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EX-32 - EXHIBIT 32 - Live Oak Bancshares, Inc.exhibit322017q2.htm
EX-31.2 - EXHIBIT 31.2 - Live Oak Bancshares, Inc.exhibit3122017q2.htm
EX-31.1 - EXHIBIT 31.1 - Live Oak Bancshares, Inc.exhibit3112017q2.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2017
or
¨
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
liveoakbancshareslogo.jpg
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)
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  ý    NO  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    YES  ý    NO  ¨
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
 
¨
 
Accelerated filer
 
x
 
 
 
 
Non-accelerated filer
 
¨ (Do not check if smaller reporting company)
 
Smaller reporting company
 
¨
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
x
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.     ¨
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  ý
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of August 4, 2017, there were 30,020,634 shares of the registrant’s voting common stock outstanding and 4,643,530 shares of the registrant’s non-voting common stock outstanding.




Live Oak Bancshares, Inc. and Subsidiaries
Form 10-Q
For the Quarterly Period Ended June 30, 2017
TABLE OF CONTENTS

 
 
Page
PART I. FINANCIAL INFORMATION
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
PART II. OTHER INFORMATION
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 




PART I. FINANCIAL INFORMATION
Item 1.        Financial Statements
Live Oak Bancshares, Inc.
Consolidated Balance Sheets
As of June 30, 2017 (unaudited) and December 31, 2016*
(Dollars in thousands)
 
June 30,
2017
 
December 31,
2016*
Assets
 
 
 
Cash and due from banks
$
207,373

 
$
238,008

Certificates of deposit with other banks
5,750

 
7,250

Investment securities available-for-sale
72,993

 
71,056

Loans held for sale
609,138

 
394,278

Loans and leases held for investment
1,084,503

 
907,566

Allowance for loan and lease losses
(19,560
)
 
(18,209
)
Net loans and leases
1,064,943

 
889,357

Premises and equipment, net
125,008

 
64,661

Foreclosed assets
2,140

 
1,648

Servicing assets
53,675

 
51,994

Other assets
57,087

 
37,009

Total assets
$
2,198,107

 
$
1,755,261

Liabilities and Shareholders’ Equity
 
 
 
Liabilities
 
 
 
Deposits:
 
 
 
Noninterest-bearing
$
40,966

 
$
27,990

Interest-bearing
1,830,755

 
1,457,086

Total deposits
1,871,721

 
1,485,076

Short term borrowings
10,000

 

Long term borrowings
52,173

 
27,843

Other liabilities
26,582

 
19,495

Total liabilities
1,960,476

 
1,532,414

Shareholders’ equity
 
 
 
Preferred stock, no par value, 1,000,000 authorized, none issued or outstanding at June 30, 2017 and December 31, 2016

 

Class A common stock, no par value, 100,000,000 shares authorized, 29,996,318 and 29,530,072 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively
150,939

 
149,966

Class B common stock, no par value, 10,000,000 shares authorized, 4,643,530 and 4,723,530 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively
49,168

 
50,015

Retained earnings
38,041

 
23,518

Accumulated other comprehensive loss
(517
)
 
(652
)
Total equity
237,631

 
222,847

Total liabilities and shareholders’ equity
$
2,198,107

 
$
1,755,261

*    Derived from audited consolidated financial statements.
See Notes to Unaudited Consolidated Financial Statements

1


Live Oak Bancshares, Inc.
Consolidated Statements of Income
For the three and six months ended June 30, 2017 and 2016 (unaudited)
(Dollars in thousands, except per share data)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Interest income
 
 
 
 
 
 
 
Loans and fees on loans
$
23,559

 
$
12,902

 
$
43,313

 
$
23,907

Investment securities, taxable
316

 
252

 
639

 
503

Other interest earning assets
470

 
248

 
812

 
386

Total interest income
24,345

 
13,402

 
44,764

 
24,796

Interest expense
 
 
 
 
 
 
 
Deposits
5,592

 
3,243

 
10,135

 
5,687

Borrowings
361

 
242

 
596

 
483

Total interest expense
5,953

 
3,485

 
10,731

 
6,170

Net interest income
18,392

 
9,917

 
34,033

 
18,626

Provision for loan and lease losses
1,556

 
3,453

 
3,055

 
4,886

Net interest income after provision for loan and lease losses
16,836

 
6,464

 
30,978

 
13,740

Noninterest income
 
 
 
 
 
 
 
Loan servicing revenue
6,174

 
5,081

 
12,097

 
9,865

Loan servicing asset revaluation
(1,164
)
 
(1,604
)
 
(3,173
)
 
(1,630
)
Net gains on sales of loans
18,176

 
14,555

 
37,128

 
30,980

Construction supervision fee income
286

 
667

 
715

 
1,297

Title insurance income
2,397

 

 
3,835

 

Other noninterest income
798

 
649

 
1,818

 
1,268

Total noninterest income
26,667

 
19,348

 
52,420

 
41,780

Noninterest expense
 
 
 
 
 
 
 
Salaries and employee benefits
17,968

 
15,411

 
36,650

 
28,404

Travel expense
2,148

 
2,330

 
3,746

 
4,176

Professional services expense
1,424

 
910

 
3,160

 
1,438

Advertising and marketing expense
1,976

 
1,365

 
3,461

 
2,328

Occupancy expense
1,350

 
1,055

 
2,545

 
2,248

Data processing expense
1,858

 
1,404

 
3,554

 
2,612

Equipment expense
1,703

 
534

 
2,777

 
1,085

Other loan origination and maintenance expense
981

 
621

 
1,986

 
1,195

FDIC insurance
724

 
149

 
1,450

 
297

Title insurance closing services expense
785

 

 
1,190

 

Other expense
2,383

 
1,353

 
5,766

 
3,060

Total noninterest expense
33,300

 
25,132

 
66,285

 
46,843

Income before taxes
10,203

 
680

 
17,113

 
8,677

Income tax expense
408

 
557

 
1,206

 
3,871

Net income
9,795

 
123

 
15,907

 
4,806

Net loss attributable to noncontrolling interest

 

 

 
8

Net income attributable to Live Oak Bancshares, Inc.
$
9,795

 
$
123

 
$
15,907

 
$
4,814

Basic earnings per share
$
0.28

 
$
0.00

 
$
0.46

 
$
0.14

Diluted earnings per share
$
0.27

 
$
0.00

 
$
0.44

 
$
0.14

See Notes to Unaudited Consolidated Financial Statements

2


Live Oak Bancshares, Inc.
Consolidated Statements of Comprehensive Income
For the three and six months ended June 30, 2017 and 2016 (unaudited)
(Dollars in thousands)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Net income
$
9,795

 
$
123

 
$
15,907

 
$
4,806

Other comprehensive income before tax:
 
 
 
 
 
 
 
Net unrealized gain on investment securities arising during the period
293

 
251

 
220

 
640

Reclassification adjustment for (gain) loss on sale of securities available-for-sale included in net income

 

 

 

Other comprehensive income before tax
293

 
251

 
220

 
640

Income tax expense
(113
)
 
(97
)
 
(85
)
 
(247
)
Other comprehensive income, net of tax
180

 
154

 
135

 
393

Total comprehensive income
$
9,975

 
$
277

 
$
16,042

 
$
5,199

See Notes to Unaudited Consolidated Financial Statements

3


Live Oak Bancshares, Inc.
Consolidated Statements of Changes in Shareholders’ Equity
For the six months ended June 30, 2017 and 2016 (unaudited)
(Dollars in thousands)
 
Common stock
 
Retained
earnings
 
Accumulated
other
comprehensive
income (loss)
 
Non-
controlling
interest
 
Total
equity
Shares
 
 
 
Class A
 
Class B
 
Amount
 
Balance at December 31, 2015
29,449,369

 
4,723,530

 
$
187,507

 
$
12,140

 
$
(192
)
 
$
33

 
$
199,488

Net income (loss)

 

 

 
4,814

 

 
(8
)
 
4,806

Other comprehensive income

 

 

 

 
393

 

 
393

Issuance of restricted stock
2,776

 

 

 

 

 

 

Stock option exercises
16,707

 

 
107

 

 

 

 
107

Stock option based compensation expense

 

 
1,173

 

 

 

 
1,173

Restricted stock expense

 

 
2,409

 

 

 

 
2,409

Dividends (distributions to shareholders)

 

 

 
(1,026
)
 

 

 
(1,026
)
Balance at June 30, 2016
29,468,852

 
4,723,530

 
$
191,196

 
$
15,928

 
$
201

 
$
25

 
$
207,350

Balance at December 31, 2016
29,530,072

 
4,723,530

 
$
199,981

 
$
23,518

 
$
(652
)
 
$

 
$
222,847

Net income

 

 

 
15,907

 

 

 
15,907

Other comprehensive income

 

 

 

 
135

 

 
135

Issuance of restricted stock
287,190

 

 

 

 

 

 

Withholding cash issued in lieu of restricted stock issuance

 

 
(4,828
)
 

 

 

 
(4,828
)
Employee stock purchase program
12,411

 

 
241

 

 

 

 
241

Stock option exercises
58,921

 

 
456

 

 

 

 
456

Stock option based compensation expense

 

 
924

 

 

 

 
924

Restricted stock expense

 

 
2,768

 

 

 

 
2,768

Stock issued in acquisition of Reltco, Inc.
27,724

 

 
565

 

 

 

 
565

Non-voting common stock converted to voting common stock in private sale
80,000

 
(80,000
)
 

 

 

 

 

Dividends (distributions to shareholders)

 

 

 
(1,384
)
 

 

 
(1,384
)
Balance at June 30, 2017
29,996,318

 
4,643,530

 
$
200,107

 
$
38,041

 
$
(517
)
 
$

 
$
237,631

See Notes to Unaudited Consolidated Financial Statements

4


Live Oak Bancshares, Inc.
Consolidated Statements of Cash Flows
For the six months ended June 30, 2017 and 2016 (unaudited)
(Dollars in thousands)
 
Six Months Ended
June 30,
 
2017
 
2016
Cash flows from operating activities
 
 
 
Net income
$
15,907

 
$
4,806

Adjustments to reconcile net income to net cash used by operating activities:
 
 
 
Depreciation and amortization
4,062

 
2,109

Provision for loan losses
3,055

 
4,886

Amortization of premium on securities, net of accretion
219

 
79

Amortization (accretion) of discount on unguaranteed loans, net
1,255

 
156

Deferred tax expense (benefit)
1,427

 
(1,457
)
Originations of loans held for sale
(632,414
)
 
(471,295
)
Proceeds from sales of loans held for sale
466,309

 
322,748

Net gains on sale of loans held for sale
(37,128
)
 
(30,980
)
Net loss on sale of foreclosed assets
3

 
1

Net increase in servicing assets
(1,681
)
 
(4,224
)
Net loss on disposal of premises and equipment
213

 

Stock option based compensation expense
924

 
1,173

Restricted stock expense
2,768

 
2,409

Stock based compensation expense excess tax benefits
874

 

     Business combination contingent consideration fair value adjustment
350

 

Changes in assets and liabilities:
 
 
 
Other assets
(9,463
)
 
(1,301
)
Other liabilities
845

 
478

Net cash used by operating activities
(182,475
)
 
(170,412
)
Cash flows from investing activities
 
 
 
Purchases of securities available-for-sale
(6,403
)
 
(14,799
)
Proceeds from sales, maturities, calls, and principal paydowns of securities available-for-sale
4,467

 
2,318

Proceeds from sale/collection of foreclosed assets

 
91

Business combination, net of cash acquired
(7,684
)
 

Maturities of certificates of deposit with other banks
1,500

 
1,750

Loan and lease originations and principal collections, net
(192,018
)
 
(80,162
)
Purchases of premises and equipment, net
(63,482
)
 
(433
)
Net cash used in investing activities
(263,620
)
 
(91,235
)
See Notes to Unaudited Consolidated Financial Statements

5


Live Oak Bancshares, Inc.
Consolidated Statements of Cash Flows (Continued)
For the six months ended June 30, 2017 and 2016 (unaudited)
(Dollars in thousands)
 
Six Months Ended
June 30,
 
2017
 
2016
Cash flows from financing activities
 
 
 
Net increase in deposits
386,645

 
336,009

Proceeds from long term borrowings
16,900

 

Repayment of long term borrowings
(670
)
 
(202
)
Proceeds from short term borrowings
23,100

 

Repayment of short term borrowings
(5,000
)
 

Stock option exercises
456

 
107

Employee stock purchase program
241

 

Withholding cash issued in lieu of restricted stock
(4,828
)
 

Shareholder dividend distributions
(1,384
)
 
(1,368
)
Net cash provided by financing activities
415,460

 
334,546

Net (decrease) increase in cash and cash equivalents
(30,635
)
 
72,899

Cash and cash equivalents, beginning
238,008

 
102,607

Cash and cash equivalents, ending
$
207,373

 
$
175,506

 
 
 
 
Supplemental disclosure of cash flow information
 
 
 
Interest paid
$
10,858

 
$
6,180

Income tax
7,876

 
2,776

 
 
 
 
Supplemental disclosures of noncash operating, investing, and financing activities
 
 
 
Unrealized holding gains on available-for-sale securities, net of taxes
$
135

 
$
393

Transfers from loans to foreclosed real estate and other repossessions
495

 
406

Transfers from foreclosed real estate to SBA receivable

 
9

Transfer of loans held for sale to loans held for investment
4,149

 
336,263

Transfer of loans held for investment to loans held for sale
18,410

 
1,848

Transfers from short term borrowings to long term borrowings
8,100

 

Business combination:
 
 
 
Assets acquired (excluding goodwill)
5,766

 

Liabilities assumed
4,681

 

Purchase price
8,351

 

Goodwill recorded
7,266

 

See Notes to Unaudited Consolidated Financial Statements

6


Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
Note 1. Basis of Presentation
Nature of Operations
Live Oak Bancshares, Inc. (the “Company” or “LOB”) is a bank holding company headquartered in Wilmington, North Carolina incorporated under the laws of North Carolina in December 2008. The Company conducts business operations primarily through its commercial bank subsidiary, Live Oak Banking Company (the “Bank”). The Bank was organized and incorporated under the laws of the State of North Carolina on February 25, 2008 and commenced operations on May 12, 2008. The Bank specializes in providing lending services to small businesses nationwide in targeted industries. The Bank identifies and grows within credit-worthy industries through expertise within those industries. A significant portion of the loans originated by the Bank are guaranteed by the Small Business Administration (“SBA”) under the 7(a) Loan Program and to a lesser extent by the U.S. Department of Agriculture ("USDA") Rural Energy for America Program ("REAP") and Business & Industry ("B&I") loan programs. On July 28, 2015 the Company completed its initial public offering. In 2010, the Bank formed Live Oak Number One, Inc., a wholly-owned subsidiary, to hold properties foreclosed on by the Bank.
In addition to the Bank, the Company owns Live Oak Grove, LLC, opened in September 2015 for the purpose of providing Company employees and business visitors an on-site restaurant location, Government Loan Solutions, Inc. (“GLS”), a management and technology consulting firm that specializes in the settlement, accounting, and securitization processes for government guaranteed loans, including loans originated under the SBA 7(a) loan program and USDA-guaranteed loans, and 504 Fund Advisors, LLC (“504FA”), formed to serve as the investment adviser to the 504 Fund, a closed-end mutual fund organized to invest in SBA section 504 loans.
The Company acquired control over 504FA, previously carried as an equity method investment, on February 2, 2015 by increasing its ownership from 50.0% to 91.3%. The acquisition of an additional 41.3% of ownership occurred in exchange for contingent consideration estimated to total $170 thousand. Transactions in the third quarter of 2015 and first quarter of 2016 increased the Company’s ownership to 92.9%. On September 1, 2016, the Company acquired the remaining 7.1% ownership from a third party investor in exchange for contingent consideration estimated to total $24 thousand.
In August 2016, the Company formed Live Oak Ventures, Inc. for the purpose of investing in businesses that align with the Company's strategic initiative to be a leader in financial technology.
In November 2016, the Company formed Live Oak Clean Energy Financing LLC for the purpose of providing financing to entities for renewable energy applications.
On February 1, 2017, the Company completed its acquisition of Reltco Inc. and National Assurance Title, Inc. (collectively referred to as "Reltco"), two nationwide title agencies under common control based in Tampa, Florida. See Note 4. Business Combination for a further discussion of this transaction.
The Company earns revenue primarily from the sale of SBA and USDA-guaranteed loans and net interest income. Income from the sale of loans is comprised of net gains on the sale of loans, revenues on the servicing of sold loans and valuation of loan servicing rights. Offsetting these revenues are the cost of funding sources, provision for loan and lease losses, any costs related to foreclosed assets and other operating costs such as salaries and employee benefits, travel, professional services, advertising and marketing and tax expense.
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 six months ended June 30, 2017 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2017. The consolidated balance sheet as of December 31, 2016 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, 2016, filed with the Securities Exchange Commission on March 9, 2017 (SEC File No. 001-37497) (the "2016 Annual Report"). A summary description of the significant accounting policies followed by the Company is set forth in Note 1 of the Notes to Consolidated Financial Statements in the Company’s 2016 Annual Report. These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes in the Company's 2016 Annual Report.
The preparation of financial statements in conformity with United States generally accepted accounting principles, or GAAP, requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates.

7



Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

Amounts in all tables in the Notes to Unaudited Consolidated Financial Statements have been presented in thousands, except percentage, time period, stock option, share and per share data or where otherwise indicated.
Business Segments
Management has determined that the Company has one significant operating segment, which is providing a lending platform for small businesses nationwide. In determining the appropriateness of segment definition, the Company considers the materiality of a potential segment, the components of the business about which financial information is available, and components for which management regularly evaluates relative to resource allocation and performance assessment.
Equipment Leasing
The Company purchases new equipment for the purpose of leasing such equipment to customers within its verticals. Equipment purchased to fulfill commitments to commercial renewable energy projects is rented out under operating leases while leases of equipment outside of the renewable energy vertical are generally direct financing leases. Accordingly, leased assets under operating leases are included in premises and equipment while leased assets under direct financing leases are included in loans and leases held for investment.
Direct Financing Leases
Interest income on direct financing leases is recognized when earned.  Unearned interest is recognized over the lease term on a basis which results in a constant rate of return on the unrecovered lease investment.  The term of each lease is generally 4-6 years which is consistent with the useful life of the equipment with no residual value.  As of June 30, 2017 the Company had net investments in direct financing lease receivables of $390 thousand.
Operating Leases
The term of each operating lease is generally 10 years. The Company retains ownership of the equipment and associated tax benefits such as investment tax credits and accelerated depreciation. At the end of the lease term, the lessee has the option to renew the lease for two additional terms or purchase the equipment at the then current fair market value.
Rental revenue from operating leases is recognized over a straight-line basis over the term of the lease. Rental equipment is recorded at cost and depreciated to an estimated residual value on a straight-line basis over the estimated useful life. The useful lives and residual values are generally 15 years and 30%, respectively; however, they are subject to periodic evaluation. Changes in useful lives or residual values will impact depreciation expense and any gain or loss from the sale of used equipment. The estimated useful lives and residual values of the Company's leasing equipment are based on industry disposal experience and the Company's expectations for future sale prices.
If the Company decides to sell or otherwise dispose of rental equipment, it is carried at the lower of cost or fair value less costs to sell or dispose.   Repair and maintenance costs that do not extend the lives of the rental equipment are charged to direct operating expenses at the time the costs are incurred.
As of June 30, 2017 the Company had a net investment of $42.5 million in assets included in premises and equipment that are subject to operating leases.
A maturity analysis of future minimum lease payments under non-cancelable operating leases is as follows:
As of June 30, 2017
 
Amount
2017
 
$
794

2018
 
2,966

2019
 
2,971

2020
 
2,975

2021
 
2,978

Thereafter
 
17,122

Total
 
$
29,806


8



Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

Impairment of Long-Lived Assets
The Company evaluates the carrying value of rental equipment and identifiable definite lived intangible assets for impairment whenever events or circumstances have occurred that would indicate the carrying amount may not be fully recoverable. A key element in determining the recoverability of long-lived assets is the Company’s outlook as to the future market conditions for its rental equipment. If the carrying amount is not fully recoverable, an impairment loss is recognized to reduce the carrying amount to fair value. The Company determines fair value based upon the condition of the rental equipment and the projected net cash flows from its rental and sale considering current market conditions. Goodwill and identifiable indefinite lived assets are evaluated for potential impairment annually or when circumstances indicate potential impairment may have occurred. Impairment losses, if any, are determined based upon the excess of carrying value over the estimated fair value of the asset. There have been no impairments of long-lived assets.
Change in Accounting Estimate
During 2017, the Company assessed its estimate of the useful lives of the Company’s aircraft transportation. The Company revised its original useful life estimate of 20 years and currently estimates that its aircraft transportation will have a useful life of 10 years. The effects of reflecting this change in accounting estimate on the 2017 consolidated financial statements are as follows:
 
 
Three months ended
June 30, 2017
 
Six months ended
June 30, 2017
Decrease in:
 
 
 
 
Net income
 
$
202

 
$
490

Basic EPS
 
$
0.01

 
$
0.01

Diluted EPS
 
$
0.01

 
$
0.01

Reclassifications
Certain reclassifications have been made to the prior period’s consolidated financial statements to place them on a comparable basis with the current year. Net income and shareholders’ equity previously reported were not affected by these reclassifications.
Note 2. Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). This standard is intended to clarify the principles for recognizing revenue and to develop a common revenue standard for GAAP. ASU 2014-09 is effective for the Company on January 1, 2018. Adoption by the Company is not expected to have a material impact on the consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). The FASB issued this ASU to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet by lessees for those leases classified as operating leases under current GAAP and disclosing key information about leasing arrangements. The amendments in this ASU are effective for the Company on January 1, 2019. The impact of this standard will depend on the Company's lease portfolio at the time of the adoption and the Company is currently assessing the effect that the adoption of this standard will have on the consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 simplifies the accounting for share-based payment transactions for items including income tax consequences, classification of awards as equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 was effective and adopted by the Company on January 1, 2017. Starting this quarter, stock-based compensation excess tax benefits or deficiencies are reflected in the Consolidated Statements of Income as a component of the income tax expense, where as they previously were recognized in equity. Additionally, the Consolidated Statements of Cash Flows now present excess tax benefits as an operating activity while any cash paid in lieu of shares for tax-withholding being classified as a financing activity. There were no excess tax benefits in the prior period presented for reclassification. Finally, the Company will continue to incorporate actual forfeitures as they occur in the accrual of compensation expense. As a result of the adoption of ASU 2016-09, the Consolidated Statement of Cash Flows for the six months ended June 30, 2017 was adjusted as follows: a $874

9



Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

thousand increase to net cash provided by operating activities and a $4.8 million increase to net cash used in financing activities. The adoption of ASU 2016-09 further resulted in a $0.03 increase in basic EPS and $0.02 increase on diluted EPS for the six months ended June 30, 2017. See Note 9 for information regarding the additional impact on our consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). This new guidance replaces the incurred loss impairment methodology in current standards with an expected credit loss methodology and requires consideration of a broader range of information to determine credit loss estimates. ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 will be effective for the Company on January 1, 2020. The Company is currently evaluating required changes to loan loss estimation models and processes and assessing the effect the implementation of the new standard will have on its consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805) - Clarifying the Definition of a Business” (“ASU 2017-01”).  ASU 2017-01 clarifies the definition and provides a more robust framework to use in determining when a set of assets and activities constitutes a business. ASU 2017-01 is intended to provide guidance when evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 will be effective for the Company on January 1, 2018. The Company does not expect this amendment to have a material effect on its consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). ASU 2017-04 removes Step 2 from the goodwill impairment test. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 will be effective for the Company on January 1, 2020, with early adoption permitted for interim or annual impairment tests performed after January 1, 2017. ASU 2017-04 is not expected to have a material impact on its consolidated financial statements.
In February 2017, the FASB issued ASU No. 2017-05, “Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20) - Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets” (“ASU 2017-05”). ASU 2017-05 clarifies the scope of Subtopic 610-20 and adds guidance on nonfinancial asset derecognition as well as the accounting for partial sales of nonfinancial assets. The amendments conform the derecognition guidance on nonfinancial assets with the model for transactions in the new revenue standard. ASU 2017-05 will be effective for the Company on January 1, 2018 and is not expected to have a significant impact on its consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, "Compensation - Stock Compensation (Topic 718) - Scope of Modification Accounting" ("ASU 2017-09"). ASU 2017-09 clarifies when changes to the terms or conditions of a share-based payment award should be accounted for as a modification. This guidance indicates modification accounting is required when the fair value, vesting conditions, or classification of the award changes. ASU 2017-09 will be effective for the Company on January 1, 2018 and is not expected to have a significant impact on its consolidated financial statements.
Note 3. Earnings Per Share
Basic and diluted earnings per share are computed based on the weighted average number of shares outstanding during each period. Diluted earnings per share reflects the potential dilution that could occur, upon the exercise of stock options or upon the vesting of restricted stock grants, any of which would result in the issuance of common stock that would then be shared in the net income of the Company.

10



Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Basic earnings per share:
 
 
 
 
 
 
 
Net income available to common shareholders
$
9,795

 
$
123

 
$
15,907

 
$
4,814

Weighted-average basic shares outstanding
34,618,721

 
34,189,217

 
34,543,229

 
34,183,004

Basic earnings per share
$
0.28

 
$
0.00

 
$
0.46

 
$
0.14

Diluted earnings per share:
 
 
 
 
 
 
 
Net income available to common shareholders, for diluted earnings per share
$
9,795

 
$
123

 
$
15,907

 
$
4,814

Total weighted-average basic shares outstanding
34,618,721

 
34,189,217

 
34,543,229

 
34,183,004

Add effect of dilutive stock options and restricted stock grants
1,323,320

 
1,016,908

 
1,228,953

 
896,656

Total weighted-average diluted shares outstanding
35,942,041

 
35,206,125

 
35,772,182

 
35,079,660

Diluted earnings per share
$
0.27

 
$
0.00

 
$
0.44

 
$
0.14

Anti-dilutive shares
245,583

 
1,807,823

 
983,174

 
1,807,823

 

11



Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

Note 4. Business Combination
On February 1, 2017, the Company completed its acquisition of Reltco Inc. and National Assurance Title, Inc. (collectively referred to as "Reltco"), two nationwide title agencies under common control based in Tampa, Florida. The acquisition continues the Company's growth strategy, including vertically integrating with complementary services to deliver a high-quality customer experience with speed.
On the acquisition date, the fair value of Reltco included $5.8 million in assets and $4.7 million in liabilities. The total acquisition gross consideration at the time of the transaction, including earn-out contingent consideration was approximately $15.8 million. The acquisition was valued at $12.7 million after consideration of the applicable fair value adjustments to the earn-out, resulting in the Company paying $7.8 million in cash and issuing 27,724 shares of its common stock at closing in addition to an earn-out of up to 184,012 shares of its stock and $3.8 million in cash, in exchange for all of the outstanding shares of Reltco. The earn-out was recorded as a $4.3 million contingent liability on the acquisition date and is earned proportionally based on the ratio of the new subsidiary's actual future aggregate net income after tax divided by a target net income after tax of approximately $6.0 million over the four year earn-out period. Fair value measurement of the earn-out was calculated using the Monte Carlo Simulation. The Monte Carlo Simulation simulates 100,000 trials to assess the expected market price as of the earn-out measurement date at the end of each of the next four years based on the Cox, Ross & Rubinstein option pricing methodology. The Monte Carlo Simulation utilized various assumptions that include a risk free rate of return through the end of each measurement period equivalent to that of a U.S. Treasury, expected volatility of 30.00% over four years and a dividend yield of 0.40%.
The merger was accounted for in accordance with the acquisition method of accounting, and the identifiable assets acquired and liabilities assumed were recorded at their estimated fair values as of the acquisition date separately from goodwill. The estimated fair values of assets acquired and liabilities assumed are based on the information available at the date of the acquisition. Management continues to evaluate these fair values, which are subject to revision as additional information becomes available. During the one year measurement period, contingent consideration is recorded at fair value based on the terms of the purchase agreement with subsequent quarterly changes in fair value recorded through earnings. For the three and six months ended June 30, 2017 the Company recorded expense of $150 thousand and $350 thousand, respectively, related to the increased fair value of contingent consideration using the Monte Carlo Simulation. The assumptions utilized include a risk free rate of return through the end of each measurement period equivalent to that of a U.S. Treasury, expected volatility of 30.00% over the remaining 3.5 years and a dividend yield of 0.33%.

12



Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

The following table summarizes the allocation of the purchase price on the date of acquisition to assets acquired and the liabilities assumed based on their estimated fair values (dollars in thousands, except per share data):
Fair value of assets acquired
 
Cash
$
102

Accounts receivable
159

Intangible assets
5,505

Total assets acquired
5,766

Fair value of liabilities assumed
 
Contingent consideration
4,300

Accounts payable and other liabilities
381

Total liabilities assumed
4,681

Net assets acquired
$
1,085

Purchase price
 
Common shares issued
27,724

Purchase price per share of the Company’s common stock
$
20.38

Company common stock issued
565

Cash
7,786

Total purchase price
8,351

Goodwill
$
7,266

Goodwill recorded represents future revenues and efficiencies gained through the Reltco acquisition. Goodwill in this transaction is expected to be deductible for income tax purposes. Intangible assets consist of trade names of $1.2 million, customer relationships of $3.9 million, and non-compete agreements of $405 thousand. The trade names have indefinite lives and the customer relationships and non-compete agreements range from five to eight years.
The Company recorded merger expenses of $766 thousand during the six month period ended June 30, 2017. The company recorded $10 thousand in merger expenses during the three and six months period ended June 30, 2016.
The following pro forma financial information for the quarters ended June 30, 2017 and 2016 reflects the Company's estimated consolidated pro forma results of operations as if the Reltco acquisition occurred on January 1, 2016:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Revenue (net interest income and noninterest income)
$
51,012

 
$
36,086

 
$
97,952

 
$
72,503

Net income available to common stockholders
9,795

 
856

 
15,945

 
5,769

Basic earnings per share
0.28

 
0.03

 
0.46

 
0.17

Diluted earnings per share
0.27

 
0.02

 
0.45

 
0.16

Note 5. Investment Securities
The carrying amount of investment securities and their approximate fair values are reflected in the following table:

13



Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
June 30, 2017
 
 
 
 
 
 
 
US government agencies
$
17,820

 
$
16

 
$
34

 
$
17,802

Residential mortgage-backed securities
53,963

 
1

 
785

 
53,179

Mutual fund
2,050

 

 
38

 
2,012

Total
$
73,833

 
$
17

 
$
857

 
$
72,993

 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
US government agencies
$
17,803

 
$
52

 
$
32

 
$
17,823

Residential mortgage-backed securities
52,301

 
3

 
1,031

 
51,273

Mutual fund
2,012

 

 
52

 
1,960

Total
$
72,116

 
$
55

 
$
1,115

 
$
71,056

There were no sales of securities during the three and six months ended June 30, 2017 and June 30, 2016.
The following tables show gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position.
 
Less Than 12 Months
 
12 Months or More
 
Total
June 30, 2017
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
US government agencies
$
6,498

 
$
34

 
$

 
$

 
$
6,498

 
$
34

Residential mortgage-backed securities
32,480

 
516

 
13,881

 
269

 
46,361

 
785

Mutual fund
2,012

 
38

 

 

 
2,012

 
38

Total
$
40,990

 
$
588

 
$
13,881

 
$
269

 
$
54,871

 
$
857

 
Less Than 12 Months
 
12 Months or More
 
Total
December 31, 2016
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
US government agencies
$
6,508

 
$
32

 
$

 
$

 
$
6,508

 
$
32

Residential mortgage-backed securities
49,109

 
1,017

 
1,635

 
14

 
50,744

 
1,031

Mutual fund
1,960

 
52

 

 

 
1,960

 
52

Total
$
57,577

 
$
1,101

 
$
1,635

 
$
14

 
$
59,212

 
$
1,115

At June 30, 2017, there were seven residential mortgage-backed securities in unrealized loss positions for greater than 12 months and seventeen residential mortgage-backed securities, three US government agency securities and the 504 Fund mutual fund investment in an unrealized loss position for less than 12 months. Unrealized losses at December 31, 2016 were comprised of two residential mortgage-backed securities in unrealized loss positions for greater than 12 months and three US government agency securities, twenty-two residential mortgage-backed securities and the 504 Fund mutual fund investment in an unrealized loss position for less than 12 months.
These unrealized losses are primarily the result of volatility in the market and are related to market interest rates. Since none of the unrealized losses relate to marketability of the securities or the issuer’s ability to honor redemption obligations and the Company has the intent and ability to hold the securities for a sufficient period of time to recover unrealized losses, none of the securities are deemed to be other than temporarily impaired.
All residential mortgage-backed securities in the Company’s portfolio at June 30, 2017 and December 31, 2016 were backed by US government sponsored enterprises (“GSEs”).

14



Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

The following is a summary of investment securities by maturity:
 
June 30, 2017
 
Available-for-Sale
 
Amortized
cost
 
Fair
value
US government agencies
 
 
 
Within one year
$
9,981

 
$
9,986

One to five years
7,839

 
7,816

Total
17,820

 
17,802

 
 
 
 
Residential mortgage-backed securities
 
 
 
Five to ten years
7,906

 
7,848

After 10 years
46,057

 
45,331

Total
53,963

 
53,179

 
 
 
 
Total
$
71,783

 
$
70,981

The table above reflects contractual maturities. Actual results will differ as the loans underlying the mortgage-backed securities may repay sooner than scheduled. This table excludes the 504 Fund mutual fund investment.
At December 31, 2016, an investment security with a fair market value of $1.5 million was pledged to secure a line of credit with the Company’s correspondent bank. At June 30, 2017, the security pledged to secure a line of credit with the Company's correspondent bank was released. At June 30, 2017 and December 31, 2016, an investment security with a fair market value of $100 thousand was pledged to the Ohio State Treasurer to allow the Company's trust department to conduct business in the state of Ohio and investment securities with a fair market value of $2.5 million and $1.2 million, respectively, were pledged to the Company's trust department for uninsured trust assets held by the trust department.
Note 6. Loans and Leases Held for Investment and Allowance for Loan and Lease Losses
Loan and Lease Portfolio Segments
The following describes the risk characteristics relevant to each of the portfolio segments. Each loan and lease category is assigned a risk grade during the origination and closing process based on criteria described later in this section.
Commercial and Industrial
Commercial and industrial loans (C&I) receive similar underwriting treatment as commercial real estate loans in that the repayment source is analyzed to determine its ability to meet cash flow coverage requirements as set forth by Bank policies. Repayment of the Bank’s C&I loans generally comes from the generation of cash flow as the result of the borrower’s business operations. This business cycle itself brings a certain level of risk to the portfolio. In some instances, these loans may carry a higher degree of risk due to a variety of reasons – illiquid collateral, specialized equipment, highly depreciable assets, uncollectable accounts receivable, revolving balances, or simply being unsecured. As a result of these characteristics, the SBA guarantee on these loans is an important factor in mitigating risk.
Construction and Development
Construction and development loans are for the purpose of acquisition and development of land to be improved through the construction of commercial buildings. Such loans are usually paid off through the conversion to permanent financing for the long-term benefit of the borrower’s ongoing operations. At the completion of the project, if the loan is converted to permanent financing or if scheduled loan amortization begins, it is then reclassified to the “Commercial Real Estate” segment. Underwriting of construction and development loans typically includes analysis of not only the borrower’s financial condition and ability to meet the required debt obligations, but also the general market conditions associated with the area and type of project being funded.
Commercial Real Estate

15



Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

Commercial real estate loans are extensions of credit secured by owner occupied and non-owner occupied collateral. Underwriting generally involves intensive analysis of the financial strength of the borrower and guarantor, liquidation value of the subject collateral, the associated unguaranteed exposure, and any available secondary sources of repayment, with the greatest emphasis given to a borrower’s capacity to meet cash flow coverage requirements as set forth by Bank policies. Such repayment of commercial real estate loans is commonly derived from the successful ongoing operations of the business occupying the property. These typically include small businesses and professional practices.
Commercial Land
Commercial land loans are extensions of credit secured by farmland. Such loans are often for land improvements related to agricultural endeavors that may include construction of new specialized facilities. These loans are usually repaid through the conversion to permanent financing, or if scheduled loans amortization begins, for the long-term benefit of the borrower’s ongoing operations. Underwriting generally involves intensive analysis of the financial strength of the borrower and guarantor, liquidation value of the subject collateral, the associated unguaranteed exposure, and any available secondary sources of repayment, with the greatest emphasis given to a borrower’s capacity to meet cash flow coverage requirements as set forth by Bank policies.
Each of the loan types referenced in the sections above is further segmented into verticals in which the Bank chooses to operate. The Bank chooses to finance businesses operating in specific industries because of certain similarities. The similarities range from historical default and loss characteristics to business operations. However, there are differences that create the necessity to underwrite these loans according to varying criteria and guidelines. When underwriting a loan, the Bank considers numerous factors such as cash flow coverage, the credit scores of the guarantors, revenue growth, practice ownership experience and debt service capacity. Minimum guidelines have been set with regard to these various factors and deviations from those guidelines require compensating strengths when considering a proposed loan.

16



Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

Loans and leases consist of the following:
 
June 30,
2017
 
December 31,
2016
Commercial & Industrial
 
 
 
Agriculture
$
2,673

 
$
1,714

Death Care Management
10,857

 
9,684

Healthcare
39,133

 
37,270

Independent Pharmacies
95,070

 
83,677

Registered Investment Advisors
80,868

 
68,335

Veterinary Industry
42,276

 
38,930

Other Industries
136,344

 
94,836

Total
407,221

 
334,446

Construction & Development
 
 
 
Agriculture
37,108

 
32,372

Death Care Management
4,385

 
3,956

Healthcare
40,252

 
30,467

Independent Pharmacies
1,319

 
2,013

Registered Investment Advisors
366

 
294

Veterinary Industry
14,325

 
11,514

Other Industries
39,163

 
31,715

Total
136,918

 
112,331

Commercial Real Estate
 
 
 
Agriculture
5,514

 
5,591

Death Care Management
58,130

 
52,510

Healthcare
114,343

 
114,281

Independent Pharmacies
18,116

 
15,151

Registered Investment Advisors
14,715

 
11,462

Veterinary Industry
104,879

 
102,906

Other Industries
84,911

 
46,245

Total
400,608

 
348,146

Commercial Land
 
 
 
Agriculture
141,110

 
113,569

Total
141,110

 
113,569

Total Loans and Leases1
1,085,857

 
908,492

Net Deferred Costs
8,475

 
7,648

Discount on SBA 7(a) and USDA Unguaranteed2
(9,829
)
 
(8,574
)
Loans and Leases, Net of Unearned
$
1,084,503

 
$
907,566

1
Total loans and leases include $39.0 million and $37.7 million of U.S. government guaranteed loans as of June 30, 2017 and December 31, 2016, respectively.
2
The Company measures the carrying value of the retained portion of loans sold at fair value under ASC Subtopic 825-10. The value of these retained loan balances is discounted based on the estimates derived from comparable unguaranteed loan sales.

17



Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

Credit Risk Profile
The Bank uses internal loan and lease reviews to assess the performance of individual loans and leases by industry segment. An independent review of the loan and lease portfolio is performed annually by an external firm. The goal of the Bank’s annual review of select borrowers' financial performance is to validate the adequacy of the risk grade assigned.
The Bank uses a grading system to rank the quality of each loan and lease. The grade is periodically evaluated and adjusted as performance dictates. Loan and lease grades 1 through 4 are passing grades and grade 5 is special mention. Collectively, grades 6 through 8 represent classified loans and leases in the Bank’s portfolio. The following guidelines govern the assignment of these risk grades:
Exceptional (1 Rated): These loans and leases are of the highest quality, with strong, well-documented sources of repayment. Debt service coverage (“DSC”) is over 1.75X based on historical results. Secondary source of repayment is strong, with a loan to value (“LTV”) of 65% or less if secured solely by commercial real estate (“CRE”). Discounted collateral coverage from all sources should exceed 125%. Guarantors have credit scores above 740.
Quality (2 Rated): These loans and leases are of good quality, with good, well-documented sources of repayment. DSC is over 1.25X based on historical or pro-forma results. Secondary source of repayment is good, with a LTV of 75% or less if secured solely by CRE. Discounted collateral coverage should exceed 100%. Guarantors have credit scores above 700.
Acceptable (3 rated): These loans and leases are of acceptable quality, with acceptable sources of repayment. DSC of over 1.00X based on historical or pro-forma results. Companies that do not meet these credit metrics must be evaluated to determine if they should be graded below this level.
Acceptable (4 rated): These loans and leases are considered very weak pass. These loans and leases are riskier than a 3-rated credit, but due to various mitigating factors are not considered a Special mention or worse. The mitigating factors must clearly be identified to offset further downgrade. Examples of loans and leases that may be put in this category include start-up loans and leases and loans and leases with less than 1:1 cash flow coverage with other sources of repayment.
Special mention (5 rated): These loans and leases are considered as emerging problems, with potentially unsatisfactory characteristics. These loans and leases require greater management attention. A loan or lease may be put into this category if the Bank is unable to obtain financial reporting from a company to fully evaluate its position.
Substandard (6 rated): Loans and leases graded Substandard are inadequately protected by current sound net worth, paying capacity of the borrower, or pledged collateral. They typically have unsatisfactory characteristics causing more than acceptable levels of risk, and have one or more well-defined weaknesses that could jeopardize the repayment of the debt.
Doubtful (7 rated): Loans and leases graded Doubtful have inherent weaknesses that make collection or liquidation in full questionable. Loans and leases graded Doubtful must be placed on non-accrual status.
Loss (8 rated): Loss rated loans and leases are considered uncollectible and of such little value that their continuance as an active Bank asset is not warranted. The asset should be charged off, even though partial recovery may be possible in the future.

18



Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

The following tables summarize the risk grades of each category:
 
Risk Grades
1 - 4
 
Risk Grade
5
 
Risk Grades
6 - 8
 
Total
June 30, 2017
 
 
 
 
 
 
 
Commercial & Industrial
 
 
 
 
 
 
 
Agriculture
$
2,442

 
$
231

 
$

 
$
2,673

Death Care Management
10,628

 
119

 
110

 
10,857

Healthcare
30,078

 
2,440

 
6,615

 
39,133

Independent Pharmacies
84,555

 
5,642

 
4,873

 
95,070

Registered Investment Advisors
76,349

 
2,433

 
2,086

 
80,868

Veterinary Industry
38,342

 
1,811

 
2,123

 
42,276

Other Industries
136,174

 
170

 

 
136,344

Total
378,568

 
12,846

 
15,807

 
407,221

Construction & Development
 
 
 
 
 
 
 
Agriculture
37,108

 

 

 
37,108

Death Care Management
4,385

 

 

 
4,385

Healthcare
40,252

 

 

 
40,252

Independent Pharmacies
1,319

 

 

 
1,319

Registered Investment Advisors
366

 

 

 
366

Veterinary Industry
14,325

 

 

 
14,325

Other Industries
39,163

 

 

 
39,163

Total
136,918

 

 

 
136,918

Commercial Real Estate
 
 
 
 
 
 
 
Agriculture
5,514

 

 

 
5,514

Death Care Management
51,370

 
4,237

 
2,523

 
58,130

Healthcare
108,388

 
4,168

 
1,787

 
114,343

Independent Pharmacies
14,145

 
1,803

 
2,168

 
18,116

Registered Investment Advisors
14,567

 
148

 

 
14,715

Veterinary Industry
89,508

 
2,498

 
12,873

 
104,879

Other Industries
84,911

 

 

 
84,911

Total
368,403

 
12,854

 
19,351

 
400,608

Commercial Land
 
 
 
 
 
 
 
Agriculture
139,792

 
1,122

 
196

 
141,110

Total
139,792

 
1,122

 
196

 
141,110

Total1
$
1,023,681

 
$
26,822

 
$
35,354

 
$
1,085,857


19



Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

 
Risk Grades
1 - 4
 
Risk Grade
5
 
Risk Grades
6 - 8
 
Total
December 31, 2016
 
 
 
 
 
 
 
Commercial & Industrial
 
 
 
 
 
 
 
Agriculture
$
1,656

 
$
58

 
$

 
$
1,714

Death Care Management
9,452

 
121

 
111

 
9,684

Healthcare
28,723

 
681

 
7,866

 
37,270

Independent Pharmacies
73,948

 
6,542

 
3,187

 
83,677

Registered Investment Advisors
65,297

 
2,246

 
792

 
68,335

Veterinary Industry
34,407

 
1,967

 
2,556

 
38,930

Other Industries
94,736

 
100

 

 
94,836

Total
308,219

 
11,715

 
14,512

 
334,446

Construction & Development
 
 
 
 
 
 
 
Agriculture
32,061

 

 
311

 
32,372

Death Care Management
3,956

 

 

 
3,956

Healthcare
30,467

 

 

 
30,467

Independent Pharmacies
2,013

 

 

 
2,013

Registered Investment Advisors
294

 

 

 
294

Veterinary Industry
9,725

 
1,789

 

 
11,514

Other Industries
31,715

 

 

 
31,715

Total
110,231

 
1,789

 
311

 
112,331

Commercial Real Estate
 
 
 
 
 
 
 
Agriculture
5,591

 

 

 
5,591

Death Care Management
46,427

 
4,314

 
1,769

 
52,510

Healthcare
103,097

 
7,142

 
4,042

 
114,281

Independent Pharmacies
12,654

 
1,968

 
529

 
15,151

Registered Investment Advisors
11,462

 

 

 
11,462

Veterinary Industry
88,168

 
3,995

 
10,743

 
102,906

Other Industries
46,245

 

 

 
46,245

Total
313,644

 
17,419

 
17,083

 
348,146

Commercial Land
 
 
 
 
 
 
 
Agriculture
112,333

 
1,138

 
98

 
113,569

Total
112,333

 
1,138

 
98

 
113,569

Total1
$
844,427

 
$
32,061

 
$
32,004

 
$
908,492

1
Total loans and leases include $39.0 million of U.S. government guaranteed loans as of June 30, 2017, segregated by risk grade as follows: Risk Grades 1 – 4 = $12.6 million, Risk Grade 5 = $3.2 million, Risk Grades 6 – 8 = $23.2 million. As of December 31, 2016, total loans and leases include $37.7 million of U.S. government guaranteed loans, segregated by risk grade as follows: Risk Grades 1 – 4 = $8.7 million, Risk Grade 5 = $7.7 million, Risk Grades 6 – 8 = $21.3 million.

20



Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

Past Due Loans and Leases
Loans and leases are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans and leases less than 30 days past due and accruing are included within current loans and leases shown below. The following tables show an age analysis of past due loans and leases as of the dates presented.
 
Less Than 30
Days Past
Due & Not
Accruing
 
30-89 Days
Past Due
& Accruing
 
30-89 Days
Past Due &
Not Accruing
 
Greater
Than 90
Days Past
Due
 
Total Not
Accruing
& Past Due
 
Current
 
Total Loans and Leases
 
90
Days or More
Past Due &
Still Accruing
June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial & Industrial
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agriculture
$

 
$

 
$

 
$

 
$

 
$
2,673

 
$
2,673

 
$

Death Care Management

 

 

 

 

 
10,857

 
10,857

 

Healthcare
557

 
94

 
942

 
3,937

 
5,530

 
33,603

 
39,133

 

Independent Pharmacies

 

 
126

 
3,634

 
3,760

 
91,310

 
95,070

 

Registered Investment Advisors

 

 

 
707

 
707

 
80,161

 
80,868

 

Veterinary Industry
30

 
40

 
557

 
1,085

 
1,712

 
40,564

 
42,276

 

Other Industries

 

 

 

 

 
136,344

 
136,344

 

Total
587

 
134

 
1,625

 
9,363

 
11,709

 
395,512

 
407,221

 

Construction & Development
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agriculture

 

 

 

 

 
37,108

 
37,108

 

Death Care Management

 

 

 

 

 
4,385

 
4,385

 

Healthcare

 

 

 

 

 
40,252

 
40,252

 

Independent Pharmacies

 

 

 

 

 
1,319

 
1,319

 

Registered Investment Advisors

 

 

 

 

 
366

 
366