unused borrowing capacity was $3.77 billion and $4.88 billion, respectively, which consisted of access through ~~unsecured federal funds~~the Federal Reserve Bank's discount window, available lines of credit with ~~various~~the FHLB and other correspondent banks ~~which totaled $167.5 million of available funding~~ as ~~of September 30, 2022 and December 31, 2021. These lines are intended for short-term borrowings and are subject~~well as access to restrictions limiting the frequency and terms of advances. These lines of credit are payable on demand and bear interest based upon the daily federal funds rate. The Company had no outstanding balances on the lines of credit as of September 30, 2022 and December 31, 2021.

~~Table of Contents~~

~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

~~The Company has entered into~~ a repurchase ~~agreement with a third party for an amount up to $5.0 million as~~agreement. New borrowing capacity added in the first quarter of ~~September 30, 2022 and December 31, 2021. At~~2023 was from the ~~time~~Bank Term Funding Program (“BTFP”). Under the Company enters into a transaction with the third party, the Company must transfer securities or other assets against the funds received. The terms of the agreement are set at market conditions at the time the Company enters into such transaction. The Company had no outstanding balance on the repurchase agreement as of September 30, 2022 and December 31, 2021.

~~On June 18, 2018, the Company entered into a borrowing agreement with the Federal Home Loan Bank of Atlanta. These borrowings~~BTFP, advances must be secured ~~with~~by pledging eligible ~~collateral approved~~securities owned by the ~~Federal Home Loan Bank~~Company on March 12, 2023. BTFP advances can be requested for a term of ~~Atlanta. At September 30, 2022 and December 31, 2021,~~up to one year at a fixed market rate until the Company had approximately $2.26 billion and $2.02 billion, respectively, in borrowing capacity available under these agreements. There are no advances outstanding and no collateral pledged as of September 30, 2022 and December 31, 2021.

The Company may borrow funds through the Federal Reserve Bank’s discount window. These borrowings are secured by a blanket floating lien on qualifying loans with a balance of $2.81 billion and $2.44 billion as of September 30, 2022 and December 31, 2021, respectively. At September 30, 2022 and December 31, 2021, the Company had approximately $2.37 billion and $2.04 billion, respectively, in borrowing capacity available under these arrangements with no outstanding balance as of September 30, 2022 and December 31, 2021.program ends March 11, 2024.

Note 9. Fair Value of Financial Instruments

Fair Value Hierarchy

There are three levels of inputs in the fair value hierarchy that may be used to measure fair value. Financial instruments are considered Level 1 when valuation can be based on quoted prices in active markets for identical assets or liabilities. Level 2 financial instruments are valued using quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or models using inputs that are observable or can be corroborated by observable market data of substantially the full term of the assets or liabilities. Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable and when determination of the fair value requires significant management judgment or estimation.

Recurring Fair Value

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


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
Equity Warrant Assets	Equity Warrant Assets	2022		2021		2022		2021		Equity Warrant Assets	2023		2022
Balance at beginning of period	Balance at beginning of period	$	2,422	$	1,580	$	1,672	$	908	Balance at beginning of period	$	2,210	$	1,672
Issuances		14		135		718		172
Net gains on derivative instruments		121		310		167		1,080
Settlements		—		(353)		—		(488)
New equity warrant assets										New equity warrant assets	153		656
Changes in fair value, net										Changes in fair value, net	(176)		—

Balance at end of period	Balance at end of period	$	2,557	$	1,672	$	2,557	$	1,672	Balance at end of period	$	2,187	$	2,328

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Notes to Unaudited Condensed Consolidated Financial Statements

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


September 30, 2022		Total		Level 1		Level 2		Level 3
March 31, 2023										March 31, 2023	Total		Level 1		Level 2		Level 3
Investment securities available-for-sale	Investment securities available-for-sale									Investment securities available-for-sale
US government agencies	US government agencies	$	20,049	$	—	$	20,049	$	—	US government agencies	$	25,247	$	—	$	25,247	$	—
Mortgage-backed securities	Mortgage-backed securities	981,841		—		981,841		—		Mortgage-backed securities	1,120,894		—		1,120,894		—
Municipal bonds(1)	Municipal bonds(1)	2,982		—		2,888		94		Municipal bonds(1)	3,070		—		2,987		83
Other debt securities(2)	Other debt securities(2)	500		500		—		—		Other debt securities(2)	480		—		—		480
Loans held for investment	Loans held for investment	512,183		—		—		512,183		Loans held for investment	466,950		—		—		466,950
Servicing assets~~(2)~~(3)	Servicing assets~~(2)~~(3)	29,081		—		—		29,081		Servicing assets~~(2)~~(3)	29,357		—		—		29,357
Mutual fund	Mutual fund	1,922		—		1,922		—		Mutual fund	1,672		—		1,672		—
Equity warrant assets	Equity warrant assets	2,557		—		—		2,557		Equity warrant assets	2,187		—		—		2,187
Total assets at fair value	Total assets at fair value	$	1,551,115	$	500	$	1,006,700	$	543,915	Total assets at fair value	$	1,649,857	$	—	$	1,150,800	$	499,057


December 31, 2021		Total		Level 1		Level 2		Level 3
December 31, 2022										December 31, 2022	Total		Level 1		Level 2		Level 3
Investment securities available-for-sale	Investment securities available-for-sale									Investment securities available-for-sale
US government agencies	US government agencies	$	10,637	$	—	$	10,637	$	—	US government agencies	$	15,668	$	—	$	15,668	$	—
Mortgage-backed securities	Mortgage-backed securities	889,339		—		889,339		—		Mortgage-backed securities	995,574		—		995,574		—
Municipal bonds(1)	Municipal bonds(1)	3,576		—		3,480		96		Municipal bonds(1)	2,977		—		2,884		93
Other debt securities	Other debt securities	2,500		—		2,500		—		Other debt securities	500		—		500		—
Loans held for sale		25,310		—		—		25,310

Loans held for investment	Loans held for investment	645,201		—		—		645,201		Loans held for investment	494,458		—		—		494,458
Servicing assets~~(2)~~(3)	Servicing assets~~(2)~~(3)	33,574		—		—		33,574		Servicing assets~~(2)~~(3)	26,323		—		—		26,323
Mutual fund	Mutual fund	2,379		—		2,379		—		Mutual fund	1,656		—		1,656		—
Equity warrant assets	Equity warrant assets	1,672		—		—		1,672		Equity warrant assets	2,210		—		—		2,210
Total assets at fair value	Total assets at fair value	$	1,614,188	$	—	$	908,335	$	705,853	Total assets at fair value	$	1,539,366	$	—	$	1,016,282	$	523,084


(1)			During the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023, the Company recorded a level 3 fair value adjustment loss of $10 thousand. During the three months ended March 31, 2022, the Company recorded a level 3 fair value adjustment ~~gain of $1 thousand and a~~ loss of $2 ~~thousand, respectively. During the three and nine months ended September 30, 2021, the Company recorded a $1 thousand fair value adjustment gain.~~thousand.


(2)			During the three months ended March 31, 2023, the Company recorded a level 3 fair value adjustment loss of $20 thousand. There was no fair value adjustment during the three months ended March 31, 2022.


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

For additional information on the valuation techniques and significant inputs for Level 2 and Level 3 assets and liabilities that are measured at fair value on a recurring basis, see Note 10. Fair Value of Financial Instruments in the Company’s ~~2021~~2022 Form 10-K.

Fair Value Option

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

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Notes to Unaudited Condensed Consolidated Financial Statements

There were no loans accounted for under the fair value option that were 90 days or more past due and still accruing interest at ~~September 30, 2022~~March 31, 2023 or December 31, ~~2021.~~2022. The unpaid principal balance of unguaranteed exposure for nonaccruals was ~~$3.7~~$9.9 million and ~~$6.9~~$7.2 million at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively.

The following tables provide more information about the fair value carrying amount and the unpaid principal outstanding of loans accounted for under the fair value option at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022.


		September 30, 2022																			March 31, 2023
		Total Loans						Nonaccruals						90 Days or More Past Due							Total Loans						Nonaccruals						90 Days or More Past Due
		Fair Value Carrying Amount		Unpaid Principal Balance		Difference		Fair Value Carrying Amount		Unpaid Principal Balance		Difference		Fair Value Carrying Amount		Unpaid Principal Balance		Difference			Fair Value Carrying Amount		Unpaid Principal Balance		Difference		Fair Value Carrying Amount		Unpaid Principal Balance		Difference		Fair Value Carrying Amount		Unpaid Principal Balance		Difference
Fair Value Option Elections	Fair Value Option Elections																			Fair Value Option Elections
Loans held for investment	Loans held for investment	$	512,183	$	532,264	$	(20,081)	$	27,905	$	30,265	$	(2,360)	$	11,757	$	13,318	$	(1,561)	Loans held for investment	$	466,950	$	489,578	$	(22,628)	$	52,161	$	55,587	$	(3,426)	$	32,898	$	34,642	$	(1,744)
		$	512,183	$	532,264	$	(20,081)	$	27,905	$	30,265	$	(2,360)	$	11,757	$	13,318	$	(1,561)		$	466,950	$	489,578	$	(22,628)	$	52,161	$	55,587	$	(3,426)	$	32,898	$	34,642	$	(1,744)


		December 31, 2021																			December 31, 2022
		Total Loans						Nonaccruals						90 Days or More Past Due							Total Loans						Nonaccruals						90 Days or More Past Due
		Fair Value Carrying Amount		Unpaid Principal Balance		Difference		Fair Value Carrying Amount		Unpaid Principal Balance		Difference		Fair Value Carrying Amount		Unpaid Principal Balance		Difference			Fair Value Carrying Amount		Unpaid Principal Balance		Difference		Fair Value Carrying Amount		Unpaid Principal Balance		Difference		Fair Value Carrying Amount		Unpaid Principal Balance		Difference
Fair Value Option Elections	Fair Value Option Elections																			Fair Value Option Elections
Loans held for sale		$	25,310	$	26,831	$	(1,521)	$	—	$	—	$	—	$	—	$	—	$	—
Loans held for investment	Loans held for investment	645,201		666,066		(20,865)		38,262		42,841		(4,579)		24,057		25,633		(1,576)		Loans held for investment	$	494,458	$	513,219	$	(18,761)	$	44,890	$	46,993	$	(2,103)	$	24,663	$	26,321	$	(1,658)
		$	670,511	$	692,897	$	(22,386)	$	38,262	$	42,841	$	(4,579)	$	24,057	$	25,633	$	(1,576)		$	494,458	$	513,219	$	(18,761)	$	44,890	$	46,993	$	(2,103)	$	24,663	$	26,321	$	(1,658)

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


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
Gains (Losses) on Loans Accounted for under the Fair Value Option	Gains (Losses) on Loans Accounted for under the Fair Value Option	2022		2021		2022		2021		Gains (Losses) on Loans Accounted for under the Fair Value Option	2023		2022
Loans held for sale	Loans held for sale	$	1,748	$	85	$	1,521	$	549	Loans held for sale	$	—	$	(170)
Loans held for investment	Loans held for investment	2,672		(1,115)		(1,046)		3,774		Loans held for investment	(4,529)		686
		$	4,420	$	(1,030)	$	475	$	4,323		$	(4,529)	$	516

~~Gains and (losses)~~Losses related to borrower-specific credit risk were ~~$451 thousand~~$3.2 million and ~~$(2.4)~~$2.1 million for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022, ~~respectively, and $81 thousand and $(212) thousand~~respectively.

The following tables summarize the activity pertaining to loans accounted for under the ~~three and nine months ended September 30, 2021, respectively.~~fair value option.


	Three Months Ended March 31,
Loans held for sale	2023		2022
Balance at beginning of period	$	—	$	25,310
Repurchases	—		65
Fair value changes	—		(170)

Settlements	—		(149)
Balance at end of period	$	—	$	25,056

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Notes to Unaudited Condensed Consolidated Financial Statements

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

Three Months Ended September 30, Nine Months Ended September 30,
Loans held for sale 2022 2021 2022 2021
Balance at beginning of period $ 23,452 $ 29,048 $ 25,310 $ 36,111
Repurchases — — 65 —
Fair value changes 1,748 85 1,521 549
Transfers to held for investment, net (24,768) — (26,219) (6,415)
Settlements (432) (1,767) (677) (2,879)
Balance at end of period $ — $ 27,366 $ — $ 27,366


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
Loans held for investment	Loans held for investment	2022		2021		2022		2021		Loans held for investment	2023		2022
Balance at beginning of period	Balance at beginning of period	$	530,644	$	743,226	$	645,201	$	815,374	Balance at beginning of period	$	494,458	$	645,201
Repurchases	Repurchases	1,946		10,005		4,851		31,790		Repurchases	11,834		1,525
Fair value changes	Fair value changes	2,672		(1,115)		(1,046)		3,774		Fair value changes	(4,529)		686
Transfers from held for sale, net		24,768		—		26,219		6,415

Settlements	Settlements	(47,847)		(54,074)		(163,042)		(159,311)		Settlements	(34,813)		(46,841)
Balance at end of period	Balance at end of period	$	512,183	$	698,042	$	512,183	$	698,042	Balance at end of period	$	466,950	$	600,571

Non-Recurring Fair Value

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


September 30, 2022		Total		Level 1		Level 2		Level 3
March 31, 2023										March 31, 2023	Total		Level 1		Level 2		Level 3
Collateral-dependent loans	Collateral-dependent loans	$	1,264	$	—	$	—	$	1,264	Collateral-dependent loans	$	8,125	$	—	$	—	$	8,125
Foreclosed assets		1,178		—		—		1,178

Total assets at fair value	Total assets at fair value	$	2,442	$	—	$	—	$	2,442	Total assets at fair value	$	8,125	$	—	$	—	$	8,125


December 31, 2021		Total		Level 1		Level 2		Level 3
December 31, 2022										December 31, 2022	Total		Level 1		Level 2		Level 3
Collateral-dependent loans	Collateral-dependent loans	$	1,567	$	—	$	—	$	1,567	Collateral-dependent loans	$	4,840	$	—	$	—	$	4,840
Foreclosed assets		620		—		—		620
Total assets at fair value	Total assets at fair value	$	2,187	$	—	$	—	$	2,187	Total assets at fair value	$	4,840	$	—	$	—	$	4,840

For additional information on the valuation techniques and significant inputs for Level 2 and Level 3 assets that are measured at fair value on a non-recurring basis, see Note 10. Fair Value of Financial Instruments in the Company’s ~~2021~~2022 Form 10-K.

~~Table of Contents~~

~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

Level 3 Analysis

For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 the significant unobservable inputs used in the fair value measurements were as follows:

September 30, 2022
Level 3 Assets with Significant
Unobservable Inputs Fair Value Valuation Technique Significant
Unobservable
Inputs Range
Recurring fair value
Municipal bond $ 94 Discounted expected cash flows Discount rate
Prepayment speed
6.0%
5.0%
Loans held for investment $ 512,183 Discounted expected cash flows

Discounted appraisals Loss rate

Discount rate
Prepayment speed
Appraisal adjustments
0% to 69.4%
(WAVG 1.7%)
11.1% to 21.0%
WAVG 17.4%
10.0% to 100.0%
Equity warrant assets $ 2,557 Black-Scholes option pricing model Volatility
Risk-free interest rate
Marketability discount
Remaining life
26.1% to 81.3%
3.8% to 4.0%
20.0%
3 - 9 Years
Non-recurring fair value
Collateral-dependent loans $ 1,264 Discounted appraisals
Appraisal adjustments (1)
10.0% to 100.0%
Foreclosed assets $ 1,178 Discounted appraisals
Appraisal adjustments (1)
10.0%

~~December 31, 2021~~

~~Level 3 Assets with Significant~~

~~Unobservable Inputs~~

~~Fair Value~~

~~Valuation Technique~~

~~Significant~~

~~Unobservable~~

~~Inputs~~

~~Range~~

~~Recurring fair value~~

~~Municipal bond~~

~~Discounted expected cash flows~~

Discount rate
Prepayment speed

~~4.8%~~

~~5.0%~~

~~Loans held for sale~~

~~25,310~~

~~Discounted expected cash flows~~

Discount rate
Prepayment speed

~~6.2% to 21.9%~~

~~WAVG 17.4%~~

~~Loans held for investment~~

~~645,201~~

~~Discounted expected cash flows~~

~~Discounted appraisals~~

~~Loss rate~~

Discount rate
Prepayment speed
Appraisal adjustments

~~0.0% to 70.2%~~

~~(WAVG 1.5%)~~

~~6.2% to 21.9%~~

~~WAVG 17.4%~~

~~10.0% to 85.0%~~

~~Equity warrant assets~~

~~1,672~~

~~Black-Scholes option pricing model~~

Volatility
Risk-free interest rate
Marketability discount
Remaining life

~~26.2% to 88.2%~~

~~1.3% to 1.5%~~

~~20.0%~~

~~4 - 10 years~~

~~Non-recurring fair value~~

~~Collateral-dependent loans~~

~~1,567~~

~~Discounted appraisals~~

~~Appraisal adjustments~~ ~~(1)~~

~~10.0% to 99.0%~~

~~Foreclosed assets~~

~~620~~

~~Discounted appraisals~~

~~Appraisal adjustments~~ ~~(1)~~

~~9.0% to 10.0%~~

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


March 31, 2023
Level 3 Assets with Significant Unobservable Inputs	Fair Value		Valuation Technique	Significant Unobservable Inputs	Range		Weighted Average(1)
Recurring fair value
Municipal bond	$	83	Discounted expected cash flows	Discount rate	5.7	%	N/A
				Prepayment speed	5.0	%	N/A
Other debt security	$	480	Discounted expected cash flows	Discount rate	6.8	%	N/A


Loans held for investment	$	466,950	Discounted expected cash flows	Loss rate	0.0 % - 82.1 %		2.1	%
				Discount rate	6.3 % - 9.8 %		8.8	%
				Prepayment speed	14.9	%	14.9	%
			Discounted appraisals	Appraisal adjustments (2)	0.0 % - 84.0 %		59.0	%
Equity warrant assets	$	2,187	Black-Scholes option pricing model	Volatility	26.8 % - 90.0 %		35.9	%
				Risk-free interest rate	3.6 % - 3.7 %		3.6	%
				Marketability discount	20.0	%	20.0	%
				Remaining life	2 - 10 years		7.0 years
Non-recurring fair value
Collateral-dependent loans	$	8,125	Discounted appraisals	Appraisal adjustments (2)	10.0 % - 92.0 %		48.7	%

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Notes to Unaudited Condensed Consolidated Financial Statements


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

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

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

Estimated Fair Value of Other Financial Instruments

GAAP also requires disclosure of the fair value of financial instruments carried at book value on the Unaudited Condensed Consolidated Balance Sheets.

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


September 30, 2022		Carrying Amount		Quoted Price In Active Markets for Identical Assets /Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value
March 31, 2023												March 31, 2023	Carrying Amount		Quoted Price In Active Markets for Identical Assets /Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value
Financial assets	Financial assets											Financial assets
Cash and due from banks	Cash and due from banks	$	335,046	$	335,046	$	—	$	—	$	335,046	Cash and due from banks	$	463,186	$	463,186	$	—	$	—	$	463,186
Federal funds sold		68,324		68,324		—		—		68,324

Certificates of deposit with other banks	Certificates of deposit with other banks	4,250		4,393		—		—		4,393		Certificates of deposit with other banks	4,000		4,000		—		—		4,000
Loans held for sale	Loans held for sale	537,649		—		—		542,025		542,025		Loans held for sale	533,292		—		—		553,270		553,270
Loans and leases held for investment, net of allowance for credit losses on loans and leases	Loans and leases held for investment, net of allowance for credit losses on loans and leases	6,262,908		—		—		6,079,982		6,079,982		Loans and leases held for investment, net of allowance for credit losses on loans and leases	7,111,795		—		—		7,430,287		7,430,287
Financial liabilities	Financial liabilities											Financial liabilities
Deposits	Deposits	8,404,909		—		7,898,277		—		7,898,277		Deposits	9,421,994		—		9,237,147		—		9,237,147
Borrowings	Borrowings	35,616		—		—		34,256		34,256		Borrowings	30,767		—		—		30,025		30,025

December 31, 2021
Carrying
Amount
Quoted Price
In Active
Markets for
Identical Assets
/Liabilities
(Level 1) Significant
Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3) Total
Fair
Value
Financial assets
Cash and due from banks $ 187,203 $ 187,203 $ — $ — $ 187,203
Federal funds sold 16,547 16,547 — — 16,547
Certificates of deposit with other banks 4,750 4,930 — — 4,930
Loans held for sale 1,091,209 — — 1,197,307 1,197,307
Loans and leases held for investment, net of allowance for credit losses on loans and leases 4,812,477 — — 4,958,875 4,958,875
Financial liabilities
Deposits 7,112,044 — 6,942,512 — 6,942,512
Borrowings 318,289 — — 312,036 312,036

Table of Contents

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements


December 31, 2022	Carrying Amount		Quoted Price In Active Markets for Identical Assets /Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value
Financial assets
Cash and due from banks	$	280,239	$	280,239	$	—	$	—	$	280,239
Federal funds sold	136,397		136,397		—		—		136,397
Certificates of deposit with other banks	4,000		4,000		—		—		4,000
Loans held for sale	554,610		—		—		577,254		577,254
Loans and leases held for investment, net of allowance for credit losses on loans and leases	6,753,154		—		—		6,652,936		6,652,936
Financial liabilities
Deposits	8,884,928		—		8,532,615		—		8,532,615
Borrowings	83,203		—		—		82,258		82,258

Note 10. Commitments and Contingencies

Litigation

In the normal course of business, the Company is involved in various legal proceedings. Management believes that the outcome of such proceedings will not materially affect the financial position, results of operations or cash flows of the Company.

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~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

~~On March 12, 2021, a purported class action was filed against the Company in the United States District Court for the Eastern District of North Carolina,~~ ~~Joseph McAlear, individually and on behalf of all others similarly situated v. Live Oak Bancshares, Inc. et al.~~ The complaint alleged the existence of an agreement between the Company, nCino, Inc. and Apiture, LLC in which those companies purportedly sought to restrain the mobility of employees in violation of antitrust laws by agreeing not to solicit or hire each other’s employees. The complaint alleged violations of Section 1 of the federal Sherman Act (15 U.S.C. § 1) and violations of Sections 75-1 and 75-2 of the North Carolina General Statutes. The plaintiff sought monetary damages, including treble damages, entitlement to restitution, disgorgement, attorneys’ fees, and pre- and post-judgment interest. On October 12, 2021, the Company reached an agreement to settle the case with a proposed class of all persons (with certain exclusions) employed by the Company or its wholly-owned subsidiary, Live Oak Banking Company, Apiture, Inc. or nCino, Inc. in North Carolina at any time from January 27, 2017, through March 31, 2021. In the agreement, the Company agreed to pay $3.9 million. On October 13, 2021, the plaintiff filed a motion for preliminary approval of the settlement, which the court granted by order entered on November 23, 2021. After class-wide noticing, the plaintiff filed a motion for final approval on March 28, 2022, which the court granted by order entered on April 28, 2022. Pursuant to the terms of the settlement, the settlement became effective on June 11, 2022.

Financial Instruments with Off-Balance-Sheet Risk

The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, credit risk in excess of the amount recognized in the balance sheet.

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as for on-balance-sheet instruments. A summary of the Company’s commitments is as follows:


		September 30, 2022		December 31, 2021			March 31, 2023		December 31, 2022
Commitments to extend credit	Commitments to extend credit	$	2,927,606	$	2,634,387	Commitments to extend credit	$	2,905,792	$	2,731,866
Standby letters of credit	Standby letters of credit	25,912		10,753		Standby letters of credit	24,422		26,454
Airplane purchase agreement commitments	Airplane purchase agreement commitments	30,000		—		Airplane purchase agreement commitments	21,000		24,000
Total unfunded off-balance-sheet credit risk	Total unfunded off-balance-sheet credit risk	$	2,983,518	$	2,645,140	Total unfunded off-balance-sheet credit risk	$	2,951,214	$	2,782,320

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the party. Collateral held varies, but may include accounts receivable, inventory, property and equipment, residential real estate and income-producing commercial properties. Commitment letters are issued after approval of the loan by the Credit Department and generally expire ~~ninety~~90 days after issuance.

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Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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

The allowance for ~~off-balance sheet~~off-balance-sheet credit exposures was ~~$1.1~~$4.3 million and ~~$739 thousand~~$1.5 million at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively.

The Company is in the early phase of constructing a new facility to accommodate expansion of its main campus. The total estimated cost to complete the construction program is approximately $33.6 million. At March 31, 2023, the Company was committed to approximately $3.9 million of the total estimated amount.

As of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, the Company recorded unfunded commitments to provide capital contributions for on-balance-sheet investments in the amount of ~~$23.9~~$34.2 million and ~~$10.4~~$26.1 million, respectively.

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~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

Concentrations of Credit Risk

The distribution of commitments to extend credit approximates the distribution of loans outstanding. The Company does not have a significant number of credits to any single borrower or group of related borrowers whereby their retained unguaranteed exposure exceeds $20.0 million, except for ~~twenty-two~~twenty-six relationships that have a retained unguaranteed exposure of ~~$656.3~~$867.9 million of which ~~$381.8~~$499.5 million of the unguaranteed exposure has been disbursed.

Additionally, the Company has future minimum lease payments receivable under non-cancelable operating leases totaling ~~$60.0~~$55.8 million, of which no relationships exceed $20.0 million.

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

Note 11. Segments

The Company's management reporting process measures the performance of its operating segments based on internal operating structure, which is subject to change from ~~time to time.~~time-to-time. Accordingly, the Company operates two reportable segments for management reporting purposes as discussed below:

Banking - This segment specializes in providing financing services to small businesses nationwide in targeted industries and deposit-related services to small businesses, consumers and other customers nationwide. The primary source of revenue for this segment is net interest income and secondarily the origination and sale of government guaranteed loans.

Fintech - This segment is involved in making strategic investments into emerging financial technology companies. The primary sources of revenue for this segment are principally gains and losses on equity method and equity security investments and management fees. The Fintech segment is comprised of the Company's direct wholly owned subsidiaries Live Oak Ventures and Canapi Advisors, and the investments held by those entities, as well as the Bank's investment in Apiture.

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Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

The following tables provide financial information for the Company's segments. The information provided under the caption “Other” represents operations not considered to be reportable segments and/or general operating expenses of the Company, and includes the parent company, other non-bank subsidiaries and elimination adjustments to reconcile the results of the operating segments to the ~~unaudited condensed consolidated financial statements~~Unaudited Condensed Consolidated Financial Statements prepared in conformity with GAAP.


	Banking		Fintech		Other		Consolidated
As of and for the three months ended March 31, 2023
Interest income	$	151,269	$	12	$	135	$	151,416
Interest expense	69,077		—		322		69,399
Net interest income (loss)	82,192		12		(187)		82,017
Provision for loan and lease credit losses	19,021		—		—		19,021
Noninterest income	16,997		2,039		543		19,579
Noninterest expense	74,483		2,256		2,223		78,962
Income tax expense (benefit)	3,297		156		(238)		3,215
Net income (loss)	$	2,388	$	(361)	$	(1,629)	$	398
Total assets	$	10,181,253	$	124,450	$	58,594	$	10,364,297
As of and for the three months ended March 31, 2022
Interest income	$	92,746	$	36	$	—	$	92,782
Interest expense	14,530		—		473		15,003
Net interest income (loss)	78,216		36		(473)		77,779
Provision for loan and lease credit losses	1,836		—		—		1,836
Noninterest income	31,935		237		496		32,668
Noninterest expense	61,399		2,168		2,147		65,714
Income tax expense (benefit)	9,076		(146)		(542)		8,388
Net income (loss)	$	37,840	$	(1,749)	$	(1,582)	$	34,509
Total assets	$	8,450,425	$	121,471	$	48,070	$	8,619,966

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~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

Banking Fintech Other Consolidated
As of and for the three months ended September 30, 2022
Interest income $ 115,819 $ 8 $ 7 $ 115,834
Interest expense 31,581 — 367 31,948
Net interest income (loss) 84,238 8 (360) 83,886
Provision for loan and lease credit losses 14,169 — — 14,169
Noninterest income 27,268 29,980 476 57,724
Noninterest expense 78,474 2,495 2,079 83,048
Income tax expense (benefit) 1,344 416 (235) 1,525
Net income (loss) $ 17,519 $ 27,077 $ (1,728) $ 42,868
Total assets $ 9,140,943 $ 163,304 $ 10,403 $ 9,314,650
As of and for the three months ended September 30, 2021
Interest income $ 92,783 $ — $ 3 $ 92,786
Interest expense 14,667 — 384 15,051
Net interest income (loss) 78,116 — (381) 77,735
Provision for loan and lease credit losses 4,319 — — 4,319
Noninterest income 25,125 (283) 434 25,276
Noninterest expense 52,423 1,223 1,813 55,459
Income tax expense (benefit) 9,363 (206) 237 9,394
Net income (loss) $ 37,136 $ (1,300) $ (1,997) $ 33,839
Total assets $ 7,984,677 $ 113,117 $ 39,547 $ 8,137,341

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~~Live Oak Bancshares, Inc.~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

Banking Fintech Other Consolidated
As of and for the nine months ended September 30, 2022
Interest income $ 307,780 $ 80 $ 3 $ 307,863
Interest expense 64,961 — 1,303 66,264
Net interest income (loss) 242,819 80 (1,300) 241,599
Provision for loan and lease credit losses 21,272 — — 21,272
Noninterest income 64,371 152,878 1,672 218,921
Noninterest expense 216,652 6,809 6,180 229,641
Income tax expense (benefit) 10,152 26,138 (1,099) 35,191
Net income (loss) $ 59,114 $ 120,011 $ (4,709) $ 174,416
Total assets $ 9,140,943 $ 163,304 $ 10,403 $ 9,314,650
As of and for the nine months ended September 30, 2021
Interest income $ 268,856 $ 129 $ 25 $ 269,010
Interest expense 48,967 — 896 49,863
Net interest income (loss) 219,889 129 (871) 219,147
Provision for loan and lease credit losses 11,292 — — 11,292
Noninterest income 82,459 42,361 1,624 126,444
Noninterest expense 158,877 3,355 9,057 171,289
Income tax expense (benefit) 19,143 10,008 (2,989) 26,162
Net income (loss) $ 113,036 $ 29,127 $ (5,315) $ 136,848
Total assets $ 7,984,677 $ 113,117 $ 39,547 $ 8,137,341

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

The following presents management’s discussion and analysis of the financial condition and results of operations of Live Oak Bancshares, Inc. (individually, “Bancshares” and collectively with its subsidiaries including Live Oak Banking Company, the “Company”). This discussion should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included elsewhere in this quarterly report on Form 10-Q and with the Company's Annual Report on Form 10-K for the fiscal year ended December 31, ~~2021~~2022 (the ~~"2021~~"2022 Form 10-K"). Results of operations for the periods included in this quarterly report on Form 10-Q are not necessarily indicative of results to be obtained during any future period.

Important Note Regarding Forward-Looking Statements

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

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

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

•changes in Small Business Administration ~~("SBA"~~(“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"~~“Bank”) as an SBA Preferred Lender;

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

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

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

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

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

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

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

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•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 ~~service providers~~institutions operating in the Company’s market area and elsewhere, including ~~providers~~institutions operating regionally, nationally and internationally, together with such competitors offering banking products and services by mail, telephone and the Internet;

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

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

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

•changes in political and economic conditions;

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

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

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

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

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

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

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

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

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

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Nature of Operations

Bancshares is a financial holding company and a bank holding company headquartered in Wilmington, North Carolina incorporated under the laws of the state of North Carolina in December 2008. The Company conducts business operations primarily through its commercial bank subsidiary, Live Oak Banking Company (the “Bank”). The Bank was incorporated in February 2008 as a North Carolina-chartered commercial bank. The Bank specializes in providing lending and deposit related services to small businesses nationwide. The Bank identifies and extends lending to credit-worthy borrowers within specified 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 SBA under the 7(a) Loan Program and the U.S. Department of Agriculture’s ~~("USDA"~~(“USDA”) Rural Energy for America Program ~~("REAP"~~(“REAP”), Water and Environmental Program (“WEP”) ~~and~~, Business & Industry ("(“B~~&I"~~&I”) and Community Facilities loan programs.

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

The Bank’s wholly owned subsidiaries are Live Oak Number One, Inc., Live Oak Clean Energy Financing LLC (“LOCEF”), Live Oak Private Wealth, LLC (“Live Oak Private Wealth”) and Tiburon Land Holdings, LLC (“TLH”). Live Oak Number One, Inc. holds properties foreclosed on by the Bank. LOCEF provides financing to entities for renewable energy applications and became a wholly owned subsidiary of the Bank during the first quarter of 2019. Live Oak Private Wealth provides high-net-worth individuals and families with strategic wealth and investment management services. During the first quarter of 2022, Jolley Asset Management, LLC (“JAM”) was merged into Live Oak Private Wealth. JAM was previously a wholly owned subsidiary of Live Oak Private Wealth. TLH was formed in the third quarter of 2022 to hold land adjacent to the Bank's headquarters consisting of wetlands and other protected property for the use and enjoyment of the Bank's employees and customers.

GLS is a management and technology consulting firm that advises and offers solutions and services to participants in the government guaranteed lending sector. GLS primarily provides services in connection with the settlement, accounting, and securitization processes for government guaranteed loans, including loans originated under the SBA 7(a) loan programs and USDA guaranteed loans. The Grove provides Company employees and business visitors an on-site restaurant location. Live Oak Ventures’ purpose is investing in businesses that align with the Company's strategic initiative to be a leader in financial technology. Canapi Advisors provides investment advisory services to a series of funds (the “Canapi Funds”) focused on providing venture capital to new and emerging financial technology companies.

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

The Company generates revenue primarily from net interest income and secondarily through origination and sale of government guaranteed loans. Income from the retention of loans is comprised principally of interest income. Income from the sale of loans is comprised of ~~net gains on sales of loans along with~~ loan servicing revenue and revaluation of related servicing ~~assets.~~assets along with net gains on sales of loans. Offsetting these revenues are the cost of funding sources, provision for loan and lease credit losses, any costs related to foreclosed assets and other operating costs such as salaries and employee benefits, travel, professional services, advertising and marketing and tax expense. The Company also ~~generates~~has less routinely generated gains and losses arising from its financial technology investments predominantly in its fintech segment, as discussed more fully later in this section ~~entitled~~under the caption “Results of Segment Operations.”

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Results of Operations

Performance Summary

Three months ended ~~September 30, 2022~~March 31, 2023 compared with three months ended ~~September 30, 2021~~March 31, 2022

For the three months ended ~~September 30, 2022,~~March 31, 2023, the Company reported net income of ~~$42.9 million,~~$398 thousand, or ~~$0.96~~$0.01 per diluted share, compared to net income of ~~$33.8~~$34.5 million, or $0.76 per diluted share, for the ~~third~~first quarter of ~~2021.~~2022.

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

•~~Increase~~Provision for loan and lease credit losses increased $17.2 million, compared to $1.8 million for the first quarter of 2022. The level of provision expense in ~~equity method investment income~~the first quarter of ~~$30.4~~2023 was primarily the result of continued growth of the loan and lease portfolio combined with portfolio trends and changes in the macroeconomic outlook;

•Decreased net gains on sales of loans of $10.8 million, or 51.5%, the result of lower loan sale volume and comparatively lower premiums in the first quarter of 2023;

•The net loss on loans accounted for under the fair value option of $4.5 million, increased by $5.0 million, from a net gain of $516 thousand in the first quarter of 2022;

•Increased noninterest expense of $13.2 million, or 20.2%, principally comprised of salaries and employee benefits up $6.3 million, or 16.3%, and other expense up $3.5 million largely a product of $2.8 million in increased levels of reserves on unfunded commitments driven by ~~a $28.4 million gain related to~~refinements in estimation assumptions.

Key factors partially offsetting the ~~Company’s sale~~decrease in net income for the first quarter of ~~its investment in Payrailz, LLC (“Payrailz”);~~

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2023 were:

•Increase in net interest income of ~~$6.2~~$4.2 million, or ~~7.9%~~5.4%, predominately from increases in volume for the total loan and lease portfolio, partially mitigated by a decrease in the net interest margin arising from an increase in interest-bearing liabilities combined with average cost of funds outpacing the average yield on ~~interest earning~~interest-earning assets;

•A net ~~loss~~gain on loan servicing asset revaluation ~~decreasing by $4.6~~of $356 thousand compared to a net loss of $1.6 million in the first quarter of 2022, resulting in a positive change of $1.9 million, or ~~77.5%~~122.7%;

•~~The net gain on loans accounted for under the fair value option increasing by $5.5~~Increased management fee income of $2.0 million, or ~~529.1%, from a net loss of $1.0 million in the third quarter of 2021;~~133.3%; and

•Decreased income tax expense of ~~$7.9~~$5.2 million, or ~~83.8%, largely due to higher than expected investment tax credits arising from renewable energy investments in the third quarter of 2022.~~

~~Key factors partially offsetting the increase in net income for the third quarter of 2022 were:~~

•Provision for loan and lease credit losses increased $9.9 million, or 228.1%, compared to $4.3 million for the third quarter of 2021. The level of provision expense in the third quarter of 2022 was primarily the result of loan growth, charge-off experience impacts, increased levels of loans classified as held for investment and changes in the macroeconomic outlook;

•Decreased net gains on sales of loans of $9.6 million, or 50.8%, the result of lower volume of loan sales combined with overall weaker market conditions compared to those experienced in the prior year; and

•~~Increased noninterest expense of $27.6 million, or 49.7%~~61.7%, principally ~~comprised of salaries and employee benefits up $15.3 million, or 54.2%, and $7.7 million in impairment charges~~ related to ~~a renewable energy tax credit investment closed in the third quarter of 2022.~~

~~Nine months ended September 30, 2022 compared with nine months ended September 30, 2021~~

For the nine months ended September 30, 2022, the Company reported a net income of $174.4 million, or $3.88 per diluted share, as compared to net income of $136.8 million, or $3.05 per diluted share, for the nine months ended September 30, 2021. This increase in net income was largely due to the following items:

•Increase in equity method investment income of $150.8 million, due to the above mentioned third quarter 2022 Payrailz gain of $28.4 million combined with the $120.5 million gain recognized in the second quarter of 2022 related to the sale of its investment in Finxact, Inc. ("Finxact"); and

•Increase in net interest income of $22.5 million, or 10.2%, predominately from increases in both average yield and volume for the total loan and lease portfolio. The growth in net interest income was mitigated by rising average cost of funds and moderate growth in interest-bearing liabilities.

~~Key factors partially offsetting the increase in net income for the first nine months of 2022 were:~~

•~~Decreased equity security investment gains of $42.0 million, due to the Company’s $44.1 million second quarter 2021 fair value gain from its investment in~~ ~~Greenlight Financial Technologies, Inc. (“Greenlight”);~~

•Provision for loan and lease credit losses increasing $10.0 million, or 88.4%, compared to $11.3 million in the first nine months of 2021. The level of provision expense in the year to date period of 2022 was primarily the result of the above mentioned factors driving the increase for the third quarter of 2022;

•Decreased net gains on sales of loans of $11.1 million, or 23.7%, combined with an increased loss on loan servicing asset revaluation of $4.0 million, or 52.8%, and a net gain on loans accounted for under the fair value option decreasing by $3.8 million, or 89.0%, all principally the result of weaker overall market conditions emerging in 2022 as compared to the first nine months of 2021;

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•Increased noninterest expense of $58.4 million, or 34.1%, principally comprised of salaries and employee benefits up $35.8 million, or 38.7%, advertising and marketing expense up $3.5 million, or 110.6%, technology expense up $3.4 million, or 21.2%, contributions and donations up $4.4 million, or 221.0%; and increased impairment charges ~~of $4.6 million related to renewable energy tax credits; and~~

•~~Increased income tax expense of $9.0 million primarily due the~~ above discussed ~~increase~~decrease in net income.

Net Interest Income and Margin

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

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Three months ended ~~September 30, 2022~~March 31, 2023 compared with three months ended ~~September 30, 2021~~March 31, 2022

For the three months ended ~~September 30, 2022,~~March 31, 2023, net interest income increased ~~$6.2~~$4.2 million, or ~~7.9%~~5.4%, to ~~$83.9~~$82.0 million compared to ~~$77.7~~$77.8 million for the three months ended ~~September 30, 2021.~~March 31, 2022. This increase was principally due to the growth in the ~~volume~~held for ~~the total~~investment loan and lease portfolio outpacing ~~moderate~~ growth in interest-bearing liabilities combined with an increase in average cost of funds which exceeded the increase in average yield on interest-earning assets. This increase in net interest income over the prior year was significantly higher when excluding the effects of declining levels of Paycheck Protection Program (“PPP”) loan net interest income for the compared period, which has been declining over time as PPP loans are paid down. Excluding PPP loan impacts, ~~of $1.2 million,~~ comprised of amortization of net deferred fees combined with a 1% annualized interest rate less the related interest expense from funding activity, net interest income increased by ~~$17.2~~$8.2 million. Average interest-earning assets increased by ~~$926.6 million,~~$1.75 billion, or ~~12.0%~~22.3%, to ~~$8.66~~$9.61 billion for the ~~three months ended September 30, 2022,~~first quarter of 2023, compared to ~~$7.74~~$7.85 billion for the ~~three months ended September 30, 2021,~~first quarter of 2022, while the yield on average interest-earning assets increased ~~fifty-five~~one hundred-sixty basis points to ~~5.31%~~6.39%. The cost of funds on interest-bearing liabilities for the ~~three months ended September 30, 2022,~~first quarter of 2023 increased ~~seventy-five~~two hundred-thirty basis points to ~~1.55% while~~3.11%, and the average balance of interest-bearing liabilities increased by ~~$704.9 million,~~$1.53 billion, or ~~9.5%~~20.3%, over the three months ended September 30, 2021. The increase in average interest-bearing liabilities was largely driven by funding for significant loan originations and growth. This increase was muted by a $755.3 million reduction in average borrowings largely related to the Federal Reserve Bank's Paycheck Protection Program Liquidity Facility ("PPPLF") repayments since September 30, 2021. As indicated in the rate/volume table below, the overall increase discussed above is reflected in increased interest income of $23.0 million outpacing growth in interest expense of $16.9 million for the thirdfirst quarter of 2022 compared to the third quarter of 2021. For the three months ended September 30, 2021, compared to the three months ended September 30, 2022, net interest margin decreased from 3.99% to 3.84%. As of September 30, 2022, the Company had $23.9 million in PPP loan balances on its books which includes $490 thousand in net deferred fees remaining to be recognized into future interest income. The Company expects to recognize most of the remaining net deferred fees for PPP loans in 2022.

~~Table of Contents~~

~~Nine months ended September 30, 2022 compared with nine months ended September 30, 2021~~

For the nine months ended September 30, 2022, net interest income increased $22.5 million, or 10.2%, to $241.6 million compared to $219.1 million for the nine months ended September 30, 2021. This increase was principally due to growth in both average yield and volume for the total loan and lease portfolio outpacing growth in both interest-bearing liabilities and average cost of funds. This increase in net interest income over the prior year was significantly higher when excluding the effects of declining levels of PPP loan net interest income for the compared period. Excluding PPP loan impacts of $6.5 million as defined above, net interest income increased by $59.9 million. Average interest-earning assets increased by $566.9 million, or 7.4%, to $8.26 billion for the nine months ended September 30, 2022, compared to $7.69 billion for the nine months ended September 30, 2021, while the yield on average interest-earning assets increased thirty-one basis points to 4.99%. The cost of funds on interest-bearing liabilities for the nine months ended September 30, 2022, increased twenty-four basis points to 1.13% while the average balance of interest-bearing liabilities increased by $349.6 million, or 4.7%, over the nine months ended September 30, 2021. The increase in average interest-bearing liabilities was also largely driven by funding for significant loan originations and growth. This increase was muted by a ~~$1.05 billion~~$104.0 million reduction in average borrowings largely related to Paycheck Protection Program Liquidity Facility, or PPPLF, repayments ~~since September 30, 2021.~~in 2022. As indicated in the rate/volume table below, the overall increase discussed above is reflected in increased interest income of ~~$38.9~~$58.6 million ~~as compared to an increase~~outpacing growth in interest expense of ~~$16.4~~$54.4 million for the ~~nine months ended September 30, 2022~~first quarter of 2023 compared to the ~~nine months ended September 30, 2021.~~first quarter of 2022. For the ~~nine months ended September 30, 2021~~first quarter of 2023 compared to the ~~nine months ended September 30,~~first quarter of 2022, net interest margin ~~increased~~decreased from ~~3.81%~~4.02% to ~~3.91%~~3.46%.

During ~~the first nine months~~2022 and through March of ~~2022,~~2023, the Federal Reserve increased the federal funds upper target r~~ate~~rate by ~~300~~425 basis ~~points.~~points and 50 basis points, respectively, to 5.00%. In ~~September 2022,~~March 2023, the Federal Reserve released its most current federal funds target rate midpoint projections which implied an ~~additional~~ increase of ~~approximately 125 basis points in~~ the ~~remainder of 2022 and an increase of approximately 30 basis points~~median Federal Funds rate to 5.1% by the end of ~~2023. Of the additional increases anticipated in 2022,~~2023 and a decrease of approximately 75 basis ~~point increase is currently expected~~points to ~~occur in November 2022.~~4.3% by the end of 2024. There can be no assurance that any further increases in the federal funds rate will occur, and if they do, the amount and timing of actual increases are subject to change. See Item 3. Quantitative and Qualitative Disclosures About Market Risk for information about the Company’s sensitivity to interest rates.

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


		Three Months Ended September 30,													Three Months Ended March 31,
		2022						2021							2023						2022
		Average Balance		Interest		Average Yield/Rate		Average Balance		Interest		Average Yield/Rate			Average Balance		Interest		Average Yield/Rate		Average Balance		Interest		Average Yield/Rate
Interest-earning assets:	Interest-earning assets:													Interest-earning assets:
Interest-earning balances in other banks	Interest-earning balances in other banks	$	225,959	$	1,375	2.41	%	$	452,830	$	221	0.19	%	Interest-earning balances in other banks	$	220,114	$	3,193	5.88	%	$	223,638	$	179	0.32	%
Federal funds sold	Federal funds sold	187,014		1,073		2.28		9,260		3		0.13		Federal funds sold	140,033		1,624		4.70		9,197		6		0.26
Investment securities	Investment securities	1,040,076		5,506		2.10		808,697		3,174		1.56		Investment securities	1,187,377		7,547		2.58		895,592		3,399		1.54
Loans held for sale	Loans held for sale	1,000,912		16,156		6.40		1,098,940		15,090		5.45		Loans held for sale	560,155		11,986		8.68		1,115,441		15,183		5.52
Loans and leases held for investment(1)	Loans and leases held for investment(1)	6,208,447		91,724		5.86		5,366,088		74,298		5.49		Loans and leases held for investment(1)	7,497,824		127,066		6.87		5,609,338		74,015		5.35
Total interest-earning assets	Total interest-earning assets	8,662,408		115,834		5.31		7,735,815		92,786		4.76		Total interest-earning assets	9,605,503		151,416		6.39		7,853,206		92,782		4.79
Less: Allowance for credit losses on loans and leases	Less: Allowance for credit losses on loans and leases	(65,511)						(56,411)						Less: Allowance for credit losses on loans and leases	(94,283)						(62,732)
Noninterest-earning assets	Noninterest-earning assets	598,220						581,771						Noninterest-earning assets	600,471						588,171
Total assets	Total assets	$	9,195,117					$	8,261,175					Total assets	$	10,111,691					$	8,378,645
Interest-bearing liabilities:	Interest-bearing liabilities:													Interest-bearing liabilities:

Interest-bearing checking														Interest-bearing checking	$	21,668	$	271	5.07	%	$	—	$	—	—	%
Savings	Savings	$	4,009,928	$	16,775	1.66	%	$	3,367,168	$	4,359	0.51	%	Savings	4,207,286		36,251		3.49		3,605,905		4,840		0.54
Money market accounts	Money market accounts	100,074		72		0.29		104,576		74		0.28		Money market accounts	114,084		137		0.49		91,463		54		0.24
Certificates of deposit	Certificates of deposit	3,978,793		14,706		1.47		3,156,834		9,726		1.22		Certificates of deposit	4,535,363		30,936		2.77		3,551,310		9,454		1.08
Total deposits	Total deposits	8,088,795		31,553		1.55		6,628,578		14,159		0.85		Total deposits	8,878,401		67,595		3.09		7,248,678		14,348		0.80
Borrowings	Borrowings	63,207		395		2.48		818,511		892		0.43		Borrowings	158,508		1,804		4.62		262,485		655		1.01
Total interest-bearing liabilities	Total interest-bearing liabilities	8,152,002		31,948		1.55		7,447,089		15,051		0.80		Total interest-bearing liabilities	9,036,909		69,399		3.11		7,511,163		15,003		0.81
Noninterest-bearing deposits	Noninterest-bearing deposits	133,676						79,006						Noninterest-bearing deposits	177,078						86,570
Noninterest-bearing liabilities	Noninterest-bearing liabilities	84,597						46,907						Noninterest-bearing liabilities	64,409						51,940
Shareholders' equity	Shareholders' equity	824,842						688,173						Shareholders' equity	833,295						728,972
Total liabilities and shareholders' equity	Total liabilities and shareholders' equity	$	9,195,117					$	8,261,175					Total liabilities and shareholders' equity	$	10,111,691					$	8,378,645
Net interest income and interest rate spread	Net interest income and interest rate spread			$	83,886	3.76	%			$	77,735	3.96	%	Net interest income and interest rate spread			$	82,017	3.28	%			$	77,779	3.98	%
Net interest margin	Net interest margin					3.84	%					3.99	%	Net interest margin					3.46	%					4.02	%
Ratio of average interest-earning assets to average interest-bearing liabilities	Ratio of average interest-earning assets to average interest-bearing liabilities					106.26	%					103.88	%	Ratio of average interest-earning assets to average interest-bearing liabilities					106.29	%					104.55	%

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

~~Table of Contents~~

Nine Months Ended September 30,
2022 2021
Average
Balance
Interest
Average
Yield/Rate
Average
Balance
Interest
Average
Yield/Rate
Interest-earning assets:
Interest-earning balances in other banks $ 259,212 $ 2,402 1.24 % $ 433,219 $ 752 0.23 %
Federal funds sold 92,127 1,275 1.85 22,151 19 0.11
Investment securities 950,787 12,951 1.82 769,890 9,078 1.58
Loans held for sale 1,078,743 47,308 5.86 1,127,924 45,383 5.38
Loans and leases held for investment(1)
5,876,078 243,927 5.55 5,336,824 213,778 5.36
Total interest-earning assets 8,256,947 307,863 4.99 7,690,008 269,010 4.68
Less: Allowance for credit losses on loans and leases (63,613) (53,589)
Noninterest-earning assets 610,330 599,902
Total assets $ 8,803,664 $ 8,236,321
Interest-bearing liabilities:
Interest-bearing checking $ — $ — — % $ 102,566 $ 442 0.58 %
Savings 3,838,150 29,153 1.02 2,945,535 12,180 0.55
Money market accounts 94,901 182 0.26 105,048 239 0.30
Certificates of deposit 3,749,894 35,343 1.26 3,129,084 33,062 1.41
Total deposits 7,682,945 64,678 1.13 6,282,233 45,923 0.98
Borrowings 152,157 1,586 1.39 1,203,240 3,940 0.44
Total interest-bearing liabilities 7,835,102 66,264 1.13 7,485,473 49,863 0.89
Noninterest-bearing deposits 105,629 76,304
Noninterest-bearing liabilities 64,205 43,819
Shareholders' equity 798,728 630,725
Total liabilities and shareholders' equity $ 8,803,664 $ 8,236,321
Net interest income and interest rate spread $ 241,599 3.86 % $ 219,147 3.79 %
Net interest margin 3.91 % 3.81 %
Ratio of average interest-earning assets to average interest-bearing liabilities 105.38 % 102.73 %

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

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


		Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended March 31,
		2022 vs. 2021						2022 vs. 2021							2023 vs. 2022
		Increase (Decrease) Due to						Increase (Decrease) Due to							Increase (Decrease) Due to
		Rate		Volume		Total		Rate		Volume		Total			Rate		Volume		Total
Interest income:	Interest income:													Interest income:
Interest-earning balances in other banks	Interest-earning balances in other banks	$	1,900	$	(746)	$	1,154	$	2,607	$	(957)	$	1,650	Interest-earning balances in other banks	$	3,041	$	(27)	$	3,014
Federal funds sold	Federal funds sold	531		539		1,070		742		514		1,256		Federal funds sold	817		801		1,618
Investment securities	Investment securities	1,265		1,067		2,332		1,574		2,299		3,873		Investment securities	2,667		1,481		4,148
Loans held for sale	Loans held for sale	2,530		(1,464)		1,066		3,993		(2,068)		1,925		Loans held for sale	6,523		(9,720)		(3,197)
Loans and leases held for investment	Loans and leases held for investment	5,372		12,054		17,426		8,156		21,993		30,149		Loans and leases held for investment	24,590		28,461		53,051
Total interest income	Total interest income	11,598		11,450		23,048		17,072		21,781		38,853		Total interest income	37,638		20,996		58,634
Interest expense:	Interest expense:													Interest expense:
Interest-bearing checking	Interest-bearing checking	—		—		—		—		(442)		(442)		Interest-bearing checking	—		271		271
Savings	Savings	10,656		1,760		12,416		11,738		5,235		16,973		Savings	28,417		2,994		31,411
Money market accounts	Money market accounts	1		(3)		(2)		(36)		(21)		(57)		Money market accounts	63		20		83
Certificates of deposit	Certificates of deposit	2,195		2,785		4,980		(3,924)		6,205		2,281		Certificates of deposit	16,816		4,666		21,482
Borrowings	Borrowings	2,275		(2,772)		(497)		4,845		(7,199)		(2,354)		Borrowings	1,870		(721)		1,149
Total interest expense	Total interest expense	15,127		1,770		16,897		12,623		3,778		16,401		Total interest expense	47,166		7,230		54,396
Net interest income	Net interest income	$	(3,529)	$	9,680	$	6,151	$	4,449	$	18,003	$	22,452	Net interest income	$	(9,528)	$	13,766	$	4,238

Provision for Loan and Lease Credit Losses

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

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

For the ~~third~~first quarter of ~~2022,~~2023, there was a provision for loan and lease credit losses of ~~$14.2~~$19.0 million compared to ~~$4.3~~$1.8 million for the same period in ~~2021,~~2022, an increase of ~~$9.9 million.~~ ~~For the first nine months of 2022, there was a provision for loan and~~ ~~lease credit losses of $21.3 million compared to $11.3 million for the same period in 2021, an increase of $10.0~~$17.2 million. The increase in provision expense as compared to the ~~third~~first quarter of ~~2021 and the first nine months of 2021~~2022 was primarily the result of loan growth, ~~charge-off experience impacts, a transfer of $729.5 million in loans carried at amortized cost, including $694.0 million in guaranteed loans, from held for sale to held for investment~~combined with portfolio trends and changes in the macroeconomic outlook. ~~See “Results of Operations” discussion of “Net Gains on Sales of Loans” for additional information influencing management's intent to hold more loans for investment.~~

Loans and leases held for investment at historical cost were ~~$6.35~~$7.22 billion as of ~~September 30, 2022,~~March 31, 2023, increasing by ~~$1.6~~$2.08 billion, or ~~34.3%~~40.5%, compared to ~~September 30, 2021.~~March 31, 2022. Excluding PPP loans and net unearned fees on those loans, the balance in loans and leases held for investment at historical cost was ~~$6.32~~$7.21 billion at ~~September 30, 2022,~~March 31, 2023, an increase of ~~$2.09~~$2.20 billion, or ~~49.3%~~44.0%, over ~~September 30, 2021.~~

~~Table of Contents~~

March 31, 2022.

Net charge-offs for loans and leases carried at historical cost were ~~$1.7~~$6.7 million, or ~~0.12%~~0.38% of average quarterly loans and leases held for investment, carried at historical cost, on an annualized basis, for the three months ended ~~September 30, 2022,~~March 31, 2023, compared to net charge-offs of ~~$2.5~~$2.4 million, or ~~0.21%~~0.19%, for the three months ended ~~September 30, 2021.~~March 31, 2022. ~~For the nine months ended September 30, 2022, net charge-offs totaled $6.6 million~~ ~~compared to $3.9 million for the~~ ~~nine months ended September 30, 2021, an increase of $2.6 million, or 67.6%.~~ The increase in net charge-offs for the first ~~nine~~three months of ~~2022~~2023 was ~~anticipated following the expiration of government subsidies and the return~~primarily isolated to ~~expected losses consistent with pre-Covid historical experience.~~two relationships. Net charge-offs are a key element of historical experience in the Company's estimation of the allowance for credit losses on loans and leases.

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In addition, nonperforming loans and leases not guaranteed by the SBA or USDA, excluding ~~$2.7~~$8.2 million and ~~$6.3~~$4.5 million accounted for under the fair value option at ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ respectively, totaled ~~$14.3~~$22.0 million, which was ~~0.23%~~0.30% of the held for investment loan and lease portfolio carried at historical cost at ~~September 30, 2022,~~March 31, 2023, compared to ~~$20.5~~$19.5 million, or ~~0.43%~~0.38% of loans and leases held for investment carried at historical cost at September 30, 2021. Nonperforming loans and leases carried at historical cost which are not guaranteed by the SBA or USDA were 0.23% and 0.48% of the historical cost portion of the held for investment loan and lease portfolio, excluding PPP loans, at September 30, 2022 and 2021, respectively.March 31, 2022.

Noninterest Income

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

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

Three Months Ended September 30, 2022/2021 Increase (Decrease)
2022 2021 Amount Percent
Noninterest income
Loan servicing revenue $ 6,230 $ 6,278 $ (48) (0.8) %
Loan servicing asset revaluation (1,324) (5,878) 4,554 77.5
Net gains on sales of loans 9,275 18,860 (9,585) (50.8)
Net gain (loss) on loans accounted for under the fair value option 4,420 (1,030) 5,450 529.1
Equity method investments income (loss) 29,136 (1,250) 30,386 2,430.9
Equity security investments gains (losses), net 876 176 700 397.7
Lease income 2,516 2,527 (11) (0.4)
Management fee income 2,844 1,489 1,355 91.0
Other noninterest income 3,751 4,104 (353) (8.6)
Total noninterest income $ 57,724 $ 25,276 $ 32,448 128.4 %

~~Table of Contents~~


		Nine Months Ended September 30,				2022/2021 Increase (Decrease)					Three Months Ended March 31,				2023/2022 Increase (Decrease)
		2022		2021		Amount		Percent			2023		2022		Amount		Percent
Noninterest income	Noninterest income									Noninterest income
Loan servicing revenue	Loan servicing revenue	$	19,063	$	18,930	$	133	0.7	%	Loan servicing revenue	$	6,380	$	6,356	$	24	0.4	%
Loan servicing asset revaluation	Loan servicing asset revaluation	(11,561)		(7,566)		(3,995)		(52.8)		Loan servicing asset revaluation	356		(1,569)		1,925		122.7
Net gains on sales of loans	Net gains on sales of loans	35,882		47,023		(11,141)		(23.7)		Net gains on sales of loans	10,175		20,977		(10,802)		(51.5)
Net gain (loss) on loans accounted for under the fair value option		475		4,323		(3,848)		(89.0)
Net (loss) gain on loans accounted for under the fair value option										Net (loss) gain on loans accounted for under the fair value option	(4,529)		516		(5,045)		(977.7)
Equity method investments income (loss)	Equity method investments income (loss)	146,068		(4,685)		150,753		3,217.8		Equity method investments income (loss)	(2,952)		(2,124)		(828)		(39.0)
Equity security investments gains (losses), net	Equity security investments gains (losses), net	2,487		44,534		(42,047)		(94.4)		Equity security investments gains (losses), net	77		(44)		121		275.0
Lease income	Lease income	7,529		7,742		(213)		(2.8)		Lease income	2,535		2,503		32		1.3
Management fee income	Management fee income	6,890		4,896		1,994		40.7		Management fee income	3,472		1,488		1,984		133.3
Other noninterest income	Other noninterest income	12,088		11,247		841		7.5		Other noninterest income	4,065		4,565		(500)		(11.0)
Total noninterest income	Total noninterest income	$	218,921	$	126,444	$	92,477	73.1	%	Total noninterest income	$	19,579	$	32,668	$	(13,089)	(40.1)	%

For the three months ended ~~September 30, 2022,~~March 31, 2023, noninterest income ~~increased~~decreased by ~~$32.4~~$13.1 million, or ~~128.4%~~40.1%, compared to the three months ended ~~September 30, 2021.~~March 31, 2022. The ~~increase~~decrease over the prior year is the result of ~~the $28.4 million Payrailz gain included in equity method investment income, combined with~~ a decrease in ~~the~~net gains on sales of loans of $10.8 million combined with an incremental $5.0 million net loss ~~on servicing asset revaluation of $4.6 million and a $5.5 million increase in net gains~~ on loans accounted for under the fair value option. Partially offsetting the ~~increase~~decrease over the prior year was ~~decreased~~the net ~~gains~~gain on ~~sales of loans of $9.6 million.~~

~~For the nine months ended September 30, 2022, noninterest income increased by $92.5 million, or 73.1%, compared to the~~ ~~nine months ended September 30, 2021~~. The increase over the prior year is also the result of the above mentioned Payrailz gain combined with the $120.5 million Finxact gain recognized in the second quarter of 2022. Partially offsetting the increase over the prior year was a decrease in equity security investment gains of $42.0 million, related to the 2021 Greenlight gain. Also partially offsetting the increase over the first nine months of 2021 was decreased net gains on sales of loans of $11.1 million, an increased loss on loan servicing asset revaluation incrementally increasing $1.9 million combined with $2.0 million more in management fee income generated by Canapi Advisors. Canapi Advisors is included in the Company's Fintech segment.

Table of ~~$4.0 million, and a decreased net gain on loans accounted for under the fair value option of $3.8 million.~~Contents

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 September 30, Three Months Ended June 30, Three Months Ended March 31,
2022 2021 2022 2021 2022 2021
Amount of loans and leases originated $ 1,005,235 $ 1,063,190 $ 959,635 $ 1,153,693 $ 865,063 $ 1,180,219
Guaranteed portions of loans sold 148,110 201,903 68,818 130,858 219,703 136,747
Outstanding balance of guaranteed loans sold(1)
2,671,705 2,731,031 2,681,079 2,694,931 2,786,403 2,843,963


		Nine Months Ended September 30,				For years ended December 31,									Three Months Ended March 31,				For years ended December 31,
		2022		2021		2021		2020		2019		2018			2023		2022		2022		2021		2020		2019
Amount of loans and leases originated	Amount of loans and leases originated	$	2,829,933	$	3,397,102	$	4,480,725	$	4,450,198	$	2,001,886	$	1,765,680	Amount of loans and leases originated	$	1,030,882	$	865,063	$	4,007,621	$	4,480,725	$	4,450,198	$	2,001,886
Guaranteed portions of loans sold	Guaranteed portions of loans sold	436,631		469,508		668,462		542,596		340,374		945,178		Guaranteed portions of loans sold	167,826		219,703		580,889		668,462		542,596		340,374
Outstanding balance of guaranteed loans sold(1)	Outstanding balance of guaranteed loans sold(1)	2,671,705		2,731,031		2,756,915		2,819,625		2,746,480		3,045,460		Outstanding balance of guaranteed loans sold(1)	2,695,757		2,786,403		2,668,110		2,756,915		2,819,625		2,746,480

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

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

Loan Servicing Asset Revaluation: The Company revalues its serviced loan portfolio at least quarterly. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as adequate compensation for servicing, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses, with the prepayment speed being one of the most sensitive assumptions. For the three months ended ~~September 30, 2022,~~March 31, 2023, there was a ~~negative~~net gain on loan servicing asset revaluation ~~adjustment~~ of ~~$1.3 million,~~$356 thousand, compared to ~~$5.9~~a net loss of $1.6 million for the three months ended ~~September 30, 2021,~~March 31, 2022, resulting in a ~~decrease in expense~~positive change of ~~$4.6~~$1.9 million, or ~~77.5%~~122.7%. ~~For the nine months ended September 30, 2022 there was negative loan servicing revaluation adjustment of $11.6 million compared to $7.6 million for the nine months ended September 30, 2021, an~~The increase in ~~expense of $4.0 million, or 52.8%. The decrease in~~ the ~~loss~~net gain on valuation of the servicing asset compared to the ~~third~~first quarter of ~~2021~~2022 was principally the result of positive movements in market pricing ~~particularly as it relates to variable products,~~ during the ~~third~~first three months of 2023 as compared to negative market changes within the first quarter of 2022. The increase in the loss on loan servicing valuation when comparing to the first nine months of 2021 is principally the result of the emergence of weaker market conditions in 2022 than those experienced in the first nine months of the prior year.

Net Gains on Sales of Loans: For the three months ended ~~September 30, 2022,~~March 31, 2023, net gains on sales of loans decreased ~~$9.6~~$10.8 million, or ~~50.8%~~51.5%, compared to the three months ended ~~September 30, 2021.~~March 31, 2022. The volume of guaranteed loans sold decreased ~~$53.8~~$51.9 million, or ~~26.6%~~23.6%, for the three months ended ~~September 30, 2022~~March 31, 2023 to ~~$148.1~~$167.8 million from ~~$201.9~~$219.7 million in the three months ended September 30, 2021. For the nine months ended September 30, 2022, net gains on sales of loans decreased $11.1 million, or 23.7%, compared to the nine months ended September 30, 2021. For the nine months ended September 30, 2022, the volume of guaranteed loans sold decreased $32.9 million, or 7.0%, to $436.6 million from $469.5 million for the nine months ended September 30, 2021.March 31, 2022. The average net gain on loan sale premium decreased from ~~110%~~109% to ~~108% in the third quarters of 2021 and 2022, respectively, and decreased from 110% to 109%~~106% in the first ~~nine months~~quarters of ~~2021~~2022 and ~~2022,~~2023, respectively. The decrease in net gains on sales of loans ~~for both periods~~ was principally the result of lower loan ~~sales~~sale volume ~~combined with negative market conditions beginning to materialize~~and comparatively lower premiums in ~~2022, as discussed above.~~the first quarter of 2023. Accordingly, these market trends influenced the Company's level of appetite for loan sales during periods of weaker premiums in the current year.

Net (Loss) Gain ~~(Loss)~~ on Loans Accounted for Under the Fair Value Option: For the three months ended ~~September 30, 2022,~~March 31, 2023, the Company had a net ~~gain~~loss on loans accounted for under the fair value option of ~~$4.4~~$4.5 million compared to a net loss of $1.0 million for the third quarter of 2021, a positive change of $5.5 million, or 529.1%. For the nine months ended September 30, 2022, the Company had a net gain on loans accounted for under the fair value option of $475 thousand compared to a net gain of ~~$4.3 million~~$516 thousand for the ~~same period~~first quarter of ~~2021,~~2022, a negative change of ~~$3.8 million, or 89.0%.~~$5.0 million. The carrying amount of loans accounted for under the fair value option at ~~September 30, 2022~~March 31, 2023 and ~~2021~~2022 was ~~$512.2~~$467.0 million (all classified as held for investment) and ~~$725.4~~$625.7 million ($~~27.4~~25.1 million classified as held for sale and ~~$698.0~~$600.6 million classified as held for investment), respectively, a decrease of ~~$213.2~~$158.7 million, or ~~29.4%~~25.4%. The ~~increased~~incremental net ~~gain~~loss on loans accounted for under the fair value option during ~~third~~first quarter of ~~2022~~2023 compared to the ~~third~~first quarter of ~~2021~~2022 was largely the result of ~~positive movements in~~negative market ~~pricing, as discussed above relative~~impacts related to loan servicing, in combination with continued amortization of the underlying loan portfolio. The decreased net gain on loans accounted for under the fair value option during the first nine months of 2022 as compared to the prior comparative period is principally the result of the emergence of weaker market conditions than those experienced in the first nine months of 2021.rising interest rates.

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.

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

Three Months Ended September 30, 2022/2021 Increase (Decrease)
2022 2021 Amount Percent
Noninterest expense
Salaries and employee benefits $ 43,479 $ 28,202 $ 15,277 54.2 %
Non-employee expenses:
Travel expense 2,372 1,819 553 30.4 %
Professional services expense 2,505 4,251 (1,746) (41.1)
Advertising and marketing expense 2,621 1,631 990 60.7
Occupancy expense 2,519 2,042 477 23.4
Technology expense 7,770 6,150 1,620 26.3
Equipment expense 3,761 3,706 55 1.5
Other loan origination and maintenance expense 3,376 3,489 (113) (3.2)
Renewable energy tax credit investment impairment 7,721 60 7,661 12,768.3
FDIC insurance 2,697 1,670 1,027 61.5
Contributions and donations 191 523 (332) (63.5)
Other expense 4,036 1,916 2,120 110.6
Total non-employee expenses 39,569 27,257 12,312 45.2 %
Total noninterest expense $ 83,048 $ 55,459 $ 27,589 49.7 %


		Nine Months Ended September 30,				2022/2021 Increase (Decrease)					Three Months Ended March 31,				2023/2022 Increase (Decrease)
		2022		2021		Amount		Percent			2023		2022		Amount		Percent
Noninterest expense	Noninterest expense									Noninterest expense
Salaries and employee benefits	Salaries and employee benefits	$	128,262	$	92,468	$	35,794	38.7	%	Salaries and employee benefits	$	44,765	$	38,507	$	6,258	16.3	%
Non-employee expenses:	Non-employee expenses:									Non-employee expenses:
Travel expense	Travel expense	6,627		4,027		2,600		64.6		Travel expense	2,411		1,897		514		27.1
Professional services expense	Professional services expense	9,284		11,411		(2,127)		(18.6)		Professional services expense	927		2,791		(1,864)		(66.8)
Advertising and marketing expense	Advertising and marketing expense	6,651		3,158		3,493		110.6		Advertising and marketing expense	3,603		1,729		1,874		108.4
Occupancy expense	Occupancy expense	7,619		6,378		1,241		19.5		Occupancy expense	1,925		2,327		(402)		(17.3)
Technology expense	Technology expense	19,585		16,159		3,426		21.2		Technology expense	7,729		6,053		1,676		27.7
Equipment expense	Equipment expense	11,361		11,128		233		2.1		Equipment expense	3,818		3,816		2		0.1
Other loan origination and maintenance expense	Other loan origination and maintenance expense	9,511		10,123		(612)		(6.0)		Other loan origination and maintenance expense	3,927		3,113		814		26.1
Renewable energy tax credit investment impairment	Renewable energy tax credit investment impairment	7,771		3,187		4,584		143.8		Renewable energy tax credit investment impairment	69		—		69		100.0
FDIC insurance	FDIC insurance	6,833		5,139		1,694		33.0		FDIC insurance	3,403		1,972		1,431		72.6
Contributions and donations	Contributions and donations	6,429		2,003		4,426		221.0		Contributions and donations	56		723		(667)		(92.3)
Other expense	Other expense	9,708		6,108		3,600		58.9		Other expense	6,329		2,786		3,543		127.2
Total non-employee expenses	Total non-employee expenses	101,379		78,821		22,558		28.6	%	Total non-employee expenses	34,197		27,207		6,990		25.7
Total noninterest expense	Total noninterest expense	$	229,641	$	171,289	$	58,352	34.1	%	Total noninterest expense	$	78,962	$	65,714	$	13,248	20.2	%

Total noninterest expense for the three ~~and nine~~ months ended ~~September 30, 2022,~~March 31, 2023, increased ~~$27.6~~$13.2 million, or ~~49.7%~~20.2%, ~~and $58.4 million, or 34.1%, respectively,~~ compared to the same ~~periods~~period in ~~2021.~~2022. The increase in noninterest expense for the comparable three ~~and nine~~ month ~~periods~~period was largely driven by various components, as discussed below.

~~Table of Contents~~

Salaries and employee benefits: Total personnel expense for the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 increased by ~~$15.3~~$6.3 million, or ~~54.2%~~16.3%, ~~and $35.8 million, or 38.7%, respectively,~~ compared to the same ~~periods~~period in ~~2021.~~2022. The increase in salaries and employee benefits was principally related to continued investment in human resources to support strategic and growth initiatives. Additional bonus accruals of $7.5 million and $3.0 million were included in both the second and third quarters of 2022 related to the earlier discussed Finxact and Payrailz gains, respectively, while the second quarter of 2021 included an additional $4.0 million bonus accrual, related to earlier mentioned Greenlight gain. Total full-time equivalent employees increased from ~~755~~842 at ~~September~~March 3031, ~~2021,~~2022, to ~~940~~968 at ~~September~~March 3031, ~~2022.~~2023. Salaries and employee benefits expense included ~~$5.0~~$6.2 million and ~~$15.1~~$5.0 million of stock-based compensation for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022,~~, respectively, compared to $3.7 million and $12.8 million for the three and nine months ended September 30, 2021,~~ respectively. Expenses related to the employee stock purchase program, stock grants, stock option compensation and restricted stock expense are all considered stock-based compensation.

~~Travel~~Professional service expense: For the ~~nine~~three months ended ~~September 30, 2022, travel~~March 31, 2023, professional service expenses ~~increased $2.6~~decreased $1.9 million, or ~~64.6%~~66.8%, compared to the same period in ~~2021~~. Travel expenses increased primarily in relation to supporting both loan origination volume and the customer base as travel restrictions have eased combined with inflationary impacts on travel related costs.

~~Professional service expense:~~ ~~For the~~ ~~three and nine~~ ~~months ended September 30,~~ 2022 ~~professional service expenses decreased $1.7 million, or 41.1%, and $2.1 million, or 18.6%, respectively,~~ ~~compared to the same periods in 2021~~. The decrease compared to the prior ~~periods~~period was ~~largely driven by lower~~due to an insurance recovery of $1.3 million in the current quarter related to previously expensed legal fees.

Advertising and marketing expense: For the three ~~and nine~~ months ended ~~September 30, 2022,~~March 31, 2023, advertising and marketing expense increased ~~$990 thousand, or 60.7%, and $3.5~~$1.9 million, or ~~110.6%~~108.4%, ~~respectively,~~ compared to the same ~~periods~~period in ~~2021. Increases were~~2022. This increase was largely driven by ~~a continuation of renewed marketing events.~~continued investment in the Company’s lending and deposit market growth.

Technology expense: For the three ~~and nine~~ months ended ~~September 30, 2022,~~March 31, 2023, technology expense increased ~~$1.6~~$1.7 million, or ~~26.3%~~27.7%, ~~and $3.4 million, or 21.2%, respectively,~~ compared to the same ~~periods~~period in ~~2021.~~2022. This increase was primarily related to enhanced investments in the Company’s technology resources.

~~Renewable energy tax credit investment impairment:~~FDIC insurance: ~~During the third quarter of 2022, the Company recognized $7.7 million in impairment charges related to a new renewable energy tax credit investment that was fully funded.~~ Investments of this type generate a return primarily through the realization of income tax credits and other benefits; accordingly, impairment of the investment amount is recognized in conjunction with the realization of related tax benefits. Partially offsetting this increase over the first nine months of 2021 was $3.1 million in impairment charges for a first quarter 2021 renewable energy tax credit investment.

~~Contributions and donations:~~For the ~~nine~~three months ended ~~September 30, 2022, contributions and donations expense~~March 31, 2023, FDIC insurance increased ~~$4.4~~$1.4 million, or ~~221.0%~~72.6%, compared to the same period in ~~2021.~~2022. This increase ~~was related to~~is largely a ~~special charitable donation during~~product of the ~~second quarter of 2022 of $5.0 million made in connection with the earlier discussed Finxact gain.~~Bank's continued growth.

~~Income Tax Expense~~

Other expense:For the three months ended ~~September 30,~~March 31, 2023, other expense increased $3.5 million, compared to the same period in 2022, largely related to $2.8 million in increased levels of reserves on unfunded commitments. This increase in the reserve for unfunded commitments was largely a result of refinements to the estimation assumptions in the first quarter of 2023.

Table of Contents

Income Tax Expense

For the three months ended March 31, 2023, income tax expense was ~~$1.5~~$3.2 million compared to ~~$9.4~~$8.4 million for the ~~third~~first quarter of ~~2021,~~2022, and the Company’s effective tax rates were ~~3.4%~~89.0% and 21.7%, respectively. For the nine months ended September 30, 2022, income tax expense was $35.2 million compared to $26.2 million for the first nine months of 2021, and the Company’s effective tax rates were 16.8% and 16.0%19.6%, respectively. The lower level of income tax expense ~~and effective tax rate~~ for the ~~third~~first quarter of ~~2022~~2023 as compared to the same period in ~~2021~~2022 was principally the result of decreased pretax income while the higher ~~than anticipated investment~~effective tax ~~credits~~rate was principally the product of discrete items in the first quarter of 2023 related to renewable energy investments, arising from impacts of the passage of the Inflation Reduction Act of 2022 combined with higher than expected costs, as a result of the ongoing inflationary environment. The increase in income tax expense for first nine months of 2022 compared to the comparative period of 2021 was primarily from increased pretax income during the current period, largely a product of the earlier discussed Finxact and Payrailz gains.stock compensation.

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Results of Segment Operations

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


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2022		2021		2022		2021			2023		2022
Banking	Banking	$	17,519	$	37,136	$	59,114	$	113,036	Banking	$	2,388	$	37,840
Fintech	Fintech	27,077		(1,300)		120,011		29,127		Fintech	(361)		(1,749)
Other	Other	(1,728)		(1,997)		(4,709)		(5,315)		Other	(1,629)		(1,582)
Consolidated net income	Consolidated net income	$	42,868	$	33,839	$	174,416	$	136,848	Consolidated net income	$	398	$	34,509

Banking

For the three ~~and nine~~ months ended ~~September 30, 2022,~~March 31, 2023, net income decreased ~~$19.6~~$35.5 million, or ~~52.8%~~93.7%, ~~and $53.9 million, or 47.7%, respectively,~~ compared to the same ~~periods~~period of ~~2021.~~2022. Key factors influencing this decrease are discussed below.

The provision for loan and lease credit losses for the three ~~and nine~~ months ended ~~September 30, 2022,~~March 31, 2023, increased ~~$9.9 million, or 228.1%, and $10.0 million, or 88.4%, respectively.~~$17.2 million. See the analysis of provision for loan and lease credit losses included in the above section captioned “Provision for Loan and Lease Credit Losses” as it is entirely related to the Banking segment.

For the three ~~and nine~~ months ended ~~September 30, 2022,~~March 31, 2023, noninterest income ~~increased $2.1~~decreased $14.9 million, or ~~8.5%~~46.8%, ~~and decreased $18.1 million, or 21.9%, respectively,~~ compared to the same ~~periods~~period of ~~2021. The decrease for the nine month comparative periods was principally driven by a~~2022. ~~decrease in net gains on sales of loans combined with an increase of losses in loan servicing asset revaluation and decrease in net gain arising from loans accounted for under the fair value option.~~ See the analysis of these categories of noninterest income included in the above section captioned “Noninterest Income” for additional discussion.

For the three ~~and nine~~ months ended ~~September 30, 2022,~~March 31, 2023, noninterest expense increased ~~$26.1~~$13.1 million, or ~~49.7%~~21.3%, ~~and $57.8 million, or 36.4%, respectively,~~ compared to same ~~periods~~period of ~~2021.~~2022. See the analysis of these categories of noninterest expense included in the above section captioned “Noninterest Expense” for additional discussion.

For the three ~~and nine~~ months ended ~~September 30, 2022,~~March 31, 2023, income tax expense decreased ~~$8.0~~$5.8 million, or ~~85.6%~~63.7%, ~~and $9.0 million, or 47.0%, respectively,~~ compared to the same ~~periods~~period of ~~2021.~~2022. This decrease relative to the Bank for both comparative periods is discussed in the above section captioned ~~"Income~~“Income Tax ~~Expense" in regard to impacts of changes in anticipated investment tax credits related to renewable energy investments.~~Expense.”

Fintech

For the three ~~and nine~~ months ended ~~September 30, 2022,~~March 31, 2023, net ~~income increased~~loss decreased by ~~$28.4~~$1.4 million, ~~and $90.9 million, respectively,~~ compared to same ~~periods~~period of ~~2021.~~2022. The primary factor influencing the decrease in net loss was an increase ~~was principally due to the third and second quarters~~in noninterest income of ~~2022 equity method investment gains of $28.4~~$1.8 million and $120.5 million from the sale of Payrailz and Finxact, respectively. This increase for the comparative nine month periods was partially offset by the equity security investment gains arising from the second quarter of 2021 gain of $44.1 million arising from the Company’s investment in Greenlight.

~~For the three and nine months ended September 30, 2022, noninterest expense increased $1.3 million and $3.5 million, respectively,~~ compared to the same period of ~~2021.~~2022. This increase was ~~largely~~ principally due ~~increased levels~~to a $2.0 million increase in management fee income earned by Canapi Advisors. There were two funds receiving advisory services in the first quarter of ~~salaries and benefits.~~

~~For the three and nine months ended September 30,~~ 2022 ~~income tax expense increased $622 thousand, or 301.9%, and $16.1 million, or 161.2%, respectively,~~ compared to four funds in the ~~same periods~~first quarter of ~~2021. This increase is a product of the above discussed increase in Fintech segment income for comparative periods. See the above section captioned “Income Tax Expense.”~~2023.

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Discussion and Analysis of Financial Condition

~~September 30, 2022~~March 31, 2023 vs. December 31, ~~2021~~2022

Total assets at ~~September 30, 2022~~March 31, 2023 were ~~$9.31~~$10.36 billion, an increase of ~~$1.10 billion,~~$508.8 million, or ~~13.4%~~5.2%, compared to total assets of ~~$8.21~~$9.86 billion at December 31, ~~2021.~~2022. The growth in total assets was principally driven by the following:

•Cash and cash equivalents, comprised of cash and due from banks and federal funds sold was $403.4 million at September 30, 2022, an increase of $199.6 million, or 98.0%, compared to $203.8 million at December 31, 2021. This change reflects increased liquidity planning levels in the current rising rate environment and proceeds arising from the Payrailz and Finxact sales combined with growing deposit levels.

•Growth in total loans and leases held for investment and held for sale of ~~$753.3~~$321.5 million resulting from strong origination activity in the first ~~nine~~three months of ~~2022~~2023 and holding loans available for sale for longer periods of time before sale, as discussed more fully below. Total originations during the first ~~nine~~quarter of 2023 were $1.03 billion.

•Investment securities available-for-sale increased $135.0 million during the first three months of 2023, from $1.01 billion at December 31, 2022, ~~were $2.83 billion.~~to $1.15 billion at March 31, 2023, an increase of 13.3%. The increase was largely the result of liquidity and balance sheet management. At March 31, 2023, the investment portfolio was comprised of U.S. government agencies, U.S. government-sponsored entity mortgage-backed securities, municipal bonds and other debt securities.

Cash and cash equivalents, comprised of cash and due from banks and federal funds sold, was $463.2 million at March 31, 2023, an increase of $46.6 million, or 11.2%, compared to $416.6 million at December 31, 2022. This change principally reflects strategically increased liquidity in response to the recent banking crisis.

Loans held for sale decreased ~~$578.9~~$21.3 million, or ~~51.8%~~3.8%, during the first ~~nine~~three months of ~~2022,~~2023, from ~~$1.12 billion~~$554.6 million at December 31, ~~2021,~~2022, to ~~$537.6~~$533.3 million at ~~September 30, 2022.~~March 31, 2023. The decrease ~~was primarily the result of a $754.7 million transfer of~~in loans ~~including $696.6 million in guaranteed loans, from~~ held for sale ~~to held for investment in the third quarter of 2022. This transfer~~ was ~~largely~~principally due to the impact of ~~recent and anticipated future~~ market conditions in a rising rate environment ~~influencing~~which has influenced management's ~~intent and ability to hold these loans for the foreseeable future. See “Results of Operations” discussion of “Net Gains on Sales of Loans” for additional information influencing managements~~ intent to hold ~~more~~a greater portion of loans as held for investment.

Loans and leases held for investment increased ~~$1.33 billion,~~$342.8 million, or ~~24.1%~~4.7%, during the first ~~nine~~three months of ~~2022,~~2023, from ~~$5.52~~$7.34 billion at December 31, ~~2021,~~2022, to ~~$6.85~~$7.69 billion at ~~September 30, 2022.~~March 31, 2023. The increase was primarily the result of the above-mentioned loan originations in ~~2022~~2023 combined with increased levels of loans retained as held for investment. ~~Excluding PPP loans,~~

Total deposits were $9.42 billion at March 31, 2023, an increase of $537.1 million, or 6.0%, from $8.88 billion at December 31, 2022. The increase in total ~~loans~~deposits from the prior period was to support growth in the loan and ~~leases held for investment increased $1.57~~lease portfolio, as well as enhance the Company’s liquidity profile in response to the recent banking crisis. In addition, the Company began offering the IntraFi Insured Cash Sweep product in the first quarter of 2023 whereby depositors have access to FDIC insurance in excess of $250 thousand. At March 31, 2023 the Bank’s total uninsured deposits were approximately $1.4 billion, or ~~29.9%, during the first nine months~~14.5% of ~~2022. All PPP loans are classified as held for investment.~~total deposits.

~~Other assets increased $48.1~~Borrowings decreased to $30.8 million ~~or 19.2%, during the first nine months of 2022,~~at March 31, 2023 from ~~$250.3~~$83.2 million at December 31, ~~2022 to $298.4 million at September 30,~~ 2022. ~~This increase was principally comprised of full and partially funded commitments to equity method and equity security investments.~~

Total deposits were $8.40 billion at September 30, 2022, an increase of $1.29 billion, or 18.2%, from $7.11 billion at December 31, 2021. The increase in deposits is largely driven by significant loan origination efforts.

~~Borrowings decreased to $35.6 million at September 30, 2022 from $318.3 million at December 31, 2021.~~ This decrease was ~~related~~ principally due to paying off the Company’s Fed Funds line of credit in the first quarter of 2023. See Note 8. Borrowings in the accompanying Notes to Unaudited Condensed Consolidated Financial Statements for a discussion of current sources of available debt capacity.

Regulatory Impact of Asset Growth

General. As of March 31, 2023, the Company and the Bank each first exceeded $10 billion in total assets. As of March 31, 2023, the Company and the Bank each had total assets of $10.36 billion and $10.25 billion, respectively. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and its implementing regulations impose various additional requirements on bank holding companies and banks with $10 billion or more in total consolidated assets. As a general matter, the Company and the Bank are not immediately subject to these additional requirements when they exceed $10 billion in assets; instead, the Company and the Bank will be subject to these various requirements over various dates, as described below.

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

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Deposit Insurance Assessments. Also under the Dodd-Frank Act, the minimum ratio of net ~~curtailments~~worth to insured deposits of ~~borrowings through~~ the ~~PPPLF~~federal Deposit Insurance Fund administered by the FDIC was increased from 1.15 percent to 1.35 percent and the FDIC is required, in setting deposit insurance assessments, to offset the effect of the increase on institutions with assets of less than $10 billion, which ~~was paid off~~results in institutions with assets greater than $10 billion paying higher assessments. In addition, following the fourth consecutive quarter where the total assets of a bank exceeds $10 billion, as reported in its quarterly Call Report, the FDIC utilizes a different method for determining deposit insurance assessments. This large bank method is based on a bank’s ability to withstand asset- and funding-related stress, its regulatory ratings, and potential losses to the FDIC in the event of the bank’s failure, subject to discretionary adjustments by ~~September 30, 2022~~the FDIC.

Volcker Rule. Under provisions of the Dodd-Frank Act referred to as the “Volcker Rule,” certain limitations are placed on the ability of insured depository institutions and their affiliates to engage in sponsoring, investing in and transacting with certain investment funds, known as “covered funds” under the rule. There are a number of exclusions from ~~$267.6 million at~~the definition of “covered funds,” including for investments in Small Business Investment Companies, or SBICs, and certain qualifying venture capital funds. The Volcker Rule also places restrictions on proprietary trading, which could impact certain hedging activities. Community banks are excluded from the restrictions of the Volcker Rule if (i) the community bank, and every entity that controls it, has total consolidated assets equal to or less than $10 billion and (ii) trading assets and liabilities of the community bank, and every entity that controls it, are equal to or less than five percent of its total consolidated assets. The Company and the Bank will no longer be eligible for this exemption upon exceeding $10 billion in total consolidated assets.

Limits on Interchange Fees. The Bank also may be affected by the Durbin Amendment to the Dodd-Frank Act regarding limits on debit card interchange fees. The Durbin Amendment gave the Federal Reserve Board the authority to establish rules regarding interchange fees charged for electronic debit transactions by a payment card issuer that, together with its affiliates, has assets of $10 billion or more, as of December 31 ~~2021. These PPPLF borrowings were used~~of the preceding calendar year, and to ~~help fund PPP loans.~~

~~Shareholders’ equity at September 30, 2022 was $802.2 million as compared~~enforce a new statutory requirement that such fees be reasonable and proportional to ~~$715.1 million at December 31, 2021.~~the actual cost of a transaction to the issuer. The ~~book~~Federal Reserve Board has adopted rules under this provision that limit the swipe fees that a debit card issuer can charge a merchant for a transaction to the sum of 21 cents and five basis points times the value ~~per share was $18.24 at September 30, 2022 compared~~of the transaction, plus up to ~~$16.39 at December 31, 2021. Average equity to average assets was 9.1%~~one cent for the nine months ended September 30, 2022 compared to 8.8% for the year ended December 31, 2021. The increase in shareholders’ equity for the first nine months of 2022 was principally the result of $174.4 million in net income and stock-based compensation expense of $15.1 million, partially offset by other comprehensive loss associated with negative market impacts on the Company’s available-for-sale investment portfolio of $97.2 million.fraud prevention costs.

Asset Quality

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

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Nonperforming Assets

The Bank places loans and leases on nonaccrual status when they become 90 days past due as to principal or interest payments, or prior to that if management has determined based upon current information available to them that the timely collection of principal or interest is not probable. When a loan or lease is placed on nonaccrual status, any interest previously accrued as income but not actually collected is reversed and recorded as a reduction of loan or lease interest and fee income. Typically, collections of interest and principal received on a nonaccrual loan or lease are applied to the outstanding principal as determined at the time of collection of the loan or lease.

~~Troubled~~ In respect to the Company's adoption of ASU No. 2022-02 on January 1, 2023, as described more fully in Note 2 in the accompanying Unaudited Condensed Consolidated Financial Statements, the prior period discussed below has been adjusted to exclude previously disclosed troubled debt restructurings (“TDRs”) 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).for comparative purposes.

Nonperforming assets, ~~and TDRs,~~ excluding loans measured at fair value, at ~~September 30, 2022~~March 31, 2023 were ~~$108.0~~$85.7 million, which represented a ~~$27.8~~$12.3 million, or ~~34.7%~~16.8%, increase from December 31, ~~2021.~~2022. These nonperforming assets at ~~September 30, 2022 included $60.1~~March 31, 2023 were comprised of $85.7 million in nonaccrual loans and ~~leases and $1.2 million in~~leases. At March 31, 2023, there were no foreclosed assets. Of the ~~$108.0~~$85.7 million of nonperforming assets, ~~and TDRs, $65.3~~$63.7 million carried a government guarantee, leaving an unguaranteed exposure of ~~$42.7~~$22.0 million in total nonperforming assets ~~and TDRs~~ at ~~September 30, 2022.~~March 31, 2023. This represents an increase of ~~$5.7~~$3.2 million, or ~~15.5%~~17.1%, from an unguaranteed exposure of ~~$37.0~~$18.8 million at December 31, ~~2021.~~2022.

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


		September 30, 2022 (1)			December 31, 2021 (1)				March 31, 2023 (1)			December 31, 2022 (1)
Nonaccrual loans and leases:	Nonaccrual loans and leases:							Nonaccrual loans and leases:
Total nonperforming loans and leases (all on nonaccrual)	Total nonperforming loans and leases (all on nonaccrual)	$	60,064		$	42,533		Total nonperforming loans and leases (all on nonaccrual)	$	85,698		$	73,392
Total accruing loans and leases past due 90 days or more		—			—

Foreclosed assets	Foreclosed assets	1,178			620			Foreclosed assets	—			—
Total troubled debt restructurings		66,404			55,273
Less nonaccrual troubled debt restructurings		(19,600)			(18,210)
Total performing troubled debt restructurings		46,804			37,063
Total nonperforming assets and troubled debt restructurings		$	108,046		$	80,216
Total nonperforming assets								Total nonperforming assets	$	85,698		$	73,392
Allowance for credit losses on loans and leases	Allowance for credit losses on loans and leases	$	78,291		$	63,584		Allowance for credit losses on loans and leases	$	108,242		$	96,566
Total nonperforming loans and leases to total loans and leases held for investment	Total nonperforming loans and leases to total loans and leases held for investment	0.95		%	0.87		%	Total nonperforming loans and leases to total loans and leases held for investment	1.19		%	1.07		%
Total nonperforming loans and leases to total assets	Total nonperforming loans and leases to total assets	0.68		%	0.56		%	Total nonperforming loans and leases to total assets	0.87		%	0.78		%
Total nonperforming assets and troubled debt restructurings to total assets		1.23		%	1.06		%
Allowance for credit losses on loans and leases to loans and leases held for investment	Allowance for credit losses on loans and leases to loans and leases held for investment	1.23		%	1.30		%	Allowance for credit losses on loans and leases to loans and leases held for investment	1.50		%	1.41		%
Allowance for credit losses on loans and leases to total nonperforming loans and leases	Allowance for credit losses on loans and leases to total nonperforming loans and leases	130.35		%	149.49		%	Allowance for credit losses on loans and leases to total nonperforming loans and leases	126.31		%	131.58		%

(1)Excludes loans measured at fair value.

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		September 30, 2022 (1)			December 31, 2021 (1)				March 31, 2023 (1)			December 31, 2022 (1)
Nonaccrual loans and leases guaranteed by U.S. government:	Nonaccrual loans and leases guaranteed by U.S. government:							Nonaccrual loans and leases guaranteed by U.S. government:
Total nonperforming loans and leases guaranteed by the U.S government (all on nonaccrual)	Total nonperforming loans and leases guaranteed by the U.S government (all on nonaccrual)	$	45,730		$	26,546		Total nonperforming loans and leases guaranteed by the U.S government (all on nonaccrual)	$	63,696		$	54,608
Total accruing loans and leases past due 90 days or more guaranteed by the U.S government		—			—
Foreclosed assets guaranteed by the U.S. government	Foreclosed assets guaranteed by the U.S. government	900			490			Foreclosed assets guaranteed by the U.S. government	—			—
Total troubled debt restructurings guaranteed by the U.S. government		34,160			26,954
Less nonaccrual troubled debt restructurings guaranteed by the U.S. government		(15,471)			(10,770)
Total performing troubled debt restructurings guaranteed by U.S. government		18,689			16,184
Total nonperforming assets and troubled debt restructurings guaranteed by the U.S. government		$	65,319		$	43,220
Total nonperforming assets guaranteed by the U.S. government								Total nonperforming assets guaranteed by the U.S. government	$	63,696		$	54,608
Allowance for credit losses on loans and leases	Allowance for credit losses on loans and leases	$	78,291		$	63,584		Allowance for credit losses on loans and leases	$	108,242		$	96,566
Total nonperforming loans and leases not guaranteed by the U.S. government to total held for investment loans and leases	Total nonperforming loans and leases not guaranteed by the U.S. government to total held for investment loans and leases	0.23		%	0.33		%	Total nonperforming loans and leases not guaranteed by the U.S. government to total held for investment loans and leases	0.30		%	0.27		%
Total nonperforming loans and leases not guaranteed by the U.S. government to total assets	Total nonperforming loans and leases not guaranteed by the U.S. government to total assets	0.16		%	0.21		%	Total nonperforming loans and leases not guaranteed by the U.S. government to total assets	0.22		%	0.20		%
Total nonperforming assets and troubled debt restructurings not guaranteed by the U.S. government to total assets		0.49		%	0.49		%
Allowance for credit losses on loans and leases to total nonperforming loans and leases not guaranteed by the U.S. government	Allowance for credit losses on loans and leases to total nonperforming loans and leases not guaranteed by the U.S. government	546.19		%	397.73		%	Allowance for credit losses on loans and leases to total nonperforming loans and leases not guaranteed by the U.S. government	491.96		%	514.09		%

(1)Excludes loans measured at fair value.

Total nonperforming assets, ~~and TDRs,~~ including loans measured at fair value, at ~~September 30, 2022~~March 31, 2023 were ~~$164.0~~$141.3 million, which represented a ~~$10.4~~$20.9 million, or ~~6.8%~~17.4%, increase from December 31, ~~2021. These nonperforming assets at September 30, 2022 included $90.3 million in nonaccrual loans and leases and $1.2 million in foreclosed assets.~~2022. Of the ~~$164.0~~$141.3 million of nonperforming assets, ~~and TDRs, $110.4~~$109.4 million carried a government guarantee, leaving an unguaranteed exposure of ~~$53.6~~$31.9 million in total nonperforming assets ~~and TDRs~~ at ~~September 30, 2022.~~March 31, 2023. This represents an increase of ~~$1.1~~$5.9 million, or ~~2.1%~~22.5%, from an unguaranteed exposure of ~~$52.5~~$26.0 million at December 31, ~~2021.~~2022.

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

As a percentage of the Bank’s total capital, nonperforming loans and leases, excluding loans measured at fair value, represented ~~7.6%~~10.4% at ~~September 30, 2022,~~March 31, 2023, compared to ~~6.0%~~9.0% at December 31, ~~2021.~~2022. Adjusting the ratio to include only the unguaranteed portion of nonperforming loans and leases at historical cost to reflect management’s belief that the greater magnitude of risk resides in this portion, the ratios at both ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 were ~~1.8%~~2.7% and 2.3%, respectively.

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As of ~~September 30, 2022,~~March 31, 2023, and December 31, ~~2021,~~2022, potential problem (also referred to as criticized) and classified loans and leases, excluding loans measured at fair value, totaled ~~$379.4~~$504.2 million and ~~$372.7~~$424.7 million, respectively. The following is a discussion of these loans and leases. Risk Grades 5 through 8 represent the spectrum of criticized and classified loans and leases. For a complete description of the risk grading system, see Note 3. Loans and Leases Held for Investment and Credit Quality in the Company’s ~~2021~~2022 Form 10-K. At ~~September 30, 2022~~March 31, 2023, the portion of criticized and classified loans and leases guaranteed by the SBA or USDA totaled ~~$191.8~~$218.3 million and total portfolio unguaranteed exposure risk was ~~$187.6~~$285.9 million, or ~~5.0%~~6.4% of total held for investment unguaranteed exposure carried at historical cost. This compares to the December 31, ~~2021~~2022 portion of criticized and classified loans and leases guaranteed by the SBA or USDA which totaled ~~$197.2~~$195.8 million and total portfolio unguaranteed exposure risk was ~~$175.5~~$228.9 million, or ~~6.3%~~5.5% of total held for investment unguaranteed exposure carried at historical cost. As of ~~September 30,~~March 31, 2023, loans and leases carried at historical cost within the following verticals comprise the largest portion of the total potential problem and classified loans and leases: Sponsor Finance at 12.8% (principally related to Search Fund Lending), Wine and Craft Beverage at 11.3%, Senior Housing at 11.0%, General Lending at 10.7%, Healthcare at 6.2%, Hotels at 5.0%, Senior Care at 4.6% and Fitness Centers at 4.2%. As of December 31, 2022, loans and leases carried at historical cost within the following verticals comprise the largest portion of the total potential problem and classified loans and leases: Wine and Craft Beverage at ~~11.7%~~11.5%, General Lending at ~~9.5%~~10.3%, Senior ~~Care~~Housing at ~~9.4%~~10.2%, Sponsor Finance at 7.8%, Healthcare at 6.4%, Hotels at ~~8.5%, Healthcare at 8.2%, Educational Services at 8.0%~~5.9%, Fitness Centers at ~~5.2%, Sponsor Finance at 4.6%, Entertainment Centers at 4.5%, Agriculture at 4.5%, and Veterinary at 4.0%. As of~~ ~~December 31, 2021~~, loans and leases carried at historical cost within the following verticals comprise the largest portion of the total potential problem and classified loans and leases: Educational Services at 16.1%, Wine and Craft Beverage at 13.7%, Hotels at 11.8%, Entertainment Centers at 10.4%, Healthcare at 9.0%, Fitness Centers at 5.3%, Self-Storage at 4.8%5.1%, Agriculture at 4.5% and ~~Veterinary~~Senior Care at ~~4.4%~~4.0%. ~~Other than Hotels~~Of the above listed verticals, Senior Housing and Sponsor Finance ~~which~~ are ~~a part of~~within the Company’s Specialty Lending division ~~all~~while Hotels are within the Energy & Infrastructure division, the remainder of the above listed verticals are within the ~~Company’s~~ Small Business Banking ~~divisio~~n.division. The majority of the ~~$6.7~~$79.5 million increase in potential problem and classified loans and leases in the first ~~nine~~three months of ~~2022~~2023 was comprised of several relationships that did not have a government ~~guarantee, largely related to some of the more recently matured verticals.~~guarantee. The Company believes that its underwriting and credit quality standards have remained high and continues to consider changing economic conditions in a rising interest rate environment.

Loans and leases that experience insignificant payment delays and payment shortfalls are generally not individually evaluated for the purpose of estimating the allowance for credit losses. The Bank generally considers an “insignificant period of time” from payment delays to be a period of 90 days or less. The Bank would consider a modification for a customer experiencing what is expected to be a short-term event that has temporarily impacted cash flow. This could be due, among other reasons, to illness, weather, impact from a one-time expense, slower than expected start-up, construction issues or other short-term issues. Credit personnel will review the request to determine if the customer is stressed and how the event has impacted the ability of the customer to repay the loan or lease ~~lon~~glong term. At ~~September 30, 2022,~~March 31, 2023, the Company had a total of ~~$10.7~~$21.1 million in loans modified ~~unguaranteed loans and leases~~in the first quarter of 2023 to borrowers experiencing financial difficulty, all of which remained current with $4.2 million on principal payment ~~deferral with $362 thousand in accrued interest.~~deferral.

Management endeavors to be proactive in its approach to identify and resolve problem loans and leases and is focused on working with the borrowers and guarantors of these loans and leases to provide loan and lease modifications when warranted. Management implements a proactive approach to identifying and classifying loans and leases as special mention (also referred to as criticized), Risk Grade 5. At ~~September 30, 2022~~,March 31, 2023, and December 31, ~~2021~~,2022, Risk Grade 5 loans and leases, excluding ~~loans~~loans measured at fair value, totaled ~~$259.9~~$370.8 million and ~~$267.4~~$286.5 million, ~~respectively.~~respectively, for a quarter over quarter increase of $84.3 million. The ~~decrease~~increase in Risk Grade 5 loans and leases, exclusive of loans measured at fair value, during the first ~~nine months~~quarter of ~~2022~~2023 was principally confined to ~~three~~seven verticals: ~~Educational Services~~Sponsor Finance ($~~27.1~~32.3 million or ~~361.6%~~38.3%, principally related to Search Fund Lending), ~~Entertainment Centers~~Bioenergy ($~~13.9~~13.5 million or ~~185.6%~~16.0%) ~~and Hotels~~, Senior Housing ($~~9.2~~12.2 million or ~~122.9%~~14.4%)~~. Partially offsetting the above decreases were increases in Risk Grade 5 loans principally concentrated in four verticals:~~, Venture Banking ($11.8 million or 14.0%), Wine and Craft Beverage ($8.4 million or 10.0%), Conventional Financing ($6.6 million or 7.8%) and Senior Care ($~~15.4~~6.0 million or ~~205.3%), General Lending ($12.7 million or 168.8%), Sponsor Finance ($6.9 million or 92.4%) and Bioenergy ($4.1 million or 54.8%~~7.2%). The ~~decrease~~increase in criticized loans in 2023 was related to a small number of large relationships within four mature verticals. Of the ~~first nine months of 2022 was due to principal paydowns and positive risk grade migration. Hotels,~~above listed verticals, Sponsor Finance, Senior Housing, Venture Banking and ~~Bioenergy~~Conventional Financing are ~~a part of~~within the Company’s Specialty Lending division ~~with~~while Bioenergy is within the ~~remaining~~Energy & Infrastructure division, the remainder of the above listed verticals are within the ~~Company’s~~ Small Business Banking division.

At ~~September 30, 2022~~,March 31, 2023, approximately ~~100.0%~~99.6% of loans and leases classified as Risk Grade 5 are performing with no relationships having payments past due more than 30 days. While the level of nonperforming assets fluctuates in response to changing economic and market conditions, in light of the relative size and composition of the loan and lease portfolio and management’s degree of success in resolving problem assets, management believes that a proactive approach to early identification and intervention is critical to successfully managing a small business loan portfolio. As government payment assistance began to expire toward the end of 2020, bo~~rrowers~~borrowers with continuing difficulties arising from the pandemic were provided additional relief through payment deferrals. At ~~September 30, 2022,~~March 31, 2023, the Company had ~~$16.6~~$6.6 million in unguaranteed loans on SBA payment assistance. Management monitors these borrowers closely and has observed financial conditions continuing to improve. ~~Management has also noted that most loans with expired government assistance have been able to resume making regular payments.~~

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Allowance for Credit Losses on Loans and Leases

The ACL of ~~$63.6~~$96.6 million at December 31, ~~2021,~~2022, increased by ~~$14.7~~$11.7 million, or ~~23.1%~~12.1%, to ~~$78.3~~$108.2 million at ~~September 30, 2022.~~March 31, 2023. The ACL as a percentage of loans and leases held for investment at historical cost amounted to ~~1.3%~~1.4% and ~~1.2%~~1.5% at December 31, ~~2021~~2022 and ~~September 30, 2022,~~March 31, 2023, respectively. The increase in the ACL during the first ~~nine~~three months of ~~2022~~2023 was primarily ~~due to~~the result of loan growth, ~~charge-off experience impacts, the previously discussed loan reclassification from held for sale to held for investment~~combined with portfolio trends and changes in the macroeconomic outlook. See also the above section captioned “Provision for Loan and Lease Credit Losses” in “Results of Operations” for related information. ~~The ACL for PPP loans and leases was $2.4 million and $37 thousand at December 31, 2021 and September 30, 2022, respectively.~~

Actual past due held for investment loans and leases, inclusive of loans measured at fair value, have ~~decreased~~increased by ~~$23.1~~$15.3 million since December 31, ~~2021~~.2022. Total loans and leases 90 or more days past due ~~decreased $14.7~~increased $29.6 million, or ~~29.9%~~52.4%, compared to December 31, ~~2021~~.2022. This ~~decrease~~increase was comprised of a ~~$8.3~~$9.5 million ~~decrease~~increase in unguaranteed exposure combined with a ~~$6.4~~$20.1 million ~~decrease~~increase in the guaranteed portion of past due loans compared to December 31, ~~2021~~.2022. At ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~,2022, total held for investment unguaranteed loans and leases past due as a percentage of total held for investment unguaranteed loans and leases, inclusive of loans measured at fair value, was ~~0.2%~~0.6% and ~~0.6%~~0.7%, respectively. Total unguaranteed loans and leases past due were comprised of ~~$6.5~~$21.0 million carried at historical cost, a decrease of ~~$10.1 million,~~$160 thousand, and ~~$3.8~~$8.7 million measured at fair value, aan decrease of ~~$1.3 million,~~$909 thousand, as of ~~September 30, 2022~~March 31, 2023 compared to December 31, ~~2021~~.2022. Management continues to actively monitor and work to improve asset quality. Management believes the ACL of ~~$78.3~~$108.2 million at ~~September 30, 2022~~March 31, 2023 is appropriate in light of the risk inherent in the loan and lease portfolio. Management’s judgments are based on numerous assumptions about current and expected events that it believes to be reasonable, but which may or may not be valid. Accordingly, no assurance can be given that management’s ongoing evaluation of the loan and lease portfolio in light of changing economic conditions and other relevant circumstances will not require significant future additions to the ACL, thus adversely affecting the Company’s operating results. Additional information on the ACL is presented in Note 5. Loans and Leases Held for Investment and Credit Quality of the 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 ~~September 30, 2022,~~March 31, 2023, the total amount of these four items was ~~$4.06~~$4.24 billion, or ~~43.6%~~40.9% of total assets ~~an increase of $644.1 million from $3.42 billion, or 41.6%~~compared to 40.7% of total assets, at December 31, ~~2021.~~2022.

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

At ~~September 30, 2022,~~March 31, 2023, none of the investment securities portfolio was pledged to secure public deposits or pledged to retail repurchase agreements, leaving ~~$1.00~~$1.15 billion available to pledge as collateral.

Contractual Obligations

The Company has entered into significant fixed and determinable contractual obligations for future payments. Other than normal changes in the ordinary course of the Company’s operations, there have been no significant changes in the types of contractual obligations or amounts due since December 31, ~~2021.~~2022. See the section titled “Liquidity Management” in Part II, Item 7 of the Company’s ~~2021~~2022 Form 10-K for additional discussion of contractual obligations.

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Off-Balance Sheet Arrangements

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

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Asset/Liability Management and Interest Rate Sensitivity

One of the primary objectives of asset/liability management is to maximize the net interest margin while minimizing the earnings risk associated with changes in interest rates. One method used to manage interest rate sensitivity is to measure, over various time periods, the interest rate sensitivity positions, or gaps. As of ~~September 30, 2022,~~March 31, 2023, the balance sheet’s total cumulative gap position was ~~asset-sensitive at 5.2%.~~5.8%, for further information, see Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The interest rate gap method, however, addresses only the magnitude of asset and liability repricing timing differences as of the report date and does not address earnings, market value, changes in account behaviors based on the interest rate environment, nor growth. Therefore, management also uses an earnings simulation model to prepare, on a regular basis, earnings projections based on a range of instantaneous parallel interest rate shocks applied to a static balance sheet to measure interest rate risk. As of ~~September 30, 2022,~~March 31, 2023, the Company’s interest rate risk profile under the instantaneous parallel interest rate shock scenarios ~~remained asset-sensitive.~~shifted from asset-sensitive to slightly liability-sensitive. For more information, see Item 3. Quantitative and Qualitative Disclosures About Market Risk. ~~An asset-sensitive~~A liability-sensitive position means that net interest income will generally move in the ~~same~~opposite direction as interest rates. For instance, if interest rates increase, net interest income can be expected to ~~increase,~~decrease, and if interest rates decrease, net interest income can be expected to ~~decrease.~~increase. The Company attempts to mitigate interest rate risk by match funding assets and liabilities with similar rate instruments. Asset/liability sensitivity is primarily derived from the prime-based loans that adjust as the prime interest rate changes, rates on cash accounts that adjusts as the federal funds rate changes and the longer duration of indeterminate term deposits. Note that the Company regularly models various forecasted rate projections with non-parallel shifts that are reflective of potential current rate environment outcomes. Under these scenarios, the Company’s interest rate risk profile may increase in ~~asset~~liability sensitivity, decrease in ~~asset~~liability sensitivity, or depending on the scenario and timing of anticipated rate changes, may transition back to ~~a liability sensitive~~an asset-sensitive interest rate risk profile. Regular, robust modeling of various interest rate outcomes allows the Company to properly assess and manage potential risks from various rate shifts.

Capital

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

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Capital amounts and ratios as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, are presented in the table below.


		Actual				Minimum Capital Requirement				Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions (1)					Actual				Minimum Capital Requirement				Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions (1)
		Amount		Ratio		Amount		Ratio		Amount		Ratio			Amount		Ratio		Amount		Ratio		Amount		Ratio
Consolidated - September 30, 2022
Consolidated - March 31, 2023														Consolidated - March 31, 2023
Common Equity Tier 1 (to Risk-Weighted Assets)	Common Equity Tier 1 (to Risk-Weighted Assets)	$	875,137	13.16	%	$	299,202	4.50	%	N/A		N/A		Common Equity Tier 1 (to Risk-Weighted Assets)	$	889,810	11.67	%	$	342,998	4.50	%	N/A		N/A
Total Capital (to Risk-Weighted Assets)	Total Capital (to Risk-Weighted Assets)	954,555		14.36		531,915		8.00		N/A		N/A		Total Capital (to Risk-Weighted Assets)	985,300		12.93		609,775		8.00		N/A		N/A
Tier 1 Capital (to Risk-Weighted Assets)	Tier 1 Capital (to Risk-Weighted Assets)	875,137		13.16		398,937		6.00		N/A		N/A		Tier 1 Capital (to Risk-Weighted Assets)	889,810		11.67		457,331		6.00		N/A		N/A
Tier 1 Capital (to Average Assets)	Tier 1 Capital (to Average Assets)	875,137		9.49		368,924		4.00		N/A		N/A		Tier 1 Capital (to Average Assets)	889,810		8.70		409,302		4.00		N/A		N/A
Bank - September 30, 2022
Bank - March 31, 2023														Bank - March 31, 2023
Common Equity Tier 1 (to Risk-Weighted Assets)	Common Equity Tier 1 (to Risk-Weighted Assets)	$	707,007	11.08	%	$	287,034	4.50	%	$	414,605	6.50	%	Common Equity Tier 1 (to Risk-Weighted Assets)	$	732,399	10.00	%	$	329,580	4.50	%	$	476,060	6.50	%
Total Capital (to Risk-Weighted Assets)	Total Capital (to Risk-Weighted Assets)	786,427		12.33		510,283		8.00		637,854		10.00		Total Capital (to Risk-Weighted Assets)	824,208		11.25		585,920		8.00		732,400		10.00
Tier 1 Capital (to Risk-Weighted Assets)	Tier 1 Capital (to Risk-Weighted Assets)	707,007		11.08		382,712		6.00		510,283		8.00		Tier 1 Capital (to Risk-Weighted Assets)	732,399		10.00		439,440		6.00		585,920		8.00
Tier 1 Capital (to Average Assets)	Tier 1 Capital (to Average Assets)	707,007		7.74		365,261		4.00		456,576		5.00		Tier 1 Capital (to Average Assets)	732,399		7.24		404,571		4.00		505,714		5.00
Consolidated - December 31, 2021
Consolidated - December 31, 2022														Consolidated - December 31, 2022
Common Equity Tier 1 (to Risk-Weighted Assets)	Common Equity Tier 1 (to Risk-Weighted Assets)	$	689,367	12.38	%	$	250,619	4.50	%	N/A		N/A		Common Equity Tier 1 (to Risk-Weighted Assets)	$	888,235	12.47	%	$	320,446	4.50	%	N/A		N/A
Total Capital (to Risk-Weighted Assets)	Total Capital (to Risk-Weighted Assets)	753,691		13.53		445,544		8.00		N/A		N/A		Total Capital (to Risk-Weighted Assets)	977,360		13.73		569,681		8.00		N/A		N/A
Tier 1 Capital (to Risk-Weighted Assets)	Tier 1 Capital (to Risk-Weighted Assets)	689,367		12.38		334,158		6.00		N/A		N/A		Tier 1 Capital (to Risk-Weighted Assets)	888,235		12.47		427,261		6.00		N/A		N/A
Tier 1 Capital (to Average Assets)	Tier 1 Capital (to Average Assets)	689,367		8.87		310,902		4.00		N/A		N/A		Tier 1 Capital (to Average Assets)	888,235		9.26		383,499		4.00		N/A		N/A
Bank - December 31, 2021
Bank - December 31, 2022														Bank - December 31, 2022
Common Equity Tier 1 (to Risk-Weighted Assets)	Common Equity Tier 1 (to Risk-Weighted Assets)	$	640,652	12.05	%	$	239,201	4.50	%	$	345,512	6.50	%	Common Equity Tier 1 (to Risk-Weighted Assets)	$	730,092	10.70	%	$	307,179	4.50	%	$	443,703	6.50	%
Total Capital (to Risk-Weighted Assets)	Total Capital (to Risk-Weighted Assets)	704,976		13.26		425,246		8.00		531,557		10.00		Total Capital (to Risk-Weighted Assets)	815,577		11.95		546,096		8.00		682,620		10.00
Tier 1 Capital (to Risk-Weighted Assets)	Tier 1 Capital (to Risk-Weighted Assets)	640,652		12.05		318,934		6.00		425,246		8.00		Tier 1 Capital (to Risk-Weighted Assets)	730,092		10.70		409,572		6.00		546,096		8.00
Tier 1 Capital (to Average Assets)	Tier 1 Capital (to Average Assets)	640,652		8.32		307,931		4.00		384,914		5.00		Tier 1 Capital (to Average Assets)	730,092		7.70		379,396		4.00		474,245		5.00

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

Critical Accounting Policies and Estimates

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

Accounting policies, as described in detail in the Notes to the Company’s Unaudited Condensed Consolidated Financial Statements in this report and in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2021,~~2022, are an integral part of the Company’s consolidated financial statements. A thorough understanding of these accounting policies is essential when reviewing the Company’s reported results of operations and financial position. The Company’s most critical accounting policies and estimates are listed below. These estimates require the Company to make difficult, subjective or complex judgments about matters that are inherently uncertain.

•Allowance for credit losses;

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

•Valuation of servicing assets.

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

The Company has an Asset/Liability Committee to communicate, coordinate and control all aspects involving interest rate risk management. The Asset/Liability Committee ~~which includes three members of our board of directors,~~ establishes and monitors the volume, maturities, pricing and mix of assets and funding sources with the objective of managing assets and funding sources to provide results that are consistent with liquidity, growth, risk limits and profitability goals. Adherence to relevant policies is monitored on an ongoing basis by the Asset/Liability Committee.

The Company has a total cumulative gap in interest-earning assets and interest-bearing liabilities of ~~5.2%~~5.8% as of ~~September 30, 2022,~~March 31, 2023, indicating that, overall, ~~assets will reprice before liabilities during~~over the expected life of the instruments. Cumulative gap is a useful measure to monitor balance sheet match-funding, yet economic value of equity and net interest income simulations, discussed below, are more useful in understanding potential impacts to earnings from a change in interest rates.instruments, assets will reprice before liabilities.

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

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

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

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The table below sets forth an approximation of the Company’s NII sensitivity exposure for the 12-month periods ending ~~September 30, 2023~~March 31, 2024 and ~~2024~~2025 and the Company’s EVE sensitivity at ~~September 30, 2022.~~March 31, 2023. The simulation uses projected repricing of assets and liabilities at ~~September 30, 2022~~March 31, 2023 on the basis of contractual maturities, anticipated repayments and scheduled rate adjustments. Critical model assumptions such as loan and investment prepayment rates, deposit decay rates, changes in deposit pricing, both in amount and timing, relative to changes in market rates (commonly referred to as deposit betas and lags, respectively) and assumed replacement pricing can have a significant impact on interest income simulation. A static balance sheet is maintained to remove volume considerations and to place the focal point on the rate sensitivity of the Company’s balance sheet. While management believes such assumptions to be reasonable, approximate actual future activity may differ from the results shown below as it will include growth considerations, non-parallel rate movements, and management actions to mitigate the impacts of changing interest rates on the balance sheet’s earnings profile.


		Estimated Increase/Decrease in Net Interest Income		Estimated Percentage Change in EVE		Estimated Increase/Decrease in Net Interest Income		Estimated Percentage Change in EVE
Basis Point ("bp") Change in Interest Rates	Basis Point ("bp") Change in Interest Rates	12 Months Ending September 30, 2023	12 Months Ending September 30, 2024	As of September 30, 2022	Basis Point ("bp") Change in Interest Rates	12 Months Ending March 31, 2024	12 Months Ending March 31, 2025	As of March 31, 2023
+400	+400	9.8%	10.8%	(23.7)%	+400	(2.9)%	(7.5)%	(30.6)%
+300	+300	7.2	7.9	(17.8)	+300	(2.1)	(5.5)	(23.3)
+200	+200	4.8	5.3	(11.6)	+200	(1.3)	(3.5)	(15.6)
+100	+100	2.4	2.6	(5.6)	+100	(0.8)	(1.9)	(7.8)
-100	-100	(2.4)	(2.6)	5.2	-100	(0.1)	0.6	7.7
-200	-200	(4.9)	(5.3)	9.4	-200	(0.3)	0.9	15.3
-300	-300	(6.5)	(7.2)	12.7	-300	(0.6)	0.9	23.0

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

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

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

An evaluation of the Company’s disclosure controls and procedures (as defined in Rules 13(a)-15(e) and 15(d)-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), was carried out under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer as of ~~September 30, 2022,~~March 31, 2023, the last day of the period covered by this Quarterly Report. The Company’s Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of ~~September 30, 2022,~~March 31, 2023, in ensuring that the information required to be disclosed in the reports the Company files or submits under the Exchange Act is (i) accumulated and communicated to management (including the Company’s Chief Executive Officer and Chief Financial Officer) as appropriate to allow timely decisions regarding required disclosures, and (ii) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.

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Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended ~~September 30, 2022,~~March 31, 2023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

In the ordinary course of operations, the Company is at times involved in legal proceedings. In the opinion of management, as of ~~September 30, 2022,~~March 31, 2023, there are no material pending legal proceedings to which the Company or any of its subsidiaries is a party or of which any of their property is the subject. ~~See our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2022, for information on legal proceedings relating to prior periods.~~In addition, the Company is not aware of any threatened litigation, unasserted claims or assessments that could have a material adverse effect on its business, operating results or financial condition.

Item 1A. Risk Factors

There have been no material changes in the Company’s risk factors from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022, with the exception of the following:

Recent negative developments affecting the banking industry have eroded customer confidence in the banking system and may result in additional regulations that could increase the Company’s expenses and affect its operations.

Recent high-profile bank failures have generated significant market volatility among publicly traded bank holding companies, such as the Company. These market developments have negatively impacted customer confidence in the banking system. As a result, customers may choose to maintain deposits with larger financial institutions or invest in higher yielding short-term fixed income securities, all of which could materially adversely impact the Company’s liquidity, loan funding capacity, net interest margin, capital and results of operations. In connection with these high-profile bank failures, uncertainty and concern has been, and may be in the future, compounded by advances in technology that increase the speed at which deposits can be moved, as well as the speed and reach of media attention, including social media, and its ability to disseminate concerns or rumors, in each case potentially exacerbating liquidity concerns. While the Department of the Treasury, the Federal Reserve, and the FDIC have made statements ensuring that depositors of these recently failed banks would have access to their deposits, including uninsured deposit accounts, there is no guarantee that such actions will be successful in restoring customer confidence.

As a result of these events, the Company anticipates increased regulatory scrutiny—in the course of routine examinations and otherwise—and new regulations, all of which may increase the Company’s costs of doing business and reduce its profitability. Among other things, there may be an increased focus by both regulators and investors on deposit composition and the level of uninsured deposits.

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

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

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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Item 6. Exhibits.

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

INDEX TO EXHIBITS


Exhibit No.						Description of Exhibit

3.1						Amended and Restated Articles of Incorporation of Live Oak Bancshares, Inc. (incorporated by reference to Exhibit 3.1 of the registration statement on Form S-1, filed on June 19, 2015)
3.2						Amended Bylaws of Live Oak Bancshares, Inc. (incorporated by reference to Exhibit 3.2 of the amended registration statement on Form S-1, filed on July 13, 2015)
4.1						Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 of the registration statement on Form S-1, filed on June 19, 2015)
~~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)
10.1						~~RSU Award Agreement for non-employee director Casey S. Crawford * #~~
~~10.2~~						~~Member Interest Letter, dated September 6, 2022, from Canapi Ventures LOB SLP II, LLC, to the Neil L. Underwood Revocable Trust~~*#
~~10.3.1~~						Amendment to Software Service Agreement dated ~~October 4, 2022,~~March 28, 2023, between Live Oak Banking Company and nCino, Inc. *
~~10.3.2~~10.2						~~Amendment~~Amended and Restated Member Interest Letter, dated April 25, 2023, from Canapi Ventures LOB SLP II, LLC to ~~Software Service Agreement dated October 16, 2022, between Live Oak Banking Company and nCino, Inc.~~Neil L. Underwood Revocable Trust * #
31.1						Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2						Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32						Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
101						Interactive data files pursuant to Rule 405 of Regulation S-T, formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021;~~2022; (ii) Condensed Consolidated Statements of Income for the Three ~~and Nine~~ Months Ended ~~September 30, 2022~~March 31, 2023 and ~~2021;~~2022; (iii) Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three ~~and Nine~~ Months Ended ~~September 30, 2022~~March 31, 2023 and ~~2021;~~2022; (iv) Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three ~~and Nine~~ Months Ended ~~September 30, 2022~~March 31, 2023 and ~~2021;~~2022; (v) Condensed Consolidated Statements of Cash Flows for the ~~Nine~~Three Months Ended ~~September 30, 2022~~March 31, 2023 and ~~2021;~~2022; and (vi) Notes to Unaudited Condensed Consolidated Financial Statements*
104						Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

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

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

# Denotes management contract or compensatory plan.

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SIGNATURES

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


	Live Oak Bancshares, Inc.
	(Registrant)

Date: ~~November 2, 2022~~May 3, 2023	By:	/s/ William C. Losch III
		William C. Losch III
		Chief Financial Officer

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	Three Months Ended September 30, 2022
	Interest Only			Payment Deferral			Extend Amortization			Other(1)			Total TDRs(2)
	Number of Loans	Recorded investment at period end		Number of Loans	Recorded investment at period end		Number of Loans	Recorded investment at period end		Number of Loans	Recorded investment at period end		Number of Loans	Recorded investment at period end
Commercial & Industrial
Small Business Banking	—	$	—	3	$	7,074	1	$	146	—	$	—	4	$	7,220
Total	—	—		3	7,074		1	146		—	—		4	7,220
Construction & Development
Small Business Banking	—	—		—	—		—	—		2	2,518		2	2,518
Total	—	—		—	—		—	—		2	2,518		2	2,518
Total	—	$	—	3	$	7,074	1	$	146	2	$	2,518	6	$	9,738


	Nine Months Ended September 30, 2022
	Interest Only			Payment Deferral			Extend Amortization			Other(1)			Total TDRs(2)
	Number of Loans	Recorded investment at period end		Number of Loans	Recorded investment at period end		Number of Loans	Recorded investment at period end		Number of Loans	Recorded investment at period end		Number of Loans	Recorded investment at period end
Commercial & Industrial
Small Business Banking	—	$	—	6	$	10,192	3	$	1,674	1	$	527	10	$	12,393
Specialty Lending	—	—		1	734		—	—		—	—		1	734
Total	—	—		7	10,926		3	1,674		1	527		11	13,127
Commercial Real Estate
Small Business Banking	—	—		—	—		1	4,847		—	—		1	4,847
Total	—	—		—	—		1	4,847		—	—		1	4,847
Construction & Development
Small Business Banking	—	—		—	—		—	—		2	2,518		2	2,518
Total	—	—		—	—		—	—		2	2,518		2	2,518
Total	—	$	—	7	$	10,926	4	$	6,521	3	$	3,045	14	$	20,492


	Three Months Ended September 30, 2021
	Interest Only			Payment Deferral			Extend Amortization			Other			Total TDRs(1)
	Number of Loans	Recorded investment at period end		Number of Loans	Recorded investment at period end		Number of Loans	Recorded investment at period end		Number of Loans	Recorded investment at period end		Number of Loans	Recorded investment at period end
Commercial Real Estate
Small Business Banking	—	$	—	1	$	2,830	—	$	—	—	$	—	1	$	2,830
Total	—	—		1	2,830		—	—		—	—		1	2,830
Total	—	$	—	1	$	2,830	—	$	—	—	$	—	1	$	2,830


	Nine Months Ended September 30, 2021
	Interest Only			Payment Deferral			Extend Amortization			Other(1)			Total TDRs(2)
	Number of Loans	Recorded investment at period end		Number of Loans	Recorded investment at period end		Number of Loans	Recorded investment at period end		Number of Loans	Recorded investment at period end		Number of Loans	Recorded investment at period end
Commercial & Industrial
Small Business Banking	—	$	—	3	$	6,097	—	$	—	—	$	—	3	$	6,097
Total	—	—		3	6,097		—	—		—	—		3	6,097
Commercial Real Estate
Small Business Banking	—	—		5	6,613		—	—		1	3,124		6	9,737
Total	—	—		5	6,613		—	—		1	3,124		6	9,737
Total	—	$	—	8	$	12,710	—	$	—	1	$	3,124	9	$	15,834


	Three Months Ended September 30,				Three Months Ended June 30,				Three Months Ended March 31,
	2022		2021		2022		2021		2022		2021
Amount of loans and leases originated	$	1,005,235	$	1,063,190	$	959,635	$	1,153,693	$	865,063	$	1,180,219
Guaranteed portions of loans sold	148,110		201,903		68,818		130,858		219,703		136,747
Outstanding balance of guaranteed loans sold(1)	2,671,705		2,731,031		2,681,079		2,694,931		2,786,403		2,843,963