Market Overview

Live Oak Bancshares, Inc. Reports Second Quarter 2018 Results

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WILMINGTON, N.C., July 25, 2018 (GLOBE NEWSWIRE) -- Live Oak Bancshares, Inc. (NASDAQ:LOB) ("Live Oak" or "the Company") today reported second quarter net earnings available to common shareholders of $14.3 million, or $0.34 per diluted share, compared to $9.8 million, or $0.27 per diluted share, for the second quarter of 2017.

"The power of the Live Oak franchise was on full display in the second quarter as we set a quarterly record with $15.1 million in non-GAAP pre-tax income.  Our recurring revenue streams continue to grow in prominence as the loan and lease portfolio grew 35% in the past year.  Our steady investments in resources and lending initiatives are yielding excellent returns and setting the stage for continued growth through the operating leverage present in our business.  Our unique business model and superior talent positions us to thrive in the digital transformation underway in the financial services industry.  We remain passionately focused on serving the needs of small businesses through innovative technology solutions," said James S. Mahan, III, Chief Executive Officer of Live Oak.

Second Quarter 2018 Key Measures

(Dollars in thousands, except per share data)       Increase (Decrease)    
  Q2 2018   Q2 2017   Dollars   Percent   Q1 2018
Net interest income and servicing revenues $ 34,013     $ 24,566     $ 9,447     38 %   $ 31,374  
Net income 14,253     9,795     4,458     46     12,453  
Diluted earnings per share 0.34     0.27     0.07     26     0.30  
Non-GAAP net income (1) 14,524     10,227     4,297     42     12,721  
Non-GAAP diluted earnings per share (1) 0.35     0.28     0.07     25     0.31  
Loan and lease production:                  
Loans and leases originated $ 491,797     $ 586,471     $ (94,674 )   (16 )%   $ 397,559  
% Fully funded 55.9 %   42.2 %     n/a     n/a     69.5 %
Loan sales:                  
Guaranteed loans sold $ 295,216     $ 203,714     $ 91,502     45 %   $ 247,243  
Net gains on sales of guaranteed loans 24,388     18,676     5,712     31     24,418  
Average net gain on sale of guaranteed loans, per million sold 82.61     91.68     (9.07 )   (10 )   98.76  

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

Loans and Leases

At June 30, 2018, the total loan and lease portfolio of $2.29 billion increased 35.3% above its level of a year ago and by 6.0% above its level at March 31, 2018.  Net loans and leases held for investment increased $91.0 million, or 6.4%, to $1.51 billion at June 30, 2018, from $1.41 billion at March 31, 2018.  Loans held for sale increased $37.0 million, or 5.1%, to $757.5 million at June 30, 2018, from $720.5 million at March 31, 2018. Loan and lease originations totaled $491.8 million during the second quarter of 2018, an increase of $94.2 million, or 23.7%, from the first quarter of 2018.  The total loan and lease portfolio at June 30, 2018, and March 31, 2018, of $2.29 billion and $2.16 billion, respectively, was comprised of approximately 61.7% and 61.3% of unguaranteed loans and leases, respectively.

Average loans and leases were $2.25 billion during the second quarter of 2018 compared to $2.14 billion during the first quarter of 2018.

Net Interest Income

Net interest income for the second quarter of 2018 rose to $27.0 million compared to $18.4 million for the second quarter of 2017 and $24.5 million for the first quarter of 2018. The increase was driven by the significant growth in the combined held for sale and held for investment loan and lease portfolios and reflected the Company's initiative to grow recurring revenue sources.  Despite much higher average loan yields, net interest margin for the second quarter of 2018 declined to 3.46% versus 3.72% in the first quarter of 2018 due to significantly higher average balances of liquid assets and securities coupled with the rising cost of deposits.  The Company anticipates that it is positioned to benefit from the rising rate environment with 72.7% 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 second quarter of 2018 increased to $30.6 million compared to $26.7 million for the second quarter of 2017 and slightly below the $30.8 million total for the first quarter of 2018.

Net gains on sales of loans increased to $23.1 million in the second quarter of 2018 compared to $18.2 million in the second quarter of 2017 and decreased compared to $24.4 million in the first quarter of 2018.  The volume of guaranteed loan sales in the second quarter of 2018 rose to $295.2 million compared to $203.7 million in the second quarter of 2017 and $247.2 million in the first quarter of 2018. The average net gain on guaranteed loan sales decreased to $82.6 thousand per million sold in the second quarter of 2018 versus $91.7 in the second quarter of 2017 and $98.8 in the first quarter of 2018. The decline in average loan sale pricing was primarily driven by the mix of loan types sold during the quarter, especially related to renewable energy loans which typically carry lower sale premiums and, to a lesser extent, a slight decline in market premiums paid.

Loan servicing revenues of $7.0 million in the second quarter of 2018 rose by $791 thousand, or 12.8%, from the second quarter of 2017 and by $67 thousand, or 1.0%, from the first quarter of 2018. The net loss resulting from the revaluation of the servicing asset totaled $3.7 million for the second quarter of 2018, an increase of $2.5 million compared to the second quarter of 2017 but reduced from the net loss of $5.1 million in the first quarter of 2018.

Lease income from solar panels contributed $1.9 million in noninterest income in the second quarter of 2018, compared to $9 thousand in the second quarter of 2017 and $1.6 million in the first 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.

Title insurance income for the second quarter of 2018 was $996 thousand compared to $2.4 million in the second quarter of 2017 and $1.3 million in the first quarter of 2018.  This decrease was principally the result of lower levels of finance activity following recent increases in mortgage interest rates.

Noninterest Expense

Noninterest expense for the second quarter of 2018 was $40.8 million compared to $33.3 million for the second quarter of 2017 and $38.1 million for the first quarter of 2018.  The $7.5 million, or 22.6%, increase versus the prior year period reflected the ongoing expansion of the Company's workforce, industry verticals, infrastructure, and new products in support of its growth strategy.

Salaries and employee benefits for the second quarter of 2018 increased to $22.1 million compared to $18.0 million for the second quarter of 2017 and $20.2 million for the first quarter of 2018. Included in these totals is stock-based compensation expense in the second quarter of 2018 of $2.2 million compared to $1.9 million for the second quarter of 2017 and $2.3 million for the first quarter of 2018.  The increase in salaries and benefits, inclusive of stock-based compensation, is the result of the ongoing expansion of the Company's workforce and infrastructure to support its growth initiatives.

Compared to the second quarter of 2017, there were increases in data processing expense of $1.0 million and equipment expense of $1.7 million.  Largely influencing the increase in data processing was the contribution of software development resources to Apiture which transferred the recognition of costs associated with the Company's technology development from salaries and employee benefits to data processing.  The increase in equipment expense reflected the higher levels of depreciation related to solar panels acquired for the Company's renewable energy leasing business.

Asset Quality

The unguaranteed exposure of nonperforming loans increased to $11.5 million at June 30, 2018, compared to $7.4 million at March 31, 2018.  Total unguaranteed nonperforming loans as a percentage of total loans and leases held for investment increased to 0.75% at June 30, 2018, compared to 0.51% at March 31, 2018.  Total nonperforming loans increased to $46.1 million in the second quarter of 2018 from $36.8 million at the end of the prior quarter and was primarily related to older verticals.

The unguaranteed exposure of foreclosed assets increased to $197 thousand at June 30, 2018, from $101 thousand at March 31, 2018.  Foreclosed assets increased $206 thousand to $1.7 million at June 30, 2018, from $1.5 million at March 31, 2018.

Net charge-offs increased to $787 thousand in the second quarter of 2018 compared to $532 thousand in the first quarter of 2018 and $191 thousand in the second quarter of 2017.  Net charge-offs as a percentage of average held for investment loans and leases, annualized, for the quarters ended June 30, 2018 and 2017, were 0.21% and 0.07%, respectively.

Provision for Loan and Lease Losses

The provision for loan and lease losses for the second quarter of 2018 totaled $2.1 million compared to $4.4 million for the first quarter of 2018 and $1.6 million for the second quarter of 2017.  The decrease compared to first quarter of 2018 is primarily a result of updated historical loss factors consistent with our methodology for estimating the allowance for loan and lease losses.  The second quarter of 2018 provision greatly exceeded net charge-offs, thus adding to loan and lease loss reserves commensurate with the continued growth of the loan and lease portfolio.

The allowance for loan and lease losses totaled $29.4 million at June 30, 2018, compared to $28.1 million at March 31, 2018. The allowance for loan and lease losses as a percentage of total loans and leases held for investment was 1.91% and 1.95% at June 30, 2018, and March 31, 2018, respectively.

Income Tax

Income tax expense was $491 thousand in the second quarter of 2018 compared to $408 thousand in the second quarter of 2017 and $315 thousand in the first quarter of 2018.  The Company's effective tax rate is predominantly driven by the leasing of renewable energy assets that generate investment tax credits.  As the lessor of these assets, the Company is accomplishing broader strategic initiatives in the renewable energy sector.

Deposits

Total deposits of $2.97 billion at June 30, 2018 were essentially unchanged from the level at March 31, 2018.  Following successful strategic campaigns in the first quarter of 2018 to strengthen the Company's liquidity position, deposit gathering in the second quarter of 2018 served to maintain the deposit portfolio levels. Average total interest-bearing deposits for the second quarter of 2018 increased $485.5 million, or 19.4%, to $2.99 billion, compared to $2.51 billion for the first quarter of 2018. The ratio of average total loans and leases to average interest-bearing deposits was 75.1% for the second quarter of 2018, compared to 85.2% for the first quarter of 2018.

Conference Call

Live Oak will host a conference call to discuss quarterly results at 9:00 a.m. ET tomorrow morning (July 26, 2018). 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 1994024. 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 August 3, 2018, 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 | Marketing Director | Media Relations | 910.550.2255

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

  Three months ended
  2Q 2018   1Q 2018   4Q 2017   3Q 2017   2Q 2017
Interest income                  
Loans and fees on loans $ 36,267     $ 32,691     $ 29,343     $ 26,977     $ 23,559  
Investment securities, taxable 2,530     1,117     468     325     316  
Other interest earning assets 2,179     1,215     725     870     470  
Total interest income 40,976     35,023     30,536     28,172     24,345  
Interest expense                  
Deposits 13,927     10,418     7,330     6,758     5,592  
Borrowings 1     129     230     389     361  
Total interest expense 13,928     10,547     7,560     7,147     5,953  
Net interest income 27,048     24,476     22,976     21,025     18,392  
Provision for loan and leases losses 2,087     4,392     4,055     2,426     1,556  
Net interest income after provision for loan and lease losses 24,961     20,084     18,921     18,599     16,836  
Noninterest income                  
Loan servicing revenue 6,965     6,898     6,001     6,490     6,174  
Loan servicing asset revaluation (3,670 )   (5,088 )   (6,307 )   (3,691 )   (1,164 )
Net gains on sales of loans 23,061     24,418     23,314     18,148     18,176  
Lease income 1,920     1,608     1,165     682     9  
Gain on contribution to equity method investment         68,000          
Construction supervision fee income 597     779     699     362     286  
Title insurance income 996     1,300     1,762     1,968     2,397  
Other noninterest income 744     841     807     1,101     789  
Total noninterest income 30,613     30,756     95,441     25,060     26,667  
Noninterest expense                  
Salaries and employee benefits 22,146     20,209     18,982     19,037     17,968  
Travel expense 2,041     1,843     2,089     2,289     2,148  
Professional services expense 1,119     1,298     709     1,068     1,424  
Advertising and marketing expense 1,868     1,662     1,386     1,516     1,976  
Occupancy expense 1,882     1,857     2,177     1,473     1,350  
Data processing expense 2,906     2,837     2,913     1,982     1,858  
Equipment expense 3,368     3,077     2,474     2,228     1,703  
Other loan origination and maintenance expense 1,414     1,329     1,383     1,601     981  
Renewable energy tax credit investment impairment         690          
FDIC insurance 1,010     572     898     858     724  
Title insurance closing services expense 372     426     541     687     785  
Other expense 2,704     2,962     3,134     3,117     2,383  
Total noninterest expense 40,830     38,072     41,024     35,856     33,300  
Income before taxes 14,744     12,768     73,338     7,803     10,203  
Income tax expense (benefit) 491     315     1,608     (5,059 )   408  
Net income $ 14,253     $ 12,453     $ 71,730     $ 12,862     $ 9,795  
Earnings per share                  
Basic $ 0.36     $ 0.31     $ 1.80     $ 0.34     $ 0.28  
Diluted $ 0.34     $ 0.30     $ 1.74     $ 0.33     $ 0.27  
Weighted average shares outstanding                  
Basic 40,027,336     39,926,781     39,879,345     37,366,041     34,618,721  
Diluted 41,619,647     41,399,930     41,184,793     38,644,677     35,942,041  
                             

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

  As of the quarter ended
  2Q 2018   1Q 2018   4Q 2017   3Q 2017   2Q 2017
Assets                  
Cash and due from banks $ 392,941     $ 527,952     $ 295,271     $ 260,907     $ 207,373  
Certificates of deposit with other banks 2,250     2,250     3,000     3,250     5,750  
Investment securities available-for-sale 384,943     378,488     93,355     76,575     72,993  
Loans held for sale 757,494     720,511     680,454     692,586     609,138  
Loans and leases held for investment 1,534,368     1,442,077     1,343,973     1,169,887     1,084,503  
Allowance for loan and lease losses (29,350 )   (28,050 )   (24,190 )   (21,027 )   (19,560 )
Net loans and leases 1,505,018     1,414,027     1,319,783     1,148,860     1,064,943  
Premises and equipment, net 234,817     216,831     178,790     129,233     125,008  
Foreclosed assets 1,725     1,519     1,281     2,231     2,140  
Servicing assets 52,689     53,120     52,298     53,392     53,675  
Other assets 141,092     146,165     134,242     65,155     57,087  
Total assets $ 3,472,969     $ 3,460,863     $ 2,758,474     $ 2,432,189     $ 2,198,107  
Liabilities and Shareholders' Equity                  
Liabilities                  
Deposits:                  
Noninterest-bearing $ 46,192     $ 48,755     $ 57,868     $ 55,260     $ 40,966  
Interest-bearing 2,923,044     2,924,586     2,202,395     1,957,631     1,830,755  
Total deposits 2,969,236     2,973,341     2,260,263     2,012,891     1,871,721  
Short term borrowings                 10,000  
Long term borrowings 3,385     3,489     26,564     26,872     52,173  
Other liabilities 37,362     35,197     34,714     27,835     26,582  
Total liabilities 3,009,983     3,012,027     2,321,541     2,067,598     1,960,476  
Shareholders' equity                  
Preferred stock, no par value, 1,000,000 shares authorized, none issued or outstanding                  
Class A common stock (voting) 274,043     271,451     268,557     266,336     150,939  
Class B common stock (non-voting) 49,168     49,168     49,168     49,168     49,168  
Retained earnings 144,791     131,739     120,241     49,707     38,041  
Accumulated other comprehensive loss (5,016 )   (3,522 )   (1,033 )   (620 )   (517 )
Total equity 462,986     448,836     436,933     364,591     237,631  
Total liabilities and shareholders' equity $ 3,472,969     $ 3,460,863     $ 2,758,474     $ 2,432,189     $ 2,198,107  
                                       

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

  Six months ended
  June 30, 2018   June 30, 2017
Interest income      
Loans and fees on loans $ 68,958     $ 43,313  
Investment securities, taxable 3,647     639  
Other interest earning assets 3,394     812  
Total interest income 75,999     44,764  
Interest expense      
Deposits 24,345     10,135  
Borrowings 130     596  
Total interest expense 24,475     10,731  
Net interest income 51,524     34,033  
Provision for loan losses 6,479     3,055  
Net interest income after provision for loan losses 45,045     30,978  
Noninterest income      
Loan servicing revenue 13,863     12,097  
Loan servicing asset revaluation (8,758 )   (3,173 )
Net gains on sales of loans 47,479     37,128  
Lease income 3,528     9  
Construction supervision fee income 1,376     715  
Title insurance income 2,296     3,835  
Other noninterest income 1,585     1,809  
Total noninterest income 61,369     52,420  
Noninterest expense      
Salaries and employee benefits 42,355     36,650  
Travel expense 3,884     3,746  
Professional services expense 2,417     3,160  
Advertising and marketing expense 3,530     3,461  
Occupancy expense 3,739     2,545  
Data processing expense 5,743     3,554  
Equipment expense 6,445     2,777  
Other loan origination and maintenance expense 2,743     1,986  
FDIC insurance 1,582     1,450  
Title insurance closing services expense 798     1,190  
Other expense 5,666     5,766  
Total noninterest expense 78,902     66,285  
Income before taxes 27,512     17,113  
Income tax expense 806     1,206  
Net income $ 26,706     $ 15,907  
Earnings per share      
Basic $ 0.67     $ 0.46  
Diluted $ 0.64     $ 0.44  
Weighted average shares outstanding      
Basic 39,977,336     34,543,229  
Diluted 41,516,333     35,772,182  
           

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

  As of and for the three months ended
  2Q 2018   1Q 2018   4Q 2017   3Q 2017   2Q 2017
Income Statement Data                  
Net income $ 14,253     $ 12,453     $ 71,730     $ 12,862     $ 9,795  
Per Common Share                  
Net income, basic $ 0.36     $ 0.31     $ 1.80     $ 0.34     $ 0.28  
Net income, diluted 0.34     0.30     1.74     0.33     0.27  
Dividends declared 0.03     0.03     0.03     0.03     0.02  
Book value 11.55     11.23     10.95     9.15     6.86  
Tangible book value (1) 11.45     11.13     10.85     8.84     6.50  
Performance Ratios                  
Return on average assets (annualized) 1.61 %   1.64 %   11.21 %   2.18 %   1.89 %
Return on average equity (annualized) 12.34     11.08     68.33     16.79     16.53  
Net interest margin 3.46     3.72     4.07     3.91     3.92  
Efficiency ratio (1) 70.81     68.93     34.64     77.80     73.90  
Noninterest income to total revenue 53.09     55.69     80.60     54.38     59.18  
Selected Loan Metrics                  
Loans and leases originated $ 491,797     $ 397,559     $ 483,422     $ 395,682     $ 586,471  
Guaranteed loans sold 295,216     247,243     211,654     163,843     203,714  
Average net gain on sale of guaranteed loans 82.61     98.76     110.15     110.76     91.68  
Held for sale guaranteed loans (note amount) (2) 1,075,801     1,068,886     1,087,636     1,093,385     1,005,753  
Asset Quality Ratios                  
Allowance for loan losses to loans and leases held for investment 1.91 %   1.95 %   1.80 %   1.80 %   1.80 %
Net charge-offs $ 787     $ 532     $ 892     $ 959     $ 191  
Net charge-offs to average loans and leases held for investment (3) 0.21 %   0.15 %   0.28 %   0.34 %   0.07 %
Nonperforming loans $ 46,105     $ 36,776     $ 23,480     $ 22,420     $ 21,856  
Foreclosed assets 1,725     1,519     1,281     2,231     2,140  
Nonperforming loans (unguaranteed exposure) 11,466     7,386     3,610     3,299     3,546  
Foreclosed assets (unguaranteed exposure) 197     101     90     446     345  
Nonperforming loans not guaranteed by the SBA and foreclosures 11,663     7,487     3,700     3,745     3,891  
Nonperforming loans and foreclosures, not guaranteed by the SBA, to total assets 0.34 %   0.22 %   0.13 %   0.15 %   0.18 %
Capital Ratios                  
Common equity tier 1 capital (to risk-weighted assets) 16.78 %   16.36 %   17.81 %   17.78 %   11.93 %
Total capital (to risk-weighted assets) 17.97     17.51     18.91     18.93     13.08  
Tier 1 risk based capital (to risk-weighted assets) 16.78     16.36     17.81     17.78     11.93  
Tier 1 leverage capital (to average assets) 11.81     13.32     15.53     13.99     9.93  
                             

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 June 30, 2018   Three months ended March 31, 2018
    Average
Balance
   Interest   Average Yield/
Rate
  Average
Balance
   Interest   Average Yield/
Rate
Interest earning assets:                        
Interest earning balances in other banks   $ 505,351     $ 2,179     1.73 %   $ 354,028     $ 1,215     1.39 %
Investment securities   383,154     2,530     2.65     181,900     1,117     2.49  
Loans held for sale   744,789     11,937     6.43     727,696     11,046     6.16  
Loans and leases held for investment (1)   1,504,738     24,330     6.49     1,408,112     21,645     6.23  
Total interest earning assets   3,138,032     40,976     5.24     2,671,736     35,023     5.32  
Less: allowance for loan and lease losses   (27,930 )           (24,219 )        
Non-interest earning assets   424,100             396,920          
Total assets   $ 3,534,202             $ 3,044,437          
                         
Interest bearing liabilities:                        
Interest bearing checking   $ 36,926     $ 100     1.09 %   $ 43,597     $ 103     0.96 %
Savings   998,521     4,061     1.63     822,266     3,118     1.54  
Money market accounts   151,880     463     1.22     168,954     521     1.25  
Certificates of deposit   1,806,063     9,303     2.07     1,473,054     6,676     1.84  
Total interest bearing deposits   2,993,390     13,927     1.87     2,507,871     10,418     1.68  
Other borrowings   3,488     1     0.11     11,228     129     4.66  
Total interest bearing liabilities   2,996,878     13,928     1.86     2,519,099     10,547     1.70  
Non-interest bearing deposits   53,922             56,596          
Non-interest bearing liabilities   21,217             19,022          
Shareholders' equity   462,185             449,720          
Total liabilities and shareholders' equity   $ 3,534,202             $ 3,044,437          
                         
Net interest income and interest rate spread       $ 27,048     3.38 %       $ 24,476     3.62 %
                         
Net interest margin           3.46             3.72  
                         
Ratio of average interest-earning assets to average interest-bearing liabilities           104.71 %           106.06 %

(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
  2Q 2018   1Q 2018   4Q 2017   3Q 2017   2Q 2017
Total shareholders' equity $ 462,986     $ 448,836     $ 436,933     $ 364,591     $ 237,631  
Less:                  
Goodwill             7,278     7,266  
Other intangible assets 3,980     4,122     4,264     5,126     5,292  
Tangible shareholders' equity (a) $ 459,006     $ 444,714     $ 432,669     $ 352,187     $ 225,073  
Shares outstanding (c) 40,086,409     39,974,148     39,895,583     39,862,147     34,639,848  
Total assets $ 3,472,969     $ 3,460,863     $ 2,758,474     $ 2,432,189     $ 2,198,107  
Less:                  
Goodwill             7,278     7,266  
Other intangible assets 3,980     4,122     4,264     5,126     5,292  
Tangible assets (b) $ 3,468,989     $ 3,456,741     $ 2,754,210     $ 2,419,785     $ 2,185,549  
Tangible shareholders' equity to tangible assets (a/b) 13.23 %   12.87 %   15.71 %   14.55 %   10.30 %
Tangible book value per share (a/c) $ 11.45     $ 11.13     $ 10.85     $ 8.84     $ 6.50  
Efficiency ratio:                  
Noninterest expense (d) $ 40,830     $ 38,072     $ 41,024     $ 35,856     $ 33,300  
Net interest income 27,048     24,476     22,976     21,025     18,392  
Noninterest income 30,613     30,756     95,441     25,060     26,667  
Less: gain on sale of securities                  
Adjusted operating revenue (e) $ 57,661     $ 55,232     $ 118,417     $ 46,085     $ 45,059  
Efficiency ratio (d/e) 70.81 %   68.93 %   34.64 %   77.80 %   73.90 %
                             

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

  Three months ended   Six months ended
  2Q 2018   1Q 2018   2Q 2017   2Q 2018   2Q 2017
Reconciliation of net income to non-GAAP net income for non-routine income and expenses:                  
Net income $ 14,253     $ 12,453     $ 9,795     $ 26,706     $ 15,907  
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 357     352     378     709     724  
Merger costs for acquisition of Reltco and Apiture investment         250         766  
Trade-in loss on aircraft                 206  
Renewable energy tax credit investment income, impairment and loss         19         38  
Income tax effects and adjustments for non-GAAP items * (86 )   (84 )   (259 )   (170 )   (694 )
Other renewable energy tax expense         44         88  
Non-GAAP net income $ 14,524     $ 12,721     $ 10,227     $ 27,245     $ 17,035  
* Estimated at 24.0% for 2018 and 40.0% for 2017                  
Non-GAAP earnings per share:                  
Basic $ 0.36     $ 0.32     $ 0.30     $ 0.68     $ 0.49  
Diluted $ 0.35     $ 0.31     $ 0.28     $ 0.66     $ 0.48  
                   
Weighted-average shares outstanding:                  
Basic 40,027,336     39,926,781     34,618,721     39,977,336     34,543,229  
Diluted 41,619,647     41,399,930     35,942,041     41,516,333     35,772,182  
                   
Reconciliation of financial statement line items as reported to adjusted for non-routine income and expenses:                  
Noninterest income, as reported $ 30,613     $ 30,756     $ 26,667     $ 61,369     $ 52,420  
Renewable energy tax credit investment income         (10 )       (20 )
Noninterest income, as adjusted 30,613     30,756     26,657     61,369     52,400  
                   
Noninterest expense, as reported 40,830     38,072     33,300     78,902     66,285  
Stock based compensation expense (357 )   (352 )   (378 )   (709 )   (724 )
Merger costs associated with Reltco and Apiture investment         (250 )       (766 )
Trade-in loss on aircraft                 (206 )
Renewable energy tax credit investment impairment and loss         (29 )       (58 )
Noninterest expense, as adjusted 40,473     37,720     32,643     78,193     64,531  
                   
Income before taxes, as reported 14,744     12,768     10,203     27,512     17,113  
Renewable energy tax credit investment income         (10 )       (20 )
Stock based compensation expense 357     352     378     709     724  
Merger costs associated with Reltco and Apiture investment         250         766  
Trade-in loss on aircraft                 206  
Renewable energy tax credit investment impairment and loss         29         58  
Income before taxes, as adjusted 15,101     13,120     10,850     28,221     18,847  
                   
Income tax expense, as reported 491     315     408     806     1,206  
Income tax effects and adjustments for non-recurring income and expenses 86     84     259     170     694  
Other renewable energy tax expense         (44 )       (88 )
Income tax expense, as adjusted $ 577     $ 399     $ 623     $ 976     $ 1,812  
                                       

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.

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