Live Oak Bancshares, Inc. Reports Fourth Quarter 2018 Results

WILMINGTON, N.C., Jan. 23, 2019 (GLOBE NEWSWIRE) — Live Oak Bancshares, Inc. (Nasdaq: LOB) (“Live Oak” or “the Company”) today reported fourth quarter net earnings available to common shareholders of $10.5 million, or $0.26 per diluted share, compared to $71.7 million, or $1.74 per diluted share, for the fourth quarter of 2017.  Net earnings for the year ended December 31, 2018 totaled $51.4 million, or $1.24 per diluted share, compared to $100.5 million for the year ended December 31, 2017, or $2.65 per diluted share.  The fourth quarter of 2017 included a one-time pretax gain of $68.0 million related to an equity method investment in Apiture, LLC (“Apiture”), an $18.9 million revaluation of the Company’s net deferred tax liability, and several other smaller non-routine costs.

During the fourth quarter of 2018, the Company implemented a strategic decision to retain a larger portion of its loans eligible for sale on balance sheet in order to reduce earnings volatility and maximize long-term profitability with what the Company believes is a more predictable earnings model.

“We are very pleased with the contributions Live Oak made in 2018 to the success of small business owners and to the changing landscape of the financial services industry.  We exited the year having originated just under $1.8 billion in loans and leases.  Recurring revenue grew 34% compared to 2017 with ample capital and strong sustained liquidity, further reflecting traction in strategic initiatives designed to maximize our unique business model.  We anticipate that our recent decision to retain more of our loan production will bring more predictability to our growing revenue streams.  Our technology and people investments have us well-positioned to serve more small businesses across the U.S. while also meaningfully contributing to the transformation of the financial services industry.  As we head into 2019, we will continue to focus on investments in our employees, customers and our community,” said James S. Mahan, III, Chief Executive Officer of Live Oak.

Year over Year Highlights

(Dollars in thousands, except per share data)										Increase (Decrease)
		2018				2017				Dollars				Percent
Net interest income and servicing revenues		$	137,164			$	102,622			$	34,542				34	%
Net income			51,448				100,499				(49,051	)			(49	)
Diluted earnings per share			1.24				2.65				(1.41	)			(53	)
Non-GAAP net income (1)			54,571				47,187				7,384				16
Non-GAAP diluted earnings per share (1)			1.32				1.25				0.07				5
Total assets			3,670,449				2,758,474				911,975				33
Total loans and leases			2,530,812				2,024,427				506,385				25
Loan and lease production:
Loans and leases originated		$	1,765,680			$	1,934,238			$	(168,558	)			(9	)%
% Fully funded			56.5	%			50.9	%		n/a				n/a
Loan sales:
Guaranteed loans sold		$	945,178			$	787,926			$	157,252				20	%
Net gains on sales of guaranteed loans			76,473				79,090				(2,617	)			(3	)
Average net gain on sale of guaranteed loans, per million sold			80.91				100.38				(19.47	)			(19	)
(1) See accompanying GAAP to Non-GAAP Reconciliation.

Fourth Quarter 2018 Key Measures

(Dollars in thousands, except per share data)										Increase (Decrease)
		Q4 2018				Q4 2017				Dollars				Percent				Q3 2018
Net interest income and servicing revenues		$	36,547			$	28,977			$	7,570				26	%		$	35,230
Net income			10,490				71,730				(61,240	)			(85	)			14,252
Diluted earnings per share			0.26				1.74				(1.48	)			(85	)			0.34
Non-GAAP net income (1)			10,764				16,875				(6,111	)			(36	)			16,562
Non-GAAP diluted earnings per share (1)			0.26				0.41				(0.15	)			(36	)			0.40
Loan and lease production:
Loans and leases originated		$	498,987			$	483,422			$	15,565				3	%		$	377,337
% Fully funded			49.8	%			42.9	%		n/a				n/a					48.2	%
Loan sales:
Guaranteed loans sold		$	104,646			$	211,654			$	(107,008	)			(51	)%		$	298,073
Net gains on sales of guaranteed loans			6,261				23,314				(17,053	)			(73	)			21,406
Average net gain on sale of guaranteed loans, per million sold			59.83				110.15				(50.32	)			(46	)			71.81
(1) See accompanying GAAP to Non-GAAP Reconciliation.

Loans and Leases

At December 31, 2018, the total loan and lease portfolio of $2.53 billion increased 25.0% from its level a year ago and 11.1% from its level at September 30, 2018.  Compared to the third quarter of 2018, loans and leases held for investment increased $212.1 million, or 13.0%, to $1.84 billion while loans held for sale increased $40.9 million, or 6.3%, to $687.4 million. Loan and lease originations totaled $499.0 million during the fourth quarter of 2018, an increase of $121.7 million, or 32.2%, from the third quarter of 2018.  Originations for year ended December 31, 2018 declined by 8.7% to $1.77 billion compared to $1.93 billion for the year ended December 31, 2017.  The total loan and lease portfolio at December 31, 2018, and September 30, 2018, of $2.53 billion and $2.28 billion, respectively, comprised approximately 62.0% and 64.4% of unguaranteed loans and leases, respectively.

Average loans and leases were $2.40 billion during the fourth quarter of 2018 compared to $2.31 billion during the third quarter of 2018.

Deposits

Total deposits increased by $225.3 million, or 7.7%, to $3.15 billion at December 31, 2018 from $2.92 billion at September 30, 2018, consistent with desired liquidity levels and the growing loan and lease portfolio. Average total interest-bearing deposits for the fourth quarter of 2018 increased $31.9 million, or 1.1%, to $2.94 billion, compared to $2.91 billion for the third quarter of 2018. The ratio of average total loans and leases to average interest-bearing deposits was 81.7% for the fourth quarter of 2018, compared to 79.3% for the third quarter of 2018.

Net Interest Income

Net interest income for the fourth quarter of 2018 rose to $28.8 million compared to $23.0 million for the fourth quarter of 2017 and $27.7 million for the third quarter of 2018. The increase from the prior year was driven by the significant growth in the combined held for sale and held for investment loan and lease portfolios along with higher investment security holdings reflecting the Company’s ongoing initiative to grow recurring revenue sources.  The increase from the third quarter of 2018 arose from a higher average loan and lease portfolio balance and an improved yield on interest earning assets of thirty-three basis points.  The net interest margin for the fourth quarter of 2018 increased eleven basis points to 3.72% versus 3.61% in the third quarter of 2018 as the increased yield on the loan and lease portfolio outpaced the increase in the average rate of interest bearing deposits.  The Company anticipates that it is positioned to benefit from a rising rate environment with 72.3% of the total held for sale and held for investment loan and lease portfolio priced at variable rates that adjust on either a calendar monthly or quarterly basis.

Noninterest Income

Noninterest income for the fourth quarter of 2018 decreased to $18.1 million compared to $95.4 million for the fourth quarter of 2017 and $24.3 million for the third quarter of 2018. 

The primary driver of the decrease in noninterest income compared to the fourth quarter of 2017 was the $68.0 million one-time gain arising from the Company’s equity method investment in Apiture.

Also, largely contributing to the decrease in noninterest income compared to the fourth quarter of 2017 and third quarter of 2018 were lower net gains on sales of loans.  The Company’s net gains on sales of loans decreased to $5.7 million in the fourth quarter of 2018 compared to $23.3 million in the fourth quarter of 2017 and $22.0 million in the third quarter of 2018.  The volume of guaranteed loan sales in the fourth quarter of 2018 declined to $104.6 million compared to $211.7 million in the fourth quarter of 2017 and $298.1 million in the third quarter of 2018. The decline in loan sale volumes is consistent with the Company’s recent strategic shift to hold substantially more of its production on balance sheet.  The average net gains on guaranteed loan sales decreased to $59.8 thousand per million sold in the fourth quarter of 2018 versus $110.2 thousand in the fourth quarter of 2017 and $71.8 thousand in the third quarter of 2018. The decline in average net gains on guaranteed loan sales for the fourth quarter of 2018 compared to the fourth quarter of 2017 and third quarter of 2018 was impacted by fair value fluctuations in exchange-traded interest rate lock commitments amounting to a net loss of $1.8 million and $38 thousand for the fourth quarter of 2018 and 2017, respectively, and a net gain of $770 thousand for the third quarter of 2018.  This resulted in a reduction to the average net gains on guaranteed loan sales of $17.6 thousand per million sold and $0.2 thousand in the fourth quarter of 2018 and 2017, respectively, and an increase of $2.6 thousand per million sold in the third quarter of 2018.  The decline in average loan sale pricing from the fourth quarter of 2017 was also largely influenced by deteriorating market conditions and the higher interest rate environment which led to increased prepayment speeds.  Other factors contributing to the decline from the third quarter of 2018 was the specific mix of loans sold by the Company rather than market conditions for the purchase of guaranteed loans which were generally improved during the fourth quarter.

Partially offsetting the overall decline in noninterest income compared to the fourth quarter of 2017 and third quarter of 2018 were increases in loan servicing revenues, lower losses from the loan servicing asset revaluation and higher lease income.

Loan servicing revenues of $7.8 million in the fourth quarter of 2018 rose by $1.8 million, or 29.2%, from the fourth quarter of 2017 and by $246 thousand, or 3.3%, from the third quarter of 2018. The net loss resulting from the revaluation of the servicing asset totaled $627 thousand for the fourth quarter of 2018, a decrease of $5.7 million compared to the fourth quarter of 2017 and a decrease of $8.8 million compared to the third quarter of 2018, largely because of the aforementioned improvement in market conditions during the fourth quarter.

Lease income from solar panels contributed $2.2 million in noninterest income in the fourth quarter of 2018, compared to $1.2 million in the fourth quarter of 2017 and $2.2 million in the third quarter of 2018.  The Company began offering operating lease agreements for solar panels to third parties at the end of the first quarter of 2017.

Noninterest Expense

Noninterest expense for the fourth quarter of 2018 decreased to $32.6 million compared to $41.0 million for the fourth quarter of 2017 and $41.2 million for the third quarter of 2018.

Salaries and employee benefits for the fourth quarter of 2018 decreased to $14.5 million compared to $19.0 million for the fourth quarter of 2017 and $20.6 million for the third quarter of 2018.  These declines were largely influenced by the Company’s reversal of accrued incentive compensation due to not meeting budgeted performance metrics for the year ending December 31, 2018 along with the exit from the title insurance business during the prior quarter.  These decreases were partially offset by the ongoing expansion of the Company’s workforce and infrastructure to support its initiatives.

Another factor contributing to the lower noninterest expense level was the absence of impairment expense related to Reltco which was $3.6 million for the fourth quarter of 2017 and $2.7 million for the third quarter of 2018 associated with its sale.

Partially offsetting the decrease in noninterest expense from the fourth quarter of 2017 were increases in travel expense of $1.2 million attributable to routine maintenance for corporate aircraft and equipment expense of $1.2 million related to higher levels of depreciation related to solar panels acquired for the Company’s renewable energy leasing business.  Travel expense increased $1.3 million compared to the third quarter of 2018 also attributable to routine maintenance for corporate aircraft during the fourth quarter of 2018. 

Asset Quality

The unguaranteed exposure of nonperforming loans increased to $14.5 million, or 0.79% of total loans and leases held for investment, at December 31, 2018, compared to $12.9 million, or 0.79%, at September 30, 2018.  Total nonperforming loans increased to $57.7 million in the fourth quarter of 2018 from $52.7 million at the end of the prior quarter.

The unguaranteed exposure of foreclosed assets decreased to $148 thousand at December 31, 2018, from $158 thousand at September 30, 2018.  Foreclosed assets decreased $335 thousand to $1.1 million at December 31, 2018, from $1.4 million at September 30, 2018.

Net charge-offs of $1.2 million in the fourth quarter of 2018 decreased compared to $2.3 million in the third quarter of 2018 and increased compared to $892 thousand in the fourth quarter of 2017.  Net charge-offs as a percentage of average held for investment loans and leases, annualized, for both quarters ended December 31, 2018 and 2017, was 0.28%.  Net charge-offs for the twelve months of 2018 totaled $4.8 million compared to $3.6 million for the twelve months of 2017.

Provision for Loan and Lease Losses

The provision for loan and lease losses for the fourth quarter of 2018 totaled $6.8 million compared to a negative provision expense of $243 thousand for the third quarter of 2018 and a provision expense of $4.1 million for the fourth quarter of 2017.  The increase in provision expense was largely the result of growth in the loan and lease portfolio combined with increases in classified and past due loans over the past year.  The quarter over quarter change was further magnified by the $2.9 million reduction in provision during the third quarter of 2018 due to updated loss factors, consistent with our methodology for estimating the allowance for loan and lease losses.

The allowance for loan and lease losses totaled $32.4 million at December 31, 2018, compared to $26.8 million at September 30, 2018. The allowance for loan and lease losses as a percentage of total loans and leases held for investment was 1.76% and 1.64% at December 31, 2018, and September 30, 2018, respectively.

Income Tax

There was a net income tax benefit in the fourth quarter of 2018 of $3.0 million compared to net income tax expense of $1.6 million in the fourth quarter of 2017 and a net income tax benefit of $3.2 million in the third quarter of 2018.  The Company’s effective tax rate is predominantly driven by the leasing of renewable energy assets which generated $20.3 million and $24.9 million in investment tax credits for the years ended December 31, 2018 and 2017, respectively.  As the lessor of these assets, the Company is accomplishing broader strategic initiatives in the renewable energy sector.

Conference Call

Live Oak will host a conference call to discuss quarterly results at 9:00 a.m. ET tomorrow morning (January 24, 2019). Media representatives, analysts and the public are invited to listen to this discussion by calling (844) 743-2494 (domestic) or (661) 378-9528 (international) with conference ID 9893275. A live webcast of the conference call along with presentation materials referenced during the conference call will be available on the Investor Relations page of the Company’s website at http://investor.liveoakbank.com. A replay of the webcast will be archived on the Company’s website for one year.  A replay of the conference call will also be available until 5:00 p.m. ET January 31, 2019 and can be accessed by dialing (855) 859-2056 (domestic) or (404) 537-3406 (international).

CFO Commentary

Additional commentary on the quarter by Brett Caines, Chief Financial Officer of the Company, is available at http://investor.liveoakbank.com in the supporting materials for the conference call.

Important Note Regarding Forward-Looking Statements

Statements in this press release that are based on other than historical data or that express the Company’s plans or expectations regarding future events or determinations are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Statements based on historical data are not intended and should not be understood to indicate the Company’s expectations regarding future events. Forward-looking statements provide current expectations or forecasts of future events or determinations. These forward-looking statements are not guarantees of future performance or determinations, nor should they be relied upon as representing management’s views as of any subsequent date. Forward-looking statements involve significant risks and uncertainties, and actual results may differ materially from those presented, either expressed or implied, in this press release. Factors that could cause actual results to differ materially from those expressed in the forward-looking statements include changes in Small Business Administration (“SBA”) rules, regulations or loan products, including the Section 7(a) program, changes in SBA standard operating procedures or changes in Live Oak Banking Company’s status 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; a reduction in or the termination of the Company’s ability to use the technology-based platform that is critical to the success of its business model, including a failure in or a breach of operational or security systems; competition from other lenders; the Company’s ability to attract and retain key personnel; market and economic conditions and the associated impact on the Company; operational, liquidity and credit risks associated with the Company’s business; the impact of heightened regulatory scrutiny of financial products and services and the Company’s ability to comply with regulatory requirements and expectations; and the other factors discussed in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) and available at the SEC’s Internet site (http://www.sec.gov). Except as required by law, the Company specifically disclaims any obligation to update any factors or to publicly announce the result of revisions to any of the forward-looking statements included herein to reflect future events or developments.

About Live Oak Bancshares, Inc.

Live Oak Bancshares, Inc. (Nasdaq: LOB) is a financial holding company and the parent company of Live Oak Banking Company.  Live Oak Bancshares and its subsidiaries partner with businesses that have a common focus of changing the banking industry by bringing efficiency and excellence to customers using technology and innovation.

Contacts:

Brett Caines | CFO | Investor Relations | 910.796.1645 & Micah Davis | CMO | Media Relations | 910.550.2255

Live Oak Bancshares, Inc.
Quarterly Statements of Income (unaudited)
(Dollars in thousands, except per share data)

		Three months ended
		4Q 2018				3Q 2018				2Q 2018				1Q 2018				4Q 2017
Interest income
Loans and fees on loans		$	40,628			$	37,724			$	36,267			$	32,691			$	29,343
Investment securities, taxable			2,558				2,528				2,530				1,117				468
Other interest earning assets			1,568				1,638				2,179				1,215				725
Total interest income			44,754				41,890				40,976				35,023				30,536
Interest expense
Deposits			15,959				14,165				13,927				10,418				7,330
Borrowings			—				1				1				129				230
Total interest expense			15,959				14,166				13,928				10,547				7,560
Net interest income			28,795				27,724				27,048				24,476				22,976
Provision for (recovery of) loan and leases losses			6,822				(243	)			2,087				4,392				4,055
Net interest income after provision for loan and lease losses			21,973				27,967				24,961				20,084				18,921
Noninterest income
Loan servicing revenue			7,752				7,506				6,965				6,898				6,001
Loan servicing asset revaluation			(627	)			(9,380	)			(3,670	)			(5,088	)			(6,307	)
Net gains on sales of loans			5,687				22,004				23,061				24,418				23,314
Lease income			2,244				2,194				1,920				1,608				1,165
Gain on contribution to equity method investment			—				—				—				—				68,000
Construction supervision fee income			323				578				597				779				699
Title insurance income			—				479				996				1,300				1,762
Other noninterest income			2,686				950				744				841				807
Total noninterest income			18,065				24,331				30,613				30,756				95,441
Noninterest expense
Salaries and employee benefits			14,503				20,553				22,146				20,209				18,982
Travel expense			3,269				2,003				2,041				1,843				2,089
Professional services expense			1,233				1,228				1,119				1,298				709
Advertising and marketing expense			1,023				1,462				1,868				1,662				1,386
Occupancy expense			1,738				1,588				1,882				1,857				2,177
Data processing expense			2,606				3,661				2,906				2,837				2,913
Equipment expense			3,630				3,649				3,368				3,077				2,474
Other loan origination and maintenance expense			1,482				1,742				1,414				1,329				1,383
Renewable energy tax credit investment impairment			—				—				—				—				690
FDIC insurance			547				1,105				1,010				572				898
Title insurance closing services expense			—				114				372				426				541
Impairment expense on goodwill and other intangibles, net			—				2,680				—				—				3,648
Other expense			2,527				1,459				2,704				2,962				3,134
Total noninterest expense			32,558				41,244				40,830				38,072				41,024
Income before taxes			7,480				11,054				14,744				12,768				73,338
Income tax expense (benefit)			(3,010	)			(3,198	)			491				315				1,608
Net income		$	10,490			$	14,252			$	14,253			$	12,453			$	71,730
Earnings per share
Basic		$	0.26			$	0.36			$	0.36			$	0.31			$	1.80
Diluted		$	0.26			$	0.34			$	0.34			$	0.30			$	1.74
Weighted average shares outstanding
Basic			40,148,115				40,119,561				40,027,336				39,926,781				39,879,345
Diluted			41,075,864				41,688,430				41,619,647				41,399,930				41,184,793

Live Oak Bancshares, Inc.
Quarterly Balance Sheets (unaudited)
(Dollars in thousands)

		As of the quarter ended
		4Q 2018				3Q 2018				2Q 2018				1Q 2018				4Q 2017
Assets
Cash and due from banks		$	316,823			$	368,565			$	392,941			$	527,952			$	295,271
Certificates of deposit with other banks			7,250				750				2,250				2,250				3,000
Investment securities available-for-sale			380,490				374,284				382,890				376,453				93,355
Loans held for sale			687,393				646,475				757,494				720,511				680,454
Loans and leases held for investment			1,843,419				1,631,337				1,534,368				1,442,077				1,343,973
Allowance for loan and lease losses			(32,434	)			(26,797	)			(29,350	)			(28,050	)			(24,190	)
Net loans and leases			1,810,985				1,604,540				1,505,018				1,414,027				1,319,783
Premises and equipment, net			262,524				263,861				234,817				216,831				178,790
Foreclosed assets			1,094				1,429				1,725				1,519				1,281
Servicing assets			47,641				49,261				52,689				53,120				52,298
Other assets			156,249				135,592				143,145				148,200				134,242
Total assets		$	3,670,449			$	3,444,757			$	3,472,969			$	3,460,863			$	2,758,474
Liabilities and Shareholders’ Equity
Liabilities
Deposits:
Noninterest-bearing		$	53,993			$	48,622			$	46,192			$	48,755			$	57,868
Interest-bearing			3,095,590				2,875,666				2,923,044				2,924,586				2,202,395
Total deposits			3,149,583				2,924,288				2,969,236				2,973,341				2,260,263
Long term borrowings			1,457				1,506				3,385				3,489				26,564
Other liabilities			25,849				41,733				37,362				35,197				34,714
Total liabilities			3,176,889				2,967,527				3,009,983				3,012,027				2,321,541
Shareholders’ equity
Preferred stock, no par value, 1,000,000 shares authorized, none issued or outstanding			—				—				—				—				—
Class A common stock (voting)			278,945				276,831				274,043				271,451				268,557
Class B common stock (non-voting)			49,168				49,168				49,168				49,168				49,168
Retained earnings			167,124				157,839				144,791				131,739				120,241
Accumulated other comprehensive loss			(1,677	)			(6,608	)			(5,016	)			(3,522	)			(1,033	)
Total equity			493,560				477,230				462,986				448,836				436,933
Total liabilities and shareholders’ equity		$	3,670,449			$	3,444,757			$	3,472,969			$	3,460,863			$	2,758,474

Live Oak Bancshares, Inc.
Statements of Income (unaudited)
(Dollars in thousands, except per share data)

		Twelve months ended
		December 31, 2018				December 31, 2017
Interest income
Loans and fees on loans		$	147,310			$	99,633
Investment securities, taxable			8,733				1,432
Other interest earning assets			6,600				2,407
Total interest income			162,643				103,472
Interest expense
Deposits			54,469				24,223
Borrowings			131				1,215
Total interest expense			54,600				25,438
Net interest income			108,043				78,034
Provision for loan and lease losses			13,058				9,536
Net interest income after provision for loan and lease losses			94,985				68,498
Noninterest income
Loan servicing revenue			29,121				24,588
Loan servicing asset revaluation			(18,765	)			(13,171	)
Net gains on sales of loans			75,170				78,590
Lease income			7,966				1,856
Gain on contribution to equity method investment			—				68,000
Construction supervision fee income			2,277				1,776
Title insurance income			2,775				7,565
Other noninterest income			5,221				3,717
Total noninterest income			103,765				172,921
Noninterest expense
Salaries and employee benefits			77,411				74,669
Travel expense			9,156				8,124
Professional services expense			4,878				4,937
Advertising and marketing expense			6,015				6,363
Occupancy expense			7,065				6,195
Data processing expense			12,010				8,449
Equipment expense			13,724				7,479
Other loan origination and maintenance expense			5,967				4,970
Renewable energy tax credit investment impairment			—				690
FDIC insurance			3,234				3,206
Title insurance closing services expense			912				2,418
Impairment expense on goodwill and other intangibles, net			2,680				3,648
Other expense			9,652				12,017
Total noninterest expense			152,704				143,165
Income before taxes			46,046				98,254
Income tax benefit			(5,402	)			(2,245	)
Net income		$	51,448			$	100,499
Earnings per share
Basic		$	1.28			$	2.75
Diluted		$	1.24			$	2.65
Weighted average shares outstanding
Basic			40,056,230				36,592,893
Diluted			41,446,750				37,859,535

Live Oak Bancshares, Inc.
Quarterly Selected Financial Data
(Dollars in thousands, except per share data)

		As of and for the three months ended
		4Q 2018				3Q 2018				2Q 2018				1Q 2018				4Q 2017
Income Statement Data
Net income		$	10,490			$	14,252			$	14,253			$	12,453			$	71,730
Per Common Share
Net income, basic		$	0.26			$	0.36			$	0.36			$	0.31			$	1.80
Net income, diluted			0.26				0.34				0.34				0.30				1.74
Dividends declared			0.03				0.03				0.03				0.03				0.03
Book value			12.29				11.89				11.55				11.23				10.95
Tangible book value (1)			12.29				11.89				11.45				11.13				10.85
Performance Ratios
Return on average assets (annualized)			1.20	%			1.65	%			1.61	%			1.64	%			11.21	%
Return on average equity (annualized)			8.64				12.08				12.34				11.08				68.33
Net interest margin			3.72				3.61				3.46				3.72				4.07
Efficiency ratio (1)			69.48				79.23				70.81				68.93				34.64
Noninterest income to total revenue			38.55				46.74				53.09				55.69				80.60
Selected Loan Metrics
Loans and leases originated		$	498,987			$	377,337			$	491,797			$	397,559			$	483,422
Guaranteed loans sold			104,646				298,073				295,216				247,243				211,654
Average net gain on sale of guaranteed loans			59.83				71.81				82.61				98.76				110.15
Held for sale guaranteed loans (note amount) (2)			914,354				896,464				1,075,801				1,068,886				1,087,636
Outstanding balance of sold loans serviced:
Guaranteed			3,045,460				3,102,820				2,951,379				2,812,108				2,680,641
Unguaranteed			174,066				170,784				155,939				174,867				169,355
Total			3,219,526				3,273,604				3,107,318				2,986,975				2,849,996
Asset Quality Ratios
Allowance for loan losses to loans and leases held for investment			1.76	%			1.64	%			1.91	%			1.95	%			1.80	%
Net charge-offs		$	1,185			$	2,310			$	787			$	532			$	892
Net charge-offs to average loans and leases held for investment (3)			0.28	%			0.57	%			0.21	%			0.15	%			0.28	%
Nonperforming loans		$	57,690			$	52,709			$	46,105			$	36,776			$	23,480
Foreclosed assets			1,094				1,429				1,725				1,519				1,281
Nonperforming loans (unguaranteed exposure)			14,488				12,897				11,466				7,386				3,610
Foreclosed assets (unguaranteed exposure)			148				158				197				101				90
Nonperforming loans not guaranteed by the SBA and foreclosures		$	14,636			$	13,055			$	11,663			$	7,487			$	3,700
Nonperforming loans and foreclosures, not guaranteed by the SBA, to total assets			0.40	%			0.38	%			0.34	%			0.22	%			0.13	%
Capital Ratios
Common equity tier 1 capital (to risk-weighted assets)			15.92	%			16.95	%			16.78	%			16.36	%			17.81	%
Total capital (to risk-weighted assets)			17.12				18.01				17.97				17.51				18.91
Tier 1 risk based capital (to risk-weighted assets)			15.92				16.95				16.78				16.36				17.81
Tier 1 leverage capital (to average assets)			12.53				12.53				11.81				13.32				15.53

Notes to Quarterly Selected Financial Data

(1)  See accompanying GAAP to Non-GAAP Reconciliation.

(2)  Includes the entire note amount, including undisbursed funds for the multi-advance loans.

(3)  Quarterly net charge-offs as a percentage of quarterly average loans and leases held for investment, annualized.

Live Oak Bancshares, Inc.
Quarterly Average Balances and Net Interest Margin
(Dollars in thousands)

		Three months ended December 31, 2018												Three months ended September 30, 2018
		Average Balance				Interest				Average Yield/Rate				Average Balance				Interest				Average Yield/Rate
Interest earning assets:
Interest earning balances in other banks		$	284,320			$	1,568				2.19	%		$	349,739			$	1,638				1.86	%
Investment securities			384,481				2,558				2.64				388,520				2,528				2.58
Loans held for sale			684,013				11,555				6.70				693,517				11,270				6.45
Loans and leases held for investment (1)			1,716,023				29,073				6.72				1,612,699				26,454				6.51
Total interest earning assets			3,068,837				44,754				5.79				3,044,475				41,890				5.46
Less: allowance for loan and lease losses			(26,816	)											(29,266	)
Non-interest earning assets			448,074												434,963
Total assets		$	3,490,095											$	3,450,172
Interest bearing liabilities:
Interest bearing checking		$	18,975			$	52				1.09	%		$	31,950			$	87				1.08	%
Savings			881,280				4,151				1.87				943,958				4,026				1.69
Money market accounts			85,479				155				0.72				120,702				314				1.03
Certificates of deposit			1,952,833				11,601				2.36				1,810,040				9,738				2.13
Total interest bearing deposits			2,938,567				15,959				2.15				2,906,650				14,165				1.93
Other borrowings			1,521				—				0.00				3,365				1				0.12
Total interest bearing liabilities			2,940,088				15,959				2.15				2,910,015				14,166				1.93
Non-interest bearing deposits			45,696												46,272
Non-interest bearing liabilities			18,474												21,804
Shareholders’ equity			485,837												472,081
Total liabilities and shareholders’ equity		$	3,490,095											$	3,450,172
Net interest income and interest rate spread						$	28,795				3.64	%						$	27,724				3.53	%
Net interest margin											3.72												3.61
Ratio of average interest-earning assets to average interest-bearing liabilities											104.38	%											104.62	%
(1)  Average loan and lease balances include non-accruing loans.

Live Oak Bancshares, Inc.
GAAP to Non-GAAP Reconciliation
(Dollars in thousands)

		As of and for the three months ended
		4Q 2018				3Q 2018				2Q 2018				1Q 2018				4Q 2017
Total shareholders’ equity		$	493,560			$	477,230			$	462,986			$	448,836			$	436,933
Less:
Goodwill			—				—				—				—				—
Other intangible assets			—				—				3,980				4,122				4,264
Tangible shareholders’ equity (a)		$	493,560			$	477,230			$	459,006			$	444,714			$	432,669
Shares outstanding (c)			40,155,792				40,140,417				40,086,409				39,974,148				39,895,583
Total assets		$	3,670,449			$	3,444,757			$	3,472,969			$	3,460,863			$	2,758,474
Less:
Goodwill			—				—				—				—				—
Other intangible assets			—				—				3,980				4,122				4,264
Tangible assets (b)		$	3,670,449			$	3,444,757			$	3,468,989			$	3,456,741			$	2,754,210
Tangible shareholders’ equity to tangible assets (a/b)			13.45	%			13.85	%			13.23	%			12.87	%			15.71	%
Tangible book value per share (a/c)		$	12.29			$	11.89			$	11.45			$	11.13			$	10.85
Efficiency ratio:
Noninterest expense (d)		$	32,558			$	41,244			$	40,830			$	38,072			$	41,024
Net interest income			28,795				27,724				27,048				24,476				22,976
Noninterest income			18,065				24,331				30,613				30,756				95,441
Less: gain on sale of securities			—				—				—				—				—
Adjusted operating revenue (e)		$	46,860			$	52,055			$	57,661			$	55,232			$	118,417
Efficiency ratio (d/e)			69.48	%			79.23	%			70.81	%			68.93	%			34.64	%

Live Oak Bancshares, Inc.
GAAP to Non-GAAP Reconciliation (Continued)
(Dollars in thousands)

		Three months ended												Twelve months ended
		4Q 2018				3Q 2018				4Q 2017				4Q 2018				4Q 2017
Reconciliation of net income to non-GAAP net income   for non-routine income and expenses:
Net income		$	10,490			$	14,252			$	71,730			$	51,448			$	100,499
Gain on contribution to equity method investment			—				—				(68,000	)			—				(68,000	)
Stock based compensation expense for restricted   stock awards with an effective grant date of May   24, 2016, as discussed in Note 10 of our March   31, 2016 Form 10-Q			360				360				360				1,429				1,370
Merger costs associated with Reltco acquisition and Apiture   investment			—				—				1,718				—				2,874
Trade-in loss on aircraft			—				—				—				—				206
Impairment expense on goodwill and other intangibles, net			—				2,680				3,648				2,680				3,648
Contract modification of Reltco			—				—				1,600				—				1,600
Renewable energy tax credit investment income,   impairment and loss			—				—				710				—				690
Income tax effects and adjustments for non-GAAP items *			(86	)			(730	)			23,986				(986	)			23,045
Deferred tax liability revaluation			—				—				(18,921	)			—				(18,921	)
Other renewable energy tax expense			—				—				44				—				176
Non-GAAP net income		$	10,764			$	16,562			$	16,875			$	54,571			$	47,187
* Estimated at 24.0% for 2018 and 40.0% for 2017
Non-GAAP earnings per share:
Basic		$	0.27			$	0.41			$	0.42			$	1.36			$	1.29
Diluted		$	0.26			$	0.40			$	0.41			$	1.32			$	1.25
Weighted-average shares outstanding:
Basic			40,148,115				40,119,561				39,879,345				40,056,230				36,592,893
Diluted			41,075,864				41,688,430				41,184,793				41,446,750				37,859,535
Reconciliation of financial statement line items as reported   to adjusted for non-routine income and expenses:
Noninterest income, as reported		$	18,065			$	24,331			$	95,441			$	103,765			$	172,921
Gain on contribution to equity method investment			—				—				(68,000	)			—				(68,000	)
Renewable energy tax credit investment income			—				—				20				—				—
Noninterest income, as adjusted		$	18,065			$	24,331			$	27,461			$	103,765			$	104,921
Noninterest expense, as reported		$	32,558			$	41,244			$	41,024			$	152,704			$	143,165
Stock based compensation expense			(360	)			(360	)			(360	)			(1,429	)			(1,370	)
Merger costs associated with Reltco acquisition and Apiture   investment			—				—				(1,718	)			—				(2,874	)
Trade-in loss on aircraft			—				—				—				—				(206	)
Impairment expense on goodwill and other intangibles, net			—				(2,680	)			(3,648	)			(2,680	)			(3,648	)
Contract modification of Reltco			—				—				(1,600	)			—				(1,600	)
Renewable energy tax credit investment impairment and   loss			—				—				(690	)			—				(690	)
Noninterest expense, as adjusted		$	32,198			$	38,204			$	33,008			$	148,595			$	132,777
Income before taxes, as reported		$	7,480			$	11,054			$	73,338			$	46,046			$	98,254
Gain on contribution to equity method investment			—				—				(68,000	)			—				(68,000	)
Renewable energy tax credit investment income			—				—				20				—				—
Stock based compensation expense			360				360				360				1,429				1,370
Merger costs associated with Reltco acquisition and Apiture   investment			—				—				1,718				—				2,874
Trade-in loss on aircraft			—				—				—				—				206
Impairment expense on goodwill and other intangibles, net			—				2,680				3,648				2,680				3,648
Contract modification of Reltco			—				—				1,600				—				1,600
Renewable energy tax credit investment impairment and loss			—				—				690				—				690
Income before taxes, as adjusted		$	7,840			$	14,094			$	13,374			$	50,155			$	40,642
Income tax expense (benefit), as reported		$	(3,010	)		$	(3,198	)		$	1,608			$	(5,402	)		$	(2,245	)
Income tax effects and adjustments for non-recurring income and expenses			86				730				(23,986	)			986				(23,045	)
Deferred tax liability revaluation			—				—				18,921				—				18,921
Other renewable energy tax expense			—				—				(44	)			—				(176	)
Income tax expense (benefit), as adjusted		$	(2,924	)		$	(2,468	)		$	(3,501	)		$	(4,416	)		$	(6,545	)

This press release presents the non-GAAP financial measures previously shown. The adjustments to reconcile from the applicable GAAP financial measure to the non-GAAP financial measures are included where applicable in financial results presented in accordance with GAAP. The Company considers these adjustments to be relevant to ongoing operating results. The Company believes that excluding the amounts associated with these adjustments to present the non-GAAP financial measures provides a meaningful base for period-to-period comparisons, which will assist regulators, investors, and analysts in analyzing the operating results or financial position of the Company. The non-GAAP financial measures are used by management to assess the performance of the Company’s business for presentations of Company performance to investors, and for other reasons as may be requested by investors and analysts. The Company further believes that presenting the non-GAAP financial measures will permit investors and analysts to assess the performance of the Company on the same basis as that applied by management. Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. Although non-GAAP financial measures are frequently used by shareholders to evaluate a company, they have limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of results reported under GAAP.